Solutions Manual for Essentials of Business Law and the Legal Environment 14th Edition By Richard Ma

Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 2: Business Ethics

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 2: Business Ethics

TABLE OF CONTENTS Answers to Questions and Case Problems ........................................................................1

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

You have an employee who has a chemical imbalance in the brain that causes him to be severely unstable. The medication that is available to deal with this schizophrenic condition is extremely powerful and decreases the taker's life span by one to two years for every year that the user takes it. You know that his doctors and family believe that it is in his best interest to take the medication. What course of action should you follow?

Answer: This question illustrates one scenario where arguments against corporate social responsibility could come into play. If you take the “anti-social responsibility” position that a corporation has—as its primary objective—a fundamental responsibility to maximize profits, the employer could make the medication a requirement for the employee to remain in the workforce. It could be argued that this decision may also decrease the possibility of injury or deterioration in working conditions for other employees. The other side of the argument, however, is that this type of decision is too personal for a corporation to make. The ultimate determination should reside with the employee, and it should be his free decision to take or not take the medication. This puts the responsibility back where it belongs: on the employee and his family.

2. You have a very shy employee from another country. After a time, you notice that the quality of her performance is deteriorating. You find an appropriate time to speak with her and determine that she is extremely distraught. She tells you that her family has arranged a marriage for her and that she refuses to obey their contract. She further states to you that she is thinking about committing suicide. Two weeks later, after her poor performance continues, you determine that she is on the verge of a nervous breakdown; and once again she informs you that she is going to commit suicide. What should you do? Consider further that you can petition a court to have her involuntarily committed to a mental hospital. You know, however, that her family would consider such a commitment an extreme insult and that they might seek retribution. Does this prospect alter your decision? Explain.

Answer: A good, responsible manager would be hard-pressed to demand that the employee either improve her on-the-job performance or face dismissal. However, initiating an involuntary committal to a mental hospital could constitute an improper invasion of rights with many legal repercussions. An interim step of providing appropriate psychological social counseling (perhaps at company expense) would seem to best fit into the concept of good corporate management.

This would benefit not only the individual but the corporation, as it may be able to

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 2: Business Ethics

keep a valued employee. The cost of counseling is likely to be less expensive than hiring and training a new employee.

3. You receive a telephone call from a company that you never do business with requesting a reference on one of your employees, Mary Sunshine. You believe Mary performs in a generally incompetent manner, and you would be delighted to see her take another job. You give her a glowing reference. Is this right? Explain.

Answer: Pawning off an incompetent employee would certainly help the profitability of an employer. However, relatively accurate referrals are expected, and good corporate citizenship would impose a moral responsibility to act properly.

The employer would be better advised to give a more accurate, but not overly negative, description of Mary’s job performance (while staying within the conditional privilege of avoiding a defamation action), rather than generate animosity and gain a reputation as a liar among other businesses in the area.

4. You have just received a report suggesting that a chemical your company uses in its manufacturing process is very dangerous. You have not read the report, but you are generally aware of its contents. You believe that the chemical can be replaced fairly easily, but that if word gets out, panic may set in among employees and community members. A reporter asks if you have seen the report, and you say no. Is your behavior right or wrong?

Explain.

Answer: Weighing the arguments for profitability to shareholders and fairness to shareholders and employees against the arguments for good corporate citizenship and long-run profits, an appropriate response might be that you are aware of the report but haven’t thoroughly read or studied it. Proceeding with a course that acknowledges (at least internally) past dangerous practices, while immediately correcting the current problems, and correcting future problems in a timely manner, may be an appropriate legal as well as moral response to this problem.

This is one of the reasons many corporations have a corporate spokesperson to give appropriate and consistent responses.

5. You and Joe Jones, your neighbor and friend, bought lottery tickets at the corner drugstore. While watching the lottery drawing on television with you that night, Joe leaped from the couch, waved his lottery ticket, and shouted, “I've got the winning number!”

Suddenly, he clutched his chest, keeled over, and died on the spot. You are the only living person who knows that Joe, not you, bought the winning ticket. If you substitute his ticket for yours, no one will know of the switch, and you will be $10 million richer. Joe's only living relative is a rich aunt whom he despised. Will you switch his ticket for yours?

Explain.

Answer: Perhaps an advocate of utilitarianism or social egalitarianism might feel that switching the ticket would be morally appropriate on the premise that it maximized pleasure and was an appropriate distribution of wealth. However, such a moral rationalization would demonstrate the flaws in both theories. There is no escaping the fact that switching the tickets would be improper under the law and most moral theories.

6. Omega, Inc., a publicly held corporation, has assets of $100 million and annual earnings in the range of $13 to $15 million. Omega owns three aluminum plants, which are profitable, and one plastics plant, which is losing $4 million a year. Because of its very high operating costs, the plastics plant shows no sign of ever becoming profitable, and there is no evidence that the plant and the underlying real estate will increase in value. Omega decides to sell the plastics plant. The only bidder for the plant is Gold, who intends to use

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 2: Business Ethics

the plant for a new purpose: to introduce automation, and to replace all existing employees. Would it be ethical for Omega to turn down Gold's bid and keep the plastics plant operating indefinitely for the purpose of preserving the employees' jobs? Explain.

Answer: Indefinite maintenance of the plastics plant may strike one as being the morally correct thing to do. The moral basis for such a decision would be essentially egalitarianism where the wealth generated by many is redistributed to benefit others. However, as the basis for an economic system, such an approach may be doomed to ultimate failure in that it does not rectify anything and only prolongs a perhaps snowballing problem that could taint and impair the job security of everyone employed by Omega. If managerial and operational changes truly cannot rectify the net loss situation suffered by the plastics plant, sale of the plant to Gold may, in a broader context, be the morally correct thing to do.

7. You are the sales manager of a two-year-old electronics firm. At times, the firm has seemed to be on the brink of failure, but recently it has begun to be profitable. In large part, the profitability is due to the aggressive and talented sales force you recruited. Two months ago, you hired Alice North, an honors graduate from the State University, who decided that she was tired of the Research Department and wanted to try sales.

Almost immediately after you sent Alice out for training with Brad West, your best salesperson, he began reporting to you an unexpected turn of events. According to Brad, “Alice is terrific: she's confident, smooth, and persistent. Unfortunately, a lot of our buyers are good old boys who just aren't comfortable around young, bright women. Just last week, Hiram Jones, one of our biggest customers, told me that he simply won't continue to do business with ‘young chicks’ who think they invented the world. It's not that Alice is a know-it-all. She's not. It's just that these guys like to booze it up a bit, tell some offcolor jokes, and then get down to business. Alice doesn't drink, and although she never objects to the jokes, it's clear she thinks they're offensive.” Brad felt that several potential deals had fallen through “because the mood just wasn't right with Alice there.” Brad added, “I don't like a lot of these guys' styles myself, but I go along to make the sales. I just do not think Alice is going to make it.”

When you call Alice in to discuss the situation, she concedes the accuracy of Brad's report but indicates that she's not to blame and insists that she be kept on the job. You feel committed to equal opportunity but don't want to jeopardize your company's ability to survive. Explain what you should do.

Answer: This is a common problem with a myriad of legal and moral implications.

From a profitability standpoint, especially in the case of a company on the brink of economic failure, ignoring the requirements and whims of customers can amount to economic death. From a legal standpoint, the Equal Opportunity laws operate harshly against an employer that discriminates on the basis of sex or race in hiring and promotional activities. Employees are frequently aware of their rights, yet wish to help the business of an employer and otherwise act as a good “team player.” A possible response might be (with the consent of Alice) attempting to divide sales accounts to give to Alice those accounts where her sex would be a neutral or perhaps positive factor, while retaining for Brad oversight of the “good old boy” accounts. Such an approach would acknowledge both her legal rights and her justifiable expectations while not undermining the profitability of a company whose very existence is at issue. Best utilization of employees is critical to any corporation, and this includes sensitivity to both the employees’ needs and the customers’ needs.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 2: Business Ethics

8. Major Company subcontracted the development of part of a large technology system to Start-up Company, a small corporation specializing in custom computer systems. The contract, which was a major breakthrough for Start-up Company and crucial to its future, provided for an initial development fee and subsequent progress payments, as well as a final date for completion.

Start-up Company provided Major Company with periodic reports indicating that everything was on schedule. After several months, however, the status reports stopped coming, and the company missed delivery of the schematics, the second major milestone.

As an in-house technical consultant for Major Company, you visited Start-up Company and found not only that it was far behind schedule but also that they it lied about its previous progress. Moreover, you determined that this slippage put the schedule for the entire project in severe jeopardy. The cause of Start-up's slippage was the removal of personnel from your project to work on short-term contracts to obtain money to meet the weekly payroll.

Your company decided that you should stay at Start-up Company to monitor its work and to assist in the design of the project. After six weeks and some progress, Start-up is still way behind its delivery dates. Nonetheless, you are now familiar enough with the project to complete it in-house with Major's personnel.

Start-up is still experiencing severe cash flow problems and repeatedly requests payment from Major. But your CEO, furious with Start-up's lies and deceptions, wishes to “bury” Start-up and finish the project using Major Company's internal resources. She knows that withholding payment to Start-up will put it out of business. What do you do? Explain.

Answer: We don't know if the development fee was ever paid to Start-up Company. Major had an obligation to pay the initial development fee. If it was paid and Start-up did not produce the required progress reports, then Major is correct to withhold payment. Situational ethics will come into play when you decide whether or not to give Start-up more time to complete the work. If the start-up fee was not paid and it was Major’s failure to pay on schedule that caused Startup to divert their personnel, then Major needs to take some share of the blame.

9. A customer requested certain sophisticated tests on equipment he purchased from your factory. Such tests are very expensive and must be performed by a third party. The equipment was tested as requested and met all of the industry standards but showed anomalies that could not be explained.

Though the problem appeared to be very minor, you decided to inspect the unit to try to understand the test data—a very expensive and time-consuming process. You informed the customer of this decision. A problem was found, but it was minor and was highly unlikely ever to cause the unit to fail. In addition to the time and expense required to rebuild the equipment, notifying the customer that you were planning to rebuild the unit would also put your overall manufacturing procedures in question. Should you fix the problem, ship the equipment as is, or inform the customer? Explain.

Answer: You must inform the customer. The customer apparently has the right to request such testing, and as such you have ethical responsibility to inform the customer of all factors. The ultimate decision should be made by the customer.

However, you have the obligation to comply with the legal and governmental responsibilities within your industry.

10. You are a project manager for a company making a major proposal to a Middle Eastern country. Your major competition is from Japan.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 2: Business Ethics

a. Your local agent, who is closely tied to a very influential sheikh, would receive a 5 percent commission if the proposal were accepted. Near the date for decision, the agent asks you for $150,000 to “grease the skids” so that your proposal is accepted.

What do you do? b. What do you do if, after you say no, the agent goes to your vice president, who provides the money? c. Your overseas operation learns that most other foreign companies in this Middle Eastern location bolster their business by exchanging currency on the gray market. You discover that your division is twice as profitable as budgeted due to the amount of domestic currency you have received on the gray market. What do you do?

Answer: (a) This may cross the line from ethical to legal requirements. If this is not illegal, then in applying the doctrine of ethical relativism, you must decide what is subjectively right for you. You also need to check the company code of conduct and any other applicable policy. (b) Again when applying the doctrine of ethical relativism, if you feel strongly enough, you may have to quit your job or request a transfer to another division. If this activity is not legal, you have the obligation to report it to your company's superiors. (c) The Utilitarianism cost–benefit analysis will allow you to first quantify this in monetary terms and then compare the direct and indirect costs and benefits. This process may achieve the most profit but may ignore justice in the process.

11. Explain what relevance ethics has to business.

Answer: Business ethics is the study and determination of what is right and good in business settings. Business ethics seeks to understand the moral issues that arise from business practices, institutions, and decision making, and their relationship to generalized human values. Unlike legal analyses, analyses of ethics have no central authority, such as courts or legislatures, upon which to rely; nor do they follow clear-cut universal standards. Nonetheless, despite these inherent limitations, it still may be possible to make meaningful ethical judgments.

12. How should the financial interests of stockholders be balanced with the varied interests of stakeholders? If you were writing a code of conduct for your company, how would you address this issue?

Answer: Finding this balance has been the struggle for most, if not all, businesses throughout time. Historically, the stockholder model for the role of business has been the norm. Under this theory, a corporation is viewed as private property owned by and for the benefit of its owners—the stockholders of the corporation.

The stakeholder model, on the other hand, holds that corporations are responsible to society at large and more directly to all those constituencies on which they depend for their survival. Thus, it is argued that a corporation should be managed for the benefit of all of its stakeholders—stockholders, employees, customers, suppliers, and managers, as well as the local communities in which it operates.

(Student answers will vary but should address these two models.)

13. A company adopts a policy that (a) prohibits romantic relationships between employees of different rank and (b) permits romantic relationships between employees of the same rank only if both employees waive in writing their rights to sue the company should the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 2: Business Ethics

relationship end. Violation of this rule is grounds for dismissal. Is this rule ethical? If not, how should it be revised? Explain.

Answer: Student answers will vary but should address ways to find a balance between individual freedoms or rights and the good of the company. Presumably, this policy was made for a purpose that serves to protect the company (which in turn protects the employee’s job and other stakeholders’ interests.) A discussion of the theory of utilitarianism would be appropriate in answering this question.

14. A company prohibits any employee from making disparaging comments about the company through any social media, including online blogs, email, posts, and other electronic media. Violation of this rule is grounds for dismissal. Explain whether this rule is ethical. If not, how should it be revised? Explain.

Answer: Student answers will vary but should address ways to find a balance between individual freedoms or rights and the good of the company. An argument against this policy would probably be grounded in the Constitutional protection of free speech, which an argument in favor of the policy would center on the good that comes from protecting the company. A discussion of the theory of utilitarianism would be appropriate in answering this question.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 3: Civil Dispute Resolution

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 3: Civil Dispute Resolution

TABLE OF CONTENTS Answers to Questions and Case Problems .........................Error! Bookmark not defined.

Answers to “Taking Sides” Problems ............................................................................... 9

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

On June 15 a newspaper columnist predicted that the coast of State X would be flooded on the following September 1. Relying on this pronouncement, Gullible quit his job and sold his property at a loss so as not to be financially ruined. When the flooding did not occur, Gullible sued the columnist in a State X court for damages. The court dismissed the case for failure to state a cause of action under applicable state law. On appeal, the State X Supreme Court upheld the lower court. Three months after this ruling, the State Y Supreme Court heard an appeal in which a lower court had ruled that a reader could sue a columnist for falsely predicting flooding. a. Must the State Y Supreme Court follow the ruling of the State X Supreme Court as a matter of stare decisis? b. Should the State Y lower court have followed the ruling of the State X Supreme Court until the State Y Supreme Court issued a ruling on the issue? c. Once the State X Supreme Court issued its ruling, could the U.S. Supreme Court overrule the State X Supreme Court? d. If the State Y Supreme Court and the State X Supreme Court rule in exactly opposite ways, must the U.S. Supreme Court resolve the conflict between the two courts?

Answer: (a) No. A decision of one state’s supreme court is not binding on another state’s supreme court. It may be persuasive, but it’s not binding. (b) Not necessarily. The decision of one state’s supreme court is not binding on the lower courts of another state. Again, it may be persuasive, but it’s not binding. (c) If the issue is one strictly of state—as opposed to federal—law, which this seems to be, then the United States Supreme Court could not overrule the State X Supreme Court. However, a decision of the U.S. Supreme Court on federal questions is binding on all other courts, federal and state. (d) No. If the conflict in rulings relates exclusively to state law, the U.S. Supreme Court cannot exercise jurisdiction. Even if the conflict between states related to federal law, there is no mandatory requirement that the Supreme Court intervene.

The Supreme Court may intervene when two Circuit Courts of Appeals adopt inconsistent positions, but there is no mandatory requirement that it do so.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 3: Civil Dispute Resolution

2. State Senator Bowdler convinced the legislature of State Z to pass a law requiring all professors to submit their class notes and transparencies to a board of censors to be sure that no “lewd” materials were presented to students at state universities. Professor Rabelais would like to challenge this law as being violative of his First Amendment rights under the U.S. Constitution. a. May Professor Rabelais challenge this law in the State Z courts? b. May Professor Rabelais challenge this law in a federal district court?

Answer: (a) Yes. Adjudicating First Amendment disputes can occur either in the state courts or the federal courts because they have concurrent jurisdiction over federal questions. (b) Yes, even if he cannot show a monetary loss, because a federal question exists and there is no minimum dollar requirement for federal question cases.

3. While driving his car in Virginia, Carpe Diem, a resident of North Carolina, struck Butt, a resident of Alaska. As a result of the accident, Butt suffered more than $80,000 in medical expenses. Butt would like to know if he personally serves the proper papers to Diem whether he can obtain jurisdiction against Diem for damages in the following courts: a. Alaska state trial court b. U.S. Circuit Court of Appeals for the Ninth Circuit (includes Alaska) c. Virginia state trial court d. Virginia federal district court e. U.S. Circuit Court of Appeals for the Fourth Circuit (includes Virginia and North Carolina) f. Virginia equity court g. North Carolina state trial court Answer: (a) The only way that Butt could get proper service on Diem for purposes of suing Diem in an Alaska state court would be if Diem somehow came into the state borders and Butt served him while he was inside the state. Butt could not use a long-arm statute to get service since there would have been no real connection between the events leading up to the lawsuit and the State of Alaska. If the case could be tried in Alaska, under the conflict of laws rules the court would apply Virginia law. (b) No. A Circuit Court of Appeals is an appellate court. It never tries cases. (c) Yes. The accident occurred in Virginia. This is the most logical place to try the case. (d) Yes. There is diversity of citizenship jurisdiction and the amount in controversy exceeds $75,000. (e) No. A Circuit Court of Appeals is an appellate court. It never tries cases. (f) No. A court of equity—assuming one exists in Virginia—does not hear cases in which money damages would provide adequate relief. In this case, money damages would suffice.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 3: Civil Dispute Resolution

(g) Yes, assuming proper services were obtained in North Carolina. Why Butt would want to sue in North Carolina is a mystery since, under the conflict of laws rules the North Carolina court would apply Virginia law.

4. Sam Simpleton, a resident of Kansas, and Nellie Naive, a resident of Missouri, each bought $85,000 in stock at local offices in their home states from Evil Stockbrokers, Inc. (Evil), a business incorporated in Delaware with its principal place of business in Kansas. Both Simpleton and Naive believe that they were cheated by Evil and would like to sue it for fraud. Assuming that no federal question is at issue, assess the accuracy of the following statements: a. Simpleton can sue Evil in a Kansas state trial court. b. Simpleton can sue Evil in a federal district court in Kansas. c. Naive can sue Evil in a Missouri state trial court. d. Naive can sue Evil in a federal district court in Missouri.

Answer: (a) Yes, you can always sue for fraud in state court. There are sufficient minimum contacts with that state, since Evil’s principal place of business is located there. (b) Simpleton cannot successfully sue Evil for fraud in federal district court because the only possible basis would be diversity of citizenship since no federal question is involved. There is no diversity in this case because Simpleton and Evil are both citizens of Kansas. A corporation is a citizen both of the state of incorporation and of its principal place of business. (c) Yes, you can always sue for fraud in state court. By using a long-arm statute, Evil can be reached because it is transacting business within Missouri. (d) In this case, Naive can claim diversity of citizenship because Evil is not a citizen of Missouri. The mere fact that a corporation does business in a state does not make it a citizen of that state. So, if Naive has suffered more than $75,000 in damages, this loss—coupled with diversity of citizenship—would make her eligible to sue Evil in a federal district court. The case does not tell us how much her loss is, however, so the facts are insufficient to make a proper determination.

5. The Supreme Court of State A ruled that, under the law of State A, pit bull owners must either keep their dogs fenced or pay damages to anyone bitten by the dogs. Assess the accuracy of the following statements: a. It is likely that the United States Supreme Court would issue a writ of certiorari in the “pit bull” case. b. If a case similar to the “pit bull” case were to come before the Supreme Court of State B in the future, the doctrine of stare decisis would leave the court no choice but to rule the same way as the Supreme Court of State A ruled in the “pit bull” case.

Answer: (a) This statement is false. The United States Supreme Court would not issue a writ of certiorari in a case involving only state tort law and not presenting a federal question. (b) False. Again, this is an issue of state law, specifically the law of State A. The decision of one state’s supreme court is not binding on the courts of another state.

Such a decision in State A may be persuasive on the courts in State B, but it is not binding.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 3: Civil Dispute Resolution

6. The Supreme Court of State G decided that the U.S. Constitution requires professors to warn students of their right to remain silent before questioning the students about cheating. This ruling directly conflicts with a decision of the U.S. Court of Appeals for the circuit that includes State G. a. Must the U.S. Circuit Court of Appeals withdraw its ruling? b. Must the Supreme Court of State G withdraw its ruling?

Answer: (a) No. Decisions of a state supreme court are only binding on the federal courts as to questions of that state’s law. Here a federal question is at issue. (b) Although a decision of a federal court, other than the U.S. Supreme Court, may be persuasive in a state court on a federal question, it is still not binding on that state court.

7. Thomas Clements brought an action in a court in Illinois to recover damages for breach of warranty against defendant Signa Corporation. (A warranty is an obligation that the seller of goods assumes with respect to the quality of the goods sold.) Clements had purchased a motorboat from Barney's Sporting Goods, an Illinois corporation. The boat was manufactured by Signa Corporation, an Indiana corporation with its principal place of business in Decatur, Indiana. Signa has no office in Illinois and no agent authorized to do business on its behalf within Illinois. Clements saw Signa's boats on display at the Chicago Boat Show. In addition, literature on Signa's boats was distributed at the Chicago Boat Show. Several boating magazines, delivered to Clements in Illinois, contained advertisements for Signa's boats. Clements has also seen Signa's boats on display at Barney's Sporting Goods Store in Palatine, Illinois, where he eventually purchased the boat. A written warranty issued by Signa was delivered to Clements in Illinois. Although Signa was served with a summons, it failed to enter an appearance in this case. A default order was entered against Signa, and subsequently a judgment of $6,220 was entered against Signa. Signa appealed. Decision?

Answer: Judgment for Clements. Under Section 17 of the Illinois Long-Arm Statute, a nonresident corporation which transacts business within the State of Illinois is subject to personal jurisdiction in the Illinois state courts in any lawsuit arising out of business. The assertion of personal jurisdiction, however, must satisfy the due process clause of the 14th Amendment to the U.S. Constitution. Due process requires sufficient “minimum contacts” between Illinois and the nonresident corporation so that the exercise of personal jurisdiction is consistent with traditional notions of fair play and substantial justice.

By displaying its boats and distributing literature at the Chicago Boat Show, advertising in magazines with Illinois subscribers and selling its boats to Illinois retailers, Signa Corporation satisfies the due process “minimum contacts” test and the Illinois Long-Arm Statute. Since it has intentionally and consistently engaged in practices designed to promote sales of its boats in Illinois, it would not violate traditional notions of fair play and justice for the Illinois State court to assert personal jurisdiction over Signa on a claim which arose out of the sale of one of its boats to an Illinois resident, in Illinois. Clements v. Barney’s Sporting Goods Store, 84 Ill.App.3d 600, 40 Ill.Dec. 342, 406 N.E.2d 43 (1980).

8. Vette sued Aetna under a fire insurance policy. Aetna moved for summary judgment on the basis that the pleadings and discovered evidence showed a lack of an insurable interest in Vette. An “insurable interest” exists when the insured derives a monetary

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 3: Civil Dispute Resolution

benefit or advantage from the preservation or continued existence of the property or would sustain an economic loss from its destruction. Aetna provided ample evidence to infer that Vette had no insurable interest in the contents of the burned building. Vette also provided sufficient evidence to put in dispute this factual issue. The trial court granted the motion for summary judgment. Vette appealed. Decision?

Answer: Judgment for Vette. Summary judgment should not be entered unless the pleadings, stipulations, affidavits, and admissions in the case show that there exists no genuine issue as to any material fact. In passing upon a motion for summary judgment, the court is required to view the facts in the light most favorable to the party opposing the motion [Vette] and to give that party the benefit of all reasonable inferences to be drawn from the underlying facts.

Although Aetna provided ample evidence to infer that Vette had no insurable interest in the contents of the burned building, Vette also provided sufficient evidence to put in dispute this material and factual issue. As the party opposing the motion for summary judgment, Vette was entitled to the benefit of all reasonable inferences and to a review of the facts in the light most favorable to him. Therefore, the motion for summary judgment should be denied. Vette Co. v.

Aetna Cas. & Sur. Co., 612 F.2d 1076 (8th Cir., 1980).

9. Mark Womer and Brian Perry were members of the U.S. Navy and were stationed in Newport, Rhode Island. On April 10, Womer allowed Perry to borrow his automobile so that Perry could visit his family in New Hampshire. Later that day, while operating Womer’s vehicle, Perry was involved in an accident in Manchester, New Hampshire. As a result of the accident, Tzannetos Tavoularis was injured. Tavoularis brought this action against Womer in a New Hampshire superior court, contending that Womer was negligent in lending the automobile to Perry when he knew or should have known that Perry did not have a valid driver’s license. Womer sought to dismiss the action on the ground that the New Hampshire courts lacked jurisdiction over him, citing the following facts: (a) he did not live in New Hampshire, (b) he had no relatives in New Hampshire, (c) he neither owned property nor possessed investments in New Hampshire, and (d) he had never conducted business in New Hampshire. Did the New Hampshire courts have jurisdiction? Explain.

Answer: Yes, judgment affirmed. The long-arm statute in New Hampshire provides that any person who “in person or through an agent…commits a tortious act within this state…submits himself…to the jurisdiction of the courts of this state as to any cause of action arising from or growing out of the [tortious] act….Although Womer’s allegedly “tortious act”—lending the car to Perry—occurred in Rhode Island, and only the injury occurred in New Hampshire, this does not preclude the exercise of jurisdiction over Womer under the long-arm statute. The jurisdiction over Womer in this case accords with constitutional due process, which requires that a defendant have “minimum contacts” with a State such that the jurisdiction does not offend “traditional notions of fair play and substantial justice.” Womer should have anticipated being brought into court in NH. He authorized Perry to drive there, and it was reasonably foreseeable that Womer would be sued in NH for negligently entrusting his vehicle to Perry. Womer had sufficient contacts with New Hampshire for the constitutional exercise of jurisdiction by its courts. Tavoularis v.

Womer, 462 A.2d 110 (N.H., 1983).

10. Mariana Deutsch worked as a knitwear mender and attended a school for beauticians. The sink in her apartment collapsed on her foot, fracturing her big toe and making it painful for her to stand. She claims that as a consequence of the injury she was compelled to abandon her plans to become a beautician because that job requires long periods of © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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standing. She also asserts that she was unable to work at her current job for a month.

She filed a tort claim against her landlord, Hewes Street Realty, for negligence in failing to maintain the sink properly. She brought the suit in federal district court, claiming damages of $85,000. Her medical expenses and actual loss of salary were less than $7,500; the rest of her alleged damages were for loss of future earnings as a beautician. Hewes Street moved to dismiss the suit on the basis that Deutsch’s claim fell short of the jurisdictional requirement and therefore the federal court lacked subject matter jurisdiction over her claim. The district court dismissed the suit, and Deutsch appealed. Does the federal court have jurisdiction? Explain.

Answer: Yes. Judgment for Deutsch. The general rule for determining the $75,000 jurisdictional amount in controversy requirement is that an amount alleged in good faith to exceed $75,000 will satisfy the requirement, unless it appears to be a legal certainty that the claim is really for less than $75,000. The court may look beyond the face of the complaint, however, to determine the validity of the alleged amount. For example, the court may dismiss a suit for lack of jurisdiction if: (1) the damages claimed are not recoverable at all under applicable law, or (2) the damages that are recoverable cannot as a matter of law exceed $75,000, or (3) the amount of damages was inflated solely to gain access to the federal courts.

In this case, Deutsch’s claim for unliquidated damages of $70,000 for her loss of future earnings as a beautician satisfies the jurisdictional requirement. Although it may seem unlikely that she could actually prove $85,000 in total damages, it cannot be said with legal certainty that the damages do not exceed $75,000.

Therefore, she should have an opportunity to have her claim decided on its merits in a federal court. Deutsch v. Hewes St. Realty Corp., 359 F2d 96 (1966).

11. Kenneth Thomas brought suit against his former employer, Kidder, Peabody & Company, and two of its employees, Barclay Perry and James Johnston, in a dispute over commissions on sales of securities. When he applied to work at Kidder, Peabody & Company, Thomas had filled out a form, which contained an arbitration agreement clause.

Thomas had also registered with the New York Stock Exchange (NYSE). Rule 347 of the NYSE provides that any controversy between a registered representative and a member company shall be settled by arbitration. Kidder, Peabody & Company is a member of the NYSE. Thomas refused to arbitrate, relying on Section 229 of the California Labor Code, which provides that actions for the collection of wages may be maintained “without regard to the existence of any private agreement to arbitrate.” Perry and Johnston filed a petition in a California state court to compel arbitration under Section 2 of the Federal Arbitration Act, which was enacted pursuant to the Commerce Clause of the U.S. Constitution. Should the petition of Perry and Johnson be granted?

Answer: Yes, the petition should be granted. Judgment for Perry and Johnston.

When it passed the Federal Arbitration Act, Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims the contracting parties had agreed to resolve by arbitration. Enacted pursuant to the Commerce Clause of the U.S. Constitution, the Federal Arbitration Act is enforceable in both state and federal courts. This Act embodies a clear federal policy of requiring arbitration unless the agreement to arbitrate is not part of a contract evidencing interstate commerce, or is revocable upon such grounds as exist at law or in equity for the revocation of any contract.

This clear federal policy places the Federal Arbitration Act in unmistakable conflict with California statute’s requirement that litigants be provided a judicial forum for resolving wage disputes. Therefore, under the supremacy clause of the U.S. Constitution, the state statute must give way to the federal law.

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12. Steven Gwin bought a lifetime termite protection plan for his home in Alabama from the local office of Allied-Bruce, a franchisee of Terminix International Company. The plan provided that Allied-Bruce would “protect” Gwin’s house against termite infestation, reinspect periodically, provide additional treatment if necessary, and repair damage caused by new termite infestations. Terminix International guaranteed the fulfillment of these contractual provisions. The plan also provided that all disputes arising out of the contract would be settled exclusively by arbitration. Four years later, Gwin had AlliedBruce reinspect the house in anticipation of selling it. Allied-Bruce gave the house a “clean bill of health.” Gwin then sold the house and transferred the Termite Protection Plan to Dobson. Shortly thereafter, Dobson found the house to be infested with termites. AlliedBruce attempted to treat and repair the house, using materials from out of state, but these efforts failed to satisfy Dobson. Dobson then sued Gwin, Allied-Bruce, and Terminix International in an Alabama state court. Allied-Bruce and Terminix International asked for a stay of these proceedings until arbitration could be carried out as stipulated in the contract. The trial court refused to grant the stay. The Alabama Supreme Court upheld that ruling, citing a state statute that makes predispute arbitration agreements unenforceable. The court found that the Federal Arbitration Act, which preempts conflicting state law, did not apply to this contract because its connection to interstate commerce was too slight. Was the Alabama Supreme Court correct? Explain.

Answer: No, the Alabama Supreme Court was wrong in upholding the trial court’s refusal to grant a stay. The trial court should have granted the stay to allow arbitration to be carried out. The Federal Arbitration Act provides that written arbitration provisions in contracts for transactions involving commerce are generally enforceable. These transactions do not always have to directly involve interstate commerce, but merely affect interstate commerce. In addition, the statute applies where a transaction has in fact involved interstate commerce even though the parties did not contemplate interstate commerce when creating the contract. In this case, the parties do not contest that the transaction, in fact, involved interstate commerce. In addition to the multistate operations of Terminix and Allied-Bruce, the materials used by Allied-Bruce in its efforts to carry out the terms of the Plan came from outside Alabama. Therefore, the Federal Arbitration Act preempts Alabama’s anti-arbitration statute and requires enforcement of the contract’s arbitration provision.

13. Eddie Lee Howard and Shane D. Schneider worked for Nitro-Lift Technologies LLC. As a condition of employment, they entered into confidentiality and noncompetition agreements that contained a clause requiring any dispute between Nitro-Lift and its employees to be settled in arbitration. After working for Nitro-Lift on wells in Oklahoma, Texas, and Arkansas, the plaintiffs quit and began working for one of Nitro-Lift’s competitors. Claiming that the plaintiffs had breached their noncompetition agreements, Nitro-Lift served them with a demand for arbitration. The plaintiffs then filed suit in the District Court of Johnston County, Oklahoma, asking the court to declare the noncompetition agreements null and void and to enjoin their enforcement. The court dismissed the complaint, finding that the contracts contained valid arbitration clauses under which an arbitrator, and not the court, must settle the parties’ disagreement. On appeal, the Oklahoma Supreme Court reversed, holding that despite the “[U.S.] Supreme Court cases on which the employers rely,” the “existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.”

Finding that the arbitration clauses were no obstacle to its review, the Oklahoma Supreme Court held that the noncompetition agreements were “void and unenforceable as against

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Oklahoma’s public policy,” expressed in an Oklahoma statute. Did the Oklahoma Supreme Court err in preventing the arbitration of the noncompetition agreement? Explain.

Answer: Yes. The judgment of the Supreme Court of Oklahoma is vacated, and the case is remanded. State courts rather than federal courts are most frequently called upon to apply the Federal Arbitration Act (FAA), [citation], including the Act's national policy favoring arbitration. It is a matter of great importance, therefore, that state supreme courts adhere to a correct interpretation of the legislation. *** The Oklahoma Supreme Court’s decision disregards this Court’s precedents on the FAA. That Act, which “declare[s] a national policy favoring arbitration,” [citation], provides that a “written provision in…a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction…shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

[Citation.] It is well settled that “the substantive law the Act created [is] applicable in state and federal courts.” [Citations.] And when parties commit to arbitrate contractual disputes, it is a mainstay of the Act’s substantive law that attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved “by the arbitrator in the first instance, not by a federal or state court.” [Citations.] *** When parties commit to arbitrate contractual disputes, the FAA requires that attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved by the arbitrator in the first instance, not by a federal or state court.

14. Llexcyiss Omega and D. Dale York, both residents of Indiana, jointly listed a Porsche automobile for sale on eBay. The listing stated that the vehicle was located in Indiana and that the winning bidder would be responsible for arranging and paying for delivery of the vehicle. The Attaways, residents of Idaho, entered a bid of $5,000 plus delivery costs.

After being notified that they had won the auction, the Attaways submitted payment to Omega and York through PayPal, which charged the amount to the Attaways’ MasterCard account. The Attaways arranged for CarHop USA, a Washington-based auto transporter, to pick up the Porsche in Indiana and deliver it to their Idaho residence. After taking delivery of the Porsche, the Attaways filed a claim with PayPal, asking for a refund of its payment to Omega and York because the Porsche was “significantly not as described” in its eBay listing. PayPal informed the Attaways via email that their claim was denied. The Attaways convinced MasterCard to rescind the payment that had been made to Omega and York.

Omega and York filed suit against the Attaways in small claims court in Indiana, demanding $5,900 in damages. Explain whether the Indiana courts have jurisdiction over the Attaways.

Answer: Yes, the Indiana courts do have jurisdiction.

The U.S. Supreme Court has established that a nonresident defendant must have “certain minimum contacts with [the forum state] such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.”

The Court later clarified this test to mean that the nonresident defendant must engage in “some act by which [he] purposefully avails [himself] of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.” If the defendant's contacts with the forum state are sufficient, due process requires that the assertion of personal jurisdiction would comport with “fair play and substantial justice.” To make this determination, the

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court may consider five factors: (1) the burden on the defendant, (2) the forum state's interest in adjudicating the dispute, (3) the plaintiff's interest in obtaining convenient and effective relief, (4) the interstate judicial system's interest in obtaining the most efficient resolution of controversies, and (5) the shared interest of the several states in furthering fundamental substantive shared policies. 105 S.Ct. 2174.

Here, the Indiana sellers, filed suit against the Idaho buyers, the Attaways, after the Attaways took delivery of the vehicle and then rescinded payment. The Attaways were able to see the sellers' location prior to making their bid on the Porsche.

Presumably, a person considering placing a bid in an online auto auction would note the vehicle's location, particularly when, as here, the seller states that the buyer will be responsible for arranging and paying for delivery. Obviously, delivery fees could vary significantly, depending upon how far away the vehicle is from the buyer's home.

By submitting a bid, the Attaways agreed to appear, in person or by representative, in Indiana to pick up the vehicle. After they won the Porsche, they hired an auto shipping company, based in Washington, to enter the state of Indiana as their representative, pick up the Porsche, and deliver it to them in Idaho. In sum, during the course of this transaction, there was more than just a single online purchase to satisfy the personal jurisdiction requirements of the federal due process clause.

Therefore, the Attaways purposefully availed themselves of the privilege of conducting activities within the state of Indiana such that they could reasonably anticipate defending a lawsuit in Indiana related to this eBay purchase.

As for whether the assertion of personal jurisdiction comports with fair play and substantial justice, it appears that the burden on the Attaways is no greater than the burden would be on Omega and York if they were forced to bring this case in Idaho. As for efficient resolution of the controversies, it is not evident that there would be greater travel expenses or inconvenience for more people if the case is tried in Indiana. In weighing the interests of the states, it is certainly within the bounds of fair play and substantial justice to allow Indiana to exercise personal jurisdiction over individuals who have entered into a contract with an Indiana resident for the purchase of property located in Indiana, have removed that property from the state of Indiana, and then rescinded payment. Attaway v.

Omega, Indiana Court of Appeals, 903 N.E.2d 73 (2009).

ANSWERS TO “TAKING SIDES” PROBLEMS John Connelly suffered personal injuries when a tire manufactured by Uniroyal failed while his 1969 Opel Kadett was being operated on a highway in Colorado. Connelly’s father had purchased the automobile from a Buick dealer in Evanston, Illinois. The tire bore the name “Uniroyal” and the legend “made in Belgium” and was manufactured by Uniroyal, sold in Belgium to General Motors, and subsequently installed on the Opel when it was assembled at a General Motors plant in Belgium. The automobile was shipped to the United States for distribution by General Motors. It appears that between 1968 and 1971, more than 4,000 Opels imported into the United States from Antwerp, Belgium, were delivered to dealers in Illinois each year; that in each of those years, between 600 and 1,320 of the Opels delivered to Illinois dealers were equipped with tires manufactured by Uniroyal; and that the estimated number of Uniroyal tires mounted on Opels delivered in Illinois within each of those years ranged from 3,235 to 6,630. Connelly

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brought suit in Illinois against Uniroyal to recover damages for personal injuries. Uniroyal asserted that it was not subject to the jurisdiction of the Illinois courts because it is not registered to do business and has never had an agent, an employee, a representative, or a salesperson in Illinois; that it has never possessed or controlled any land or maintained any office or telephone listing in Illinois; that it has never sold or shipped any products into Illinois, either directly or indirectly; and that it has never advertised in Illinois. a. What arguments could Connelly make in support of his claim that Illinois courts have jurisdiction over Uniroyal? b. What arguments could Uniroyal make in support of its claim that Illinois courts do not have jurisdiction over it? c. Who should prevail? Explain.

Answer: (a) Connelly could argue that Uniroyal was subject to the jurisdiction of the Illinois courts under that state’s long-arm statute because Uniroyal had transacted business in Illinois and that business is the subject matter of Connelly’s lawsuit.

Connelly could also argue that this exercise of jurisdiction over Uniroyal does not offend traditional notions of fair play and substantial justice. (b) Uniroyal could argue that Uniroyal was not subject to the jurisdiction of the Illinois courts under that state’s long-arm statute because Uniroyal had never transacted business in Illinois. Uniroyal could also argue that this exercise of jurisdiction over Uniroyal offends traditional notions of fair play and substantial justice because there is a total lack of contact between Uniroyal and the state of Illinois so that an assertion of jurisdiction by an Illinois court over Uniroyal would be contrary to substantial justice and would violate the rights of Uniroyal under the U.S. Constitution. (c) Answer: The court in this case found for Connelly. Connelly v. Uniroyal, Inc., Illinois Supreme Court, 1979, 75 Ill.2d 393, 389 N.E. 2d 155, http://scholar.google.com/scholar_case?case=5833115262180270768&hl=en&as_sdt= 2,34 Uniroyal argues that the requirements of due process are not satisfied unless a corporation has exercised the privilege of conducting activities within the state and thereby enjoyed the benefits and protections of the laws of that state and that there has been no action on its part by which it purposely availed itself of the privilege of conducting activities within Illinois and thereby invoked the benefits and protections of its laws.

“The ‘quality and nature of the activity’ in which a foreign corporation must engage within a state in order to be subject to the jurisdiction of its courts has been the subject of much litigation. (See Annots., 19 A.L.R.3d 13 (1968), 24 A.L.R.3d 532 (1969).) The diametrically opposed and irreconcilable views on the question whether a manufacturer whose product has been distributed in a State by a third party is insulated from in personam jurisdiction under the due process clause of the fourteenth amendment in a product liability case because the sale and distribution of the product into the forum State was through an intermediary, rather than by the manufacturer, are well demonstrated by the majority and dissenting opinions [in numerous cases.]”

“A manufacturer whose products pass through the hands of one or more middlemen before reaching their ultimate users cannot disclaim responsibility for

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the total distribution pattern of the products. If the manufacturer sells its products in circumstances such that it knows or should reasonably anticipate that they will ultimately be resold in a particular state, it should be held to have purposefully availed itself of the market for its products in that state. 71 Cal.2d 893, 902, 458 P.2d 57, 64, 80 Cal. Rptr. 113, 120.” “[Uniroyal’s] tires, introduced into the stream of commerce in obvious contemplation of their ultimate sale or use in other nations or States, came into Illinois on a regular basis and in substantial numbers, and we hold that its activities rendered it amenable to process under sections 13.3 and 16 of the Civil Practice Act. Given the nature and quality of its activities, we hold further that [Uniroyal] has purposefully invoked the benefits and protections of the law of Illinois, that as required by International Shoe and Shaffer there were present ‘such contacts of the corporation with the state of the forum as make it reasonable, in the context of our federal system of government, to require the corporation to defend the particular suit which is brought there’ (326 U.S. 310, 317, 90 L.Ed. 95, 102, 66 S.Ct. 154, 158; 433 U.S. 186, 203, 53 L.Ed.2d 683, 697, 97 S.Ct. 2569, 2580), and that requiring it to defend this action does not offend ‘traditional notions of fair play and substantial justice’ (326 U.S. 310, 316, 90 L.Ed. 95, 102, 66 S.Ct. 154, 158).”

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Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 4: Constitutional Law

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ..............................................................................13

ANSWERS TO ETHICAL DILEMMA Who Is Responsible for Commercial Speech?

1.

What should Jane do? What is best for (a) her company and (b) society? Should Jane raise her concerns to the department head?

2. Identify the competing social values at stake with regard to cigarette advertising. What role should the government play in regulating speech that promotes products such as tobacco and alcohol?

3. Should the age of Dazzling’s prospective audience influence the choice of advertisements?

Explain.

Answer: 1. One may argue that it is important for Jane to voice concerns about the cigarette advertisements, particularly in light of the company’s drive to target younger audiences. While she does have a commitment to helping her company maximize profits, and to indirectly benefit her fellow employees by doing so, her concern for the effect of the advertisements on the readers appears well-placed. Raising these concerns with the department head would allow him or her to make a managementlevel decision which would clarify the company’s commitment to its audience’s health and well-being.

2. The competing interests include the freedom of speech and the need to regulate commercial speech to protect the public, and particularly minors. A further societal concern is a monetary one, based on the health costs which society must sustain due to illnesses resulting from smoking.

There is a wide range of views on the extent to which the government should regulate commercial speech. At one end of the spectrum is the view that all regulations should be removed. The other extreme is that a product as inherently dangerous as cigarettes should not be advertised at all.

3. The age of the prospective audience may affect the degree to which the cigarette advertising is ethically (and legally) acceptable. The total message communicated to the reader is also a factor (e.g., cigarette advertisements juxtaposed with articles on health tips).

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It is enormously difficult to make distinctions with regard to the regulation of commercial speech in light of the large number of products, the range of users and uses, and the degree of product dangers.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

In May, Patricia Allen left her automobile on the shoulder of a road in the city of Erehwon after the car stopped running. A member of the Erehwon city police department found the car later that day and placed on it a sticker stating that unless the car was moved, it would be towed. When after a week the car had not been removed, the police department authorized Baldwin Auto Wrecking Co. to tow it away and to store it on its property. Allen was told by a friend that her car was at Baldwin’s. Allen asked Baldwin to allow her to take possession of her car, but Baldwin refused to relinquish the car until the $70.00 towing fee was paid. Allen could not afford to pay the fee, and the car remained at Baldwin’s for six weeks. At that time, Baldwin requested the police department for a permit to dispose of the automobile. After the police department tried unsuccessfully to telephone Allen, the department issued the permit. In late July, Baldwin destroyed the automobile. Allen brings an action against the city and Baldwin for damages for loss of the vehicle, arguing that she was denied due process. Explain who should prevail.

Answer: Judgment for Allen. These facts raise the question of due process under the Fourteenth Amendment. As the Appellate Court of Illinois stated in Valdez v.

City of Ottawa, 434 N.E. 2d 1192 (1982) upon which this problem is based: Due process is not an inflexible standard and does not require a trial-type hearing in every conceivable case of government impairment of private interest.

Nonetheless, due process requires that, at a minimum, … deprivation of life, liberty or property by adjudication be preceded by notice and an opportunity for hearing appropriate to the nature of the case. The notice must be reasonably calculated to convey the necessary information and to afford the interested parties a reasonable time for a hearing. Those parties must be given notice and an opportunity before the deprivation takes place, unless there exist extraordinary circumstances requiring immediate action to protect a valid governmental interest. Furthermore, there is no question that ownership of an automobile and continued access to it is a property interest within the protection of the Fourteenth Amendment, and whether the deprivation will be permanent or temporary is immaterial. Towing a car without prior notice [subject to exceptions noted later] is a violation of due process rights.

On these facts it seems clear that the auto posed no substantial danger to traffic when it was parked on the shoulder. This conclusion is supported by the fact that the police saw no need to disturb the car for at least one week. In the absence of an emergency the city violated Allen's constitutional rights when it seized, towed, and refused to relinquish the auto before payment of a towing fee. Moreover, the city failed to provide Allen with proper notice before towing; under these facts, notice by certified or registered mail would have been appropriate. Even if pretowing notice had not been required, due process demands prompt notice and an opportunity to a hearing before the government makes any disposition of the vehicle. Additionally, the owner must have an opportunity to contest the seizure and tow before she can be required to pay any charges or fees. See Stypmann v.

City & County of San Francisco, 557 F. 2d 1338 (1977). Accordingly, the city and Baldwin violated Allen’s right to due process when they destroyed her automobile without any notice.

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2. In 1967, large oil reserves were discovered in the Prudhoe Bay area of Alaska. As a result, state revenues increased from $124 million in 1969 to $3.7 billion in 1981. In 1980, the state legislature enacted a dividend program that would distribute annually a portion of these earnings to the state’s adult residents. Under the plan, each citizen eighteen years of age or older receives one unit for each year of residency subsequent to 1959, the year Alaska became a state. The state advanced three purposes justifying the distinctions made by the dividend program: (a) creation of a financial incentive for individuals to establish and maintain residence in Alaska; (b) encouragement of prudent management of the earnings; and (c) apportionment of benefits in recognition of undefined “contributions of various kinds, both tangible and intangible, which residents have made during their years of residency.” Crawford, a resident since 1978, brings suit challenging the dividend distribution plan as violative of the equal protection guarantee. Did the dividend program violate the Equal Protection Clause of the Fourteenth Amendment? Explain.

Answer: Decision for Crawford. When a state distributes benefits unequally, the distinctions it makes are subject to scrutiny under the Equal Protection Clause of the Fourteenth Amendment. Generally, a law will survive the scrutiny if the distinction it makes rationally furthers a legitimate state purpose. The state advanced three purposes justifying the distinctions made by the dividend program; (a) creation of a financial incentive for individuals to establish and maintain residence in Alaska; (b) encouragement of prudent management of the earnings; and (c) apportionment of benefits in recognition of undefined “contributions of various kinds, both tangible and intangible, which residents have made during their years of residency.”

The U.S. Supreme Court held that none of these purposes rationally furthered a legitimate state purpose. Zobel v. Williams, 457 U.S. 55 (1982). The court determined that the first two purposes were not rationally related to the distinctions the statute makes between newer residents and those who have been in the state since 1959. As the Court stated with respect to the first objective: “Newcomers seem more likely to become dissatisfied and to leave the State than well-established residents; it would thus seem that the State would give a larger, rather than a smaller, dividend to new residents if it wanted to discourage emigration. The separation of residents into classes hardly seems a likely way to persuade new Alaskans that the State welcomes them and wants them to stay.” The Court explained its rejection of the second objective: “Assuming, arguendo, that granting increased dividend benefits for each year of continued Alaska residence might give some residents an incentive to stay in the State in order to reap increased dividend benefits in the future, the State’s interest is not in any way served by granting greater dividends to persons for their residency during the 21 years prior to the enactment.”

The last objective—to reward citizens for past contributions—was held not to be a legitimate state purpose. As the court stated: If the states can make the amount of a cash dividend depend on length of residence, what would preclude varying university tuition on a sliding scale based on years of residence—or even limiting access to finite public facilities, eligibility for student loans, for civil service jobs, or for government contracts by length of domicile? Could States impose different taxes based on length of residence? Alaska's

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reasoning could open the door to state apportionment of other rights, benefits and services according to length of residency. It would permit the states to divide citizens into expanding numbers of permanent classes. Such a result would be clearly impossible.

3. Maryland enacted a statute prohibiting any producer or refiner of petroleum products from operating retail service stations within the state. The statute also required that any producer or refiner discontinue operating its company-owned retail service stations. Approximately 3,800 retail service stations in Maryland sell more than twenty different brands of gasoline.

All of this gasoline is brought in from other states, as no petroleum products are produced or refined in Maryland. Only 5 percent of the total number of retailers are operated by a producer or refiner. Maryland enacted the statute because a survey conducted by the state comptroller indicated that gasoline stations operated by producers or refiners had received preferential treatment during periods of gasoline shortage. Seven major producers and refiners brought an action challenging the statute on the ground that it discriminated against interstate commerce in violation of the Commerce Clause of the U.S. Constitution. Are they correct? Explain.

Answer: No, they are not correct. The Maryland statute is constitutional. In Exxon Corp. v. Governor of Maryland, 437 U.S. 117 (1978) the U.S. Supreme Court stated: Plainly, the Maryland statute does not discriminate against interstate goods, nor does it favor local producers and refiners. Since Maryland's entire gasoline supply flows in interstate commerce and since there are no local producers or refiners, such claims of disparate treatment between interstate and local commerce would be without merit. Appellants, however, focus on the retail market, arguing that the effect of the statute is to protect in-state independent dealers from out-of-state competition. They contend that the divestiture provisions "create a protected enclave for Maryland independent dealers…." As support for this proposition, they rely on the fact that the burden of the divestiture requirements falls solely on interstate companies. But this fact does not lead, either logically or practically, to a conclusion that the state is discriminating against retail interstate commerce.

As the record shows, there are several major interstate marketers of petroleum that own and operate their own retail gasoline stations. These interstate dealers, who compete directly with the Maryland independent dealers, are not affected by the Act because they do not refine or produce gasoline. In fact, the Act creates no barriers whatsoever against interstate independent dealers; it does not prohibit the flow of interstate goods, place added costs upon them, or distinguish between instate and out-of-state companies in the retail market. The absence of any of these factors fully distinguishes this case from those in which the state is found to have discriminated against interstate commerce. The fact that the burden of a state regulation falls on some interstate companies does not, by itself, establish a claim of discrimination against interstate commerce.

4. The Federal Aviation Act provides that “The United States of America is declared to possess and exercise complete and exclusive national sovereignty in the airspace of the United States.” The city of Orion adopted an ordinance that makes it unlawful for jet aircraft to take off from its airport between 11:00 p.m. of one day and 7:00 a.m. of the next day. Jordan Airlines, Inc., is adversely affected by this ordinance and brings suit challenging it under the Supremacy Clause of the U.S. Constitution as conflicting with the Federal Aviation Act or preempted by it. Is the ordinance valid? Explain.

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Answer: Decision for Jordan Airlines. The Federal Aviation Act (FAA) of 1958, as amended by the Noise Control Act of 1972, preempts the field. Any control of noise pollution must be consistent with the "highest degree of safety." The FAA requires a delicate balance between safety and efficiency, and the protection of the persons on the ground. The interdependence of these factors requires a uniform and exclusive system of federal regulation if the congressional objectives underlying the Federal Aviation Act are to be fulfilled. As the U.S. Supreme Court stated in City of Burbank v. Lockheed Air Terminal, Inc., 411 U.S. 624 (1973) upon which this problem is based: If we were to uphold the Burbank ordinance and a significant number of municipalities followed suit, it is obvious that fractionalized control of the timing of takeoffs and landings would severely limit the flexibility of the FAA in controlling air traffic flow. The difficulties of scheduling flights to avoid congestion and the concomitant decrease in safety would be compounded.

Moreover, as the court had stated in the earlier decision of Northwest Airlines, Inc. v. Minnesota: Federal control is intensive and exclusive. Planes do not wander about in the sky like vagrant clouds. They move only by federal permission, subject to federal inspection, in the hands of federally certified personnel and under an intricate system of federal commands. The moment a ship taxis onto a runway it is caught up in an elaborate and detailed system of controls.

Thus, the pervasive nature of the scheme of federal regulations of aircraft noise demonstrates that federal law has pre-empted the field.

5. The Public Service Commission of State X issued a regulation completely banning all advertising that “promotes the use of electricity” by any electric utility company in State X. The commission issued the regulation to conserve energy. Central Electric Corporation of State X challenges the order in the state courts, arguing that the commission had restrained commercial speech in violation of the First Amendment. Was its freedom of speech unconstitutionally infringed? Explain.

Answer: Yes, Central Electric’s freedom of speech was infringed. Decision for Central Electric Corporation. This problem is based upon Central Hudson Gas and Electric Corporation v. Public Service Commission, 447 U.S. 557 (1980) in which the Court concisely stated the test for commercial speech cases: In commercial speech cases, then, a four-part analysis has developed. At the outset, we must determine whether the expression is protected by the First Amendment. For commercial speech to come within that provision, it at least must concern lawful activity and not be misleading. Next, we ask whether the asserted governmental interest is substantial. If both inquiries yield positive answers, we must determine whether the regulation directly advances the governmental interest asserted, and whether it is not more extensive than is necessary to serve that interest.

On these facts the court found the promotional advertising to be commercial speech even though the electric utility had a monopoly in electricity since it nonetheless competed with fuel oil and natural gas. It was conceded by the Commission that the advertising was neither inaccurate nor relating to unlawful activities. The Court agreed that the governmental interest of conservation was substantial and found that this interest was directly advanced by the prohibition

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upon advertising. However, the court concluded that the regulation was more extensive than was necessary in that it reached all promotional advertising, regardless of its impact upon overall energy use: The commission also has not demonstrated that its interest in conservation cannot be protected adequately by more limited regulation of appellant's commercial expression. To further its policy of conservation, the Commission could attempt to restrict the format and content of Central Hudson's advertising. It might, for example, require that the advertisements include information about the relative efficiency and expense of the offered service, both under current conditions and for the foreseeable future. In the absence of a showing that more limited speech regulation would be ineffective, we cannot approve the complete suppression of Central Hudson's advertising.

6. E-Z-Rest Motel is a motel with 216 rooms located in the center of a large city in State Y. It is readily accessible from two interstate highways and three major state highways. The motel solicits patronage from outside State Y through various national advertising media, including magazines of national circulation. It accepts convention trade from outside State Y, and approximately 75 percent of its registered guests are from out of State Y. An action under the Federal Civil Rights Act of 1964 has been brought against E-Z-Rest Motel alleging that the motel discriminates on the basis of race and color. The motel contends that the statute cannot be applied to it because it is not engaged in interstate commerce. Can the federal government regulate this activity under the Interstate Commerce Clause? Why? Answer: Yes, the Federal government can regulate this activity. Decision against the E-Z Rest Motel. This problem is based upon Heart of Atlanta Motel v. United States, 379 U.S. 241 (1964) in which the court discussed the legislative history of the Civil Rights Act of 1964: While the Act as adopted carried no congressional findings the record of its passage through each house is replete with evidence of the burdens that discrimination by race or color places upon interstate commerce…. This testimony included the fact that our people have become increasingly mobile with millions of people of all races traveling from state to state; that Negroes in particular have been the subject of discrimination in transient accommodations, having to travel great distances to secure the same; that often they have been unable to obtain accommodations and have had to call upon friends to put them up overnight,… and that these conditions had become so acute as to require the listing of available lodging for Negroes in a special guidebook which was itself "dramatic testimony to the difficulties" Negroes encounter in travel…. This testimony indicated a qualitative as well as quantitative effect on interstate travel by Negroes. The former was the obvious impairment of the Negro traveler's pleasure and convenience that resulted when he continually was uncertain of finding lodging. As for the latter, there was evidence that this uncertainty stemming from racial discrimination had the effect of discouraging travel on the part of a substantial portion of the Negro community.…

The court relied upon these facts and the motel's operation to hold that the motel is subject to Congress because 'if it is interstate commerce that feels the pinch, it does not matter how local the operation which applies the squeeze'…. Thus, the power of Congress to promote interstate commerce also includes the power to regulate the local incidents thereof, including local activities in both the states of origin and destination, which might have a substantial and harmful effect upon

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that commerce. One need only examine the evidence which we have discussed above to see that Congress may—as it has—prohibit racial discrimination by motels serving travelers, however 'local' their operations may appear…." Congress may act under the Commerce Clause when the activity sought to be regulated is "commerce which concerns more states than one" and has a real and substantial relation to the national interest.

7. State Z enacted a Private Pension Benefits Protection Act requiring private employers with one hundred or more employees to pay a pension funding charge for terminating a pension plan or closing an office in State Z. Acme Steel Company closed its offices in State Z, whereupon the state assessed the company $185,000 under the vesting provisions of the Act. Acme challenged the constitutionality of the Act under the Contract Clause of the U.S. Constitution. Was the Act constitutional? Explain.

Answer: Decision for Acme. The statute is unconstitutional under the Contract Clause. As the U.S. Supreme Court stated in Allied Structural Steel Company v. Spannus, 438 U.S. 234 (1978) upon which this problem is based: Entering a field it had never before sought to regulate, the State Z Legislature grossly distorted the company's existing contractual relationships with its employees by superimposing retroactive obligations upon the company substantially beyond the terms of its employment contracts. And that burden was imposed upon the company only because it closed its office in the state.

This State Z law simply does not possess the attributes of those state laws that in the past have survived challenge under the Contract Clause of the Constitution.

The law was not even purportedly enacted to deal with a broad, generalized economic or social problem. It did not operate in an area already subject to state regulation at the time the company's contractual obligations were originally undertaken, but invaded an area never before subject to regulation by the state. It did not effect simply a temporary alteration of the contractual relationships of those within its coverage, but worked a severe, permanent, and immediate change in those relationships—irrevocably and retroactively. And its narrow aim was leveled not at every State Z employer, not even at every State Z employer who left the state, but only at those who had in the past been sufficiently enlightened as voluntarily to agree to establish pension plans for their employees.

8. A state statute empowered public school principals to suspend students for up to ten days without any notice or hearing. A student who was suspended for ten days challenges the constitutionality of his suspension on the grounds that he was denied due process.

Was due process denied? Explain.

Answer: Yes, due process was denied. Decision for the student. The plaintiff student's denial of an evidentiary hearing violated the Due Process Clause of the Fourteenth Amendment according to the U.S. Supreme Court decision in Goss. v.

Lopez, 419 U.S. 565 (1975). At the very minimum students facing suspension and the consequent interference with a protected property interest must be given some kind of notice and afforded some kind of hearing. The Due Process Clause does not require that students be afforded the opportunity to secure counsel, to confront and cross-examine witnesses supporting the charge, or to call their own witnesses to verify his version of the incident. It does, however, require that the student be given notice and an informal hearing permitting them to give their

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version of the events. Longer suspensions and expulsions may require more formality, and procedural due process laws within each state cover this process.

9. Iowa enacted a statute prohibiting the use of sixty-five-foot double-trailer-truck combinations. All the other midwestern and western states permit such trucks to be used on their roads. Despite these restrictions, Iowa’s statute permits cities abutting the state line to enact local ordinances adopting the length limitations of the adjoining state. In cases in which a city has exercised this option, otherwise-oversized trucks are permitted within the city limits and in nearby commercial zones. Consolidated Freightways is adversely affected by this statute and brings suit against Iowa, alleging that the statute violates the Commerce Clause. The District Court found that the evidence established that sixty-fivefoot doubles were as safe as the shorter truck units. Does the statute violate the Commerce Clause? Explain.

Answer: Decision for Consolidated Freightways. The U.S. Supreme Court said in Kassel v. Consolidated Freightways Corporation, 450 U.S. 662 (1981) that because Iowa imposed this burden without any significant countervailing safety interest, its statute violated the Commerce Clause. The court said that the statute seemed to have been designed not to ban dangerous trucks, because it included a "border cities exemption," but rather to discourage interstate truck traffic. A state cannot constitutionally promote its own parochial interest by requiring vehicles which have no known safety hazards to detour around it. Note, however, that this was a plurality decision by Justice Powell and three other justices. There were two other justices who had a concurring opinion and there were three justices who dissented.

This provides subsequent litigants with arguments upon which to present their case.

10. Metropolitan Edison Company is a privately owned and operated Pennsylvania corporation subject to extensive regulation by the Pennsylvania Public Utility Commission. Under a provision of its general tariff filed with the commission, Edison had the right to discontinue electric service to any customer on reasonable notice of nonpayment of bills. Catherine Jackson had been receiving electricity from Metropolitan Edison when her account was terminated because of her delinquency in payments. Edison later opened a new account for her residence in the name of James Dodson, another occupant of Jackson’s residence. In August of the following year, Dodson moved away, and no further payments were made to the account. Finally, in October, Edison disconnected Jackson’s service without any prior notice. Jackson brought suit claiming that her electric service could not be terminated without notice and a hearing. She further argued that such action, allowed by a provision of Edison’s tariff filed with the commission, constituted “state action” depriving her of property in violation of the Fourteenth Amendment’s guarantee of due process of law. Should Edison’s actions be considered state action? Explain.

Answer: No, it is not state action. Decision for Metropolitan Edison Company. In Jackson v. Metropolitan Edison Co., 419 U.S. 345 (1974) the U.S. Supreme Court stated that deprivations of property without due process by the state are prohibited by the Fourteenth Amendment, but private actions depriving individuals of property are immune from the due process requirement. The termination of Jackson's service by Edison was a private action, immune from the Fourteenth Amendment's due process requirement. Even though Edison is closely regulated by the commission and enjoys at least a partial monopoly, it is still a privately owned utility. Jackson's service was terminated in a manner the commission found permissible under state law.

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11. The McClungs owned Ollie’s Barbecue, a restaurant located a few blocks from the interstate highway in Birmingham, Alabama, with dining accommodations for whites only and a takeout service for blacks. In the year preceding the passage of the Civil Rights Act of 1964, the restaurant had purchased a substantial portion of the food it served from outside the state.

The restaurant had refused to serve blacks since its original opening in 1927 and asserted that if it were required to serve blacks it would lose much of its business. The McClungs sought a declaratory judgment to render unconstitutional the application of the Civil Rights Act to their restaurant because their admitted racial discrimination did not restrict or significantly impede interstate commerce. Decision? Discuss.

Answer: The Commerce Clause of the Constitution empowers Congress to regulate interstate commerce and to make all laws necessary and proper for that purpose.

Even if a business’s activity is local, it may be reached by Congress if the activity directly or indirectly burdens or obstructs interstate commerce. Title II of the Civil Rights Act passed by Congress in 1964 prohibits racial discrimination in a restaurant if it serves or offers to serve interstate travelers or if a substantial portion of the food it serves has moved in interstate commerce. Testimony introduced during the Congressional hearings on the act revealed that racial discrimination by restaurants, especially in the South, has resulted in the sale of fewer interstate goods, obstructed interstate travel by blacks, deterred new businesses from being established there, and caused business in general to suffer.

Consequently, there is a connection between discrimination by restaurants and interstate commerce.

12. Ollie’s Barbecue purchases through interstate commerce, a substantial portion of the food it serves, thereby at least indirectly burdening interstate commerce. Not only would the application of the Civil Rights Act to the McClungs’ restaurant not violate any express constitutional limitations, it would also remain within the limits of the Commerce Clause.

Therefore, as applied to restaurants like the McClungs’, the act is constitutionally valid.

Katzenbach v. McClung, 379 U.S.294 (1964).Miss Horowitz was admitted as an advanced medical student at the University of Missouri-Kansas City. During the spring of her first year, several faculty members expressed dissatisfaction with Miss Horowitz’s clinical performance, noting that it was below that of her peers, that she was erratic in attendance at her clinical sessions, and that she lacked a critical concern for personal hygiene. Upon the recommendation of the school’s Council on Evaluation, she was advanced to her second and final year on a probationary basis. After subsequent unfavorable reviews during her second year and a negative evaluation of her performance by seven practicing physicians, the council recommended that Miss Horowitz be dismissed from the school for her failure to meet academic standards. The decision was approved by the dean and later affirmed by the provost after an appeal by Miss Horowitz. She brought suit against the school’s Board of Curators, claiming that her dismissal violated her right to procedural due process under the Fourteenth Amendment and deprived her of “liberty” by substantially impairing her opportunities to continue her medical education or return to employment in a medically related field. Is her claim correct? Explain.

Answer: No. Judgment for the Board of Curators. Oral or written notice and an opportunity for the student to present their side of the story at a "hearing" is only required for dismissals or suspensions based on disciplinary grounds. In contrast, a dismissal on academic ground demands a less stringent procedure—merely an "informal give and take" between the student and administrative body which provides the student "the opportunity to characterize his conduct and put it in what he deems the proper context.” (Quotes from the Supreme Court opinion.)

Since the Council dismissed Miss Horowitz for failure to meet the school's

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academic standards, and not for disciplinary reasons, a hearing was not required.

In this case the faculty fully informed Miss Horowitz of her unsatisfactory performance ratings and the dangers they posed to her timely graduation and continued enrollment. Furthermore, the Council went beyond the constitutionally required procedural due process by affording her the opportunity to be examined by independent physicians before reaching a final decision. Because the Council more than satisfied the constitutional requirement of procedural due process, its decision is upheld. Board of Curators of the University of Missouri v. Horowitz.

13. Drug compounding is a process by which a pharmacist or doctor combines, mixes, or alters ingredients to create a medication tailored to the needs of an individual patient.

Compounding is typically used to prepare medications that are not commercially available, such as medication for a patient who is allergic to an ingredient in a mass-produced product.

The Federal Food, Drug, and Cosmetic Act of 1938 (FDCA) regulates drug manufacturing, marketing, and distribution, providing that no person may sell any new drug unless approved by the Food and Drug Administration (FDA). The Food and Drug Administration Modernization Act of 1997 (FDAMA), which amends the FDCA, exempts compounded drugs from the FDCA’s requirements provided the drugs satisfy a number of restrictions, including that the prescription must be “unsolicited,” and the provider compounding the drug may “not advertise or promote the compounding of any particular drug, class of drug, or type of drug.” The provider, however, may “advertise and promote the compounding service.”

A group of licensed pharmacies that specialize in drug compounding challenged the FDAMA’s requirement that they refrain from advertising and promoting their products if they wish to continue compounding on the basis that it violates the Free Speech Clause of the First Amendment. Explain what test the court should apply in determining the validity of the FDAMA. Answer: Judgment for the pharmacies. The parties agree that the advertising and soliciting prohibited by the FDAMA constitute commercial speech. Commercial speech receives First Amendment protection, because “It is a matter of public interest that [economic] decisions, in the aggregate, be intelligent and wellinformed. To this end, the free flow of commercial information is indispensable.”

Although the First Amendment protects commercial speech, not all regulation of such speech is unconstitutional. If the commercial speech concerns unlawful activity or is misleading, it is not protected by the First Amendment. If the speech concerns lawful activity and is not misleading, however, the next question is “whether the asserted governmental interest is substantial.” If it is, then the courts “determine whether the regulation directly advances the governmental interest asserted,” and, finally, “whether it is not more extensive than is necessary to serve that interest.” Each of these latter three inquiries must be answered in the affirmative for the regulation to be found constitutional.

The Government asserted that three substantial interests underlie the FDAMA. The first is an interest in “preserving the effectiveness and integrity of the FDCA’s new drug approval process and the protection of the public health that it provides.” The second is an interest in “preserving the availability of compounded drugs for those individual patients who, for particularized medical reasons, cannot use commercially available products that have been approved by the FDA.” Finally, the Government argued that “achieving the proper balance between those two independently compelling but competing interests is itself a substantial governmental interest.”

In this case, however, the Government has failed to demonstrate that the speech restrictions are “not more extensive than is necessary to serve [those] interests.”

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14. A Massachusetts statute established differential methods by which wineries can distribute wines in the state. The statute allows only “small” wineries, defined as those producing 30,000 gallons or less of grape wine a year, to obtain a “small winery shipping license.” This license allows them to sell their wines in Massachusetts in three ways: through shipments made directly to consumers, through wholesaler distribution, and through retail distribution.

All of Massachusetts’s wineries are “small” wineries. Some out-of-state wineries also meet this definition. Wines from “small” Massachusetts wineries compete with wines from “large” wineries, which Massachusetts has defined as those producing more than 30,000 gallons of grape wine annually. These “large” wineries must choose between relying upon wholesalers to distribute their wines in-state or applying for a “large winery shipping license” to sell directly to Massachusetts consumers. They cannot, by law, use both methods to sell their wines in Massachusetts, and they cannot sell wines directly to retailers under either option.

No “large” wineries are located inside Massachusetts.

Plaintiffs, a group of California winemakers and Massachusetts residents, assert that the statute was designed with the purpose, and has the effect, of advantaging Massachusetts wineries to the detriment of those wineries that produce 98 percent of the country’s wine, in violation of the Commerce Clause. Decision? Explain.

Answer: The statute violates the Commerce Clause. Family Winemakers of California v. Jenkins, 592 F.3d 1 (1st Cir. 2010).

The Commerce Clause vests Congress with the authority to “regulate Commerce among the several States.” U.S. Const. art. I, § 8, cl. 3. This grant of exclusive federal power carries an implicit consequence for states' powers. When states regulate commerce within their own borders, they cannot enact laws that discriminate against out-of-state economic interests in favor of in-state competitors absent congressional authorization or some other source of constitutional authority. Or. Waste Sys., Inc. v. Dep't of Envtl. Quality, 511 U.S. 93, 98, 114 S.Ct. 1345, 128 L.Ed.2d 13 (1994). This aspect of the Commerce Clause is commonly referred to as the “dormant commerce clause” because its limitations upon states are not stated in the text.

But § 19F [of the statute] is neutral on its face; it does not, by its terms, allow only Massachusetts wineries to distribute their wines through a combination of direct shipping, wholesaler distribution, and retail sales. Section 19F instead uses a very particular gallonage cap to confer this benefit upon “small” as opposed to “large” wineries.

We hold that § 19F violates the Commerce Clause because the effect of its particular gallonage cap is to change the competitive balance between in-state and out-of-state wineries in a way that benefits Massachusetts's wineries and significantly burdens out-of-state competitors. Massachusetts has used its 30,000gallon grape wine cap to expand the distribution options available to “small” wineries, including all Massachusetts wineries, but not to similarly situated “large” wineries, all of which are outside Massachusetts. The advantages afforded to “small” wineries by these expanded distribution options bear little relation to the market challenges caused by the relative sizes of the wineries. Section 19F's statutory context, legislative history, and other factors also yield the unavoidable conclusion that this discrimination was purposeful. Nor does § 19F serve any legitimate local purpose that cannot be furthered by a non-discriminatory alternative.

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15. American Express Travel Related Services (“,Amex”) sells Amex Travelers Cheques (“TCs”), which are preprinted checks for specified amounts with a unique serial number and no expiration date. Amex is able to sell TCs for their face value because Amex’s contract with TC owners gives Amex the right to retain, use, and invest funds from the sale of TCs until the date the TCs are cashed.

All states have unclaimed property laws requiring abandoned property to be turned over to the state while the original property owner still maintains the right to the property. The purpose of unclaimed property laws is to provide for the safekeeping of abandoned property and then to allow the rightful owner to claim the abandoned property. As these laws are applied to TCs, Amex sends the funds held as TCs to the state as unclaimed property with the serial number, amount, and date of sale, since the name of the TC owner is not known.

When one of these TCs is cashed, Amex seeks to reclaim those funds from that state. In New Jersey, the Treasurer returns the funds with interest. Until recently, all states had a fifteen-year abandonment period for traveler’s checks. In 2010, New Jersey passed Chapter 25, shortening the abandonment period for traveler’s checks to three years. Amex challenges the constitutionality of the amendment. Explain whether the amendment violates any of the following provisions of the U.S Constitution: (a) Due Process Clause, (b) Contract Clause, (c) Takings Clause, or (d) Commerce Clause.

Answer: Amex failed to show a likelihood of success on the merits of its Due Process Clause, Contract Clause, Takings Clause, and Commerce Clause claims.

American Exp. Travel Related Services, Inc. v. Sidamon-Eristoff, 669 F.3d 359 (3rd Cir. 2012); certiorari denied, U.S., 133 S.Ct. 345, 184 L.Ed.2d 157. (a) Amex failed to show a likelihood of success on the merits of its Due Process Clause claim. The amendment served legitimate state interest, as required to withstand challenge on substantive due process grounds. Amex argues that the sole purpose behind enacting Chapter 25 was to raise revenue for the State, which is not a legitimate state interest. But the State has offered several legitimate interests that justify shortening the abandonment period for traveler’s checks from fifteen years to three years. (b) Amex failed to establish likelihood of success on the merits of its Contract Clause claim. To ascertain whether there has been a Contract Clause violation, a court must first inquire whether the change in State law has “operated as a substantial impairment of a contractual relationship.” If this threshold inquiry is met, the court must then determine “whether the law at issue has a legitimate and important public purpose.” If so, the court must ascertain “whether the adjustment of the rights of the parties to the contractual relationship was reasonable and appropriate in light of that purpose.”

Amex fails to show that Chapter 25 imposes a substantial impairment on Amex's contractual relationships with TC owners. (c) Amex failed to establish reasonable probability of success on the merits of its takings claim. The Takings Clause of the Fifth Amendment prohibits the federal government from taking private property for public use without providing just compensation. When a state directly appropriates private property, it is considered a per se taking, and the state has a duty to compensate the owner. Where, as here, a party asserts a regulatory taking, there is no set formula. Rather, courts must engage in a factual inquiry to determine whether a taking has been effected. (d) Amex did not show reasonable probability of success on the merits of its dormant Commerce Clause claim. Under the Commerce Clause, Congress has the

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power to “regulate Commerce...among the several States.” U.S. Const. Art. I, § 8, cl.

3. “This clause also has an implied requirement (often called the ‘negative’ or ‘dormant’ aspect of the clause) that the states not ‘mandate differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.’” Our inquiry as to whether a state law violates the dormant Commerce Clause is twofold: first, we determine whether heightened scrutiny applies, and, if not, then we determine whether the law is invalid. We apply heightened scrutiny when a law “discriminates against interstate commerce” in purpose or effect.

Amex contends that Chapter 25, if implemented, will violate the dormant Commerce Clause because its effects will be projected into other states.

Specifically, Amex claims that it will be forced to choose between: (a) selling TCs in New Jersey at a marginal profit or at a loss; (b) not selling TCs in New Jersey; (c) charging a fee for selling TCs in New Jersey; or (d) charging a fee to sell TCs throughout the country so that it can maintain uniform conditions. If it chooses to charge a fee to sell TCs throughout the country, Amex argues, then Chapter 25 will have dictated commercial activity in other states.

Unlike these statutes, Chapter 25 does not directly regulate traveler’s checks sold in other states or force Amex to conform its out-of-state practices to less favorable in-state conditions. Nothing prevents other states from regulating traveler’s checks differently from the way New Jersey has chosen to do in Chapter 25. And by Amex's own admission, the costs of compliance could be passed on to New Jersey traveler’s check customers or be absorbed by issuers like Amex.

Therefore, Amex failed to show a reasonable probability of success on the merits of its Commerce Clause claim.

ANSWERS TO “TAKING SIDES” PROBLEMS Alabama was one of only sixteen states that permitted commercial hazardous waste landfills.

From 1985 through 1989, the tonnage of hazardous waste received per year more than doubled.

Of this, up to 90 percent of the hazardous waste was shipped in from other states. In response, Alabama imposed a fee of $97.60 per ton for hazardous waste generated outside Alabama compared with a fee of $25.60 per ton for hazardous wastes generated within Alabama. a. Chemical Waste Management, Inc., which operates a commercial hazardous waste land disposal facility in Emelle, Alabama, filed suit asserting that the Alabama law violated the Commerce Clause of the U.S. Constitution.What arguments could Chemical Waste Management, Inc., make in support of its claim that the statute is unconstitutional? b. What arguments could Alabama make to defend the constitutionality of the statute? c. Who should prevail? Explain.

Answer: (a) Chemical Waste Management, Inc. could argue that the Alabama statute imposes an unfair burden on interstate commerce that is excessive compared to the local benefit and that there are non-discriminatory alternatives available.

It also could contend that Alabama’s tax interfered with interstate commerce. (b) Alabama could argue that the additional fee of $72.00 served a legitimate local purpose related to its citizens’ health and safety that could not be adequately served by reasonable non-discriminatory alternatives, given recent large increases in the hazardous waste received into the state and the possible

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adverse effects of such waste. Alabama also could contend that it is bearing the health risk that other states refused to accept. (c) The additional fee is in violation of the U.S. Constitution. Chemical Waste Management, Inc. v. Hunt, U. S. Supreme Court 1992, 504 U.S. 334. No state may attempt to isolate itself from a problem common to the several states by raising barriers to the free flow of interstate trade. Ultimately, the state’s concern focuses on the volume of the waste entering the Emelle facility. Less discriminatory alternatives, however, are available to alleviate this concern, not the least of which are a generally applicable per-ton additional fee on all hazardous waste disposed of within Alabama, or a per-mile tax on all vehicles transporting hazardous waste across Alabama roads, or an evenhanded cap on the total tonnage landfilled at Emelle, which would curtail volume from all sources.

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Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 5: Administrative Law

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ............................................................................... 9

ANSWERS TO ETHICAL DILEMMA Should the Terminally Ill Be Asked to Await FDA Approval of Last-Chance Treatments?

1.

2.

3.

4.

5.

If Mrs. Barnett were your mother, what recommendation would you make? Under the circumstances, is it unethical to use a drug that has not been approved by the FDA? As a policy matter, how should the FDA handle drugs for life-threatening diseases?

Should individuals be allowed absolute freedom to take risks with drug therapy?

Should the FDA apply different drug approval standards with regard to children who suffer from life-threatening diseases than those it applies with regard to adults?

As policy matter, how should the government and nonprofit organizations allocate resources among research groups competing for funding? How should the government, through its administrative agencies, establish priorities for funding research on various illnesses?

Answer: 1. Under the circumstances, many would believe that is it ethical to attempt to obtain the most humane and most effective treatment possible.

Some would argue that Dr. Jason’s proposed treatment, the standard course of treatment for ovarian cancer, is highly questionable from an ethical standpoint, considering the severity of the side effects of the treatment and the poor success rate in certain cases.

2. Most would agree that the FDA must develop procedures which would test and make available drugs for life-threatening diseases as quickly as possible.

3. The goal of FDA approval is to protect the public from harmful drugs and exploitation by drug companies. However, one may question this protective posture when lifethreatening illnesses are involved and there is little hope for success from conventional treatment.

4. If additional freedom were allowed to use experimental drugs, the question would arise as to whether special provisions should be made for children.

5. Presently, there are competing demands for funds to conduct research for AIDS, cancer, diabetes, heart disease, and other serious illnesses. Should government spending be increased for research to find cures to any one or more of these illnesses? How should society establish priorities?

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ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Congress passed the Emergency Price Control Act in the interest of national defense and security. The stated purpose of the Act was “to stabilize prices and to prevent speculative, unwarranted and abnormal increases in prices and rents.” The Act established the Office of Price Administration, which was authorized to establish maximum prices and rents that were to be “generally fair and equitable and [were to] effectuate the purposes of this Act.” Stark was convicted for selling beef at prices in excess of those set by the agency. Stark appeals on the ground that the Act unconstitutionally delegated to the agency the legislative power of Congress to control prices. Is Stark correct in this contention? Explain.

Answer: No, Stark’s contention is wrong, and therefore his conviction for selling beef at inflated prices should be upheld.

Legislative rules have the force of law if they do not violate any provisions of the U.S. Constitution, such as due process or equal protection, and if they do not involve an unconstitutional delegation of legislative power from the legislature. The requirement that the enabling statute must provide reasonable standards to guide the agency may be met by statutory language such as “to prohibit unfair methods of competition,” “fair and equitable,” “public interest, convenience, and necessity,” and other equally broad expressions. The U.S. Supreme Court has stated in Yakus v. United States, 321 U.S. 414 (1944), upon which this case is based, that delegation of legislative authority should be overridden only if there is an absence of standards for the guidance of the agency, so that it would be impossible to ascertain whether the will of Congress has been obeyed. The court held that the standards prescribed by the Emergency Price Control Act were sufficiently definite and precise to enable Congress, the courts and the public to ascertain whether the Administrator, in fixing designated prices, had conformed to those standards. Accordingly, the court found that Congress had not unconstitutionally delegated legislative power to the agency.

2. The Secretary of Commerce (Secretary) published a notice in the Federal Register inviting comments regarding flammability standards for mattresses. Statistical data were compiled, consultant studies were conducted, and seventy-five groups submitted comments. The Secretary then determined that all mattresses, including crib mattresses, must pass a cigarette test, consisting of bringing a mattress in contact with a burning cigarette. The department’s staff supported this position by stating: “Exemption of youth and crib mattresses is not recommended. While members of these age groups do not smoke, their parents frequently do, and the accidental dropping of a lighted cigarette on these mattresses while attending to a child is a distinct possibility.” Bunny Bear, Inc., now challenges the cigarette flammability test, asserting that the standard was not shown to be applicable to crib mattresses, as “infants and young children obviously do not smoke.”

Bunny Bear argues that the Secretary has not satisfied the burden of proof justifying the inclusion of crib mattresses within this general safety standard. Is Bunny Bear correct?

Explain.

Answer: The flammability standard for mattresses was needed to protect the public against unreasonable risk of fire. The court held, "Whether the test is 'arbitrary, capricious' or 'substantial evidence', agencies are not precluded from drawing reasonable inferences from facts commonly known." Infants should be afforded with the same standard of safety as adults. In ruling against Bunny Bear, the court found this to be a test of general flammability to protect against mattress fires whatever their source. Bunny Bear, Inc. v. Peterson, 473 F.2d 1002 (1st Cir. 1972).

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3. Reagan National Airport in Washington, D.C., is one of the busiest and most crowded airports in the nation. Accordingly, the Federal Aviation Administration (FAA) has restricted the number of commercial landing and takeoff slots at National to 40 per hour. Allocation of the slots among the air carriers serving National had been by voluntary agreement through an airline scheduling committee (ASC). When a new carrier requested twenty slots during peak hours, National’s ASC was unable to agree on a slot allocation schedule. The FAA engaged in informal rulemaking and invited public comment to solve the slot allocation dilemma. The FAA then issued Special Federal Aviation Regulation 43 (SFAR 43) based on public comments and a proposal made at the last National ASC meeting, thereby decreasing the number of slots held by current carriers and shifting some slots to less desirable times.

SFAR 43 also granted eighteen slots to New York Air. More specifically, SFAR 43 requires five carriers to give up one or more slots in specific hours during the day, requires twelve carriers to shift one slot to the latest hour of operations, and then reserves and allocates the yielded slots among the new entrants and several other carriers. An adversely affected carrier seeks judicial review of SFAR 43, claiming that it is arbitrary, capricious, and not a product of reasoned decision making, and that it capriciously favors the Washington–New York market as well as the new carrier. What standard would apply to the agency’s actions?

Should the rule be upheld? Explain.

Answer: Northwest should not prevail, and the court should uphold SFAR 43. The FAA should be held to the substantial evidence test, which requires the conclusions reached to be supported by “such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.” SFAR 43 was not arbitrary and capricious, as the FAA invited public comment and acted on those findings and on discussions held at a previous ASC meeting. Northwest Airlines, Inc. v. Goldschmidt, 645 F.2d 1309 (8th Cir. 1981).

4. Bachowski was defeated in a United Steelworkers of America union election. After exhausting his union remedies, Bachowski filed a complaint with Secretary of Labor Dunlop. Bachowski invoked the Labor–Management Reporting and Disclosure Act, which required Dunlop to investigate the complaint and determine whether to bring a court action to set aside the election. Dunlop decided such action was unwarranted. Bachowski then filed an action in a federal district court to order Dunlop to file suit to set aside the election. What standard of review would apply and what would Bachowski have to prover to prevail under that standard?

Answer: The arbitrary and capricious standard would apply to this proceeding. This requires that Bachowski prove that the agency did not have a rational basis for reaching its decision. In the case upon which this problem is based, the reviewing court held the Secretary of Labor Dunlap properly discharged his statutory duties by conducting an extensive investigation and his findings were not arbitrary and capricious. Dunlap v.

Bachowski, 95 S.Ct. 1851, 421 U.S. 579 (1975).

5. The Federal Crop Insurance Corporation (FCIC) was created as a wholly government-owned corporation to insure wheat producers against unavoidable crop failure. As required by law, the FCIC published in the Federal Register conditions for crop insurance. Specifically, the FCIC published that spring wheat reseeded on winter wheat acreage was ineligible for coverage. When farmer Merrill applied for insurance on his wheat crop, he informed the local FCIC agent that 400 of his 460 acres of spring wheat were reseeded on the winter acreage. The agent advised Merrill that his entire crop was insurable. When drought destroyed Merrill’s wheat, Merrill tried to collect the insurance, but the FCIC refused to pay, asserting that Merrill was bound by the notice provided by publication of the regulation in the Federal Register. Is the FCIC correct? Explain.

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Answer: It was held in the case upon which this problem was based that publication in the Federal Register was sufficient notice to all persons, including Merrill and that the doctrine of estoppel did not apply in this case. Thus, Merrill will not be able to collect any insurance funds. Today, courts may be open to accepting the argument that the agency was acting more like a private company. In which case, the company/agency might be estopped to deny its original FCIC representation. Federal Crop Insurance Corp. v. Merrill, 332 U.S. 380 (1947).

6. The Department of Energy (DOE) issued a subpoena requesting information regarding purchases, sales, exchanges, and other transactions in crude oil from Phoenix Petroleum Company (Phoenix). The aim of the DOE audit was to uncover violations of the Emergency Petroleum Allocation Act (EPAA). The EPAA contained provisions for summary, or expedited, enforcement of DOE decisions. However, after the subpoena was issued, but before Phoenix had responded, the EPAA expired. The EPAA provided that The authority to promulgate and amend any regulation, or to issue any order under this Chapter shall expire at midnight September 30, 1981, but such expiration shall not affect any action or pending proceedings, administrative, civil or criminal action or proceeding, whether or not pending, based upon any act committed or liability incurred prior to such expiration date.

Using the summary enforcement provisions of the now-defunct EPAA, the DOE sues to enforce the subpoena. Phoenix argues that because the EPAA has expired, the DOE lacks the authority either to issue the subpoena or to use the summary enforcement provisions.

Is Phoenix correct? Why or why not?

Answer: Phoenix Petroleum must comply with the administrative subpoena issued by the DOE. The subpoena was issued for a proper purpose and further was issued under the appropriate authority granted to the DOE. United States v. Phoenix Petroleum Co., 571 F.Supp. 16 (S.D. Tex. 1983).

7. Under the Communications Act, the Federal Communications Commission may not impose common carrier obligations on cable operators. A common carrier is one that “makes a public offering to provide [communication facilities] whereby all members of the public who choose to employ such facilities may communicate or transmit.” In May 1976, the Commission issued rules requiring cable television systems of a designated size (a) to develop a minimum ten-channel capacity by 1986; (b) to make available on a first-come, nondiscriminatory basis certain channels for access by third parties; and (c) to furnish equipment and facilities for such access. The purpose of these rules was to ensure public access to the cable systems. Midwest Video Corporation claimed that the access rules exceeded the Commission’s jurisdiction granted it by the Communications Act, because the rules infringe upon the cable systems’ journalistic freedom by in effect treating the cable operators as “common carriers.” The Commission contended that its expansive mandate under the Communications Act to supervise and regulate broadcasting encompassed the access rules. Did the Commission exceed its authority under the Act? Why or why not?

Answer: Yes. Judgment for Midwest Video. The Commission has the authority to issue rules to promote its long-established regulatory goals of increasing the number of outlets for local expression and diversifying programming. However, under the Communications Act of 1934 the Commission may not impose common carrier obligations on cable operators. This prohibition reflects a Congressional belief that the resulting intrusion upon the journalistic integrity of broadcasters would overshadow any benefits associated with increased public access. Since the access rules require cable operators to accept on a first-come, nondiscriminatory basis those members of

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the general public who wish to use the system, the operators become essentially common carriers and their editorial freedom to control the content of programming is lost. The authority to compel cable operators to provide this type of public access must come specifically from Congress. Thus, the F.C.C.'s access rules went beyond the boundaries of its jurisdiction granted by the Communications Act of 1934 and are, therefore, set aside. FCC v. Midwest Video Corp., 440 U.S. 689. 99 S. Ct. 1435.59 L.Ed.2d 692.

8. Congress enacted the National Traffic and Motor Vehicle Safety Act of 1966 (the Act) for the purpose of reducing the number of traffic accidents that result in death or personal injury.

The Act directs the Secretary of Transportation to issue motor vehicle safety standards in order to improve the design and safety features of cars. The Secretary has delegated authority to promulgate safety standards to the National Highway Traffic Safety Administration (NHTSA) under the informal rulemaking procedure of the APA. The Act also authorizes judicial review under the provisions of the Administrative Procedure Act (APA) of all orders establishing, amending, or revoking a federal motor vehicle safety standard issued by the NHTSA. Pursuant to the Act, the NHTSA issued Motor Vehicle Safety Standard 208, which required all cars made after September 1982 to be equipped with passive restraints (either automatic seat belts or airbags). The cost of implementing the standard was estimated to be around $1 billion. However, early in 1981, due to changes in economic circumstances and particularly due to complaints from the automotive industry, the NHTSA rescinded Standard 208. The NHTSA had originally assumed that car manufacturers would install airbags in 60 percent of new cars and passive seat belts in 40 percent. However, by 1981 it appeared that manufacturers were planning to install seat belts in 99 percent of all new cars. Moreover, the majority of passive seatbelts could be easily and permanently detached by consumers.

Therefore, the NHTSA felt that Standard 208 would not result in any significant safety benefits. State Farm Mutual Automobile Insurance Company (State Farm) and the National Association of Independent Insurers (NAII) filed petitions in federal court for review of the NHTSA’s rescission of Standard 208. What standard of review would apply to the rescission?

Should it be set aside? Explain.

Answer: The Act indicates that motor vehicle safety standards are to be promulgated under the informal rulemaking procedure of the APA. The NHTSA's action in promulgating such standards therefore may be set aside if found to be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” The scope of review under the arbitrary and capricious standard is narrow and a court is not to substitute its judgment for that of the agency. Nevertheless, the agency must demonstrate a rational connection between the facts found and the choice made.

The most obvious reason for finding the rescission arbitrary and capricious is that the NHTSA apparently gave no consideration whatever to modifying Standard 208 to require that airbag technology be utilized. Even if one accepts the NHTSA conclusion that detachable seatbelts will not attain anticipated safety benefits, this alone would not justify more than an amendment to Standard 208 to achieve the objectives of the Act. The logical response to the faults of the detachable seatbelts would be to require the installation of airbags. Clearly, an agency is not required to consider all policy alternatives in making decisions. However, the airbag is more than a policy alternative; it is an alternative technology already within the ambit of the existing standard.

9. David Diersen filed a complaint against the Chicago Car Exchange (CCE), an automobile dealership, alleging that the CCE fraudulently furnished him an inaccurate odometer reading when it sold him a 1968 Dodge Charger, in violation of the Vehicle Information and Cost

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Savings Act (“the Odometer Act” or “the Act”). The Odometer Act requires all persons transferring a motor vehicle to give an accurate, written odometer reading to the purchaser or recipient of the transferred vehicle. Under the Act, those who disclose an inaccurate odometer reading with the intent to defraud are subject to a private cause of action by the purchaser and may be held liable for treble damages or $1,500, whichever is greater. The trial court granted the defendant’s motion for summary judgment, relying upon a regulation promulgated by the National Highway Traffic Safety Administration (NHTSA), which purports to exempt vehicles that are at least ten years old (such as the one Diersen purchased from the CCE) from the Act’s odometer disclosure requirements. Diersen then filed a motion for reconsideration of the court’s summary judgment order, arguing that the older-car exemption created by the NHTSA lacked any basis in the Act and was therefore invalid.

What standard should the court apply in determining the validity of the NHTSA regulation?

Answer: No. Although the district court erred in relying on the regulation promulgated by the National Highway Traffic Safety Administration (NHTSA) which purports to exempt vehicles that are at least ten years old (such as the one Diersen purchased from the CCE) from the Act’s odometer disclosure requirements, the summary judgment is proper. The NHTSA has overstepped its authority by issuing this exception since Congress clearly intended to protect all purchasers of motor vehicles from odometer tampering. The language of the Act neither implies nor spells out any exceptions. The NHTSA does not, without statutory authority, have jurisdiction to tell victims of odometer fraud that they are without a remedy if the car they purchased was ten or more years old. So, why is the summary judgment proper? Why does Diersen not have a basis for his motion for reconsideration? The summary judgment is proper because in order to succeed on his claim of odometer fraud, Diersen must demonstrate two essential elements: (1) a violation of the Act’s odometer disclosure requirements (i.e., the providing of an inaccurate odometer reading), and (2) an intent to defraud. [Citation.] A review of the summary judgment record indicates that a rational trier of fact could not find in Diersen’s favor as to the second element (intent to defraud); therefore, the court was right to enter a summary judgment in the defendant’s favor.

10. The Public Company Accounting Oversight Board (PCAOB) was created as part of a series of accounting reforms in the Sarbanes–Oxley Act of 2002. The PCAOB is a governmentally created entity with expansive powers to regulate the entire accounting industry. Every accounting firm that audits public companies under the securities laws must register with the PCAOB, pay it an annual fee, and comply with its rules and oversight. The PCAOB may inspect registered firms, initiate formal investigations, and impose sanctions in its disciplinary proceedings. Although the Securities and Exchange Commission (SEC) appoints PCAOB members and has oversight of the PCAOB, it cannot remove PCAOB members at will, but only “for good cause shown” and “in accordance with” specified procedures. The SEC Commissioners, in turn, cannot themselves be removed by the President except for “inefficiency, neglect of duty, or malfeasance in office.” Parties with standing have challenged in a U.S. District Court the constitutionality of the Sarbanes-Oxley Act’s creation of the PCAOB because it conferred executive power on PCAOB members without subjecting them to presidential control. What should the court decide? Explain.

Answer: The dual for-cause limitations on the removal of PCAOB members contravene the Constitution's separation of powers. Free Ent. Fund v. Public Co. Acctg. Oversight Bd., 561 U.S. 477, 130 S.Ct. 3138, 177 L.Ed.2d 706 (2101).

Our Constitution divided the “powers of the new Federal Government into three defined categories, Legislative, Executive, and Judicial.” INS v. Chadha, 462 U.S. 919, 951, 103 S.Ct. 2764, 77 L.Ed.2d 317 (1983). Article II vests “[t]he executive Power…in a

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President of the United States of America,” who must “take Care that the Laws be faithfully executed.” Art. II, § 1, cl. 1; id., § 3. In light of “[t]he impossibility that one man should be able to perform all the great business of the State,” the Constitution provides for executive officers to “assist the supreme Magistrate in discharging the duties of his trust.” 30 Writings of George Washington 334 (J. Fitzpatrick ed. 1939).

Since 1789, the Constitution has been understood to empower the President to keep these officers accountable—by removing them from office, if necessary. See generally Myers v. United States, 272 U.S. 52, 47 S.Ct. 21, 71 L.Ed. 160 (1926). This Court has determined, however, that this authority is not without limit. In Humphrey's Executor v.

United States, 295 U.S. 602, 55 S.Ct. 869, 79 L.Ed. 1611 (1935), we held that Congress can, under certain circumstances, create independent agencies run by principal officers appointed by the President, whom the President may not remove at will but only for good cause. Likewise, in United States v. Perkins, 116 U.S. 483, 21 Ct.Cl. 499, 6 S.Ct. 449, 29 L.Ed. 700 (1886), and Morrison v. Olson, 487 U.S. 654, 108 S.Ct. 2597, 101 L.Ed.2d 569 (1988), the Court sustained similar restrictions on the power of principal executive officers—themselves responsible to the President—to remove their own inferiors. The parties do not ask us to reexamine any of these precedents, and we do not do so.

We are asked, however, to consider a new situation not yet encountered by the Court.

The question is whether these separate layers of protection may be combined. May the President be restricted in his ability to remove a principal officer, who is in turn restricted in his ability to remove an inferior officer, even though that inferior officer determines the policy and enforces the laws of the United States?

We hold that such multilevel protection from removal is contrary to Article II's vesting of the executive power in the President. The President cannot “take Care that the Laws be faithfully executed” if he cannot oversee the faithfulness of the officers who execute them. Here the President cannot remove an officer who enjoys more than one level of good-cause protection, even if the President determines that the officer is neglecting his duties or discharging them improperly. That judgment is instead committed to another officer, who may or may not agree with the President's determination, and whom the President cannot remove simply because that officer disagrees with him. This contravenes the President's “constitutional obligation to ensure the faithful execution of the laws.” Id., at 693, 108 S.Ct. 2597.

By granting the PCAOB executive power without the Executive's oversight, this Act subverts the President's ability to ensure that the laws are faithfully executed—as well as the public's ability to pass judgment on his efforts. The Act's restrictions are incompatible with the Constitution's separation of powers.

The Sarbanes–Oxley Act remains “‘fully operative as a law’” with these tenure restrictions excised. New York, 505 U.S., at 186, 112 S.Ct. 2408 (quoting Alaska Airlines, Inc. v. Brock, 480 U.S. 678, 684, 107 S.Ct. 1476, 94 L.Ed.2d 661 (1987)). *** The remaining provisions are not “incapable of functioning independently,” Alaska Airlines, 480 U.S., at 684, 107 S.Ct. 1476, and nothing in the statute's text or historical context makes it “evident” that Congress, faced with the limitations imposed by the Constitution, would have preferred no PCAOB at all to a PCAOB whose members are removable at will. Ibid.; see also Ayotte, supra, at 330, 126 S.Ct. 961.

The Constitution that makes the President accountable to the people for executing the laws also gives him the power to do so. That power includes, as a general matter, the authority to remove those who assist him in carrying out his duties. Without such

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power, the President could not be held fully accountable for discharging his own responsibilities; the buck would stop somewhere else. Such diffusion of authority “would greatly diminish the intended and necessary responsibility of the chief magistrate himself.” The Federalist No. 70, at 478.

While we have sustained in certain cases limits on the President's removal power, the Act before us imposes a new type of restriction—two levels of protection from removal for those who nonetheless exercise significant executive power. Congress cannot limit the President's authority in this way.

11. Present and former law review editors who were researching disciplinary systems and procedures at the military service academies for an article requested, but were denied, access to case summaries of honor and ethics hearings maintained in the United States Air Force Academy’s Honor and Ethics Code reading files. Personal references and other identifying information are deleted from these summaries. It was the Academy’s practice to post copies of such summaries on forty squadron bulletin boards throughout the Academy and to distribute copies to Academy faculty and administration officials. The editors brought an action under the Freedom of Information Act (FOIA) against the Department of the Air Force to compel disclosure of the case summaries. Which exemptions to FOIA are most applicable? Explain whether any of these exemptions would enable the Academy to withhold the requested case summaries.

Answer: Exemption 2 (records that relate solely to the internal personnel rules and practices of an agency) and Exemption 6 (personnel and medical files, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy).

Exemption 2 does not generally apply to matters, such as these summaries, in which there is a genuine and important public interest. The public has a substantial concern with the Academy's administration of discipline and procedures that affect the training of Air Force officers and their military careers. Exemption 6 does not create a blanket exemption for personnel files. With respect to such files, nondisclosure is not sanctioned unless there is a showing of a clearly unwarranted invasion of personal privacy, and redaction of documents to permit disclosure of nonexempt portions is appropriate under Exemption 6. Department of Air Force v. Rose, 425 U.S. 352, 96 S.Ct. 1592, 48 L.Ed.2d 11 (1976). *** where the situation is not one where disclosure may risk circumvention of agency regulation, Exemption 2 is not applicable to matters subject to such a genuine and significant public interest. The exemption was not designed to authorize withholding of all matters except otherwise secret law bearing directly on the propriety of actions of members of the public. Rather, the general thrust of the exemption is simply to relieve agencies of the burden of assembling and maintaining for public inspection matter in which the public could not reasonably be expected to have an interest. The case summaries plainly do not fit that description. They are not matter with merely internal significance. They do not concern only routine matters. Their disclosure entails no particular administrative burden. We therefore agree with the Court of Appeals that *** “the Agency's withholding of the case summaries (as edited to preserve anonymity) cannot be upheld by reliance on the second exemption.”

We *** find nothing in the wording of Exemption 6 or its legislative history to support the Agency’s claim that Congress created a blanket exemption for personnel files.

Judicial interpretation has uniformly reflected the view that no reason would exist for nondisclosure in the absence of a showing of a clearly unwarranted invasion of privacy, whether the documents are filed in “personnel” or “similar” files. We hold, therefore, in agreement with the Court of Appeals, “that the in camera procedure (ordered) will

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further the statutory goal of Exemption Six: a workable compromise between individual rights ‘and the preservation of public rights to Government information.’”

ANSWERS TO “TAKING SIDES” PROBLEMS Section 7(a)(2) of the Endangered Species Act of 1973 (ESA) provides (in relevant part) that [e]ach Federal agency shall, in consultation with and with the assistance of the Secretary (of the Interior), insure that any action authorized, funded, or carried out by such agency…is not likely to jeopardize the continued existence of any endangered species or threatened species or result in the destruction or adverse modification of habitat of such species which is determined by the Secretary, after consultation as appropriate with affected States, to be critical.

In 1978, the Fish and Wildlife Service and the National Marine Fisheries Service, on behalf of the Secretary of the Interior and the Secretary of Commerce respectively, promulgated a joint regulation stating that the obligations imposed by Section 7(a)(2) extend to actions taken in foreign nations. In 1983, the Interior Department proposed a revised joint regulation that would require consultation only for actions taken in the United States or on the high seas. Shortly thereafter, Defenders of Wildlife and other organizations filed an action against the Secretary of the Interior, seeking a declaratory judgment that the new regulation is in error as to the geographic scope of Section 7(a)(2) and an injunction requiring the Secretary to promulgate a new regulation restoring the initial interpretation. The Secretary asserted that the plaintiffs did not have standing to bring this action. a. What arguments would support the plaintiff’s standing to bring this action? b. What arguments would support the Secretary’s claim that plaintiffs did not have standing to bring this action? c. Which side’s arguments are most convincing? Explain.

Answer: (a) The plaintiff could argue that: (i) its members have visited foreign regions of the world and observed the habitat of endangered species and that they intend to return and view the endangered animals directly at some later date and the planned or existing government-supported projects will adversely affect these habitats and therefore affect the members’ future viewings of the endangered animals; (ii) any person who uses any part of a “contiguous ecosystem” adversely affected by a funded activity has standing even if the activity is located a great distance away; and (iii) anyone who has an interest in studying or seeing the endangered animals anywhere on the globe has standing. (b) The Secretary could argue that: (i) the plaintiff’s “intent” to return to the places they had visited before—where they will presumably be deprived of the opportunity to observe animals of the endangered species—is not imminent or actual injury; (ii) a plaintiff claiming injury from environmental damage must use the area affected by the challenged activity and not an area roughly “in the vicinity” of it; and (iii) it is pure speculation to say that anyone who observes or works with an endangered species, anywhere in the world, is appreciably harmed by a single project affecting some portion of that species with which he has no more specific connection. (c) The Secretary prevailed. Lujan v. Defenders of Wildlife, Supreme Court of the United States, 1992, 504 U.S. 555, 112 S.Ct. 2130, 119 L.Ed.2d 351.

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Our cases have established that the irreducible constitutional minimum of standing contains three elements. First, the plaintiff must have suffered an “injury in fact”—an invasion of a legally protected interest that is (1) concrete and particularized and (2) “actual or imminent,” not conjectural or hypothetical. Second, there must be a causal connection between the injury and the conduct complained of—the injury has to be “fairly…traceable to the challenged action of the defendant, and not… th[e] result [of] the independent action of some third party not before the court.” Third, it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision. When the plaintiff is not himself the object of the government action or inaction he challenges, standing is not precluded, but it is ordinarily substantially more difficult to establish. Even if it is assumed that the governmental actions described will have the alleged effect, these affidavits contain no facts showing how damage to the species will produce “imminent” injury to the affiants. The affiants’ profession of an “intent” to return to the places they had visited before— where they will presumably be deprived of the opportunity to observe animals of the endangered species—is simply not enough. Such “some day” intentions—without any description of concrete plans, or indeed even any specification of when the “some day” will be—do not support a finding of the “actual or imminent” injury that our cases require.

In addition to these affidavits, the respondents propose a series of novel standing theories. First, the “ecosystem nexus” theory proposes that any person who uses any part of a “contiguous ecosystem” adversely affected by a funded activity has standing even if the activity is located a great distance away. This approach is inconsistent with the National Wildlife Federation case, which held that a plaintiff claiming injury from environmental damage must use the area affected by the challenged activity and not an area roughly “in the vicinity” of it. Second, the “animal nexus” approach proposes that anyone who has an interest in studying or seeing the endangered animals anywhere on the globe has standing. Third, the “vocational nexus” approach proposes that anyone with a professional interest in such animals can sue. The latter two theories overlook that standing requires, at the summary judgment stage, a factual showing of perceptible harm. It goes beyond the limit and into pure speculation and fantasy, to say that anyone who observes or works with an endangered species, anywhere in the world, is appreciably harmed by a single project affecting some portion of that species with which he has no more specific connection. Therefore, the plaintiffs lack standing to bring this action and the Court of Appeals erred in denying the summary judgment motion filed by the United States.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 6: Criminal Law

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 6: Criminal Law

TABLE OF CONTENTS Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems ............................................................................... 7

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Sam said to Carol, “Kim is going to sell me a good used car next Monday and then I’ll deliver it to you in exchange for your computer but I’d like to have the computer now.” Relying on this statement, Carol delivered the computer to Sam. Sam knew Kim had no car and would have none in the future, and he had no such arrangement with her. The appointed time of exchange passed, and Sam failed to deliver the car to Carol. Has a crime been committed?

Discuss.

Answer: Yes. Sam has committed the crime of obtaining property by false pretenses. This crime declares it illegal for one to obtain title to property of another by means of materially false representations made with the intent to defraud and with knowledge of this falsity. Here Sam obtained Carol’s computer by falsely promising Carol that he (Sam) would in return deliver to Carol a used car that Sam was to obtain from Kim. Sam, however, never had any intention or right to obtain Kim’s car and thus falsely represented his intentions and rights and did so with the intent to defraud Carol and with knowledge that his statement was indeed false.

2. Sara, a lawyer, drew a deed for Robert by which Robert was to convey land to Rick. The

deed was correct in every detail. Robert examined and verbally approved it but did not sign it. Then Sara erased Rick’s name and substituted her own. Robert subsequently signed the deed with all required legal formalities without noticing the change. Was Sara guilty of forgery? Discuss.

Answer: Yes. Forgery is the intentional falsification with intent to defraud, of a legally significant instrument. In this case Sara intentionally altered Robert’s deed to name herself as grantee in place of Rick. A deed is clearly an instrument of legal significance and hence Sara’s intentional falsification of the document constituted the crime of forgery.

3. Ann took Bonnie’s watch without Bonnie knowing of the theft. Bonnie subsequently discovered her loss and was informed that Ann had taken the watch. Bonnie immediately pursued Ann. Ann pointed a loaded pistol at Bonnie, who, in fear of being shot, allowed Ann to escape. Was Ann guilty of robbery? Of any other crime?

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Answer: Ann is not guilty of robbery. In order for conduct to constitute a robbery it is necessary for the force or threat of force to accompany or precede the taking.

"Thus it is not robbery to steal property without violence of intimidation (e.g., to obtain it by stealth or fraud or sudden snatching) although the thief later, in order to retain the stolen property or make good his escape, uses violence or intimidation upon the property owner." LaFave and Scott, Criminal Law 701 (citing Thompson v. State, 24 Ala. App. 300, 130 SO 679 (1931); People v. Jones, 290 Ill. 603, 125 N.E. 256 (1919); State v. Holmes, 317 MO. 9, 295 S.W. 71 (1927); Mason v.

Commonwealth, 200 VA. 253, 105 S.E. 2d 149 (1958) ). Thus, Ann did not perpetrate the crime of robbery, but has committed the crimes of larceny and assault.

4. Jones and Wilson were on trial, separately, for larceny of a $10,000 bearer bond (payable to

the holder of the bond, not a named individual) issued by Brown, Inc. The state’s evidence showed that the owner of the bond put it in an envelope bearing his name and address and dropped it accidentally in the street; that Jones found the envelope with the bond in it; that Jones could neither read nor write; that Jones presented the envelope and bond to Wilson, an educated man, and asked Wilson what he should do with it; that Wilson told Jones that the finder of lost property becomes the owner of it; that Wilson told Jones that the bond was worth $1,000 but that the money could be collected only at the issuer’s home office; that Jones then handed the bond to Wilson, who redeemed it at the corporation’s home office and received $10,000; that Wilson gave Jones $1,000 of the proceeds. What rulings?

Answer: The question of Jones’s criminal liability deals with whether he has taken the lost bond by a trespass from the owner’s possession. Although the owner of lost or mislaid property has constructive ownership of the property, a finder is only held to have committed a trespass within the definition of larceny if (1) he intends to steal the property and (2) he either knew who the actual owner was or could so find out. Here, Jones, who could not read and did not know who the owner was, did not commit a larceny.

The question concerning Wilson, on the other hand, is not whether he committed a crime but what crime he committed and that is dependent upon whether or not Wilson ever obtained title to the property. Wilson clearly has committed a taking and carrying away of personal property of another with intent to steal. The question then remaining is whether Wilson obtained possession of the property or title to the property. From the facts it appears that Wilson was solely acting as Jones’s agent and therefore never obtained title to the property. Nonetheless, regardless of the conclusion reached on this issue, Wilson has committed a crime: larceny (larceny by trick) if he did not receive title, or obtaining property by false pretense if he did receive title. In either instance Wilson received the property by false representations made with the intent to defraud and with knowledge of their falsity.

A second issue concerning Wilson that should be discussed is whether the personal property is that of another. For larceny the thief need not take the property from its owner; a thief taking the property from another thief is guilty of larceny. Thus, Wilson’s taking of the property from Jones is criminally wrong.

5. Truck drivers for a hauling company, while loading a desk, found a $100 bill that had fallen

out of the desk. They agreed to get it exchanged for small bills and divide the proceeds. En route to the bank, one of them changed his mind and refused to proceed with the scheme, whereupon the other pulled a knife and demanded the bill. A police officer intervened. What crimes have been committed?

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Answer: This case presents a number of difficult questions. First, regarding whether the drivers committed the crime of larceny is dependent upon whether their conduct demonstrated the necessary intent to steal. In this case they are not simply finders in that they know who the money belonged to and when they took it with the intent to keep it, they committed the crime of larceny. Here, unlike in question 4, the drivers knew who was the owner and intended to convert the money to their own use. The crime had not been completed, so the one driver who wanted to back out could return the money to the owner. It would still be an attempted larceny, however. Also, the one driver who pulled a knife on the other is guilty of both an assault and a robbery. As with larceny, a thief stealing from another thief by means of force is guilty of a robbery.

6. Peter, an undercover police agent, was trying to locate a laboratory where it was believed

that methamphetamine, or “speed”—a controlled substance—was being manufactured illegally. Peter went to Mary’s home and said that he represented a large organization that was interested in obtaining methamphetamine. Peter offered to supply a necessary ingredient for the manufacture of the drug, which was very difficult to obtain, in return for one-half of the drug produced. Mary agreed and processed the chemical given to her by Peter in Peter’s presence. Later Peter returned with a search warrant and arrested Mary.

Mary was charged with various narcotics law violations. Mary asserted the defense of entrapment. Should Mary prevail? Why or why not?

Answer: The defense is not valid. If the rule advanced by Mary were adopted, it would not help Mary, for the evidence disclosed that, although the necessary ingredient was difficult to obtain, it was not impossible. Peter merely contributed the ingredient to a criminal enterprise already in progress. Peter did not commit any crime in infiltrating Mary's drug enterprise. The chemical, which the problem did not disclose, was harmless by itself and its possession was legal. The court reaffirmed earlier decisions that the principal element in the defense of entrapment was the defendant's predisposition to commit the crime. The court reasoned that it would not be desirable to grant immunity from prosecution to a person who planned to commit a crime, and then committed it, simply because a government undercover agent induced him by providing an opportunity or facility for commission of the offense. It is only when the government implants the criminal design in the mind of the defendant that the defense of entrapment may be asserted. Therefore, in this case the defense of entrapment is not available to Mary. United States v. Russell, 411 U. S. 423, 93S. Ct. 1637, 36 L. Ed. 2d 366 (1973).

7. The police obtained a search warrant based on an affidavit that contained the following

allegations: (a) Donald was seen crossing a state line on four occasions during a five-day period and going to a particular apartment, (b) telephone records disclosed that the apartment had two telephones, (c) Donald had a reputation as a bookmaker and as an associate of gamblers, and (d) the Federal Bureau of Investigation was informed by a “confidential reliable informant” that Donald was conducting gambling operations from the apartment. The affidavit did not indicate how the informant knew of this information, nor did it contain any information about the reliability of the informant. When a search was made based on the warrant, evidence was obtained that resulted in Donald’s conviction of violating certain gambling laws. Donald challenged the constitutionality of the search warrant. Were Donald’s constitutional rights violated? Explain your answer.

Answer: The search warrant was not sufficiently supported by the evidence to be valid. The fact that Donald frequented an apartment with two telephones does not prove anything. The statement that Donald was a known gambler is an

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“unilluminating assertion” of suspicion that is entitled to no weight in appraising the magistrate’s decision to issue the warrant. In determining whether the informant’s tip was sufficient to issue the warrant the following factors must be considered. The affidavit stated that the confidential informant was “reliable”.

However, no reason was given to support that conclusion. Additionally, the tip did not contain the underlying circumstances from which the informer concluded that Donald was running a bookmaking operation, or how the tip was obtained. “In the absence of a statement detailing the manner in which the information was gathered, it is especially important that the magistrate may know that he is relying on something more substantial than a casual rumor circulating in the underworld or an accusation based merely on an individual’s general reputation.” Here the only facts supplied were that Donald was using two telephones in conducting gambling operations. This is not sufficient to show probable cause that a crime was being committed. No search warrant should have been issued and, therefore, the evidence obtained by the search was not admissible. Spinelli v. United States, 394 U. S. 410, 89, Ct. 584, 21 L. Ed. 2d 637 (1969).

8. A national bank was robbed by a man with a small strip of tape on each side of his face. An

indictment was returned against David. David was then arrested, and counsel was appointed to represent him. Two weeks later, without notice to David’s lawyer, an agent with the Federal Bureau of Investigation arranged to have the two bank employees observe a lineup, including David and five or six other prisoners. Each person in the lineup wore strips of tape, as had the robber, and each was directed to repeat the words “Put the money in the bag,” as had the robber. Both of the bank employees identified David as the robber. At David’s trial he was again identified by the two, in the courtroom, and the prior lineup identification was elicited on cross-examination by David’s counsel. David’s counsel moved the court to grant a judgment of acquittal or alternatively to strike the courtroom identifications on the ground that the lineup had violated David’s Fifth Amendment privilege against selfincrimination and his Sixth Amendment right to counsel. Decision?

Answer: No, as to the Fifth Amendment privilege. Neither the lineup itself, nor anything that David was required to do in the lineup violated David's privilege against self-incrimination. There is no question of the admissibility into evidence of anything David said or did at the lineup that involves his privilege. The privilege protects an accused from being compelled to provide evidence of a testimonial or communicative nature. This was not the case here, and thus the Fifth Amendment provides no basis for striking the judgment.

Yes, as to Sixth Amendment right to counsel. Because the lineup was conducted without notice to and in the absence of counsel there may have been a violation of David’s Sixth Amendment right to counsel. The confrontation compelled by the lineup between the accused and the victim or witnesses to elicit identification is filled with numerous dangers and factors that might seriously limit the defendant's right to a fair trial. Because of this a post-indictment lineup is a "critical stage of the prosecution," at which David was entitled to counsel. The U. S. Supreme Court vacated the judgment and remanded the case to determine if admission of the evidence was "harmless error," or sufficient to warrant a new trial. United States v.

Wade, 388 U. S. 218, 87 S. Ct. 1926, 18 L. Ed. 2d 1149 (1967).

9. Waronek owned and operated a trucking rig, transporting goods for L.T.L. Perishables, Inc.,

of St. Paul, Minnesota. He accepted an offer to haul a trailer load of beef from Illini Beef Packers, Inc., in Joslin, Illinois, to Midtown Packing Company in New York City. After his truck was loaded with ninety-five forequarters and ninety-five hindquarters of beef in Joslin,

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Waronek drove north to his home in Watertown, Wisconsin, rather than east to New York.

While in Watertown, he asked employees of the Royal Meat Company to butcher and prepare four hindquarters of beef—two for himself and two for his friends. He also offered to sell ten hindquarters to one employee of the company at an alarmingly reduced rate. The suspicious employee contacted the authorities, who told him to proceed with the deal.

When Waronek arrived in New York with his load short nineteen hindquarters, Waronek telephoned L.T.L. Perishables in St. Paul. He notified them “that he was short nineteen hindquarters, that he knew where the beef went, and that he would make good on it out of future settlements.” L.T.L. told him to contact the New York police, but he failed to do so.

Shortly thereafter, he was arrested by the Federal Bureau of Investigation and indicted for the embezzlement of goods moving in interstate commerce. Explain whether Waronek was guilty of the crime of embezzlement.

Answer: Waronek was guilty of embezzlement. Waronek was entrusted with possession of the hindquarters under a contract of carriage, and he took and converted these to his own use. Larceny involves an unlawful trespass to the possessory interest of the owner in the property. If the owner is not in possession of the property taken, there can be no larceny. Where the taker has been entrusted with the possession of the property, the crime is more aptly described as embezzlement. United States v. Waronek, 582 F. 2d 1158 (1978).

10. Four separate cases involving similar fact situations were consolidated because they

presented the same constitutional question. In each case, police officers, detectives, or prosecuting attorneys took a defendant into custody and interrogated him in a police station to obtain a confession. In none of these cases did the officials fully and effectively advise the defendant of his rights at the outset of the interrogation. The interrogations produced oral admissions of guilt from each defendant, as well as signed statements from three of them, which were used to convict them at their trials. The defendants appealed, arguing that the officials should have warned them of their constitutional rights and the consequences of waiving them before the questioning began. It was contended that to permit any statements obtained without such a warning violated their Fifth Amendment privilege against self-incrimination. Were the defendants’ constitutional rights violated?

Discuss.

Answer: Judgment for defendants. The long-standing Fifth Amendment privilege against self-incrimination applies to police interrogations of defendants in custody as well as in the courtroom. It guarantees the accused “the right to remain silent unless he chooses to speak in the unfettered exercise of his own will.” Frequently, custodial interrogations by law enforcement officials involve intimidation, trickery, violence, and other coercive measures that tend to deprive the defendant of his free will. Therefore, to safeguard the Fifth Amendment privilege, law enforcement officials must inform the defendant prior to an interrogation that: (1) he has the right to remain silent and anything he says might be used against him in court; (2) he has the right to consult with a lawyer and to have the lawyer present during the interrogation; and (3) if he is indigent, a lawyer will be appointed to represent him.

If prior to or during the interrogation, the defendant indicates that he wishes to remain silent, the questioning must cease. If he states that he wants an attorney, the questioning must cease until the attorney is present. If statements are obtained following the defendant’s waiver of his rights, the government has a heavy burden to prove that the waiver was given knowingly and intelligently. If the officials fail to follow this procedure, any statements obtained during the interrogation are inadmissible.

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In each of these cases, the law enforcement officials did not inform the defendants of their Fifth Amendment privileges before their interrogations. The defendants’ right to remain silent and protection from self-incrimination were not adequately protected, making their confessions inadmissible in court. Therefore, their convictions were reversed. Miranda v. Arizona, 384 U.S. 436, 86 S.Ct. 1602, 16 L.Ed.2d 694 (1966).

11. Officer Cyril Rombach of the Burbank Police Department, an experienced and well-trained

narcotics officer, applied for a warrant to search several residences and automobiles for cocaine, methaqualone, and other narcotics. Rombach supported his application with information given to another police officer by a confidential informant of unproven reliability.

He also based the warrant application on his own observations made during an extensive investigation: known drug offenders visiting the residences and leaving with small packages as well as a suspicious trip to Miami by two of the suspects. A state superior court judge in good faith issued a search warrant to Rombach based on this information. Rombach’s searches netted large quantities of drugs and other evidence, which produced indictments of several suspects on charges of conspiracy to possess and distribute cocaine. The defendants moved to suppress the evidence on the grounds that the search warrant was defective in that Rombach had failed to establish the informant’s credibility. Should the evidence be excluded, or can it be placed into evidence since the police and courts acted in good faith? Why or why not?

Answer: No. Judgment for the prosecution. The Fourth Amendment contains no express provision mandating the exclusion of evidence that is obtained by an unlawful search and seizure. Consequently, an unlawful search and seizure will not automatically grant an individual a constitutional right to have the unlawfully obtained evidence excluded. When law enforcement officers act in good faith and rely reasonably on a facially valid search warrant issued by a detached, neutral magistrate, the evidence obtained should not be excluded, even if the warrant is subsequently declared defective. To exclude such evidence would punish law enforcement officers, whose conduct is objectively reasonable, for a magistrate’s error. Such a case may also result in permitting some guilty defendants to go free or to receive reduced sentences, simply because of a technical flaw in the application. These considerations weigh heavily in favor of recognizing a good faith exception to the exclusionary rule.

12. On February 10, Kelm secured a loan for $6,000 from Ms. Joan Williams. Kelm told Williams

that the loan was to finance a real estate transaction. Five days later, Ms. Williams received a check drawn by Kelm in the amount of $6,000 from Kelm’s attorney. Although the check was dated February 15, Kelm claims that she delivered the check to her attorney on February 10. The following week, Ms. Williams learned the check was uncollectible. Subsequently, Williams received assurances from Kelm but was unsuccessful in her efforts to obtain money from the drawee’s bank. When Williams deposited the check, it was returned with a notation that it should not be presented again and that no account was on file. Bank records show that the account was closed on March 8 and that it had had a negative balance since February 10. Did Kelm illegally issue a bad check? Explain.

Answer: Yes, Kelm illegally issued a bad check. State v. Kelm, Superior Court of New Jersey, 1996, 289 N.J. Super. 55, 672 A.2d 1261; cert. denied, 146 N.J. 68, 679 A.2d 655 (1996).

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The principal issue on appeal is whether an intent to defraud is an element of Section 2C:21-5 [issuing a bad check] of the New Jersey statutes. The statute provides: A person who issues or passes a check or similar sight order for the payment of money, knowing that it will not be honored by the drawee, commits an offense… For the purposes of this section as well as in any prosecution for theft committed by means of a bad check, an issuer is presumed to know that the check or money order (other than a post-dated check or order) would not be paid, if: *** (b) Payment was refused by the drawee for lack of funds, upon presentation within 30 days after issue, and the issuer failed to make good within 10 days after receiving notice of that refusal…

This statute, unlike its predecessor, does not contain the language “with intent to defraud.” Kelm's reliance on cases interpreting the prior bad check statute is misplaced. An intent to defraud is not an element of the offense of issuing a bad check. Rather, the current statute requires mere knowledge at the time the check is issued or passed that it will not be honored by the drawee.

Addressing Kelm's second assertion, the statute's reference to postdated checks does not completely exempt such checks from its operation. That reference only exempts the drawer of a postdated check from the presumption of knowledge that the check will not be paid. In such cases, the state must prove such knowledge beyond a reasonable doubt.

The trial judge's charge to the jury correctly reflected the statutory requirement of knowledge. It also states that if the jury should find that the check was postdated, then the element of knowledge requires proof beyond a reasonable doubt. The jury was correctly instructed by this charge. Therefore, the jury's verdict is affirmed.

ANSWERS TO “TAKING SIDES” PROBLEMS Olivo was in the hardware area of a department store. A security guard saw him look around, take a set of wrenches, and conceal it in his clothing. Olivo looked around once more and proceeded toward an exit, passing several cash registers. The guard stopped him short of the exit. a. What argument would support the prosecutor in finding Olivo guilty of larceny? b. What argument would you make as Olivio’s defense counsel for finding him not guilty of larceny? c. Which side’s argument do you find most convincing? Explain.

Answer: (a) A shoplifter need not leave the store to be guilty of larceny. The modern definition of larceny aims to protect individual property rights. If a shopper exercises dominion and control over merchandise wholly inconsistent with the owner’s continued rights and the other elements of larceny are present, a larceny has occurred. A customer may exercise such dominion and control—in a manner contrary to that of a prospective purchaser—without leaving the store. In this particular case, Olivo’s suspicious survey of the area, concealment © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 6: Criminal Law

of the tools in his clothing, and movement toward an exit suggest an exercise of dominion and control inconsistent with the store’s continued rights. (b) Olivo has not left the store, therefore he has not deprived the owner of his rights in the merchandise. As long as Olivo is still in the store, he has a right to hold the merchandise. The owner should have waited until Olivo had actually left the store with the merchandise. (c) Answers will vary.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 7: Intentional Torts

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 7: Intentional Torts

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems .............................................................................. 11

ANSWERS TO ETHICAL DILEMMA What May One Do to Attract Clients from a Previous Employer?

1.

2.

3.

4.

5.

6.

Should Jones agree to the proposed mailing? Is it ethical for those forming the new firm to use a client list of their former employer when seeking clients?

What practical steps could Jones take to assist him in his decision?

What are the competing social interests at stake in this controversy?

How would your answers differ, if at all, if the firms were accounting firms rather than law firms?

In what manner, if at all, should the law protect existing businesses from competition?

Under what circumstances might competition become unfair, and how should laws be tailored to deter unfair practices?

Should Jones be concerned about the comparisons the letter makes between the new firm and Adle & Bart?

Answer: 1. Most would agree that Jones should not go along with the proposed mailing. The mailing involves the use of confidential client files of a former employer and may violate the state’s Code of Ethics on self-recommendation.

2. Jones could discuss the matter with a disinterested attorney to discuss the legal ramifications and to review the applicable Code of Ethics. As a matter of public policy, increased continuing education requirements for attorneys with particular emphasis on ethics and effective enforcement of disciplinary actions could be helpful in deterring this type of conduct.

3. The competing social interests include the freedom of competition balanced against the importance of privacy and fundamental notions of fair-play.

4. If the parties involved were accountants, the public at large and all users of financial statements would have an interest in obtaining properly and consistently prepared financial statements. Frequent changes of accountants can impede the audit process.

The American Institute of Certified Public Accountants (AICPA) has established a Statement on Auditing Standards (SAS 7) which governs the conduct of the

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predecessor and successor auditors and requires that communications take place with regard to matters affecting the integrity of the client. Further, some companies require stockholder approval of the retention of present auditors or a change to new

auditors.

The AICPA has its own ethical standards which prohibit solicitation in a manner that is false, misleading, or deceptive. Solicitation by the use of coercion, overreaching or harassing conduct is prohibited. (Rule 502 of the Code of Professional Conduct.)

5. The Restatement (Second) of Torts lists a number of factors which provide guidance on the degree of protection afforded. (See discussion above regarding Section 767.)

The determination of tortious interference remains highly factual. While the case-bycase approach creates uncertainty, it is an approach which has the advantage of balancing the competing social interests in each individual case.

6. Jones should be quite concerned with the wording of the letter regarding comparisons made with Adle & Bart. Tortious interference is a highly factual determination, and the outcome of a lawsuit could turn on the exact wording. Further, the wording could potentially expose Jones to a lawsuit for libel.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

The Penguin intentionally hits Batman with his umbrella. Batman, stunned by the blow, falls backward, knocking Robin down. Robin's leg is broken in the fall, and he cries out, “Holy broken bat bones! My leg is broken.” Who, if anyone, has liability to Robin? Why? Answer: The Penguin is liable to Robin for battery. Section 13 of the Restatement imposes liability if the actor (Penguin) intends to injure a third person (Batman) and causes injury (directly or indirectly) to the person of the other (Robin). Batman is not liable because he did not act with intent and, as Section 14 states, “To make the actor liable for a battery, the harmful bodily contact must be caused by an act done by the person whose liability is in question.”

2. CEO was convinced by his employee, M. Ploy, that a coworker, A. Cused, had been stealing money from the company. At lunch that day in the company cafeteria, CEO discharged Cused from her employment, accused her of stealing from the company, searched through her purse over her objections, and finally forcibly escorted her to his office to await the arrival of the police, whom he had his secretary summon. Cused is indicted for embezzlement but subsequently is acquitted upon establishing her innocence. What rights, if any, does Cused have against CEO? Explain.

Answer: CEO might be liable for slander if there was no basis for the embezzlement accusation and there was a publication of the defamatory information to someone else in the cafeteria. By taking the employee’s purse, CEO committed a trespass to personal property, an intentional dispossession or unauthorized use of another’s property. This constituted an interference with the employee’s right to exclusive use and possession. By searching the purse, the CEO has committed the tort of intrusion. Cused could also demonstrate that CEO’s physical contact constituted a battery, which is the intentional infliction of harmful or offensive bodily contact. Cused did not consent to the touching. An action might also lie for emotional distress since the courts now grant recovery for mental anguish despite a lack of physical injury. Also, there may be false imprisonment if there was not a lawful restraint under local shoplifting law. Finally, given the

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acquittal, a claim for malicious prosecution could be made if CEO filed the charges without probable cause and for an improper purpose.

3. Ralph kisses Edith while she is asleep but does not waken or harm her. Edith sues Ralph for battery. Has a battery been committed? Explain.

Answer: Yes. Decision for Edith. Section 18 provides: “(1) An actor is subject to liability to another for battery if (a) he acts intending to cause a harmful or offensive contact with the person of the other or third person, or an imminent apprehension of such a contact, and (b) an offensive contact with the person of the other directly or indirectly results.” All of these elements have been satisfied by the facts of this problem. Moreover, Comment d to Section 18 states: “In order that the actor may be liable under the statement in this Subsection, it is not necessary that the other should know of the offensive contact which is inflicted upon him at the time when it is inflicted. The actor’s liability is based upon his intentional invasion of the other’s dignitary interest in the inviolability of his person and the affront to it while it is being perpetrated.”

4. Claude, a creditor seeking to collect a debt, calls on Dianne and demands payment in a rude and insolent manner. When Dianne says that she cannot pay, Claude calls Dianne a deadbeat and says that he will never trust Dianne again. Is Claude liable to Dianne? If so, for what tort? Explain.

Answer: No. Liability for infliction of emotional distress would not arise out of these facts. Liability clearly does not extend to mere insults, indignities, threats, annoyances, petty oppressions, or other trivialities. There is no occasion for the law to intervene in every case where someone’s feelings are hurt. Comment d to Section 46. In this case, although Claude’s behavior was unthinkable, it was not sufficient to support a claim of infliction of emotional distress. Moreover, there is no defamation because there has been no communication to a third party.

5. Lana, a ten-year-old child, is run over by a car negligently driven by Mitchell. Lana, at the time of the accident, was acting reasonably and without negligence. Clark, a newspaper reporter, photographs Lana while she is lying in the street in great pain. Two years later, Perry, the publisher of a newspaper, prints Clark’s picture of Lana in his newspaper as a lead to an article concerning the negligence of children. The caption under the picture reads: “They ask to be killed.” Lana, who has recovered from the accident, brings suit against Clark and Perry. What is the result? Explain.

Answer: Judgment for Lana against Perry but not against Clark. The facts make out a case against Perry for the tort of invasion of privacy; in particular, placing another in a false light. Section 652E of the Restatement imposes liability for publicity which places another in a false light. It is unlikely that Perry could utilize the First Amendment as a defense because Lana was neither a public official nor a public figure. Even if that defense were available, it is forfeited if Perry acted with “malice,” which appears to be the case here because Perry acted in reckless disregard of the truth. Clark did not commit the tort of intrusion because he photographed an event that occurred in public.

6. The Saturday Evening Post featured an article entitled “The Story of a College Football Fix,” characterized in the subtitle as “A Shocking Report of How Wally Butts and Bear Bryant Rigged a Game Last Fall.” Butts was athletic director of the University of Georgia, and Bryant was head coach of the University of Alabama. The article was based on a claim by one George Burnett that he had accidentally overheard a long-distance telephone conversation between Butts and Bryant in the course of which Butts divulged information on plays Georgia

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would use in the upcoming game against Alabama. The writer assigned to the story by the Post was not a football expert, did not interview either Butts or Bryant, and did not personally see the notes Burnett had made of the telephone conversation. Butts admitted that he had a long-distance telephone conversation with Bryant but denied that any advance information on prospective football plays was given. Has Butts been defamed by the Post?

Why or why not?

Answer: Yes. Decision for Butts. The publication was defamatory because it was a communication that injured Butts’ good name. Although Butts was a public figure, the magazine published the story in reckless disregard of the truth, which constitutes malice and results in a loss of First Amendment protection. Curtis Publishing Co. v. Butts, 388 U. S. 130.

7. A patient confined in a hospital, Joan, has a rare disease that is of great interest to the public. Carol, a television reporter, requests Joan to consent to an interview. Joan refuses, but Carol, nonetheless, enters Joan's room over her objection and photographs her. Joan brings a suit against Carol. Is Carol liable? If so, for what tort? Explain.

Answer: Yes, Carol is liable to Joan. Carol has committed the tort of intrusion, the invasion of privacy with unreasonable and highly offensive interference with the solitude or seclusion of another. Restatement, Section 652B. Such unreasonable interference would include improper entry into another’s dwelling. This form of invasion of privacy is committed once the intrusion occurs, as publication is not required. The defense of constitutional privilege would not be available.

If Carol published the photograph, she would also be liable to Joan for public disclosure of private facts. The law of privacy imposes liability for the offensive publication of private information about another. As with intrusion, this tort only applies to private, not public, information regarding the plaintiff, but unlike intrusion it requires publicity. This tort applies to truthful private information if the matter published would be offensive and objectionable to a reasonable person of ordinary sensibilities.

8. Owner has a place on his land where he piles trash. The pile has been there for three months. John, a neighbor of Owner, without Owner's consent or knowledge, throws trash onto the trash pile. Owner learns that John has done this and sues him. What tort, if any, has John committed? Explain.

Answer: John is liable for trespass. Section 158 provides: “One is subject to liability to another for trespass, irrespective of whether he thereby causes harm to any legally protected interest of the other, if he intentionally (a) enters land in the possession of the other, or causes a thing or a third person to do so, or (b) remains on the land, or (c) fails to remove from the land a thing which he is under a duty to remove.”

The actor without himself entering the land may invade another’s interest in its exclusive possession by throwing, propelling, or placing a thing either on or beneath the surface of the land or in the air space above it.

9. Chris leaves her car parked in front of a store. There are no signs that say Chris cannot park there. The store owner, however, needs the car moved to enable a delivery truck to unload. He releases the brake and pushes Chris's car three or four feet, doing no harm to the car. Chris returns and sees that her car has been moved and is very angry. She

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threatens to sue the storeowner for trespass to her personal property. Can she recover?

Explain.

Answer: Probably not. Liability for trespass to a chattel (movable personal property) is imposed only if (a) the actor dispossesses the other of the chattel, or (b) the chattel is impaired as to its condition, quality, or value, or (c) the possessor is deprived of the use of the chattel for a substantial time, or (d) bodily harm is caused to the possessor, or harm is caused to some person or thing in which the possessor has a legally protected interest. Section 218. The deprivation of use, not amounting to a dispossession, necessary to render the actor liable for his use or other intermeddling with the chattel of another without the other’s consent must be for a time so substantial that it is possible to estimate the loss caused thereby.

A mere momentary or theoretical deprivation of use is not sufficient unless there is a dispossession.

10. Carr borrowed John's brand-new Ford for the purpose of going to the store. He told John he would be right back. Carr then decided, however, to go to the beach while he had the car. Can John recover from Carr the value of the automobile? If so, for what tort? Explain.

Answer: The tort for which John can recover depends in part on the amount of time Carr has the vehicle. John can definitely recover for a trespass to personal property since Carr dispossessed John of the vehicle beyond the authorized use.

This would apply if the beach is just a few miles away and Carr is only gone for a few hours or so. Recovery would not be for the full value of the car. If, however, the beach is hundreds of miles away and Carr keeps the vehicle for an unreasonably long time, John may be able to recover for conversion. This is a much more significant interference with the other’s right of control, and would allow John to recover the full value of the vehicle. Section 222A. 11. Marcia Samms claimed that David Eccles had repeatedly and persistently called her at various hours, including late at night, from May to December, soliciting her to have illicit sexual relations with him. She also claimed that on one occasion Eccles came over to her residence to again solicit sex and indecently exposed himself to her. Mrs. Samms had never encouraged Eccles but had continuously repulsed his “insulting, indecent, and obscene” proposals. She brought suit against Eccles, claiming she suffered great anxiety and fear for her personal safety and severe emotional distress, demanding actual and punitive damages.

Can she recover? If so, for what tort? Explain.

Answer: Yes, Samms could recover for Infliction of Emotional Distress. The courts recognize a cause of action for severe emotional distress even if not accompanied by bodily impact or physical injury, where defendant engaged in intentional conduct aimed at the plaintiff (1) with the purpose of inflicting emotional distress, or (2) where any reasonable person should have known that emotional distress would result. Also, the conduct must be outrageous and intolerable according to general community standards of decency and morality. Eccles’ conduct constitutes more than a mere solicitation, considering that it persisted for eight months and also involved indecent exposure. The aggravating circumstances are sufficient to give Samms a cause of action based solely on her emotional distress. Samms v.

Eccles, 358 P.2d 344 (1931).

12. National Bond and Investment Company sent two of its employees to repossess Whithorn’s car after he failed to complete the payments. The two repossessors located Whithorn while he was driving his car. They followed him and hailed him down in order to make the repossession. Whithorn refused to abandon his car and demanded evidence of their authority. The two repossessors became impatient and called a wrecker. They ordered the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 7: Intentional Torts

driver of the wrecker to hook Whithorn’s car and move it down the street while Whithorn was still inside the vehicle. Whithorn started the car and tried to escape, but the wrecker lifted the car off the road and progressed seventy-five to one hundred feet until Whithorn managed to stall the wrecker. Has National Bond committed the tort of false imprisonment?

Explain.

Answer: Yes, National Bond falsely imprisoned Whithorn. The result of Whithorn’s departure would have been an automatic parting with his automobile, which he did not desire to part with and which he did not have to part with, and which the two repossessors had no right to take over his protests. He had a legal right to be in his car at the time the repossessors hooked up the car and forcibly dragged Whithorn down the street. This was a restraint imposed upon him and a detention of his person, such as to constitute a false imprisonment. National Bond & Investment Co. v. Whithorn, 123 S.W.2d 263 (1939).

13. William Proxmire, a U.S. senator from Wisconsin, initiated the “Golden Fleece of the Month Award” to publicize what he believed to be wasteful government spending. The second of these awards was given to the federal agencies that had for seven years funded Dr. Hutchinson’s research on stress levels in animals. The award was made in a speech Proxmire gave in the Senate; the text was also incorporated into an advance press release that was sent to 275 members of the national news media. Proxmire also referred to the research again in two subsequent newsletters sent to one hundred thousand constituents and during a television interview. Hutchinson then brought this action alleging defamation resulting in personal and economic injury. Assuming that Hutchinson proved that the statements were false and defamatory, would he prevail? Explain.

Answer: Yes, Dr. Hutchinson would prevail. Proxmire’s speech on the Senate floor was immune from liability, but the advance news release, the newsletters and the comments made by Senator Proxmire during the television news interviews were not privileged under the Speech and Debate clause of the U.S. Constitution. Nor are they protected by the First Amendment as to defamatory comments made. Dr. Hutchinson was not a public figure prior to receiving the Golden Fleece Award since his published writings reached a relatively small audience concerned with research in human behavior. Rather, any notoriety he achieved came as a result of the alleged defamation, and therefore cannot serve as a basis for Proxmire’s defense. Hutchinson v. Proxmire, 443 U.S. 111.

14. Capune was attempting a trip from New York to Florida on an eighteen-foot-long paddleboard. The trip was being covered by various media to gain publicity for Capune and certain products he endorsed. Capune approached a pier by water. The pier was owned by Robbins, who had posted signs prohibiting surfing and swimming around the pier. Capune was unaware of these notices and attempted to continue his journey by passing under the pier. Robbins ran up yelling and threw two bottles at Capune. Capune was frightened and tried to maneuver his paddleboard to go around the pier. Robbins then threw a third bottle that hit Capune on the head. Capune had to be helped out of the water and taken to the hospital. He suffered a physical wound that required twenty-four sutures and, as a result, had to discontinue his trip. Capune brought suit in tort against Robbins. Is Robbins liable?

If so, for which tort or torts? Explain.

Answer: Yes, Robbins is liable to Capune for battery. Robbins’ throwing the bottles with the intent to frighten Capune constitutes sufficient intent to make Robbins liable in battery for any injuries that resulted. The harmful physical contact resulted from Capune being hit by the bottle thrown by Robbins. Capune v.

Robbins, 273 NC. 581, 160 S.E.2d 881 (1968).

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15. Ralph Nader, who has been a critic of General Motors Corp. for many years, claims that when General Motors learned that Nader was about to publish a book entitled Unsafe at Any Speed, criticizing one of its automobiles, the company decided to conduct a campaign of intimidation against him. Specifically, Nader claims that GMC (a) conducted a series of interviews with Nader’s acquaintances, questioning them about his political, social, racial, and religious views; (b) kept him under surveillance in public places for an unreasonable length of time including close observation of him in a bank; (c) caused him to be accosted by women for the purpose of entrapping him into illicit relationships; (d) made threatening, harassing, and obnoxious telephone calls to him; (e) tapped his telephone and eavesdropped by means of mechanical and electronic equipment on his private conversations with others; and (f) conducted a “continuing” and harassing investigation of him. Nader brought suit against GMC for invasion of privacy. Which, if any, of the alleged actions would constitute invasion of privacy? Explain.

Answer: Judgment in part for Nader. The tort of invasion of one’s privacy includes instances of intrusion by physical trespass or otherwise into areas from which an ordinary man would reasonably expect that others should be excluded. The concern is not with one’s broad right to be left alone, but rather with the right to keep one’s private affairs secret from others. Thus, one must show that the questioned conduct was truly “intrusive” and that it was designed to elicit information that would not be available through normal inquiry or observation.

In the present case, only two of the activities complained of could constitute an invasion of Nader’s privacy: (1) the unauthorized wiretapping and eavesdropping by electronic means, and (2) certain potentially overzealous surveillance of Nader in a public place by closely observing him in a bank. In contrast, the other activities may have uncovered information of a personal nature about Nader, but this cannot be regarded as an invasion of his privacy since it was gained from third persons.

Presumably since Nader confided in these third persons, he also assumed the risk that they would breach his confidence. Nader v. General Motors Corp., 25 N.Y.2d 560, 255 N.E.2d 765, 307 N.Y.S.2d 647 (1970).

16. Bill Kinsey was charged with murdering his wife while working for the Peace Corps in Tanzania. After waiting six months in jail, he was acquitted at a trial that attracted wide publicity. Five years later, while a graduate student at Stanford University, Kinsey had a brief affair with Mary Macur. He abruptly ended the affair by telling Macur he would no longer be seeing her because another woman, Sally Allen, was coming from England to live with him.

A few months later, Kinsey and Allen moved to Africa and were subsequently married. Soon after Bill ended their affair, Macur began a letter-writing campaign designed to expose Bill and his mistreatment of her. Macur sent several letters to both Bill and Sally Kinsey, their parents, their neighbors, their parents’ neighbors, members of Bill’s dissertation committee, other faculty, and the president of Stanford University. The letters contained statements accusing Bill of murdering his first wife, spending six months in jail for the crime, being a rapist, and exhibiting other questionable behavior. The Kinseys brought an action for invasion of privacy, seeking damages and a permanent injunction. Will the Kinseys prevail? If so, for what tort? Explain.

Answer: Judgment for the Kinseys. The tort of invasion of privacy includes four separate torts, two of which are involved here: (1) the public disclosure of true, embarrassing private facts concerning the plaintiff; and (2) publicity that places the plaintiff in a false light in the public eye. In both of these torts there must be a communication to the general public or a large number of people as opposed to private communications. In this case, Macur sent the letters to approximately twenty people. The recipients were such a diverse group, however, living in several

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different states and totally unconnected either socially or professionally, that her campaign satisfied this requirement. Macur claims that even if she invaded Kinsey’s privacy, it was privileged because he was a public figure by virtue of his participation in the Peace Corps and his widely publicized murder trial. The definition of a public figure is not clear, but membership in the Peace Corps is not sufficient to make a person a public figure. Moreover, once Kinsey had been acquitted at his trial, he was no longer a public figure and should be allowed “to melt into the shadows of obscurity” once again. Kinsey v. Macur, 107 Cal.App.3d 265, 165 Cal.Rptr. 608 (1980).

17. Plaintiff, John W. Carson, was the host and star of The Tonight Show, a well-known television program broadcast by the National Broadcasting Company. Carson also appeared as an entertainer in nightclubs and theaters around the country. From the time he began hosting The Tonight Show, he had been introduced on the show each night with the phrase “Here’s Johnny.” The phrase “Here’s Johnny” is still generally associated with Carson by a substantial segment of the television viewing public. To earn additional income, Carson began authorizing use of this phrase by outside business ventures.

Defendant, Here’s Johnny Portable Toilets, Inc., is a Michigan corporation engaged in the business of renting and selling “Here’s Johnny” portable toilets. Defendant’s founder was aware at the time he formed the corporation that “Here’s Johnny” was the introductory slogan for Carson on The Tonight Show. He indicated that he coupled the phrase with a second one, “The World’s Foremost Commodian,” to make “a good play on a phrase.” Carson brought suit for invasion of privacy. Should Carson recover? If so, for which tort? Explain.

Answer: Yes, Carson should recover for violation of his right of privacy. The right of privacy involves four distinct torts, one of which is the appropriation of a person's name or likeness. This tort, also known as the "right of publicity," protects the commercial interests of celebrities in exploiting their identities and applies to these facts.

In this case there would have been no violation of Carson's right of publicity if the defendant had used Carson's actual name, such as "J. William Carson Portable Toilet" or the "John William Carson Portable Toilet" or the "J.W. Carson Portable Toilet." The reason is that, though literally using the plaintiff's "name," the defendant would not have appropriated Carson's identity as a celebrity. Here there was an appropriation of Carson's identity without using his "name," because of the public's association of Carson with the phrase "Here's Johnny." Carson v. Here's Johnny Portable Toilets, Inc. 18. Lemmie L. Ruffin, Jr., was an Alabama licensed agent for Pacific Mutual Life Insurance and for Union Fidelity Life Insurance Company. Union wrote group health insurance policies for municipalities, while Pacific did not. Plaintiffs Cleopatra Haslip, Cynthia Craig, Alma M. Calhoun, and Eddie Hargrove were employees of Roosevelt City, Alabama. Ruffin gave the city a single proposal for health and life insurance for its employees, which the city approved. Both companies provided the coverage; however, Union provided the health insurance and Pacific provided the life insurance. This packaging of coverage by two different and unrelated insurers was not unusual. Union would send its billings for health premiums to Ruffin at Pacific Mutual’s office. The city clerk each month issued a check for those premiums and sent it to Ruffin. Ruffin, however, did not remit to Union the premium payments he received from the city; instead, he misappropriated most of them. When Union did not receive payment from the city, it sent notices of lapsed health coverage to the plaintiffs, who did not know that their health policies had been canceled.

Plaintiff Haslip was subsequently hospitalized, and because the hospital could not confirm

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her health coverage, it required her to make a partial payment on her bill. Her physician, when he was not paid, placed her account with a collection agency, which obtained against Haslip a judgment that damaged her credit. Plaintiffs sued Pacific Mutual and Ruffin for fraud. The case was submitted to a jury, which was instructed that if it found liability for fraud, it could award punitive damages. The jury returned verdicts for the plaintiffs and awarded Haslip $1,040,000, of which at least $840,000 was punitive damages. The Supreme Court of Alabama affirmed the trial court’s judgment. Pacific Mutual appealed. Decision?

Explain.

Answer: Judgment of the Supreme Court of Alabama in favor of the plaintiffs affirmed. Under the traditional common law approach, the amount of a punitive award initially is determined by a jury. Jurors are instructed to consider the gravity of the wrong and the need to deter similar wrongful conduct in the future. The trial and appellate courts then review the jury's determination to ensure that it is reasonable. While the common law method for assessing punitive damages does not always deny due process, neither is it always constitutional. The task in this case is to determine whether the Due Process Clause of the Fourteenth Amendment renders the punitive damages award of this case unconstitutional.

The Court concludes that the punitive damages the jury assessed against Pacific Mutual did not violate the Due Process Clause. Even though Alabama law, like the law of most states, imposes punitive damages for purposes of retribution and deterrence, this does not resolve the issue. The trial judge's instructions gave the jury significant discretion, but such discretion was not unlimited. It was confined to deterrence and retribution. The trial court found specifically that the defendants' conduct evidenced intentional, malicious, gross, or oppressive fraud. The Supreme Court of Alabama previously had decided that courts could consider the following factors in determining whether an award of punitive damages was excessive or inadequate: (a) whether a reasonable relationship existed between the punitive damages award and the harm likely to result from the defendant's conduct as well as the harm that actually had occurred; (b) the degree of reprehensibility of the defendant's conduct, the duration of that conduct, the defendant's level of awareness, any concealment, and the existence and frequency of similar past conduct; (c) the profitability to the defendant of the wrongful conduct and the desirability of removing that profit and of having the defendant also sustain a loss; (d) the "financial position" of the defendant; (e) all the costs of litigation; (f) the imposition of criminal sanctions on the defendant for its conduct, these sanctions to be taken in mitigation; and (g) the existence of other civil awards against the defendant for the same conduct, these also to be taken in mitigation.

The Court concludes that the application of these standards by the courts of Alabama imposes a sufficiently definite and meaningful constraint on the discretion of Alabama fact finders (juries) in awarding punitive damages. The Alabama Supreme Court's post-verdict review ensures that punitive damages awards are not grossly out of proportion to the severity of the offense and have some understandable relationship to compensatory damages.

19. Susan Jungclaus Peterson was a twenty-one-year-old student at Moorhead State University who had lived most of her life on her family farm in Minnesota. Though Susan was a dean’s list student her first year, her academic performance declined after she became deeply involved in an international religious cult organization known locally as The Way of Minnesota, Inc. The cult demanded an enormous psychological and monetary commitment from Susan. Near the end of her junior year, her parents became alarmed by the changes in Susan’s physical and mental well-being and concluded that she had been “reduced to a

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condition of psychological bondage by The Way.” They sought help from Kathy Mills, a selfstyled “deprogrammer” of minds brainwashed by cults.

On May 24, Norman Jungclaus, Susan’s father, picked up Susan at Moorhead State. Instead of returning home, they went to the residence of Veronica Morgel, where Kathy Mills attempted to deprogram Susan. For the first few days of her stay, Susan was unwilling to discuss her involvement. She lay curled in a fetal position in her bedroom, plugging her ears and hysterically screaming and crying while her father pleaded with her to listen. By the third day, however, Susan’s demeanor changed completely. She became friendly and vivacious and communicated with her father. Susan also went roller skating and played softball at a nearby park over the following weekend. She spent the next week in Columbus, Ohio, with a former cult member who had shared her experiences of the previous week.

While in Columbus, she spoke daily by telephone with her fiancé, a member of The Way, who begged her to return to the cult. Susan expressed the desire to get her fiancé out of the organization, but a meeting between them could not be arranged outside the presence of other members of The Way. Her parents attempted to persuade Susan to sign an agreement releasing them from liability for their actions, but Susan refused. After nearly sixteen days of “deprogramming,” Susan left the Morgel residence and returned to her fiancé and The Way. Upon the direction of The Way ministry, she brought an action against her parents for false imprisonment. Will Susan prevail? Explain.

Answer: Judgment for Mr. and Mrs. Jungclaus. "If a person is aware of a reasonable means of escape that does not present a danger of bodily or material harm, a restriction is not total and complete and does not constitute unlawful imprisonment." Also, a person cannot recover damages for any period of detention to which she voluntarily consents. For the final thirteen days of the sixteen-day period, Susan willingly remained in the company of her parents. She also had several reasonable and safe opportunities to escape while playing softball, roller skating, and taking her trip to Ohio. Given that the conditioning of the cult may have impaired her free will prior to her "deprogramming," it is reasonable to infer from her subsequent consent that she would have consented to the first three days' detention if she had had her full capacity. Furthermore, parents may place limitations on their adult child's mobility, if they have a good-faith, reasonable belief that the child's judgmental capacity has been seriously affected by a cult and if she at some point assents to the limitations. Thus, Susan's assent during the thirteen-day period relieved her parents of liability for false imprisonment.

20. Debra Agis was a waitress in a restaurant owned by the Howard Johnson Company. On May 23, Roger Dionne, manager of the restaurant, called a meeting of all waitresses at which he informed them “there was some stealing going on.” Dionne also stated that the identity of the party or parties responsible was not known and that he would begin firing all waitresses in alphabetical order until the guilty party or parties were detected. He then fired Debra Agis, who allegedly “became greatly upset, began to cry, sustained emotional distress, mental anguish, and loss of wages and earnings.” Mrs. Agis brought this complaint against the Howard Johnson Company and Roger Dionne, alleging that the defendants acted recklessly and outrageously, intending to cause emotional distress and anguish. The defendants argued that damages for emotional distress are not recoverable unless physical injury occurs as a result of the distress. Will Agis be successful on her complaint? Why or why not?

Answer: Yes. An individual "who, by extreme and outrageous conduct and without privilege, causes severe emotional distress to another is subject to liability for such emotional distress even though no bodily harm may result." Mrs. Agis successfully established the following four essential elements: (1) that the defendants intended

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to cause emotional distress or that they knew or should have known that emotional distress was likely to result from their conduct; (2) that the defendants' conduct was "extreme and outrageous" and "beyond all possible bounds of decency;" (3) that the defendants' actions caused Mrs. Agis's distress; and (4) that Mrs. Agis's emotional distress was "severe" and such "that no reasonable man could be expected to endure it."

21. Pro Golf Manufacturing, Inc., manufactures and repairs golf equipment as well as gives golf lessons. On September 27, the Tribune Review newspaper published an article stating that several historic buildings, including the building housing Pro Golf’s business, were set for demolition. On February 18 of the following year, the Tribune Review published another newspaper article, stating that the building containing Pro Golf’s business had been demolished. However, the building containing Pro Golf’s business neither had been scheduled for demolition nor had been demolished. Pro Golf seeks to recover for the financial loss that these false publications caused. Explain which tort offers the best likelihood of recovery and what Pro Golf would have to prove to recover.

Answer: This problem is based on Pro Golf Mfg. v. Tribune Review Newspaper, 809 A.2d 243 (Supreme Court of Pennsylvania, 2002). The tort that offers the best likelihood of recovery would be disparagement (injurious falsehood) and Pro Golf would have to prove: (1) the statement is false; (2) the publisher either intends the publication to cause pecuniary loss or reasonably should recognize that publication will result in pecuniary loss; (3) pecuniary loss does in fact result; and (4) the publisher either knows that the statement is false or acts in reckless disregard of its truth or falsity. Restatement (Second) of Torts § 623(A) (1977).

ANSWERS TO “TAKING SIDES” PROBLEMS Edith Mitchell, accompanied by her thirteen-year-old daughter, went through the checkout at Walmart and purchased several items. As they exited, the Mitchells passed through an electronic antitheft device, which sounded an alarm. Robert Canady, employed by Walmart as a “people greeter” and security guard, forcibly stopped Edith Mitchell at the exit, grabbed her bag, and told her to step back inside. The security guard never touched Edith or her daughter and never threatened to touch either of them. Nevertheless, Edith Mitchell described the security guard’s actions in her affidavit as “gruff, loud, rude behavior.” The security guard removed every item Mitchell had just purchased and ran it through the security gate. One of the items still had a security code unit on it, which an employee admitted could have been overlooked by the cashier. When the security guard finished examining the contents of Mitchell’s bag, he put it on the checkout counter. This examination of her bag took ten or fifteen minutes. Once her bag had been checked, no employee of Walmart ever told Mitchell she could not leave. Mitchell was never threatened with arrest.

Mitchell brought a tort action against Walmart. a. Explain on which torts Mitchell should base her claim against Walmart? b. What arguments would support Walmart’s denial of liability for these torts? c. Which party should prevail? Explain.

Answer: (a) Mitchell could base her claim against Walmart on false imprisonment, assault, battery, defamation, and intentional infliction of emotional distress.

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(b) Walmart could deny liability based on a merchant’s conditional privilege to investigate a suspected shoplifting. (c) Answer: Walmart should prevail. Mitchell v. Walmart Stores, Inc., Georgia Court of Appeals, 1996, 477 S.E.2d 631: http://scholar.google.com/scholar_case?case=2296695846303644766&q=477+S.e.2d +631&hl=en&as_sdt=2,34 The owner or operator of a mercantile establishment has the right to detain a person reasonably suspected of shoplifting. The cause of detention must be “established by competent evidence” and must be reasonable in length of time. In the case of an establishment utilizing an anti-shoplifting or inventory control device, the automatic activation of the device as a result of a person exiting the protected area shall constitute reasonable cause for the detention of the person.

The agent’s alleged rudeness is irrelevant, as his actions were clearly in response to the alarm, establishing probable cause. The plaintiff's claims for false arrest are without merit. “[I]t makes no difference to ‘reasonable cause’ whether or not employee negligence in failing to deactivate the special tag set the device off. What matters is whether the method and time of detention were reasonable within statutory limitations.”

Plaintiff was subjected to a ten- or fifteen-minute “detention” in the open, during which the items in plaintiff's shopping bag were individually tested for the presence of the electronic antitheft sensor and after which plaintiff's bag was returned to her and she was free to leave. This procedure was reasonable. Causing embarrassment is not the same as unlawful imprisonment. Although one might conclude that Walmart exceeded its conditional privilege by acting in an excessive manner, this court determined otherwise.

Similarly, there was no unlawful restraint either by force or fear here, as is necessary to recover for false imprisonment. It follows that the trial court correctly granted defendant’s motion for summary judgment.

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Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 8: Negligence and Strict Liability

CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems .............................................................................. 11

ANSWERS TO ETHICAL DILEMMA What Are the Obligations of a Bartender to His Patrons?

1. What action, if any, should John take?

2. What are the potential risks to the two men who are drinking? Are public safety issues involved?

3. What management policies should the hotel institute with regard to its liquor policies and athletic operations?

4. Do the drinking companions bear an ethical responsibility for each other’s drinking?

5. How should society balance the interests of freedom of business and individual conduct (i.e., drinking) with the competing interests of protecting public safety?

Answer: 1. John could take action immediately to prevent the serving of a fourth round of drinks.

He could contact the manager or the head of hotel security for help. If the hotel’s superior managers do nothing, and simply share Mr. Arnold’s views, John faces a difficult dilemma. At what point should he call outside police? On the other hand, if John or the hotel forcefully detains the skiers, one wonders whether the hotel may be potentially liable for false imprisonment or other intentional torts (intentional infliction of emotional distress, etc.)

2. The risks to the two men drinking are that they could hurt themselves skiing or driving.

There are public safety issues involved, as the men could injure other skiers or occupants of other cars.

3. Management should develop policies for handling alcohol and train employees accordingly. Strategies for the enforcement of management regulations should be developed. Alcohol policies should be developed with the advice of legal counsel to ensure compliance with applicable state laws. While most companies will do what the state requires and no more, individual companies should consider developing their own standards based on individual ethical concerns. Some establishments require employees to take seminars focusing on responsible alcohol service. (See Rand, Ted, Vodka & Vigilance, Insurance Review, Vol. 50, Iss. 6, June 1989, pgs. 42-46.)

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4. Under most ethical theories, the drinking buddies do have an ethical responsibility for each other’s drinking. They may also be subject to legal liability, although this is a separate issue.

5. States have long wrestled with the competing interests of freedom of business and the protection of the public. Oregon has an innovative statute which the National Commission on Drunk Driving has hailed as among the best in the United States.

Features of the Oregon statute include stiff blood alcohol standards, mandatory ignition interlock devices in several counties for those convicted of driving under the influence, drinking buddy liability, mandatory training classes for persons who get a license to serve liquor, and exposure to panels of about five victims of a drunk driver.

(See Bussewitz, Walter, The National Underwriter, Vol. 95, Iss. 15, Apr.1991, pg. 52.)

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

A statute that requires railroads to fence their tracks is construed as intended solely to prevent injuries to animals straying onto the right-of-way. B & A Railroad Company fails to fence its tracks. Two of Calvin's cows wander onto the track. Nellie is hit by a train. Elsie is poisoned by weeds growing beside the track. For which cow(s), if any, is B & A Railroad Company liable to Calvin? Why or why not?

Answer: The railroad company is liable for Nellie, the cow that was hit by the train, and probably not for Elsie. For a statute to be adopted as the standard of conduct of a reasonable man, the intent of the statute must have been to protect the interest against that particular harm which occurred and against that hazard from which the harm resulted. The intent of this statute was to protect cows from the hazard of the trains, not from poisonous weeds. Third Restatement, Section 14.

With respect to Elsie, the facts do not indicate whether the railroad was otherwise negligent towards Elsie or whether Calvin is negligent for allowing his cows to roam freely.

2. Martha invites John to lunch. Martha knows her private road is dangerous to travel, having been heavily eroded by recent rains. She doesn't warn John of the condition, reasonably believing that he will notice the deep ruts and exercise sufficient care. John’s attention, while driving over, is diverted from the road by the screaming of his child, who has been stung by a bee. He fails to notice the condition of the road, hits a rut, and skids into a tree. If John is not contributorily negligent, is Martha liable to John? Explain.

Answer: Under the majority of states that still use the Second Restatement, No. A possessor of land who knows of dangerous conditions on his property and fails to warn licensees is liable only if he should expect that they will not discover the danger. Restatement, Second, Torts, Section 342. In this case, it appears that Martha reasonably expected John to notice the dangerous conditions. The situation may be different if he had been invited for dinner and had to travel the road at night.

The situation may be different also in the states that have adopted the Third Restatement, as this rule requires a land possessor to use reasonable care to investigate and discover dangerous conditions and to use reasonable care to eliminate or improve those dangerous conditions that are known or should have been discovered by the exercise of reasonable care. A court in one of these states may find that Martha should have warned John of the ruts.

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3. Nathan is run over by a car and left lying in the street. Sam, seeing Nathan's helpless state, places him in his car for the purpose of taking him to the hospital. Sam drives negligently into a ditch, causing additional injury to Nathan. Is Sam liable to Nathan?

Discuss.

Answer: Yes, for the additional injuries. A person who begins a rescue by taking charge of another who is imperiled and unable to protect himself incurs a duty to exercise reasonable care under the circumstances. Furthermore, a person who discontinues aid or protection is under a duty of reasonable care not to leave the other in a worse position. Third Restatement, Section 44.

4. Vance was served liquor while he was an intoxicated patron of the Clear Air Force Station Noncommissioned Officers' Club. He later injured himself as a result of his intoxication. An Alaska state statute makes it a crime to give or to sell liquor to intoxicated persons. Vance has brought an action seeking damages for the injuries he suffered. Could Vance successfully argue that the United States was negligent per se by its employee's violation of the statute? Explain.

Answer: Yes. An unexcused violation of a statute or regulation is negligence in itself, or negligence per se if the court adopts the statute as defining the conduct of a reasonable person.

Courts may adopt the requirements of the statute as the standard of conduct if the statute is designed to protect against the type of accident the defendant’s conduct causes and the accident victim is within the class of persons the statute is designed to protect. Third Restatement, Section 14.

Applying these criteria to the statute in question, it is clear that all of the requirements are satisfied. The statute unquestionably is designed to protect against personal injuries caused by intoxication. And while the statute’s particular purpose may be to protect third parties from the negligence of an intoxicated consumer, the purpose is also, at least in part, to protect the consumer himself.

Vance v. United States, 355 F. Supp. 756 (D. Alaska, 1973).

5. A statute requires all vessels traveling on the Great Lakes to provide lifeboats. One of Winston Steamship Company's boats is sent out of port without a lifeboat. Perry, a sailor, falls overboard in a storm so heavy that had there been a lifeboat it could not have been launched. Perry drowns. Is Winston liable to Perry's estate? Explain.

Answer: No. For liability to exist there must be negligence and that negligence must be a legal cause of the harm. If the harm would have occurred in the absence of the negligence, the negligence is not a legal cause. A widely applied test for causation in fact is the “but-for” test: A person’s conduct is a cause of an event if the event would not have occurred but for the person’s negligent conduct. That is, conduct is a factual cause of harm when the harm would not have occurred absent the conduct. Third Restatement, Section 26.

6. Lionel is negligently driving an automobile at excessive speed. Reginald’s negligently driven car crosses the center line of the highway and scrapes the side of Lionel’s car, damaging its fenders. As a result, Lionel loses control of his car, which goes into the ditch, wrecking the car and causing personal injuries to Lionel. What can Lionel recover? Explain.

Answer: The question here is whether Lionel’s negligent conduct was a contributing factor to the accident. The Third Restatement, Section 463, defines contributory negligence as “conduct on the part of the plaintiff which falls below

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the standard to which he should conform for his own protection, and which is a legally contributing cause co-operating with the negligence of the defendant in bringing about the plaintiff’s harm.” The Third Restatement’s definition of negligence as the failure of a person to exercise reasonable care under all the circumstances applies to the contributory negligence of the plaintiff. Section 3, Comment b.

Here it appears that the plaintiff’s negligence may not be a substantial factor in causing his harm and thus he could collect for both personal injuries and property damage. If, on the other hand, one concluded that the plaintiff was contributorily negligent, he would be totally barred from recovery in those states that still recognize the traditional doctrine but could collect a proportional share of his injuries in those states that have adopted the doctrine of comparative negligence.

7. Ellen, the owner of a baseball park, is under a duty to the entering public to provide a reasonably sufficient number of screened seats to protect those who desire such protection against the risk of being hit by batted balls. Ellen fails to do so. a. Frank, a customer entering the park, is unable to find a screened seat and, although fully aware of the risk, sits in an unscreened seat. Frank is struck and injured by a batted ball. Is Ellen liable? Explain. b. Gretchen, Frank’s wife, has just arrived from Germany and is viewing baseball for the first time. Without asking any questions, she follows Frank to a seat. After the batted ball hits Frank, it caroms into Gretchen, injuring her. Is Ellen liable to Gretchen? Explain.

Answer: (a) Under the Second Restatement of Torts: No, Frank has voluntarily assumed the risk and, therefore, is not entitled to recover for harm arising out of the assumed risk. Restatement, Second, Torts, Section 496C, Illustration 4.

However, the Third Restatement of Torts: Apportionment of Liability has abandoned the doctrine of implied voluntary assumption of risk: it is no longer a defense that the plaintiff was aware of a risk and voluntarily confronted it.

But if a plaintiff’s conduct in the face of a known risk is unreasonable, it might constitute contributory negligence, thereby reducing the plaintiff’s recovery under comparative negligence. This new Restatement limits the defense of assumption of risk to express assumption of risk, which consists of a contract between the plaintiff and another person to absolve the other person from liability for future harm. On these facts it would appear that Frank could recover unless his sitting there is contributorily negligent. (b) Ellen would be subject to liability to Gretchen for her failure to satisfy the duty she owed to Gretchen. On these facts, Gretchen has not assumed the risk, because she has no knowledge of the possible risk. Illustration 5, Section 496C, Second Restatement. The same result under the Third Restatement because she would not be considered contributorily negligent.

8. CC Railroad is negligent in failing to give warning of the approach of its train to a crossing and thereby endangers Larry, a blind man who is about to cross. Mildred, a bystander, in a reasonable effort to save Larry, rushes onto the track to push Larry out of danger. Although Mildred acts as carefully as possible, she is struck and injured by the train. a. Can Mildred recover from Larry? Why or why not? b. Can Mildred recover from CC Railroad? Why or why not?

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Answer: (a) Larry is not liable to Mildred because Larry did not breach a duty owed to Mildred. (b) Yes. Mildred does not assume the risk. A plaintiff’s acceptance of risk is not regarded as voluntary where the defendant’s tortious conduct has forced upon him a choice of courses of conduct, which leaves him no reasonable alternative to taking his chances. As Cardozo said: “Danger invites rescue.” Moreover, it was foreseeable that Mildred would attempt to rescue Larry. Therefore, CC Railroad is liable to Mildred. The same result under the Third Restatement because Mildred would not be considered contributorily negligent.

9. Two thugs in an alley in Manhattan held up an unidentified man. When the thieves departed with his possessions, the man quickly gave chase. He had almost caught one when the thief managed to force his way into an empty taxicab stopped at a traffic light. The Peerless Transport Company owned the cab. The thief pointed his gun at the driver’s head and ordered him to drive on. The driver started to follow the directions while closely pursued by a posse of good citizens, but then suddenly jammed on the brakes and jumped out of the car to safety. The thief also jumped out, but the car traveled on, injuring Mrs. Cordas and her two children. The Cordases then brought an action for damages, claiming that the cab driver was negligent in jumping to safety and leaving the moving vehicle uncontrolled. Was the cab driver negligent? Explain.

Answer: No. Judgment for Peerless Transport Company. The court stated that the test of actionable negligence is what a reasonably prudent person would have done under like conditions or circumstances. Therefore, to determine if the cab driver was negligent in abandoning his cab, his actions must be compared with what a reasonable person would have done in a similar circumstance. In general, one faced with an emergency is not required to exercise the same mature judgment that is expected of him under circumstances where he has an opportunity for deliberate action. Here, the cab driver was faced with a most frightening experience and made a split-second decision in an attempt to extricate himself from the danger. The court concluded that it could not be said that he had acted unreasonably under the emergency circumstances, and therefore the Cordases are not entitled to recover. Cordas v. Peerless Transportation Co., 27 N.Y.S. 2d 198 (1941).

10. Timothy keeps a pet chimpanzee that is thoroughly tamed and accustomed to playing with its owner’s children. The chimpanzee escapes, despite every precaution to keep it on the owner’s premises. It approaches a group of children. Wanda, the mother of one of the children, erroneously thinking the chimpanzee is about to attack the children, rushes to her child’s assistance. In her hurry and excitement, she stumbles and falls, breaking her leg.

Can Wanda recover from Timothy for her personal injuries? Explain.

Answer: Yes. Owners and possessors of wild animals are subject to strict liability for physical harm caused by such animals, whether they are trespassing or not.

Third Restatement, Section 22(b). Accordingly, the owner or possessor is liable even if she has exercised reasonable care in attempting to restrain the wild animal.

“A wild animal is an animal that belongs to a category of animals that have not been generally domesticated and that are likely, unless restrained, to cause personal injury.” Section 22(b). Moreover, it was foreseeable that a parent or other person would attempt to protect or rescue a child endangered by the chimpanzee.

11. Hawkins slipped and fell on a puddle of water just inside the automatic door to the H. E. Butt Grocery Company’s store. The water had been tracked into the store by customers and

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blown through the door by a strong wind. The store manager was aware of the puddle and had mopped it up several times earlier in the day. Still, no signs had been placed to warn store patrons of the danger. Hawkins brought an action to recover damages for injuries sustained in the fall. Was the store negligent in its conduct? Discuss.

Answer: Yes. Decision for Hawkins. The grocery store had the duty to use ordinary care to keep its premises in a reasonably safe condition for invitees or to warn them of a hazard. Whether a condition constitutes a danger is a function of reasonableness. That is, if the ordinarily prudent man could foresee that harm was a likely result of a condition, then it is a danger. The store knew or should have known that water was present and continuing to accumulate on the floor, and they negligently failed to remove the water or warn customers of the potential hazard.

H.E. Butt Grocery Co. v. Hawkins, 594 S.W. 2d 197 (1980).

12. Escola, a waitress, was injured when a bottle of soda exploded in her hand while she was putting it into the restaurant’s cooler. The bottle came from a shipment that had remained under the counter for thirty-six hours after being delivered by the bottling company. The bottler had subjected the bottle to the method of testing for defects commonly used in the industry, and there is no evidence that Escola or anyone else did anything to damage the bottle between its delivery and the explosion. Escola brought an action against the bottler for damages. Because she is unable to show any specific acts of negligence on its part, she seeks to rely on the doctrine of res ipsa loquitur. Should she be able to recover on this theory? Explain.

Answer: Decision for Escola. Res ipsa loquitur permits the jury to infer both negligent conduct and causation from the mere occurrence of certain types of events. This rule applies “when the accident causing the plaintiff's physical harm is a type of accident that ordinarily happens as a result of the negligence of a class of actors of which the defendant is the relevant member.” Third Restatement, Section 17. In the case upon which this problem is based, the court allowed Escola to rely on the doctrine even though the bottle was not in the defendant’s exclusive possession when it exploded, because she had shown that the bottle was not damaged by extraneous force after its delivery by the defendant. With the inference established, the jury may conclude that the bottle must have been defective. Because the bottler’s evidence did not refute this conclusion, Escola is entitled to recover. Escola v. Coca Cola Bottling Co. of Fresno, 24 Cavl.2d 453, 150 P.2d 436 (1944).

13. Hunn injured herself when she slipped and fell on a loose plank while walking down some steps. The night before, while entering the hotel, she had noticed that the steps were dangerous, and although she knew from her earlier stays at the hotel that another exit was available, she chose that morning to leave via the dangerous steps. The hotel was aware of the hazard, as one of three other guests who had fallen that night had reported his accident to the desk clerk then on duty. Still, the hotel did not place cautionary signs on the steps to warn of the danger, and the steps were not roped off or otherwise excluded from use.

Hunn brought an action against the hotel for injuries she sustained as a result of her fall.

Should she recover? Explain.

Answer: No, Hunn will not recover damages under the Second Restatement. There were other routes the plaintiff could have taken that were lower risk and reasonably convenient. Hunn had a full appreciation of the danger of the steps and voluntarily accepted the risk. Under the Third Restatement of Torts: Apportionment of Liability, however, there is no doctrine of implied voluntary assumption of risk; thus, it is not a defense that the plaintiff was aware of a risk and voluntarily

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confronted it. But if a plaintiff’s conduct in the face of a known risk is unreasonable, it might constitute contributory negligence, thereby reducing the plaintiff’s recovery under comparative negligence. On these facts it would appear that Hunn was contributorily negligent. Consequently, her recovery, will depend on her degree of comparative fault. Hunn v. Windsor Hotel Company, 119 W. Va. 215, 193 S.E. 57 (1937).

14. Fredericks, a hotel owner, had a dog named Sport that he had trained as a watchdog. When Vincent Zarek, a guest at the hotel, leaned over to pet the dog, it bit him. Although Sport had never bitten anyone before, Fredericks was aware of the dog’s violent tendencies and, therefore, did not allow it to roam around the hotel alone. Vincent brought an action for injuries sustained when the dog bit him. Is Fredericks liable for the actions of his dog?

Explain.

Answer: Yes, Fredricks is liable to Zarek. The defendant knew and feared the consequences and vicious propensities of “Sport” and had taken precautions against them. Owners and possessors of domestic animals are subject to strict liability if they knew, or had reason to know, of an animal’s dangerous tendencies abnormal for the animal’s category. Third Restatement, Section 23. Zarek v.

Fredericks, 138 F. 2d 689 (C.A. 3d 1943).

15. Led Foot drives his car carelessly into another car. The second car contains dynamite, a fact that Led had no way of knowing. The collision causes an explosion that shatters a window of a building half a block away on another street. The flying glass inflicts serious cuts on Sally, who is working at a desk near the window. The explosion also harms Vic, who is walking on the sidewalk near the point of the collision. Toward whom is Led Foot negligent?

Answer: Comment j to Section 29 of the Third Restatement explains that both the risk standard (for negligent conduct) and the foreseeability test (for scope of liability) “exclude liability for harms that were sufficiently unforeseeable at the time of the actor’s tortious conduct that they were not among the risks—potential harms—that made the actor negligent. Negligence limits the requirement of reasonable care to those risks that are foreseeable.” This problem is essentially the same as an example in the text. Led Foot would be liable to Vic because Led Foot should have realized that his negligent driving might result in a collision that would endanger pedestrians nearby. Sally’s harm, however, was beyond the risks posed

by Led Foot’s negligent driving and he, accordingly, is not liable to Sally.

16. A foul ball struck Marie Uzdavines on the head while she was watching the Metropolitan Baseball Club (The Mets) play the Philadelphia Phillies at the Mets’ home stadium in New York. The ball came through a hole in a screen designed to protect spectators sitting behind home plate. The screen contained several holes that had been repaired with baling wire, a lighter weight wire than that used in the original screen. Although the manager of the stadium makes no formal inspections of the screen, his employees do try to repair the holes as they find them. Weather conditions, rust deterioration, and baseballs hitting the screen are the chief causes of these holes. The owner of the stadium, the city of New York, leases the stadium to the Mets and replaces the entire screen every two years. Uzdavines sued the Mets for negligence under the doctrine of res ipsa loquitur. Is this an appropriate case for res ipsa loquitur? Explain.

Answer: Yes. Judgment for Uzdavines. Res ipsa loquitur permits the jury to infer both negligent conduct and causation from the mere occurrence of certain types of events. This rule applies “when the accident causing the plaintiff's physical harm is a type of accident that ordinarily happens as a result of the negligence of a class

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of actors of which the defendant is the relevant member.” Third Restatement, Section 17. In the case upon which this problem is based, the court ruled as follows: Under res ipsa loquitur, Uzdavines must show that: (1) the event is of a kind that ordinarily does not occur in the absence of someone’s negligence; (2) “The Mets” had exclusive control over the instrumentality (the protective screen) that caused the event; (3) the event was not due to any voluntary action or contribution on her part; and (4) evidence explaining the incident is more readily available to “The Mets” than to her. On these facts it is clear that the first, third, and fourth requirements have been met. To prove that “The Mets” exercised “exclusive control,” Uzdavines need only establish that they exercised “a degree of domination sufficient to identify defendant with probability as the party responsible” for her injuries.

Both “The Mets” and the city of New York owed an independent duty to a spectator that requires “The Mets” to exercise strict control of the screen, assuring the public that they may rely on the implied safety of sitting in that area. Since “The Mets” were under a duty to maintain and control the protective screening, the exclusive control requirement of res ipsa loquitur is satisfied and the doctrine applies to this case. Uzdavines v. Metropolitan Baseball Club, Inc., Civil Court of the City of New York, 115 Misc.2d 343, 454 N.Y.S.2d 238 (1982).

17. Two-year-old David Allen was bitten by Joseph Whitehead’s dog while he was playing on the porch at the Allen residence. Allen suffered facial cuts, a severed muscle in his left eye, a hole in his left ear, and scarring over his forehead. Through his father, David sued Whitehead, claiming that, as owner, Whitehead was responsible for his dog’s actions.

Whitehead admitted that (a) the dog was large, was mean-looking, and frequently barked at neighbors; (b) the dog was allowed to roam wild; and (c) the dog frequently chased and barked at cars. He stated, however, that (a) the dog was friendly and often played with his and neighbors’ children; (b) he had not received previous complaints about the dog; (c) the dog was neither aggressive nor threatening; and (d) the dog had never bitten anyone before this incident. Is Whitehead liable? Explain.

Answer: No. Decision for Whitehead. Owners and possessors of domestic animals are subject to strict liability if they knew, or had reason to know, of an animal’s dangerous tendencies abnormal for the animal’s category. Third Restatement, Section 23. The animal’s dangerous propensity must be the cause of the harm. The evidence shows only that Whitehead's dog was large and mean looking, chased and barked at cars, and frequently barked at neighbors. These facts are not proof that the dog had vicious propensities. Whitehead's previous knowledge of his dog's playfulness with children is not sufficient to prove that he knew or had reason to know that the dog would attack and bite a child.

18. Larry VanEgdom, in an intoxicated state, bought alcoholic beverages from the Hudson Municipal Liquor Store in Hudson, South Dakota. An hour later, VanEgdom, while driving a car, struck and killed Guy William Ludwig, who was stopped on his motorcycle at a stop sign. Lela Walz, as special administrator of Ludwig’s estate, brought an action against the city of Hudson, which operated the liquor store, for the wrongful death of Ludwig. Walz alleged that the store employee was negligent in selling intoxicating beverages to VanEgdom when he knew or could have observed that VanEgdom was drunk. Decision? Discuss.

Answer: Judgment for Walz. South Dakota forbids the sale of intoxicating beverages to one in a drunken state. Courts may adopt the requirements of the statute as the standard of conduct if the statute is designed to protect against the type of accident the defendant’s conduct causes and the accident victim is within

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the class of persons the statute is designed to protect. Third Restatement, Section 14. This statute is designed to protect, among others, such individuals as Ludwig from the risk of being killed or injured "as a result of the drunkenness to which the particular sale of alcoholic liquor contributes." This is a standard of care to which reasonably prudent persons are held; violation of the statute is a breach of legal duty and thus is negligence. Walz v. Hudson, Supreme Court of South Dakota, 327 N.W.2d 120 (1982).

19. Carolyn Falgout accompanied William Wardlaw as a social guest to Wardlaw’s brother’s camp. After both parties had consumed intoxicating beverages, Falgout walked onto a pier that was then only partially completed. Wardlaw had requested that she not go on the pier.

Falgout said, “Don’t tell me what to do,” and proceeded to walk on the pier. Wardlaw then asked her not to walk past the completed portion of the pier. She ignored his warnings and walked to the pier’s end. When returning to the shore, Falgout got her shoe caught between the boards. She fell, hanging by her foot, with her head and arms in the water. Wardlaw rescued Falgout, who had seriously injured her knee and leg. She sued Wardlaw for negligence. Decision? Explain.

Answer: Judgment for Wardlaw. A possessor of land owes a duty to warn a licensee of dangerous activities and conditions (1) of which the possessor has knowledge or has reason to know and (2) which the licensee does not and is not likely to discover. A licensee who is not warned may recover if the activity or dangerous condition resulted from the possessor’s failure to exercise reasonable care to protect him from the danger. Restatement, Section 342. As a social guest, Falgout was a licensee. Wardlaw’s duty to Falgout was to warn her of the dangerous condition. Wardlaw discharged this duty and, accordingly, is not liable to Falgout.

20. Joseph Yania, a coal strip-mine operator, and Boyd Ross visited a coal strip-mining operation owned by John Bigan to discuss a business matter with Bigan. On Bigan’s property, there were several cuts and trenches he had dug to remove the coal underneath. While Yania and Ross were there, Bigan asked the two men to help him pump water from one of these cuts in the earth. This particular cut contained water eight to ten feet in depth with sidewalls or embankments sixteen to eighteen feet in height. The two men agreed, and the process began with Ross and Bigan entering the cut and standing at the point where the pump was located. Yania stood at the top of one of the cut’s sidewalls. Apparently, Bigan taunted Yania into jumping into the water from the top of the sidewall—a height of sixteen to eighteen feet. As a result, Yania drowned. His widow brought a negligence action against Bigan. She claims that Bigan was negligent “(1) by urging, enticing, taunting, and inveigling Yania to jump into the water; (2) by failing to warn Yania of a dangerous condition on the land; and (3) by failing to go to Yania’s rescue after he jumped into the water.” Was Bigan negligent? Explain.

Answer: No. Judgment for Bigan. Taunting and enticement will only constitute actionable negligence if directed “at a child of tender years or a person mentally deficient.” Therefore, Bigan’s taunting of Yania, who was an adult in full possession of his mental faculties, is not negligence.

In addition, the owner of the land ordinarily has, at the least, a duty to warn invitees of known or discoverable dangers the owner should realize involve an unreasonable risk of harm to them. This warning is required only if the owner has no reason to believe the invitee will discover the condition or realize the risk of harm. Here, however, the dangers of the water-filled trench were “obvious and apparent to Yania,” who was also a coal strip-mine operator. Accordingly, Bigan is not negligent in failing to warn Yania of the obvious.

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Finally, despite Bigan’s tauntings, Yania jumped into the water of his own accord.

Bigan was not legally responsible, in whole or in part, for placing Yania in his perilous and fatal position. Therefore, although he may have had a moral responsibility, Bigan did not have a legal responsibility to rescue Yania, who died of his own foolhardiness.

21. Old Island Fumigation, Inc., fumigated buildings A and B of a condominium complex using Vikane gas. Buildings A and B, together with building C, form a U shape; buildings B and C have between them an atrium and were thought to be separated by an impenetrable fire wall. Although Old Island evacuated occupants of buildings A and B before the fumigation, the company advised the occupants of building C that they could remain in their dwellings while the other buildings were treated. Several residents of building C became ill shortly after the Vikane gas was released into the adjacent buildings. The hospital admission forms indicate that the cause of their illnesses was sulfuryl fluoride poisoning. Sulfuryl fluoride is the active chemical ingredient of Vikane. Several months after this incident, an architect hired by the fumigation company discovered that the fire wall between buildings B and C was defective and contained a four-foot-by-eighteen-inch open space through which the gas had entered building C. The defect was only visible from a vantage point within the crawl space and had been missed by various building inspectors and by the fumigation company during an earlier inspection. The occupants of building C who had been injured by the Vikane fumes sued the fumigator. Explain whether the fumigator is strictly liable.

Answer: Old Island Fumigation, Inc., is strictly liable for damages caused to the plaintiffs by its fumigation of the condominium complex. Old Island Fumigation, Inc. v. Barbee, 604 So.2d 1246 (Florida Dist. Court of Appeals, 3rd Dist., 1992).

Fumigation is an ultrahazardous activity as it “necessarily involves a risk of serious harm to the person, land, or chattels of others which cannot be eliminated by the exercise of the utmost care, and is not a matter of common usage.” Cities Serv. Co. v. State, 312 So.2d 799 (Fla. 2d DCA 1975) [applying Restatement of Torts § 520 (1938) and Restatement (Second) of Torts § 520 (Tentative Draft No. 10, 1964)] (factors to be considered in determining whether activity is ultrahazardous activity are: (1) whether activity involves high degree of risk of harm to property of others; (2) whether potential harm is likely to be great; (3) whether risk can be eliminated by exercise of reasonable care; whether activity is matter of common usage; (4) whether activity is appropriate to place where conducted; (5) whether activity has substantial value to community); Great Lakes Dredging & Dock Co. v. Sea Gull Operating Corp., 460 So.2d 510 (1984) (same); see also Luthringer v. Moore, 31 Cal.2d 489, 190 P.2d 1 (1948) (fumigation is ultrahazardous activity). Old Island Fumigation is thus liable regardless of the level of care exercised in carrying out this activity.

The reason for imposing strict liability upon those who carry on abnormally dangerous activities is that they have for their own purposes created a risk that is not a usual incident of the ordinary life of a community. If the risk ripens into injury, it is immaterial that the harm occurs through the unexpectable action of a human being ***. This is true irrespective of whether the action of the human being which makes the abnormally dangerous activity harmful is innocent, negligent or even reckless.

Restatement (Second) of Torts § 522 cmt. a (Tentative Draft No. 10, 1968).

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ANSWERS TO “TAKING SIDES” PROBLEMS Rebecca S. Dukat arrived at Mockingbird Lanes, a bowling alley in Omaha, Nebraska, at approximately 6:00 p.m. to bowl in her league game. The bowling alley’s parking lot and adjacent sidewalk were covered with snow and ice. Dukat proceeded to walk into the bowling alley on the only sidewalk provided in and out of the building. She testified that she noticed the sidewalk was icy. After bowling three games and drinking three beers, Dukat left the bowling alley at approximately 9:00 p.m. She retraced her steps on the same sidewalk, which was still covered with ice and in a condition that, according to Frank Jameson, general manager of Mockingbird Lanes, was “unacceptable” if the bowling alley was open to customers. As Dukat proceeded along the sidewalk to her car, she slipped, attempted to catch herself by reaching toward a car, and fell. She suffered a fracture of both bones in her left ankle as well as a ruptured ligament.

Dukat sued Mockingbird Lanes, seeking damages for her for personal injuries. Mockingbird denied liability for Dukat’s personal injuries. a. What arguments would support Dukat’s claim for her personal injuries? b. What arguments would support Mockingbird’s denial of liability for Dukat’s personal injuries? c. Which side should prevail? Explain.

Answer: (a) Dukat could argue that she was an invitee. Therefore, with respect to the condition of the premises, Mockingbird is under a duty to exercise reasonable care to protect her against dangerous conditions she is unlikely to discover.

This liability extends not only to those conditions of which the Mockingbird actually knows but also to those of which Mockingbird would discover by the exercise of reasonable care. Accordingly, Dukat could argue that Mockingbird was negligent in failing to keep the sidewalk in a reasonably safe condition, in failing to warn her of a dangerous condition, and in failing to take adequate and reasonable measures to protect her. (b) Mockingbird could argue that because Dukat knew of the dangerous conditions: (1) Dukat was contributorily negligent, and (2) Dukat had assumed the risk of injury. (c) Decision for Leiserv (Mockingbird’s parent company). Under the Second and Third Restatements, Dukat was probably contributorily negligent. It is clear that Dukat knew of the icy condition of the sidewalk as she entered the bowling alley and despite this knowledge may have done things a reasonably careful person might not have done. For example, Dukat drank three beers while she was at the bowling alley and she decided to navigate the same icy path she had come in on without asking the assistance of one of her friends who remained inside the bowling alley. A reasonable person might also have asked management to spread an ice-melting substance on the sidewalk and delayed their departure. If she is contributorily negligent, then her recovery, if any, depends upon the rule followed by the state in which the injury occurred and her degree of fault.

Regarding the possible defense of assumption of the risk, under the Second Restatement of Torts she may have voluntarily assumed the risk and, therefore, is not entitled to recover for harm arising out of the assumed risk. However, the Third Restatement of Torts: Apportionment of Liability has abandoned the doctrine of implied voluntary assumption of risk: it is no longer a defense that the plaintiff was aware of a risk and voluntarily confronted it. But if a plaintiff’s

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conduct in the face of a known risk is unreasonable, it might constitute contributory negligence, thereby reducing the plaintiff’s recovery under comparative negligence. On these facts it would appear that Dukat was contributorily negligent and her recovery, if any, depends upon the rule followed by the state in which the injury occurred and her degree of fault.

Dukat v. Leiserv, Inc., Nebraska Court of Appeals, 1998, 578 N.W.2d 486.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 9: Introduction to Contracts

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 9: Introduction to Contracts

TABLE OF CONTENTS Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems ............................................................................... 9

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Owen telephones an order to Hillary's store for certain goods, which Hillary delivers to Owen. Nothing is said by either party price or payment terms. What are the legal obligations of Owen and Hillary?

Answer: Owen and Hillary’s agreement deals in goods, so the contract falls within the UCC. Omission of a stated price would require payment of a “reasonable” price with full payment being made when possession of the goods is obtained. Since Hillary has fully performed by delivering the goods, Owen is obligated to pay a reasonable price for them.

2. Minth is the owner of the Hiawatha Supper Club, which he leased for two years to Piekarski.

During the period of the lease, Piekarski contracted with Puttkammer for the resurfacing of the access and service areas of the supper club. Puttkammer performed the work satisfactorily. Minth knew about the contract and the performance of the work. The work, including labor and materials, had a reasonable value of $2,540, but Puttkammer was never paid because Piekarski went bankrupt. Puttkammer brought an action against Minth to recover the amount owed to him by Piekarski. Will Puttkammer prevail? Explain.

Answer: No. Judgment for Minth. In order to establish a cause of action for unjust enrichment, Puttkammer must be able to demonstrate that (1) a benefit was conferred on Minth by Puttkammer; (2) Minth knew of or appreciated the benefit; and (3) Minth accepted or retained the benefit under circumstances making it inequitable for Minth to retain the benefit without paying for its value. Here, the first and second elements have been satisfied but not the third.

An action for unjust enrichment is based on the moral principle that one who has received a benefit has the duty to reimburse the other when to retain that benefit would be unjust. But it is not enough that the benefit was conferred and retained; the retention must also be unjust. Here, Puttkammer does not claim or imply that Minth ordered or ratified the work, that he performed the work expecting to be paid by Minth, that he was prejudiced by any misconduct or fault on Minth's part, or that Minth's interests were so intertwined with those of Piekarski that the contract could be said to have been executed on Minth's behalf. Rather, all that

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Puttkammer has alleged is that Minth knowingly acquiesced in the performance of the work. Puttkammer v. Minth, 83 Wis.2d 686, 266 N.W.2d 361 (1978).

3. Jonathan writes to Willa, stating “I'll pay you $150 if you reseed my lawn.” Willa reseeds Jonathan's lawn as requested. Has a contract been formed? If so, what kind? Explain.

Answer: Yes, this is an example of a unilateral contract. Jonathan’s writing to Willa is an offer which is accepted when Willa reseeds the lawn. Jonathan must pay $150 to Willa.

4. Calvin uses fraud to induce Maria to promise to pay money in return for goods he has

delivered to her. Has a contract been formed? If so, what kind? What are the rights of Calvin and Maria?

Answer: This is a voidable contract. A contract has been formed; however, Maria, at her option, may rescind the contract. Calvin has no right to void the contract if Maria decides to not rescind.

5. Anna is about to buy a house on a hill. Prior to the purchase, she obtains a promise from Betty, the owner of the adjacent property, that Betty will not build any structure that would block Anna's view. In reliance on this promise, Anna buys the house. Is Betty's promise binding? Why or why not?

Answer: Betty’s promise is not binding and there is no contract. The essential elements of a contract (mutual assent, consideration, legality and legal capacity) are not all present. However, the doctrine of promissory estoppel may be applicable. If a jury finds that Anna acted reasonably in reliance on Betty’s promise, Betty’s promise will be enforceable.

6. Mary Dobos was admitted to Boca Raton Community Hospital in serious condition with an

abdominal aneurysm. The hospital called upon Nursing Care Services, Inc., to provide around-the-clock nursing services for Mrs. Dobos. She received two weeks of in-hospital care, forty-eight hours of postrelease care, and two weeks of at-home care. The total bill was $3,723.90. Mrs. Dobos refused to pay, and Nursing Care Services, Inc., brought an action to recover. Mrs. Dobos maintained that she was not obligated to render payment in that she never signed a written contract, nor did she orally agree to be liable for the services. The necessity for the services, reasonableness of the fee, and competency of the nurses were undisputed. After Mrs. Dobos admitted that she or her daughter authorized the forty-eight hours of postrelease care, the trial court ordered compensation of $248 for that period. It did not allow payment of the balance, and Nursing Care Services, Inc., appealed. Decision?

Explain.

Answer: These circumstances establish a contract implied in law or “quasi contract,” which is imposed by law to prevent the unjust enrichment of one party at the expense of another. The principle of quasi contract is frequently applied in the area of work performed or services rendered, although liability is generally imposed only when the person for whose benefit the services were rendered requested them or knowingly and voluntarily accepted their benefits. Emergency aid, however, is an exception. In the present case, the services provided to Mrs. Dobos in the hospital were essential to her health and safety, and she was unable to consent to receiving them. Nursing Care Services, Inc., acted with intent to charge for the services and had no reason to know that Mrs. Dobos would not agree. Given these circumstances, the in-hospital services clearly fall within the

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emergency aid exception. As for the two weeks of at-home care, Mrs. Dobos knowingly and voluntarily accepted the benefits conferred, and thus obligated herself to pay for the reasonable value of the services. Nursing Care Services, Inc. v.

Dobos, 380 So.2d 516, (Fla. 4th DCA 1980).

7. St. Charles Drilling Co. contracted with Osterholt to install a well and water system that would produce a specified quantity of water. The water system failed to meet its warranted capacity, and Osterholt sued for breach of contract. Does the Uniform Commercial Code apply to this contract? Explain.

Answer: The UCC does not apply to contracts primarily for services. The test for inclusion is whether the contract's predominant purpose is the rendition of services with goods incidentally involved, or whether it is a sale of goods with labor incidentally involved. In this case the contract to install a water system was a service transaction and, therefore, not within the scope of the UCC for two reasons. First, the parties had no agreement as to what specific component parts were to be installed, but rather the contractor undertook to install a system of indefinite description and of warranted capacity. Second, the language of the contract itself indicated that the arrangement was a service contract rather than a sale of goods. Osterholt v. St. Charles Drilling Co., 500 F.Supp. 529 (1980).

8. Helvey brought suit against the Wabash County REMC (REMC) for breach of implied and

express warranties. He alleged that REMC furnished electricity in excess of 135 volts to Helvey’s home, damaging his 110-volt household appliances. This incident occurred more than four years before Helvey brought this suit. In defense, REMC pleads that the Uniform Commercial Code’s (UCC’s) Article 2 statute of limitations of four years has passed, thereby barring Helvey’s suit. Helvey argues that providing electrical energy is not a transaction in goods under the UCC but rather a furnishing of services that would make applicable the general contract six-year statute of limitations. Is the contract governed by the UCC? Why or why not?

Answer: There have been only a few cases addressing whether electricity is considered goods. The courts are divided on the question. In the case upon which this problem was based, the court held that, yes, this contract is governed by the UCC, and therefore, REMC would prevail. The UCC essentially defines goods as tangible personal property. To be within the UCC's definition of a good, electricity must be (1) a thing, (2) existing, and (3) movable, with (2) and (3) occurring simultaneously. Electricity can be measured in order to establish a purchase price by the amount of current which passes through the meter, thus fulfilling the existing and movable requirements. Also, it is legally considered personal property, subject to ownership, and may be bartered, sold, and, in fact, stolen. Therefore, the sale of electricity is a sale of goods subject to UCC's Article 2's statute of limitations. Helvey v. Wabash County REMC, Court of Appeals of Indiana, First District, 1972. 151 Ind.App. 176, 278 N.E.2d 608.

9. Jack Duran, president of Colorado Carpet Installation, Inc., began negotiations with Fred and

Zuma Palermo for the sale and installation of carpeting, carpet padding, tile, and vinyl floor covering in their home. Duran drew up a written proposal that referred to Colorado Carpet as “the seller” and to the Palermos as the “customer.” The proposal listed the quantity, unit cost, and total price of each item to be installed. The total price of the job was $4,777.75.

Although labor was expressly included in this figure, Duran estimated the total labor cost at $926. Mrs. Palermo in writing accepted Duran’s written proposal soon after he submitted

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it to her. After Colorado Carpet delivered the tile to the Palermo home, however, Mrs. Palermo had a disagreement with Colorado Carpet’s tile man and arranged for another contractor to perform the job. Colorado Carpet brought an action against the Palermos for breach of contract. Does the Uniform Commercial Code apply to this contract? Explain.

Answer: The UCC defines “goods” as ”all things… which are movable at the time of identification to the contract for sale” and defines a “sale” as “the passing of title from the seller to the buyer for a price.” In this case, the carpeting and other materials were movable when Colorado Carpet procured them for installation, and the agreement contemplated that title would pass to the Palermos. The contract included, however, not only the sale of goods as defined by the UCC, but also the performance of labor or service. Since goods and services are mixed, the primary purpose of the agreement is crucial in determining the nature of the contract. A number of factors point to the conclusion that the primary purpose of the contract was the sale of goods, with labor or service only incidentally involved. The charge for labor was a small percentage of one overall contractual price. Colorado Carpet's proposal referred to the parties as ”seller” and ”customer.” Further, as noted above, the carpeting and other materials meet the UCC definition of ”goods.”

Colorado Carpet Installation, Inc. v. Palermo, 668 F.2d 1384 (Col. 1983).

10. On November 1, the Kansas City Post Office Employees Credit Union merged with the Kansas

City Telephone Credit Union to form the Communications Credit Union (Credit Union).

Systems Design and Management Information (SDMI) develops computer software programs for credit unions, using Burroughs (now Unisys) hardware. SDMI and Burroughs together offered to sell to Credit Union both a software package, called the Generic System, and Burroughs hardware. Later in November, a demonstration of the software was held at SDMI’s offices, and the Credit Union agreed to purchase the Generic System software. This agreement was oral. After Credit Union was converted to the SDMI Generic System, major problems with the system immediately became apparent, so SDMI filed suit against Credit Union to recover the outstanding contract price for the software. Credit Union counterclaimed for damages based upon breach of contract and negligent and fraudulent misrepresentation. Does the Uniform Commercial Code apply to this contract? Explain.

Answer: Judgment for SDMI. We must determine whether the oral agreement between SDMI and Credit Union was for goods or services. The test when dealing with a mixed contract is “not whether they [goods or services] are mixed, but, granting that they are mixed, whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service, with goods incidentally involved … or is a transaction of sale, with labor incidentally involved.”

Prior to entering into an agreement for the Generic System software, Credit Union attended a demonstration of the program at SDMI's place of business. Therefore, we conclude the software was movable at the time of identification to the contract, satisfying that requirement of the definition of goods. SDMI installed the Generic System software on Credit Union's computer and was present to attempt modifications and corrections of the program so the accounting system would run more efficiently. These services are incidental to the sale of the software because, without Credit Union buying the Generic System program, the services would not be necessary. Therefore, the sale of the software is predominant. We hold this software to be goods and subject to the provisions of the UCC.

11. Insul-Mark is the marketing arm of Kor-It Sales, Inc. Kor-It manufactures roofing fasteners, and Insul-Mark distributes them nationwide. In late 1985, Kor-It contracted with Modern

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Materials, Inc., to have large volumes of screws coated with a rust-proofing agent. The contract specified that the coated screws must pass a standard industry test and that KorIt would pay according to the pound and length of the screws coated. Kor-It had received numerous complaints from customers that the coated screws were rusting, and Modern Materials unsuccessfully attempted to remedy the problem. Kor-It terminated its relationship with Modern Materials and brought suit for the deficient coating. Modern Materials counterclaimed for the labor and materials it had furnished to Kor-It. The trial court held that the contract (a) was for performance of a service, (b) not governed by the Uniform Commercial Code, (c) governed by the common law of contracts, and (d) therefore barred by a two-year statute of limitations. Insul-Mark appealed. Decision? Explain.

Answer: The transaction is predominantly for the performance of a service and, therefore, is not governed by the Sales article of the UCC Where a transaction is “mixed,” that is it involves both goods and services, the Sales article of the UCC will apply only where the “predominant thrust” of the transaction is a sale of goods with labor only incidentally involved. This court rejects the “bifurcation” approach, taken by some lower courts, whereby a mixed transaction is viewed as two transactions: one for the sale of goods governed by the UCC, and one for the performance of a service governed by the common law. The bifurcation approach is less sensitive to the parties’ expectations than the predominant thrust approach and would not work where an agreement is not readily divisible.

Whether the predominant thrust of a transaction is the sale of goods or the performance of a service depends primarily on the language of the contract in light of the situation of the parties and the surrounding circumstances. Also relevant are the final product the purchaser bargained to receive and whether it may be described as a good or a service. Finally, the courts examine the costs involved for the goods and services, and whether the purchaser was charged only for a good or a price based on both goods and services.

The agreement between Kor-It and Modern Materials was predominantly for the performance of a service. The performance Kor-It contracted to obtain was the transformation of its screws from a non-coated form to a coated form with enhanced rust-resistance. Modern Materials’ complex multi-step application process was the crucial element completing this transformation. The transfer of the coating material, a good, in the process was incidental to the larger service.

This is evidenced by the fact that Kor-It did not involve itself in deciding which coating material Modern Materials would apply to the screws. Furthermore, the pricing method in this transaction reveals that its predominant thrust was the performance of a service: Kor-It was charged by the pound of screws coated rather than by the gallons of coating used.

12. Max E. Pass, Jr., and his wife, Martha N. Pass, departed in an aircraft owned and operated

by Mr. Pass from Plant City, Florida, bound for Clarksville, Tennessee. Somewhere over Alabama the couple encountered turbulence, and Mr. Pass lost control of the aircraft. The plane crashed, killing both Mr. and Mrs. Pass. Approximately four and a half months prior to the flight in which he was killed, Mr. Pass had taken his airplane to Shelby Aviation, an aircraft service company, for inspection and service. In servicing the aircraft, Shelby Aviation replaced both rear wing attach point brackets on the plane. Three and one half years after the crash, Max E. Pass, Sr., father of Mr. Pass and administrator of his estate, and Shirley Williams, mother of Mrs. Pass and administratrix of her estate, filed suit against Shelby Aviation. The lawsuit alleged that the rear wing attach point brackets sold and installed by Shelby Aviation were defective because they lacked the bolts necessary to secure them

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properly to the airplane. The plaintiffs asserted claims against the defendant for breach of express and implied warranties under Article 2 of the Uniform Commercial Code (UCC), which governs the sale of goods. Shelby Aviation contended that the transaction with Mr. Pass had been primarily for the sale of services, rather than of goods, and that consequently Article 2 of the UCC did not cover the transaction. Does the UCC apply to this transaction?

Explain.

Answer: No, plaintiffs’ warranty claim dismissed. The problem in “mixed” transactions such as this one is to determine whether Article 2 governs the contract. The test for inclusion or exclusion in the UCC is not whether the contracts are mixed, but granting that they are mixed, whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of services with goods incidentally involved (e.g., contract with artist for painting) or is a transaction of sale, with labor incidentally involved (e.g., installation of a water heater in a bathroom). In order to determine the predominant purpose of a mixed transaction, courts examine the language of the parties’ contract, the nature of the business of the supplier of the goods and services, the reason the parties entered into the contract (i.e., what each bargained to receive), and the respective amounts charged under the contract for goods and for services. In this case, the written document evidencing the transaction is the invoice prepared by Shelby Aviation. In the top left hand corner is a preprinted paragraph that states that the owner is authorizing “the following repair work to be done along with the necessary material.” As a whole, the invoice clearly emphasizes the repair and inspection aspect of the transaction, indicating that the predominant purpose was the sale of service, with the sale of goods incidental to that service.

13. In March, William Tackaberry, a real estate agent for the firm of Weichert Co. Realtors

(Weichert), informed Thomas Ryan, a local developer, that he knew of property Ryan might be interested in purchasing. Ryan indicated he was interested in knowing more about the property. Tackaberry disclosed the property’s identity and the seller’s proposed price.

Tackaberry also stated that the purchaser would have to pay Weichert a 10 percent commission. Tackaberry met with the property owner and gathered information concerning the property’s current leases, income, expenses, and development plans. Tackaberry also collected tax and zoning documents relevant to the property. In a face-to-face meeting on April 4, Tackaberry gave Ryan the data he had gathered and presented Ryan with a letter calling for a 10 percent finder’s fee to be paid to Weichert by Ryan upon “successfully completing and closing of title.” Ryan refused to agree to the 10 percent figure during this meeting. Tackaberry arranged a meeting, held three days later, where Ryan contracted with the owner to buy the land. Ryan refused, however, to pay the 10 percent finder’s fee to Weichert. What, if anything, is Weichert entitled to recover from Ryan? Explain.

Answer: Weichert Co. Realtors is entitled to recover a reasonable finder’s fee from Tackaberry. A contract arises from offer and acceptance, and must be sufficiently definite “that the performance to be rendered by each party can be ascertained with reasonable certainty.”

Applying that principle, courts have allowed quasi-contractual recovery for services rendered when a party confers a benefit with a reasonable expectation of payment.

That type of quasi-contractual recovery is known as quantum meruit (”as much as he deserves”), and entitles the performing party to recoup the reasonable value of services rendered.

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Though there is insufficient evidence of a mutual agreement (Ryan never expressly assented to the terms of Tackaberry's offer), the parties’ behavior does create a situation of unjust enrichment. Ryan refused to pay the ten-percent finder’s fee, but he nonetheless accepted the benefit of Tackaberry’s efforts. The courts impose a quasi contractual obligation to pay the reasonable value of a benefit conferred in order to avoid unjust enrichment.

14. Kasch and his brother owned M.W. Kasch Co. Kasch hired Skebba as a sales

representative and over the years promoted him first to account manager; then to customer service manager, field sales manager, vice president of sales, senior vice president of sales and purchasing; and finally, to vice president of sales. When M.W. Kasch Co. experienced serious financial problems in 2011, Skebba was approached by another company to leave Kasch and work there. When Skebba told Kasch he was accepting the new opportunity, Kasch asked what it would take to get him to stay. Skebba told Kasch that he needed security for his retirement and family and would stay if Kasch agreed to pay Skebba $250,000 if one of these three conditions occurred: (1) the company was sold, (2) Skebba was lawfully terminated, or (3) Skebba retired. Kasch agreed to this proposal and promised to have the agreement drawn up. Skebba turned down the job opportunity and stayed with Kasch from December 2011 through 2017 when the company assets were sold. Over the years, Skebba repeatedly but unsuccessfully asked Kasch for a written summary of this agreement. Eventually, Kasch sold the business, receiving $5.1 million dollars for his 51 percent share of the business. Upon the sale of the business, Skebba asked Kasch for the $250,000. Kasch refused and denied ever having made such an agreement. Instead, Kasch gave Skebba a severance agreement, which had been drafted by Kasch’s lawyers in 2011.

This agreement promised two years of salary continuation on the sale of the company, but only if Skebba was not hired by the successor company. The severance agreement also required a setoff against the salary continuation of any sums Skebba earned from any activity during the two years of the severance agreement. Skebba sued. Explain whether Skebba is entitled to recover.

Answer: The jury found there was no contract, but that Kasch had made a promise upon which Skebba relied to his detriment, that the reliance was foreseeable, and that Skebba was damaged in the amount of $250,000.

Kasch did not promise to pay Skebba more than Skebba would have earned at the job Skebba turned down. Kasch did not promise that total income to Skebba would be greater than in the turned-down job, no matter how long he remained with Kasch. Kasch only promised that if Skebba stayed, Kasch would pay Skebba $250,000 (the sum Skebba wanted for his retirement), at the time the earliest of three conditions occurred. Kasch sold the business while Skebba was still employed by Kasch. Kasch refused to pay as promised.

The purpose of promissory estoppel is to enforce promises where the failure to do so is unjust. The requirements of promissory estoppel follow: (1) Was the promise one which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee? (2) Did the promise induce such action or forbearance? (3) Can injustice be avoided only by enforcement of the promise? The first two of these requirements are facts to be found by a jury or other factfinder, while the third is a policy decision to be made by the court.

A court, in fashioning a remedy, can consider any equitable or legal remedy, which will “prevent injustice.” Moreover, the amount allowed as damages may be determined by the plaintiff's expenditures or change of position in reliance as well

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as by the value to him of the promised performance. In determining what justice requires, the court must remember all of its powers, derived from equity, law merchant, and other sources, as well as the common law. Its decree should be molded accordingly.

Wisconsin is one of a small group of states that recognizes that to fulfill the purpose of promissory estoppel (i.e., prevent injustice) a court must be able to fashion a remedy that restores the promisee to where he or she would be if the promisor had fulfilled the promise. In this case, Skebba performed in reliance on Kasch's promise to pay $250,000 to him if one of three conditions occurred. Kasch enjoyed the fruits of Skebba's reliance—he kept on a top salesperson to help the company through tough financial times and he avoided the damage that he believed Skebba's leaving could have had on M.W. Kasch's reputation in the industry. Accordingly, to prevent injustice, the equitable remedy for Skebba to receive is Kasch's specific performance: the promised payment of the $250,000.

15. Hannaford is a national grocery chain whose electronic payment processing system was

breached by hackers as early as December 7, 2007. The hackers stole up to 4.2 million credit and debit card numbers, expiration dates, and security codes, but did not steal customer names. The breach affected purchases at more than 270 of its stores. On February 27, 2008, Visa Inc. notified Hannaford that Hannaford’s system had been breached. Hannaford discovered the means of access on March 8, 2008 and contained the breach on March 10, 2008. Hannaford gave notice to certain financial institutions on March 10, 2008. On March 17, 2008, Hannaford publicly announced for the first time the extent of the breach. It also announced “that it had already received reports of approximately 1,800 cases of fraud resulting from the theft of those numbers.” A number of affected customers sued Hannaford for breach of implied contract to recover losses arising from the unauthorized use of their credit and debit card data. Damages sought included the cost of replacement card fees when the issuing bank declined to issue a replacement card to them, fees for accounts overdrawn by fraudulent charges, fees for altering pre-authorized payment arrangements, loss of accumulated reward points, inability to earn reward points during the transition to a new card, emotional distress, time and effort spent reversing unauthorized charges and protecting against further fraud, and the cost of purchasing identity theft/card protection insurance and credit monitoring services. Discuss the validity of their claim that Hannaford had breached an implied contract with its customers.

Answer: The customers have made out a claim for an implied contract. Anderson v.

Hannaford Bros. Co., 659 F.3d 151 (Court of Appeals, 1st Circuit 2011).

Under Maine law, a “contract includes not only the promises set forth in express words, but, in addition, all such implied provisions as are indispensable to effectuate the intention of the parties and as arise from the language of the contract and the circumstances under which it was made.” The existence of such an implied contract term is determined by the jury, which considers whether the term is indispensable to effectuate the intention of the parties. The district court correctly concluded that a jury could reasonably find an implied contract between Hannaford and its customers that Hannaford would not use the credit card data for other people's purchases, would not sell the data to others, and would take reasonable measures to protect the information. When a customer uses a credit card in a commercial transaction, she intends to provide that data to the merchant only. Ordinarily, a customer does not expect—and certainly does not intend—the merchant to allow unauthorized third-parties to access that data. A jury could

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reasonably conclude, therefore, that an implicit agreement to safeguard the data is necessary to effectuate the contract.

16. On May 5, Stewart Richardson (Seller) and Jasdip Properties SC, LLC (Buyer) entered into

an agreement for the purchase of certain property in Georgetown, South Carolina, for $537,000. Buyer paid an initial earnest money deposit of $10,000, half of which Seller was entitled to retain in the event the sale was not concluded. The balance was due at the closing on or before July 28. Later, Seller granted Buyer extensions to the closing date in return for additional payments of $175,000 and $25,000, each to be applied to the purchase price. Without fault on his part, Buyer was unable to close in a timely fashion, and Seller rescinded the contract. Assuming that there is no breach of contract by either Seller or Buyer, explain what the rights of the parties are with respect to the money paid

by Buyer.

Answer: Under the theory of restitution, Buyer is entitled to $205,000: the money that was paid towards the purchase price ($175,000 and $25,000) plus half of the $10,000 earnest money. This problem is based on Jasdip Properties SC, LLC v.

Estate of Richardson, Court of Appeals of South Carolina, 395 S.C. 633, 720 S.E.2d 485 (2011).

To recover on a theory of restitution, the plaintiff must show that (1) the plaintiff conferred a non-gratuitous benefit on the defendant, (2) the defendant realized some value from the benefit, and (3) it would be inequitable for the defendant to retain the benefit without paying the plaintiff for the value of the benefit. Unjust enrichment is usually a prerequisite for enforcement of the doctrine of restitution; if there is no basis for unjust enrichment, there is no basis for restitution.

Buyer met the requirements to recover under the theory of restitution: (1) Buyer paid Seller $205,000 towards the purchase price, and the sale did not go through despite the fact that neither party breached; (2) Seller kept the $205,000 although he also retained the Property; and (3) Seller’s keeping the $205,000 is inequitable because the Seller still has the Property and the Buyer intended to go forward with the purchase.

ANSWERS TO “TAKING SIDES” PROBLEMS Richardson hired J. C. Flood Company, a plumbing contractor, to correct a stoppage in the sewer line of her house. The plumbing company’s “snake” device, used to clear the line leading to the main sewer, became caught in the underground line. To release it, the company excavated a portion of the sewer line in Richardson’s backyard. In the process, the company discovered numerous leaks in a rusty, defective water pipe that ran parallel with the sewer line. To meet public regulations, the water pipe, of a type no longer approved for such service, had to be replaced either then or later, when the yard would have to be excavated again. The plumbing company proceeded to repair the water pipe. Though Richardson inspected the company’s work daily and did not express any objection to the extra work involved in replacing the water pipe, she refused to pay any part of the total bill after the company completed the entire operation.

J. C. Flood Company then sued Richardson for the costs of labor and material it had furnished.

a. What arguments would support J. C. Flood’s claim for the costs of labor and material it had furnished?

b. What arguments would support Richardson’s refusal to pay the bill? c. For what, if anything, should Richardson be liable? Explain. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Answer:

(a) J.C. Flood could argue that (1) Richardson had agreed expressly to the

replacement of the water pipe; (2) Richardson had agreed impliedly to the replacement of the water pipe; (3) the work was necessary, completed and satisfactorily performed; and (4) the bill was reasonable in its amount. (b) Richardson could argue that (1) she had never agreed expressly to the replacement of the water pipe; (2) she had never been informed of the need to replace the water pipe; (3) the work was unnecessary; and (4) the bill was not reasonable in its amount. (c) Decision for J.C. Flood. Richardson v. J. C. Flood Company, District of Columbia Court of Appeals, 1963, 190 A.2d 259.

Contracts are either expressed or implied: expressed when their terms are stated by the parties, implied when arising from a mutual agreement not set forth in words. An implied contract “may be presumed from the acts and conduct of the parties as a reasonable man would view them under all the circumstances.” Here, Richardson made daily inspections yet failed to object to the replacement of the water pipe until after the work was completed.

Although she did not expressly agree to this extra work, her acts and conduct indicate her consent to it. Therefore, she created an implied (in fact) contract obligating her to pay for the reasonable value of the company's services.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 10: Mutual Assent

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 10: Mutual Assent

TABLE OF CONTENTS Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems ..............................................................................12

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Ames, seeking business for his lawn maintenance firm, posted the following notice in the

meeting room of the Antlers, a local lodge: “To the members of the Antlers—Special this month. I will resod your lawn for $4.00 per square foot using Fairway brand sod. This offer expires July 15.”

The notice also included Ames’s name, address, and signature and specified that the acceptance was to be in writing.

Bates, a member of the Antlers, and Cramer, the janitor, read the notice and were interested. Bates wrote a letter to Ames saying he would accept the offer if Ames would use Putting Green brand sod. Ames received this letter July 14 and wrote to Bates saying he would not use Putting Green sod. Bates received Ames’s letter on July 16 and promptly wrote Ames that he would accept Fairway sod. Cramer wrote to Ames on July 10 saying he accepted Ames’s offer.

By July 15, Ames had found more profitable ventures and refused to resod either lawn at the specified price. Bates and Cramer brought an appropriate action against Ames for breach of contract. Decisions as to the respective claims of Bates and Cramer? Discuss.

Answer: Ames wins both cases. The first letter from Bates was not an acceptance because it did not correspond with the terms of the offer. It was a counteroffer, as it called for Ames to use a different brand sod, and therefore constituted a rejection of the original offer which terminated the original offer. After Ames had rejected the counteroffer, Bates wrote on July 16 an acceptance of the original offer. This failed to form a contract as the original offer had been terminated by (a) the rejection, Restatement, Second, Contacts, §38 and (b) expiration of the time for acceptance as by its terms it expired July 15, Restatement, Second Contracts, §41.

Cramer cannot recover because he was not an offeree. The offer was addressed to members of the Antlers. The party making an offer has the right to determine with whom he will contract. It is immaterial whether the offeror had special reasons for contracting with the offeree rather than with someone else.

Cramer made an offer to Ames through his letter, which Ames could have accepted, but chose not to.

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2. Justin owned four speedboats named Porpoise, Priscilla, Providence, and Prudence. On

April 2, Justin made written offers to sell the four boats in the order named for $14,200 each to Charles, Diane, Edward, and Fran, respectively, allowing ten days for acceptance.

Explain in which, if any, of the following four situations was a contract formed. a. Five days later, Charles received notice from Justin that he had contracted to sell Porpoise to Mark. The next day, April 8, Charles notified Justin that he accepted Justin’s offer. b. On the third day, April 5, Diane mailed a rejection to Justin that reached Justin on the morning of the sixth day. At 10:00 A.M. on the fourth day, Diane sent an acceptance by overnight letter to Justin, who received it at noon the fifth day. c. Edward, on April 3, replied that he was interested in buying Providence but declared the price appeared slightly excessive and wondered if, perhaps, Justin would be willing to sell the boat for $13,900. Five days later, having received no reply from Justin, Edward accepted Justin’s offer by letter, and enclosed a certified check for $14,200. d. Fran was accidentally killed in an automobile accident on April 9. The following day, the executor of her estate mailed an acceptance of Justin’s offer to Justin.

Answer: (a) No contract. Where the offeror, after making an offer for sale, sells or contracts to sell the property to another person and the offeree acquires reliable information of this fact, before he has exercised his power of creating a contract by acceptance of the offer, the offer is revoked. Restatement, Second, Contracts, Section 43. (b) A contract was formed on April 6. Rejection by mail or telegram does not destroy the power of acceptance until received by the offeror, but limits the power so that an authorized or unauthorized means of acceptance (this was an authorized means since the contracts fall under the UCC) started after the sending of a prior rejection is only effective if the acceptance is received, as here, by the offeror before he receives the rejection. (c) A contract. A counteroffer by the offeree, relating to the same matter as the offer, is a rejection of the original offer, unless the offeror in his offer or the offeree in his counteroffer manifest a different intention. Restatement, Second, Contracts, §39. Here, Edward made a mere inquiry regarding the possibility of different terms or, stated somewhat differently, a request for a better offer.

Edward’s inquiry was not a counteroffer since it did not contain a promise.

Edward’s subsequent acceptance was therefore effective. (d) No contract. The death of the offeree terminates a revocable offer because it thereby becomes impossible to accept it. Restatement, Second, Contracts, Section 48. A revocable offer can be accepted only by or for the benefit of the person to whom it is made.

3. Alpha Rolling Mill Corporation (Alpha Corporation), by letter dated June 8, offered to sell

Brooklyn Railroad Company (Brooklyn Company) two thousand to five thousand tons of fifty-pound iron rails on certain specified terms and added that, if the offer was accepted, Alpha Corporation would expect to be notified prior to June 20. Brooklyn Company, on June 16, by fax, referring to Alpha Corporation’s offer of June 8, directed Alpha Corporation to enter an order for one thousand two hundred tons of fifty-pound iron rails on the terms specified. The same day, June 16, Brooklyn Company, by letter to Alpha Corporation, confirmed the fax. On June 18, Alpha Corporation, by telephone, declined to fulfill the order. Brooklyn Company, on June 19, wrote Alpha Corporation: “Please enter an order for two thousand tons of rails as per your letter of the eighth. Please forward written contract. Reply.” In reply to Brooklyn Company’s repeated inquiries concerning

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whether the order for two thousand tons of rails had been entered, Alpha denied the existence of any contract between Brooklyn Company and itself. Thereafter, Brooklyn Company sued Alpha Corporation for breach of contract. Decision? Discuss.

Answer: Decision for Alpha Rolling Mill Corporation and against Brooklyn Railroad Company. The offer was for a quantity of between 2,000 to 5,000 tons of iron rails.

When the railroad company ordered 1,200 tons it was not accepting the offer but making a counteroffer. This counteroffer is a rejection of the original offer. After Alpha's refusal to accept the counteroffer, the railroad company attempted to accept 2,000 tons under the original offer. However, the original offer at this time was no longer in existence, having been terminated by the rejection. There was no offer open to the railroad company for acceptance after the rejection, and no contract was formed.

4. On April 8, Crystal received a telephone call from Akers, a truck dealer, who told Crystal

that a new model truck in which Crystal was interested would arrive in one week.

Although Akers initially wanted $10,500, the conversation ended after Akers agreed to sell and Crystal agreed to purchase the truck for $10,000, with a $1,000 down payment and the balance on delivery. The next day, Crystal sent Akers a check for $1,000, which Akers promptly cashed.

One week later, when Crystal called Akers and inquired about the truck, Akers informed Crystal he had several prospects looking at the truck and would not sell for less than $10,500. The following day Akers sent Crystal a properly executed check for $1,000 with the following notation thereon: “Return of down payment on sale of truck.”

After notifying Akers that she will not cash the check, Crystal sues Akers for damages.

Should Crystal prevail? Explain.

Answer: Decision for Crystal. The agreement made in the course of a telephone conversation between Crystal and truck dealer Akers was for the sale by Akers to Crystal at an agreed price of $10,000 for a new model truck. The trade description of the truck was known to both parties, as Crystal was interested in it, and dealer Akers had apparently ordered the new truck from the manufacturer as he told Crystal that he expected to receive delivery of it in one week. The price was payable $1,000 down, and the balance upon delivery. This is a valid oral contract for the sale of goods by description. Each party manifested to the other over the telephone assent to these terms, and Crystal promptly sent to Akers her check for $1,000 which Akers cashed. The mutual promises exchanged were definite and certain.

Note regarding the statute of frauds: Akers’ check for $1,000 payable to Crystal and Akers’ notation thereon fulfill all of the requirements of the statute of frauds and make the contract enforceable against Akers in that (1) the notation evidences a contract for the sale of goods; (2) the check bears Akers’ signature as drawer; and (3) the singular number of "truck" refers to the quantity of one truck. Alternatively, there has been partial payment and acceptance of an indivisible item.

5. On November 15, Gloria, Inc., a manufacturer of crystalware, mailed to Benny Buyer a

letter stating that Gloria would sell to Buyer one hundred crystal “A” goblets at $100 per goblet and that “the offer would remain open for fifteen (15) days.” On November 18, Gloria, noticing the sudden rise in the price of crystal “A” goblets, decided to withdraw its offer to Buyer and so notified Buyer. Buyer chose to ignore Gloria’s letter of revocation and gleefully watched as the price of crystal “A” goblets continued to skyrocket. On November

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30, Buyer mailed to Gloria a letter accepting Gloria’s offer to sell the goblets. The letter was received by Gloria on December 4. Buyer demands delivery of the goblets. Explain what the result is.

Answer: Buyer prevails. Gloria, Inc.’s offer of November 15, constituted a firm offer—it is a signed writing by a merchant promising to hold open an offer for three months or less (15 days in this case) and therefore cannot be revoked prior to November 30. Thus, Gloria, Inc.’s revocation of November 18 is ineffective and of no legal effect.

Buyer accepted Gloria, Inc.’s offer within the prescribed time period by dispatching his acceptance on November 30. Buyer’s use of the mail for sending his acceptance is a reasonable means of acceptance (this is a UCC sale) and thus is effective upon dispatch.

6. On May 1, Melforth Realty Company offered to sell Greenacre to Dallas, Inc., for $1 million.

The offer was made by a letter sent by overnight delivery and stated that the offer would expire on May 15. Dallas decided to purchase the property and sent a letter by registered first-class mail to Melforth on May 10 accepting the offer. As a result of unexplained delays in the postal service, the letter was not received by Melforth until May 22. Now, Melforth wishes to sell Greenacre to another buyer who is offering $1.2 million for the tract of land. Has a contract resulted between Melforth and Dallas? Explain.

Answer: Under the Restatement, Second, Dallas’s acceptance, via mail, is a reasonable means of acceptance and is effective upon dispatch. Thus, Dallas’s acceptance, mailed on May 10, would have been effective prior to the offer’s termination on May 15.

Under the traditional rule the acceptance would have been unauthorized, since it was not the means utilized by the offeror in making the offer, and therefore effective only when received by the offeror, provided it is received within the time period the authorized means would have arrived. Here the offer was not received (May 22) until the offer had already expired (May 15) and it was not received within the time frame that the authorized means (telegraph) would have been received within (probably no later than May 16).

Had Melforth stipulated that the acceptance be received by May 15, then the effective moment of acceptance would be upon receipt by Melforth, and there would no contract.

7. Rowe advertised in newspapers of wide circulation and otherwise made it known that she

would pay $5,000 for a complete set, consisting of ten volumes, of certain rare books.

Ford, not knowing of the offer, gave Rowe all but one volume of the set of rare books as a Christmas present. Ford later learned of the offer, obtained the one remaining book, tendered it to Rowe, and demanded the $5,000. Rowe refused to pay. Discuss whether Ford is entitled to the $5,000.

Answer: Ford is not entitled to the $5,000, as he did not accept Rowe’s offer and therefore no contract was formed. The gift of the nine books by Ford to Rowe was not an acceptance because acceptance requires an intention on the part of the offeree to accept the offer, and since at the time of making the gift Ford had no knowledge of the offer, he did not have and could not have had such intention.

Moreover, even if Ford had then known of the offer, his intention at that time was

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to give the nine books to Rowe as a Christmas present, and not to accept any offer.

8. Scott, manufacturer of a carbonated beverage, entered into a contract with Otis, owner of a baseball park, whereby Otis rented to Scott a large signboard on top of the center field wall. The contract provided that Otis should letter the sign as Scott desired and would change the lettering from time to time within forty-eight hours after receipt of written request from Scott. As directed by Scott, the signboard originally stated in large letters that Scott would pay $100 to any ballplayer hitting a home run over the sign.

In the first game of the season, Hume, the best hitter in the league, hit one home run over the sign. Scott immediately served written notice on Otis instructing Otis to replace the offer on the signboard with an offer to pay $50.00 to every pitcher who pitched a no-hit game in the park. A week after receipt of Scott’s letter, Otis had not changed the wording on the sign; and on that day, Perry, a pitcher for a scheduled game, pitched a no-hit game and Todd, one of his teammates, hit a home run over Scott’s sign.

Scott refuses to pay any of the three players. Discuss what the rights of Scott, Hume, Perry, and Todd are.

Answer: Batter Hume is entitled to recover $100 from Scott who by his large signboard on top of the center field wall promised to pay that amount to any hitter who would hit a home run over the signboard. When Hume performed the act requested, a unilateral contract was formed.

Pitcher Perry cannot recover from Scott. No offer was publicly made to any pitcher for a no-hit game, nor was any offer made to pitcher Perry.

Batter Todd can recover $100 from Scott. The offer was not revoked as to Todd. An offer made by advertisement in a newspaper, or by a general notification to the public, or to a number of persons whose identity is unknown to the offeror is revoked by an advertisement or general notice given publicity equal to that given to the offer before a contract has been created by acceptance of the offer.

Advertiser Scott may recover a net of $50 from Otis, i.e., the $100 which Scott has to pay Todd less the $50 which Scott would have had to pay Perry but for Otis’s failure to change the sign.

9. Barney accepted Clark’s offer to sell to him a portion of Clark’s coin collection. Clark

forgot at the time of the offer and acceptance that her prized $20.00 gold piece was included in the portion that she offered to sell to Barney. Clark did not intend to include the gold piece in the sale. Barney, at the time of inspecting the offered portion of the collection, and prior to accepting the offer, saw the gold piece. Is Barney entitled to the $20.00 gold piece? Explain.

Answer: Yes. Mutual assent to the formation of a contract is operative as to the extent it is manifested. If the manifestation is at variance with the mental intent, the objective expression is controlling. It was Clark’s intention to sell that particular portion of the coin collection as a whole unit and the parties mutually assented to this. See City of Everett v. Estate of Sumstad, 631 P.2d 366 (Wash.

1981). This transaction shows no evidence of fraud in the inducement, which would make it voidable at Clark’s choice.

10. Small, admiring Jasper’s watch, asked Jasper where and at what price he had purchased

it. Jasper replied, “I bought it at West Watch Shop about two years ago for around $85.00, but I am not certain as to that.” Small then said, “Those fellows at West are good people

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and always sell good watches. I’ll buy that watch from you.” Jasper replied, “It’s a deal.”

The next morning, Small telephoned Jasper and said he had changed his mind and did not wish to buy the watch.

Jasper sued Small for breach of contract. In defense, Small has pleaded that he made no enforceable contract with Jasper because (a) the parties did not agree on the price to be paid for the watch and (b) the parties did not agree on the place and time of delivery of the watch to Small. Are either or both of these defenses good? Explain.

Answer: The first defense has merit, especially when combined with the second defense. The second defense will not stand alone, but when coupled with the lack of agreement as to price, it is less likely they intended to form a contract. Small’s comments regarding the watch were not definite and certain. (a) §2-305, UCC, provides: “Open Price Term. (1) The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if (a) nothing is said as to price.” From the facts given, it would be difficult to determine a reasonable price.

As to the second argument of time and place for delivery the UCC provides: “2308. Absence of Specified Place for Delivery. Unless otherwise agreed (a) the place for delivery of goods is the seller’s place of business or if he has none his residence”; *** “2-309. Absence of Specific Time Provision; Notice of Termination.

(1) The time for shipment or delivery of any other action under a contract if not provided in this Article or agreed upon shall be a reasonable time.”

11. Jeff says to Brenda, “I offer to sell you my PC for $900.” Brenda replies, “If you do not

hear otherwise from me by Thursday, I have accepted your offer.” Jeff agrees and does not hear from Brenda by Thursday. Does a contract exist between Jeff and Brenda?

Explain.

Answer: Yes, there is a contract. Brenda’s statement to Jeff is an acceptance of his offer subject to a condition that she does not communicate a rejection before Thursday. Although silence generally cannot be an acceptance, Brenda’s silence here is evidence that her acceptance is both positive and unequivocal under the terms she, the offeree, has imposed on herself.

12. On November 19, Hoover Motor Express Company sent to Clements Paper Company a

written offer to purchase certain real estate. Sometime in December, Clements authorized Williams to accept the offer. Williams, however, attempted to bargain with Hoover to obtain a better deal, specifically that Clements would retain easements on the property.

In a telephone conversation on January 13 of the following year, Williams first told Hoover of his plan to obtain the easements. Hoover replied, “Well, I don’t know if we are ready.

We have not decided; we might not want to go through with it.” On January 20, Clements sent a written acceptance of Hoover’s offer. Hoover refused to buy, claiming it had revoked its offer through the January 13 phone conversation. Clements then brought suit to compel the sale or obtain damages. Explain whether Hoover successfully revoked its offer.

Answer: Yes, the offer was revoked. Express notice of revocation before acceptance of an offer is not required. The offeror may implicitly revoke his offer through acts or communications to the offeree that are inconsistent with its

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continuance. If the offeree has knowledge of this inconsistent interest before he has accepted, then the offer is revoked.

Here, Williams knew through the January 13 phone conversation that Hoover “thought they might not go through with it.” This communication by Hoover to Williams effectively revoked its offer. Therefore, Clements’ acceptance on January 20 came too late to bind Hoover to the sale. Hoover Motor Express Co. v. Clements Paper Co., 241 S.W.2d 851 (Tenn. 1951).

13. Walker leased a small lot to Keith for ten years at $100 a month, with a right for Keith to extend the lease for another ten-year term under the same terms except as to rent. The renewal option provided: “Rental will be fixed in such amount as shall actually be agreed upon by the lessors and the lessee with the monthly rental fixed on the comparative basis of rental values as of the date of the renewal with rental values at this time reflected by the comparative business conditions of the two periods.”

Keith sought to exercise the renewal right and, when the parties were unable to agree on the rent, brought suit against Walker. Who prevails? Why? Answer: Walker prevails. The renewal option provision did not constitute an option contract or any agreement giving Keith a unilateral right to a new contract for a second 10-year period of time. The renewal option was merely an agreement to attempt to negotiate in good faith a new lease agreement for the second 10-year period. If Walker acted reasonably and attempted to negotiate an extension of the lease in good faith, yet despite that effort the parties were unable to agree on the new rent, Walker has no liability.

14. The Brewers contracted to purchase Dower House from McAfee. Then, several weeks

before the May 7 settlement date for the purchase of the house, the two parties began to negotiate for the sale of certain items of furniture in the house. On April 30, McAfee sent the Brewers a letter containing a list of the furnishings to be purchased at specific prices; a payment schedule including a $3,000 payment due on acceptance; and a clause reading: “If the above is satisfactory, please sign and return one copy with the first payment.”

On June 3, the Brewers sent a letter to McAfee stating that enclosed was a $3,000 check, that the original contract had been misplaced and could another be furnished, that they planned to move into Dower House on June 12, and that they wished that the red desk also be included in the contract. McAfee then sent a letter dated June 8 to the Brewers listing the items of furniture they had purchased.

The Brewers moved into Dower House in the middle of June. Soon after they moved in, they tried to contact McAfee at his office to tell him that there had been a misunderstanding relating to their purchase of the listed items. They then refused to pay him any more money, and he brought this action to recover the outstanding balance unless the red desk was also included in the sale. Will McAfee be able to collect the additional money from the Brewers? Why or why not?

Answer: Yes. The contract for the furniture is governed by the UCC. The Brewers’ letter of June 3rd constituted a definite and seasonable acceptance or written confirmation sent within a reasonable time after receipt of plaintiffs offer to sell.

The enclosure of the $3,000 check, the amount due upon acceptance of the contract, and the request to “include the red secretary on the contract,” manifested the Brewers’ assent or confirmation of the specific items enumerated in the April 30th letter. The reference to the red secretary was not expressed in

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language making acceptance conditional upon inclusion of the secretary. This item was merely a proposal for an addition to the contract. While it is true that the Brewers did not sign and return one copy of the contract in the manner requested

by McAfee, their acceptance of the offer by letter was reasonable under the circumstances because they had misplaced the contract and the copy of it.

Moreover, there was no indication by the McAfee that if the offer was not accepted in the suggested manner, it would not be acceptable to him. The UCC rejects the technical rules of acceptance in providing that “an offer . . . shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances.” McAfee v. Brewer, 214 Va. 579, 203 S.E.2d 129 (1974).

15. The Thoelkes were owners of real property located in Florida, which the Morrisons agreed

to purchase. The Morrisons signed a contract for the sale of that property and mailed it to the Thoelkes in Texas on November 26. Subsequently, the Thoelkes executed the contract and placed it in the mail addressed to the Morrisons’ attorney in Florida. After the executed contract was mailed but before it was received in Florida, the Thoelkes called the Morrisons’ attorney in Florida and attempted to repudiate the contract. Does a contract exist between the Thoelkes and the Morrisons? Discuss?

Answer: Yes, a contract exists and thus decision for the Morrison’s. Under the deposited acceptance rule, an unqualified offer was accepted when the letter was placed in the mail. The repudiation was ineffective, because a contract came into existence when the letter was mailed, even though it had not been received by the Morrison’s attorney. This rule is also known as the “rule in Adams v. Lindsell,” because that was the first case in which it was enunciated. Morrison v. Thoelke, 155 So.2d 889 (Fla. App. 1963).

16. Lucy and Zehmer met while having drinks in a restaurant. During the course of their

conversation, Lucy apparently offered to buy Zehmer’s 471.6-acre farm for $50,000 cash.

Although Zehmer claims that he thought the offer was made in jest, he wrote the following on the back of a pad: “We hereby agree to sell to W. O. Lucy the Ferguson Farm complete for $50,000, title satisfactory to buyer.” Zehmer then signed the writing and induced his wife Ida to do the same. She claims, however, that she signed only after Zehmer assured her that it was only a joke. Finally, Zehmer claims that he was “high as a Georgia pine” at the time but admits that he was not too drunk to make a valid contract. Explain whether the contract is enforceable.

Answer: Judgment for Lucy—the contract is enforceable. An agreement or mutual assent is essential to the formation of a valid contract. The mental assent of the parties is not requisite, however, unless one party’s undisclosed intentions are not made known to the other party. If they are not, then the words and undisclosed intentions are judged by an objective standard to see if they manifest an intention to agree. Thus, Zehmer cannot claim that he was merely jesting when his conduct and words would warrant a reasonable person in believing that he intended a real agreement. Zehmer’s response to Lucy’s offer, therefore, whether made in earnest or in secret jest constituted a binding contract. Zehmer had contractual capacity, because he was able to understand the nature and consequences of his actions.

Lucy v. Zehmer, 196 Va. 493, 84 S.E.2d 516 (1954).

17. On July 31, Lee Calan Imports advertised a used Volvo station wagon for sale in the

Chicago Sun-Times. As part of the information for the advertisement, Lee Calan Imports instructed the newspaper to print the price of the car as $1,795. However, due to a

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mistake made by the newspaper, without any fault on the part of Lee Calan Imports, the printed ad listed the price of the car as $1,095. After reading the ad and then examining the car, O’Brien told a Lee Calan Imports salesman that he wanted to purchase the car for the advertised price of $1,095. Calan Imports refuses to sell the car to O’Brien for $1,095.

Is there a contract? If so, for what price? Discuss.

Answer: No contract. A newspaper ad is an invitation to make an offer, not an offer. Judgment for Lee Calan Imports. “Advertisements are not offers because (1) they do not contain a promise and (2) they leave unexpressed many terms that would be necessary to the making of a contract. In this case, it should be easy to prove that this merchant is not engaging in price inflation, since the price listed was a typographical error on the part of the newspaper.” O'Keefe v. Lee Calan Imports, Inc., 262 N.E. 2d 758, 128 Ill. App.2d 410 (1970).

18. On May 20, cattle rancher Oliver visited his neighbor Southworth, telling him, “I know

you’re interested in buying the land I’m selling.” Southworth replied, “Yes, I do want to buy that land, especially because it adjoins my property.” Although the two men did not discuss the price, Oliver told Southworth he would determine the value of the property and send that information to Southworth so that he would have “notice” of what Oliver “wanted for the land.” On June 13, Southworth called Oliver to ask if he still planned to sell the land. Oliver answered, “Yes, and I should have the value of the land determined soon.” On June 17, Oliver sent a letter to Southworth listing a price quotation of $324,000.

Southworth then responded to Oliver by letter on June 21, stating that he accepted Oliver’s offer. However, on June 24 Oliver wrote back to Southworth saying, “There has never been a firm offer to sell, and there is no enforceable contract between us.” Oliver maintains that a price quotation alone is not an offer. Southworth claims a valid contract has been made. Who wins? Discuss.

Answer: Southworth is correct, there is a valid and enforceable contract to sell the property. Despite the general rule that a price quotation alone is insufficient to constitute an offer, "there may be circumstances under which a price quotation, when considered together with facts and circumstances, may constitute an offer which, if accepted, will result in a binding contract." Whether Oliver has communicated his intent to enter into a contract must be judged on the basis of what a reasonable person in the position of Southworth has been led to believe.

Here, the circumstances surrounding the letter of June 17 (of itself merely a price quotation) made it reasonable that Southworth believed Oliver had made an offer to sell the ranch lands. Southworth v. Oliver, 284 Or. 361, 587 P.2d 994 (1978).

19. On August 12, Mr. and Mrs. Mitchell, the owners of a small secondhand store, attended

Alexander’s Auction, where they bought a used safe for $50.00. The safe, part of the Sumstad estate, contained a locked inside compartment. Both the auctioneer and the Mitchells knew this fact. Soon after the auction, the Mitchells had the compartment opened by a locksmith, who discovered $32,207 inside. The Everett Police Department impounded the money. The city of Everett brought an action against the Sumstad estate and the Mitchells to determine the owner of the money. Who should receive the money?

Why? Answer: Judgment in favor of the Mitchells—they are entitled to the funds. The subject matter transferred in a sale is determined by the intent of the parties as revealed by the terms of their agreement in light of the surrounding circumstances.

The intentions of the parties are revealed by a reasonable interpretation of their words and acts. Any unexpressed intention is irrelevant. In this case, the Mitchells

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understood that all auction sales were final, and the auctioneer made no statement reserving rights to any contents of the safe to the estate. The reasonable conclusion is that the auctioneer intended to sell the safe and its contents and that the parties mutually assented to such a sale.

20. Irwin Schiff is a self-styled “tax rebel” who has made a career, and substantial profit, out

of his tax protest activities. On February 7, Schiff appeared live on CBS News Nightwatch, a late-night program with a viewer participation format. During the broadcast, Schiff repeated his assertion that nothing in the Internal Revenue Code stated that an individual was legally required to pay federal income tax. Schiff then challenged, “If anybody calls this show—I have the Code—and cites any section of this Code that says an individual is required to file a tax return, I will pay them $100,000.” Call-in telephone numbers were periodically flashed on the screen. John Newman, an attorney, did not see Schiff’s live appearance on Nightwatch. Newman did, however, see a two-minute videotaped segment, including Schiff’s challenge, which was rebroadcast several hours later on the CBS Morning News. Newman researched the matter that same day and on the following day, February 9, placed a call using directory assistance to CBS Morning News stating that the call was performance of the consideration requested by Mr. Schiff in exchange for his promise to pay $100,000. When Schiff refused to pay, Newman sued. Should Newman prevail? Explain.

Answer: No, Newman will not prevail as the offer was no longer open. The offeror is the master of the offer, and it is clear that Schiff by his words “if anybody calls this show...” limited his offer in time to remain open only for the duration of the live Nightwatch broadcast. The CBS Morning News report on Schiff’s offer did not serve to renew or extend the original offer. Newman’s attempted acceptance was therefore untimely, and no contract was formed.

21. The Cornillies listed a home for sale with a real estate agent. Patrick and Anne Giannetti

offered $155,000 for the home and submitted a deposit in the amount of $2,500. The Cornillies countered this offer with an offer to sell the house for $160,000. The Giannettis then inquired whether certain equipment and items of furniture could be included with the sale of the house. The Cornillies refused to include the questioned items in the sale.

The Giannettis then accepted the $160,000 offer but changed the mortgage amount from $124,000 to $128,000. Is there a binding contract? Explain.

Answer: There is no binding contract. The purported acceptance by the Giannettis was a counteroffer, which operated as a rejection as well as a new offer. Giannetti v. Cornillie, 204 Mich. App. 234, 514 N.W.2d 221 (Court of Appeals of Michigan, 1994).

“An offer is a unilateral declaration of intention, and is not a contract. A contract is made when both parties have executed or accepted it, and not before. A counter proposition is not an acceptance.” An acceptance must be “unambiguous and in strict conformance with an offer.” Moreover, “[A] proposal to accept, or an acceptance, upon terms varying from those offered, is a rejection of the offer, and puts an end to the negotiation, unless the party who made the original offer renews it, or assents to the modification suggested.” Thus, “[a]ny material departure from the terms of an offer invalidates the offer as made and results in a counter proposition, which, unless accepted, cannot be enforced.” Before the change, the Giannettis were obligated to buy the property if they obtained a mortgage for $124,000; after the change, no obligation to buy arose unless they obtained a $128,000 mortgage. Thus, the modification changed the contract—by

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 10: Mutual Assent

legally widening the door through which the Giannettis could escape the contract— and it was therefore material.

22. Kelly-Moore Paint Company, entered into a fifteen-year commercial lease with Osprey for

a property in Edmond, Oklahoma. The lease contained an option for two five-year renewals. The lease required that Kelly-Moore give notice of its intent to renew at least six months prior to its expiration. It also provided that the renewal “may be delivered either personally or by depositing the same in United States mail, first class postage prepaid, registered or certified mail, return receipt requested.” Upon expiration of the original fifteen-year lease, Kelly-Moore timely informed Osprey by certified letter of its intent to extend the lease an additional five years. The first five-year extension was due to expire on August 31. On the last day of the six-month notification deadline, Kelly-Moore faxed a letter of renewal notice to Osprey’s office at 5:28 p.m. In addition, Kelly-Moore sent a copy of the faxed renewal notice letter by Federal Express that same day. Osprey denies ever receiving the fax, but it admits receiving the Federal Express copy of the notice on the following business day. Osprey rejected the notice, asserting that it was late, and it filed an action to remove Kelley-Moore from the premises. Explain who should prevail.

Answer: The key issue revolves around whether Kelly-Moore's notice of intent to renew the lease was delivered in a timely manner according to the terms of the lease agreement.

The lease agreement clearly stipulates that Kelly-Moore must give notice of its intent to renew at least six months prior to the lease’s expiration. The lease provides options for delivering the renewal notice: personally, or by depositing the notice in the U.S. mail (first-class postage prepaid), registered or certified mail (return receipt requested). Kelly-Moore timely informed Osprey of its intent to extend the lease for an additional five years by sending a certified letter before the original lease's expiration.

On the last day of the six-month notification deadline, Kelly-Moore faxed a letter of renewal notice to Osprey’s office and sent a copy by Federal Express. The lease agreement allows for notice to be delivered by fax. However, there is no mention of a specific time by which the fax must be received, only that it must be sent at least six months before the expiration of the lease. Kelly-Moore faxed the notice on the last day of the deadline. Kelly-Moore also sent a copy of the notice via Federal Express on the same day. Osprey denies receiving the faxed notice but acknowledges receiving the Federal Express copy the next day.

Based on these facts, Kelly-Moore acted in accordance with the lease agreement by sending the notice via fax and Federal Express on the last day of the notification deadline. The lease does not specify a requirement for the notice to be physically received by Osprey on or before the deadline, only that it must be sent within the specified timeframe. Since Kelly-Moore fulfilled the notice requirement as outlined in the lease agreement, and there is no explicit requirement for physical receipt of the notice by Osprey on the deadline day, Kelly-Moore should prevail in this situation. The court would likely find that the notice was timely and valid, and Osprey’s rejection of the notice would not be justified under the terms of the lease.

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ANSWERS TO “TAKING SIDES” PROBLEMS Cushing filed an application with the office of the Adjutant General of the State of New Hampshire for the use of the Portsmouth Armory to hold a dance on the evening of April 29. The application, made on behalf of the Portsmouth Area Clamshell Alliance, was received by the Adjutant General’s office on or about March 30. On March 31 the Adjutant General mailed a signed contract after agreeing to rent the armory for the evening requested. The agreement required acceptance by the renter affixing his signature to the agreement and then returning the copy to the Adjutant General within five days after receipt. Cushing received the contract offer, signed it on behalf of the Alliance, and placed it in the outbox for mailing on April 3. At 6:30 on the evening of April 4, Cushing received a telephone call from the Adjutant General revoking the rental offer. Cushing stated during the conversation that he had already signed and mailed the contract. The Adjutant General sent a written confirmation of the withdrawal on April 5. On April 6, the Adjutant General’s office received by mail from Cushing the signed contract dated April 3 and postmarked April 5. a. What are the arguments that a binding contract exists? b. What are the arguments that a contract does not exist or should not exist? c. What is the proper outcome? Explain.

Answer: (a) Cushing claims that he signed the contract and placed it in the outbox for mailing on April 3. Furthermore, it was customary practice for letters to be collected from the outbox daily and then placed in the U.S. mail. Since this occurred before the attempted revocation of the offer by the Adjunct General on April 4, the revocation was ineffective, and the contract is binding and enforceable. An acceptance is effective upon dispatch unless the offer specifically states otherwise, the offeree responds by some unauthorized means, or the acceptance follows a prior rejection. (b) There is no proof that Cushing actually mailed the contract prior to April 4, since the postmark is April 5. If, in fact, Cushing signed and mailed the letter after the call from the Adjunct General on April 4, the revocation is effective. Even if Cushing put the contract in the outbox, there is no evidence that it was actually put into the U.S. mailbox prior to the evening of April 4. (c) Judgment for Cushing. Cushing v. Thomson, Supreme Court of New Hampshire, 118 N.H. 292, 386 A.2d 805 (1978). When the parties to a contract are at a distance and the offer is sent by mail, the reply accepting the offer may be sent through the same medium. Moreover, the contract becomes complete and binding when the acceptance is mailed, properly addressed to the party making the offer, and is beyond the sender’s control. Once the offer has been accepted by posting in the mail, the offer cannot be revoked by the offeror.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 11: Conduct Invalidating Assent

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 11: Conduct Invalidating Assent

CONTENTS Answers to Questions and Case Problems.........................................................................1 Answers to “Taking Sides” Problems ................................................................................13

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Anita and Barry were negotiating, and Anita's attorney prepared a long and carefully drawn contract, which was given to Barry for examination. Five days later and prior to its execution, Barry's eyes became so infected that it was impossible for him to read. Ten days thereafter and during the continuance of the illness, Anita called upon Barry and urged him to sign the contract, telling him that time was running out. Barry signed the contract despite the fact he was unable to read it. In a subsequent action by Anita, Barry claimed that the contract was not binding upon him because it was impossible for him to read and he did not know what it contained prior to his signing it. Explain whether or not Barry should be held to the contract.

Answer: Yes, decision in favor of Anita and against Barry. Barry's defense that the contract was not binding upon him because he had not and could not have read it prior to signing it is not valid. Here, there was no misrepresentation of the contents of the contract Barry was requested to sign. There is nothing approaching fraud upon the part of Anita. Upon the facts stated, Barry's inability to read the contract because of impaired vision does not afford him a defense where his signature to the contract was voluntary, and was not induced by fraud or misrepresentation. Moreover, Barry could not prove a defense based upon duress since Anita did not physically compel nor force Barry by threats to manifest assent to the proposal. Barry could easily have had someone read the contract to him, or have it reviewed by his attorney.

2. William tells Carol that he paid $150,000 for his farm in 2021 and that he believes it is

worth twice that at the present time. Relying upon these statements, Carol buys the farm from William for $225,000. William did pay $150,000 for the farm in 2021, but its value has increased only slightly, and it is presently not worth $300,000. a. On discovering this, Carol offers to reconvey the farm to William and sues for the return of her $225,000. Result? Explain. b. Modify the facts in (a) by assuming that William had paid $100,000 for the property in 2021. What is the result? Explain.

Answer: (a) Decision for William; Carol is not entitled to the return of her $225,000 as long as William actually believed his farm was worth approximately $300,000. William’s statement with respect to the value of the farm was merely the expression of an

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 11: Conduct Invalidating Assent

opinion and not the statement of a material fact upon which Carol had a right to rely. There is no indication of an appraisal or other expert opinion upon which William’s opinion is based. (b) Decision for Carol. William’s statement to Carol that he paid $150,000 for the farm was an untrue statement of a material fact, upon which Carol had a right to and did rely.

3. On September 1, Adams in Portland, Oregon, wrote a letter to Brown in New York City

offering to sell to Brown one thousand tons of chromite at $48.00 per ton, to be shipped

by S.S. Malabar sailing from Portland, Oregon, to New York City via the Panama Canal.

Upon receiving the letter on September 5, Brown immediately mailed to Adams a letter stating that she accepted the offer. There were two ships by the name of S.S. Malabar sailing from Portland to New York City via the Panama Canal, one sailing in October and the other sailing in December. At the time of mailing her letter of acceptance Brown knew of both sailings and further knew that Adams knew only of the December sailing. Is there a contract? If so, to which S.S. Malabar does it relate?

Answer: There is a contract, and it relates to the S.S. Malabar sailing in December. In the classic Peerless case (Raffles v. Wichelhaus, 2 Hurlstone and Coltman Reports 906) there were two ships sailing from Bombay, both named "Peerless." The defendant knew only of the "Peerless" sailing in October and the plaintiff knew only of the "Peerless" sailing in December. There was no meeting of the minds and hence, no contract. Here, since Brown knew of both sailings and further knew that Adams did not know of the October sailing, she, Brown, will not be heard to say that she intended the chromite to be shipped on the S.S. Malabar sailing in October. Adams and Brown manifested a mutual intent to a sale of chromite to be shipped on the S.S. Malabar sailing in December. Restatement, 2nd, Sect. 20.

4. Adler owes Perreault, a police captain, $500. Adler threatens that unless Perreault

discharges him from the debt, Adler will disclose the fact that Perreault has on several occasions become highly intoxicated and has been seen in the company of certain disreputable persons. Perreault, induced by fear that such a disclosure would cost him his position or in any event lead to social disgrace, gives Adler a release but subsequently sues to set it aside and recover on his claim. Will Adler be able to enforce the release?

Why or why not?

Answer: No. The restatement, second, Contracts, Section 175, defines duress as a manifestation “induced by an improper threat by the other party that leaves the victim no reasonable alternative; the contract is voidable by the victim.” Moreover, a “threat is improper if the resulting exchange is not on fair terms, and (a) the threatened act would harm the recipient and would not significantly benefit the party making the threat.” Restatement, Second, Section 176(2). The facts presented in the problem state a clear-cut case of duress by the use of improper threats.

5. Harris owned a farm that was worth about $600 per acre. By false representations of fact,

Harris induced Pringle to buy the farm at $1,500 an acre. Shortly after taking possession of the farm, Pringle discovered oil under the land. Harris, on learning this, sues to have the sale set aside on the ground that it was voidable because of fraud. Result? Discuss.

Answer: Decision in favor of Pringle. Because Pringle was fraudulently induced to buy the farm, Pringle had the right to disaffirm the transaction. All of the elements are present, including justifiable reliance on the statements made by Harris. The contract was voidable by Pringle only, not by Harris. Presumably Pringle will be content with the

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bargain even though induced by fraud to make the purchase. The right of avoidance rests entirely with Pringle and he may, if he so desires, abide by the contract. It should be noted, however, that Pringle would not prevail in a suit brought in tort since Pringle did not suffer an injury.

6. On February 2, Phillips induced Mallor to purchase from her fifty shares of stock in the

XYZ Corporation for $10,000, representing that the actual book value of each share was $200. A certificate for fifty shares was delivered to Mallor. On February 16, Mallor discovered that the book value on February 2 was only $50.00 per share. Will Mallor be successful in a lawsuit against Phillips? Why or why not?

Answer: Yes, Mallor will prevail against Phillips. The statement that the actual book value of the shares of stock in XYZ Corporation was $200 per share was a statement of material fact made to induce Mallor to purchase the stock and which did, in fact, succeed in persuading Mallor to buy the shares. The transaction meets the requirements of fraud in the inducement: (1) The representation related to a material fact; (2) It was knowingly false; (3) It was made with the intention that it be acted upon by the person to whom made; (4) It was justifiably relied upon; and (5) The false representation was the proximate cause of the injury or damage.

7. Dorothy mistakenly accused Fred's son, Steven, of negligently burning down Dorothy’s

barn. Fred believed that his son was guilty of the wrong and that he, Fred, was personally liable for the damage, because Steven was only fifteen years old. Upon demand made by Dorothy, Fred paid Dorothy $25,000 for the damage to Dorothy’s barn. After making this payment, Fred learned that his son had not caused the burning of Dorothy's barn and was in no way responsible for its burning. Fred then sued Dorothy to recover the $25,000 that he had paid her. Explain whether or not he will succeed.

Answer: Yes, judgment for Fred for $25,000 against Dorothy. The payment was made under a mutual mistake of material fact. Both Fred and Dorothy mistakenly believed that Dorothy’s barn had been negligently burned by Fred’s son, Steven, while as a matter of fact Steven did not cause the burning of Dorothy’s barn and was in no way responsible for its burning. A payment made under a mutual mistake of fact is recoverable under the doctrine of quasi-contract.

8. Jones, a farmer, found an odd-looking stone in his fields. He went to Smith, the town

jeweler, and asked him what he thought it was. Smith said he did not know but thought it might be a ruby. Jones asked Smith what he would pay for it, and Smith said $200, whereupon Jones sold it to Smith for $200. The stone turned out to be an uncut diamond worth $3,000. Jones brought an action against Smith to recover the stone. On trial, it was proved that Smith actually did not know the stone was a diamond when he bought it, but he thought it might be a ruby. Can Jones void the sale? Explain.

Answer: No, Jones cannot void the sale. Mutual ignorance upon the part of Jones and Smith of the value of the subject matter did not prevent the formation of a valid contract. They both understood that the two hundred dollars was to be exchanged for the stone. There was no mistake as to the subject matter of the agreement. There was neither fraud nor misrepresentation.

9. Decedent Joan Jones, a bedridden, lonely woman, eighty-six years old, owned outright

Greenacre, her ancestral estate. Biggers, her physician and friend, visited her weekly and was held in the highest regard by Joan. Joan was extremely fearful of pain and suffering and depended on Biggers to ease her anxiety and pain. Several months before her death,

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 11: Conduct Invalidating Assent

Joan deeded Greenacre to Biggers for $10,000. The fair market value of Greenacre at this time was $250,000. Joan was survived by two children and six grandchildren. Joan’s children challenged the validity of the deed. Should the deed be declared invalid due to Biggers’s undue influence? Explain.

Answer: Yes, decision for Decedent’s children. Restatement, 2nd, Contracts, §177 (1) defines undue influence as the “unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that the person will not act in a manner inconsistent with his welfare.” A contract induced by undue influence is voidable. Here the doctor had a fiduciary responsibility and that since the price was far below fair market value, that the doctor acted improperly. Nevertheless, this presumption is rebuttable.

10. In February, Gardner, a schoolteacher with no experience in running a tavern, entered into

a contract to purchase for $40,000 the Punjab Tavern from Meiling. The contract was contingent upon Gardner's obtaining a five-year lease for the tavern's premises and a liquor license from the state. Prior to the formation of the contract, Meiling had made no representations to Gardner concerning the gross income of the tavern. Approximately three months after the contract was signed, Gardner and Meiling met with an inspector from the Oregon Liquor Control Commission (OLCC) to discuss transfer of the liquor license. Meiling reported to the agent, in Gardner's presence, that the tavern's gross income figures for February, March, and April were $5,710, $4,918, and $5,009, respectively.

The OLCC granted the required license, the transaction was closed, and Gardner took possession on June 10. After discovering that the tavern's income was very low and that the tavern had very few female patrons, Gardner contacted Meiling's bookkeeping service and learned that the actual gross income for those three months had been approximately $1,400 to $2,000. Will a court grant Gardner rescission of the contract? Explain.

Answer: No. To sustain a case of fraudulent misrepresentation, the injured party must prove that he actually relied upon the false representation, causing him to enter into the bargain. Meiling's only representations concerning the Tavern's gross income were made months after the contract was formed. Since these misrepresentations came after the binding agreement of February, they could not have been relied upon by Gardner in making the agreement. Therefore, rescission of the contract is not permitted. Gardner v. Meiling, 280 Or. 665, 572 P.2d 1012 (1977).

11. Dorothy and John Huffschneider listed their house and lot for sale with C. B. Property. The owners told C. B. that the size of the property contained 6.8 acres. Dean Olson, a salesman for C. B., advertised the property in local newspapers as consisting of six acres.

James and Jean Holcomb signed a contract to purchase the property through Olson after first inspecting the property with Olson and being assured by Olson that the property was at least 6.6 acres. The Holcombs never asked for or received a copy of the survey. In actuality, the lot was only 4.6 acres. Can the Holcombs rescind the contract? Explain.

Answer: Decision for James and Jean Holcomb. When Olson falsely represented that the property was at least 6.6 acres, a fraud was committed. As the sales agent Olson had an obligation to disclose all material information to the purchasers as well as to respond truthfully to all inquiries. The agent had access to the survey and could have easily verified the actual acreage. His conduct can be characterized at a minimum as "recklessly indifferent," if not outright as an intended deception, so long as Dorothy and John Huffschneider did not provide C. B. Property with a fraudulent survey of the property.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 11: Conduct Invalidating Assent

12. Christine Boyd was designated as the beneficiary of a life insurance policy issued by Aetna Life Insurance Company on the life of Christine's husband, Jimmie Boyd. The policy insured against Jimmie’s permanent total disability and also provided for a death benefit to be paid on Jimmie's death.

Several years after the policy was issued, Jimmie and Christine separated. Jimmie began to travel extensively, and, therefore, Christine was unable to keep track of his whereabouts or his state of health. Jimmie nevertheless continued to pay the premiums on the policy until Christine tried to cash in the policy to alleviate her financial distress. A loan previously had been made on the policy, however, leaving its cash surrender value, and thus the amount that Christine received, at only $4.19. Shortly thereafter, Christine learned that Jimmie had been permanently and totally disabled before the surrender of the policy. Aetna also was unaware of Jimmie’s condition, and Christine requested that the surrendered policy be reinstated and that the disability payments be made. Jimmie died soon thereafter, and Christine then requested that Aetna pay the death benefit.

Decision?

Answer: Decision for Mrs. Boyd. As a matter of equity, the surrender agreement had to be rescinded. Had Mrs. Boyd known the true facts at the time she surrendered the policy, she certainly would not have done so. Since her mistaken belief that her husband was not disabled was a material mistake of fact, her rescission was not effective. In the opinion of the court, “The supposed elements of doubt as to the health of Mr. Boyd never entered into the contemplation of either party, nor did it form any part of the consideration for the cancellation and surrender of the policy. Since the policy was in full force and effect at the time of total permanent disability,” the defendant’s insurance company is liable. Boyd v. Aetna Life Insurance Co., 310 Ill. App. 547, 35 N.E. 2d 99 (1941).

13. Treasure Salvors and the State of Florida entered into a series of four annual contracts

governing the salvage of the Nuestra Senora de Atocha. The Atocha is a Spanish galleon that sank in 1622, carrying a treasure now worth well over $250 million. Both parties had contracted under the impression that the seabed on which the Atocha lay was land owned

by Florida. Treasure Salvors agreed to relinquish 25 percent of the items recovered in return for the right to salvage on state lands. In accordance with these contracts, Treasure Salvors delivered to Florida its share of the salvaged artifacts. Subsequently, the U.S. Supreme Court held that the part of the continental shelf on which the Atocha was resting had never been owned by Florida. Treasure Salvors then brought suit to rescind the contracts and to recover the artifacts it had delivered to the state of Florida. Should Treasure Salvors prevail? Explain.

Answer: Yes, judgment for Treasure Salvors. Both parties based their contracts upon the erroneous assumption that the state of Florida owned the land in question. But for this belief, neither party would have entered into the agreements. The contracts are therefore voidable under the doctrine of mutual mistake of fact. Accordingly, Treasure Salvors may rescind the contracts and recover the artifacts delivered to the state of Florida. State of Florida, Dept. of State v. Treasure Salvors, Inc., 621 F.2d 1340 (5th Cir. 1980).

14. Jane Francois married Victor H. Francois. At the time of the marriage, Victor was a fifty year-old bachelor living with his elderly mother, and Jane was a thirty-year-old, twicedivorced mother of two. Victor had a relatively secure financial portfolio; Jane, on the other hand, brought no money or property to the marriage.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 11: Conduct Invalidating Assent

The marriage deteriorated quickly over the next couple of years, with disputes centered on financial matters. During this period, Jane systematically gained a joint interest in, and took control of, most of Victor's assets. Three years after they were married, Jane contracted Harold Monoson, an attorney, to draw up divorce papers. Victor was unaware of Jane's decision until he was taken to Monoson’s office, where Monoson presented for Victor's signature a “Property Settlement and Separation Agreement.” Monoson told Victor that he would need an attorney, but Jane vetoed Victor’s choice. Monoson then asked another lawyer, Gregory Ball, to come into the office. Ball read the agreement and strenuously advised Victor not to sign it because it would commit him to financial suicide.

The agreement transferred most of Victor's remaining assets to Jane. Victor, however, signed it because Jane and Monoson persuaded him that it was the only way that his marriage could be saved. In October of the following year, Jane informed Victor that she had sold most of his former property and that she was leaving him permanently. Can Victor have the agreement set aside as a result of undue influence? Explain.

Answer: Yes, decision for Victor. The essence of undue influence is the subversion of another's free will in order to obtain assent to an agreement. The degree of persuasion that is necessary to constitute undue influence varies from case to case. The proper inquiry is not just whether persuasion induced the transaction but whether the result was produced by the domination of the will of the victim by the person exerting undue influence. Hence, the particular transaction must be scrutinized to determine if the agreement was truly the product of a free and independent mind. The fairness of the agreement must be shown by clear and convincing evidence. Because the agreement was clearly unfair, and the agreement was contrary to Victor's own best interests, it is clear that Victor would not have signed the agreement but for undue influence.

Francois v. Francois, 599 F.2d 1286 (1979).

15. Iverson owned Iverson Motor Company, an enterprise engaged in the repair as well as the

sale of Oldsmobile, Rambler, and International Harvester Scout automobiles. Forty percent of the business's sales volume and net earnings came from the Oldsmobile franchise.

Whipp contracted to buy Iverson Motors, which Iverson said included the Oldsmobile franchise. After the sale, however, General Motors refused to transfer the franchise to Whipp. Whipp then returned the property to Iverson and brought this action seeking rescission of the contract. Should the contract be rescinded? Explain.

Answer: Yes. Historically, an action for fraud required that the injured party show that the misrepresentation upon which it detrimentally relied was made with the speaker’s knowledge of its falsity or with reckless disregard for the falsity of the statement.

Today, however, a cause of action may be based on an innocent misrepresentation.

Here, Iverson represented that the Oldsmobile franchise was transferable, when, in fact it was not. That misrepresentation, even though innocently made, makes the entire agreement voidable. Whipp v. Iverson, 34 Wis.2d 166, 168 N.W. 2d 201 (1969).

16. On February 10, Mrs. Sunderhaus purchased a diamond ring from Perel & Lowenstein for

$6,990. She was told by the company's salesman that the ring was worth its purchase price, and she also received at that time a written guarantee from the company attesting to the diamond’s value, style, and trade-in value. When Mrs. Sunderhaus went to trade the ring for another, however, she was told by two jewelers that the ring was valued at $3,000 and $3,500, respectively. Mrs. Sunderhaus knew little about the value of diamonds and claims to have relied on the oral representation of the Perel & Lowenstein’s salesman and the written representation as to the ring's value. She seeks rescission of the contract or damages in the amount of the sales price over the ring's value. Will she prevail? Explain.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 11: Conduct Invalidating Assent

Answer: Decision for Mrs. Sunderhaus. Although in general a statement of opinion as to value is not considered to be a statement of fact, the opinion here was given by a jeweler who was an "expert" upon whose advice Mrs. Sunderhaus relied. Whenever a party states a matter, which might otherwise be only an opinion, and does not state it as the mere expression of his own opinion, but affirms it as an existing fact material to the transaction, so that the other party may reasonably treat it as a fact, and rely and act upon it as such, then the statement clearly becomes an affirmation of fact within the meaning of general rule, and may be fraudulent misrepresentation. The layman must of necessity rely upon the integrity of the jeweler in purchasing a diamond or other precious stone. Mrs. Sunderhaus was in no position to make her own determination as to the weight and value of the stones. She relied upon the jeweler's statement of value and had a right to rely upon the statement of value. The written guarantee of the ring's value, style, and trade-in value is a statement of fact for purposes of fraud. Sunderhaus v. Perel & Lowenstein, 215 Tenn. 619, 388 S.W. 2d 140 (1965).

17. Division West Chinchilla Ranch advertised on television that a five-figure income could be

earned by raising chinchillas with an investment of only $3.75 per animal per year and only thirty minutes of maintenance per day. The minimum investment was $2,150 for one male and six female chinchillas. Division West represented to plaintiffs that chinchilla ranching would be easy and that no experience was required to make ranching profitable. Plaintiffs, who had no experience raising chinchillas, each invested $2,150 or more to purchase Division's chinchillas and supplies. After three years without earning a profit, the plaintiffs sued Division West for fraud. Do these facts sustain an action for fraud in the inducement? Why or why not?

Answer: Yes, judgment for plaintiffs. Division knew that plaintiffs had no experience in chinchilla ranching and it was unlikely that they would make a profit without experience and skill. The parties in this case were not bargaining with equal knowledge. Division exploited its superior position by exploiting the plaintiffs and this constitutes fraud. Fisher v. Division West Chinchilla Ranch, 310 F. Supp. 424 (D. Minn.

1970).

18. William Schmalz entered into an employment contract with Hardy Salt Company. The

contract granted Schmalz six months' severance pay for involuntary termination but none for voluntary separation or termination for cause. Schmalz was asked to resign from his employment. He was informed that if he did not resign he would be fired for alleged misconduct. When Schmalz turned in his letter of resignation, he signed a release prohibiting him from suing his former employer as a consequence of his employment.

Schmalz consulted an attorney before signing the release and, upon signing it, received $4,583.00 (one month's salary) in consideration. Schmalz then sued his former employer for the severance pay, claiming that he signed the release under duress. Is Schmalz correct in his assertion? Explain.

Answer: No. A person with business experience who understands the nature of what he is signing and who has sought the advice of counsel may not claim duress. The claim of duress is reserved for those who truly have been deprived of their free will. In this case, Schmalz signed the release with the full knowledge of its implications, accepted the salary payment, and did not repudiate until much later. These factors constitute a ratification of the release. Schmalz v. Hardy Salt Company., 739 S.W. 2d 765 (Mo. App. 1987).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 11: Conduct Invalidating Assent

19. Glen Haumont, who owned an equipment retail business in Broken Bow, Nebraska, owed

the Security State Bank more than $628,000 due to improper selling practices as well as business and inventory loans. Several times Glen tried to persuade his parents, Lee and Letha Haumont, to financially back his business debts, but each time they refused. Glen then told his parents that, according to his attorney and the bank, Glen could be prosecuted and sent to jail. Soon afterwards, David Schweitz, the president of the bank, drove out to the elder Haumonts’ farm to convince them to sign as guarantors of Glen’s debt. Both Schweitz and Glen stressed to the Haumonts that unless they agreed to guarantee his debt, Glen would go to jail. Letha asked that her attorney be allowed to read over the guarantee agreement, but Schweitz told her that he did not have time to wait and that she must decide right then whether Glen was to go to jail. As a result, the Haumonts signed the agreement, encumbering their previously debt-free family farm for more than $628,000. Should the guarantee agreement be set aside due to duress?

Answer: Yes. To constitute duress, there must be an application of such pressure or constraint as compels someone to go against their free will and takes away their free agency, destroying the power of refusing to comply with the unjust demands of another. Where a parent or other relative is induced to execute an instrument by threats and fear of criminal punishment of a child or relative, the instrument is the result of duress and the contract is therefore voidable. Here, the guaranty agreement that the Haumonts signed was clearly the product of duress, and as such they may elect to avoid it. Haumont v. Security State Bank, Supreme Court of Nebraska, 220 Neb. 809, 374 N.W.2d 2 (1985).

20. Conrad Schaneman was a Russian immigrant who could neither read nor write the English

language. Conrad deeded (conveyed) a farm he owned to his eldest son, Laurence, for $23,500, which was the original purchase price of the property thirty years earlier. The value of the farm at the time of conveyance was between $145,000 and $160,000. At the time he executed the deed, Conrad was an eighty-two-year-old invalid, was severely ill, and was completely dependent on others for his personal needs. He weighed between 325 and 350 pounds, had difficulty breathing, could not walk more than fifteen feet, and needed a special jackhoist to get in and out of the bathtub. Conrad enjoyed a longstanding, confidential relationship with Laurence, who was his principal adviser and handled Conrad’s business affairs. Laurence also obtained a power of attorney from Conrad and made himself a joint owner of Conrad’s bank account and $20,000 certificate of deposit. Conrad brought this suit to cancel the deed, claiming it was the result of Laurence’s undue influence. Explain whether the deed was executed as a result of undue influence.

Answer: Judgment for Conrad Schaneman. A confidential or fiduciary relationship exists between two persons if one has gained the confidence of the other and purports to act or advise with the other's interest in mind. In such a relationship, the court will scrutinize critically any transaction between the two parties, especially where age, infirmity, and instability are involved, to see that no injustice has occurred.

Here, the evidence shows that a confidential relationship existed between Conrad and Laurence and that due to age and physical infirmities, Conrad was, for all intents and purposes, an invalid at the time of the conveyance. It further supports a finding that Conrad’s mental acuity was impaired at times and that he sometimes suffered from disorientation and lapse of memory. Conrad was subject to the influence of Laurence, who was acting in a confidential relationship; (1) the opportunity to exercise undue influence existed; (2) there was a disposition on the part of Laurence to exercise such

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 11: Conduct Invalidating Assent

undue influence; (3) and the conveyance appeared to be the effect of such influence.

Accordingly, the deed is canceled for undue influence.

21. At the time of her death, Olga Mestrovic was the owner of a large number of works of art created by her late husband, Ivan Mestrovic, an internationally known sculptor and artist whose works were displayed throughout Europe and the United States. By the terms of Olga’s will, all the works of art created by her husband were to be sold and the proceeds distributed to members of the Mestrovic family. Also included in the estate of Olga Mestrovic was certain real property which 1st Source Bank (the Bank), as personal representative of the estate of Olga Mestrovic, agreed to sell to Terrence and Antoinette Wilkin. The agreement of purchase and sale made no mention of any works of art, although it did provide for the sale of such personal property as dishwasher, drapes, and French doors stored in the attic.

Immediately after closing on the real estate, the Wilkins complained to the Bank of the clutter left on the premises; the Bank gave the Wilkins an option of cleaning the house themselves and keeping any personal property they desired, to which the Wilkins agreed.

At the time these arrangements were made, neither the Bank nor the Wilkins suspected that any works of art remained on the premises. During cleanup, however, the Wilkins found eight drawings and a sculpture created by Ivan Mestrovic to which the Wilkins claimed ownership based upon their agreement with the Bank that, if they cleaned the real property, they could keep such personal property as they desired. Who is entitled to ownership of the works of art?

Answer: The art belongs to the estate, to be sold, with the proceeds distributed to the family. The parties in this case shared a common presupposition as to certain facts which proved false. The Bank and the Wilkins considered the real estate which the Wilkins had purchased to be cluttered with items of personal property variously characterized as “junk,” “stuff”, or “trash.” Neither party suspected that Mestrovic works of art remained on the premises, and the discovery of those works of art by the Wilkins was unexpected. Where both parties share a common assumption about a vital fact, upon which they based their bargain, the transaction may be avoided if, because of the mistake, a quite different exchange of values occurs from the exchange of values contemplated by the parties. The gain to the Wilkins and the loss to the Bank were not contemplated when they made their agreement, and so a true meeting of the minds never occurred, allowing the Bank to avoid the agreement.

22. Frank Berryessa stole funds from his employer, the Eccles Hotel Company. His father, W. S. Berryessa (Berryessa), learned of his son’s trouble and, thinking the amount involved was about $2,000, gave the hotel a promissory note for $2,186 to cover the shortage. In return, the hotel agreed not to publicize the incident or notify the bonding company. (A bonding company is an insurer that is paid a premium for agreeing to reimburse an employer for thefts by an employee.) Before this note became due, however, the hotel discovered that Frank had actually misappropriated $6,865. The hotel then notified its bonding company, Great American Indemnity Company, to collect the entire loss. W. S. Berryessa claims that the agent for Great American told him that unless he paid them $2,000 in cash and signed a note for the remaining $4,865, Frank would be prosecuted (which note would replace the initial note). Berryessa agreed, signed the note, and gave the agent a cashier’s check for $1,500 and a personal check for $500. He requested that the agent not cash the personal check for about a month. Subsequently, Great American sued Berryessa on the note. He defends against the note on the grounds of duress and counterclaims for the return of the $1,500 and the cancellation of the uncashed $500 check. Who should prevail?

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 11: Conduct Invalidating Assent

Answer: In an action on the note, Berryessa (Frank was not sued) resisted liability upon the grounds of duress and lack of consideration. He counterclaimed for the return of the $1,500 and the cancellation of the uncashed check for $500. The court held that (1) the note having been given to suppress a criminal prosecution was against public policy and not enforceable between the parties because of duress of illegal consideration, and (2) there was not duress as to the uncashed check for $500 and the payment of $1,500 cash which were substituted for the $2,186 note that had been given by defendant to the hotel employer without any duress or threat of prosecution.

23. Ronald D. Johnson is a former employee of International Business Machines Corporation

(IBM). As part of a downsizing effort, IBM discharged Johnson. In exchange for an enhanced severance package, Johnson signed a written release and covenant not to sue IBM. IBM’s downsizing plan provided that surplus personnel were eligible to receive benefits, including outplacement assistance, career counseling, job retraining, and an enhanced separation allowance. These employees were eligible, at IBM’s discretion, to receive a separation allowance of two weeks’ pay. However, employees who signed a release could be eligible for an enhanced severance allowance equal to one week’s pay for each six months of accumulated service with a maximum of twenty-six weeks’ pay.

Surplus employees could also apply for alternate, generally lower-paying, manufacturing positions. Johnson opted for the release and received the maximum twenty-six weeks’ pay. He then alleged, among other claims, that IBM subjected him to economic duress when he signed the release and covenant not to sue, and he sought to rescind both. What will Johnson need to show in order to prove his cause of action?

Answer: To constitute duress, there must be an application of such pressure or constraint as compels someone to go against their free will. Parties to a contract must freely and mutually consent to its terms. If consent to a contract is not freely given, the contract may be rescinded by the parties. In order to establish a claim for economic duress, the Plaintiff must prove by a preponderance of evidence the following elements: (1) the Defendant engaged in a sufficiently coercive wrongful act such that; (2) a reasonably prudent person in Plaintiff’s economic position would have had no reasonable alternative but to succumb to Defendant’s coercion; (3) Defendant knew of Plaintiff’s economic vulnerability; and (4) Defendant’s coercive wrongful act actually caused or induced plaintiff to enter into a contract. Johnson’s case fails to meet these elements.

First, IBM did not commit a wrongful act by designating Johnson a surplus employee or by requiring that he choose between severance options. Although the wrongful act need not be criminal or tortious, being allowed a voluntary choice of perfectly legitimate alternatives is the antithesis of duress. Encouragement or incentives is a far cry from coercion or denial of choice.

Second, Johnson had reasonable alternatives to signing the release. In determining whether a reasonable alternative was available, courts employ an objective test dependent on the circumstances of each case. Johnson was not facing imminent bankruptcy or financial ruin. Regardless of what he may have subjectively believed, Johnson had reasonable alternatives available.

Third, IBM had no knowledge of Johnson’s particular economic circumstances nor of any peculiar economic vulnerability he had. Finally, Johnson’s decision was his own and was not caused by any unfair action on the part of IBM. Therefore, at the time he signed the release, Johnson was not subject to economic duress.

24. Etta Mae Paulson died on January 31, 2022, leaving four children: Ken, Donald, Barbara, and © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 11: Conduct Invalidating Assent

Larry. She had purchased a home in Rainier in 2020, for $21,300. At that time, she had a will that she had executed in 2001, leaving all of her property to her four children in equal shares.

That will was never changed. After she moved into the house in Rainier, Ken, Ken’s wife, Barbara, and Don helped Etta, who suffered from arthritis in both hands, renal failure, congestive heart failure, and diabetes. As a result of these conditions, Etta had trouble getting around and, during the last part of her life, she used an electric cart. She was taking several medications, including Prozac, Prednisone, Zantac, and Procardia, and was receiving insulin daily and dialysis an average of three times a week. Although there is no evidence that she was mentally incompetent, the medications and treatments made her drowsy, tired, and depressed, and caused mood swings. It is undisputed that she was dependent on the help of others in her daily living.

Larry was not in the Rainier area when his mother moved there and did not visit her. The other children and her neighbor helped her. The other children reroofed the house, picked fruit and stored it, and mowed the lawn; her daughter helped her with her finances and had a joint account with her, which the daughter never used. All of those children visited her frequently, and at least one of them saw her every day. Etta expressed concern about losing the house because of her medical bills and suggested that she put the house in Ken’s name; he and Barbara looked into the situation and concluded that it was not necessary, and so advised their mother. At some point—it is not clear when—Larry was told by state welfare authorities, as Ken and Barbara had learned, that so long as his mother maintained her house as her primary residence and was not receiving Medicaid, she was not in danger of losing her house to the state.

In early 2022, Larry and his then girlfriend (later his wife) moved in with Etta and took over her care. Larry expressed his concern to his mother that the state might take her house.

Not long thereafter, Larry rented a house in Longview in his name and persuaded his mother to move in with him, his girlfriend, and her child. After Etta moved to Longview, she rented her house in Rainier; the rent was used to maintain the house in Longview. At that time, Etta had a savings account with approximately $2,000 in it; Larry held his mother’s power of attorney. At the time of her death in January 2023, that account was exhausted, although her medical expenses were being paid by Medicare. Larry admitted that he used some of that money to buy a bicycle and a guitar. He had also used her credit card, on which there was a substantial balance after her death, which he did not pay. He said that that debt “died with his mother.” On numerous occasions, Larry expressed to his mother his concern that the state would take her house if she kept it in her name. She was fearful of that, in spite of what she had been told by Ken and Barbara.

Larry told her that they were wrong and frequently urged her to make up her mind “about the deed.” Etta was hospitalized three times during 2022. Finally, on September 30, 2022, Larry suggested to his mother that they go to a title company in Rainier to get a deed. Etta signed the deed and gave up all of her rights in the property. Larry then had it recorded.

He did not mention it to any of his half-brothers or his half-sister until two months later, when he boasted of it to his half-sister. Is the deed voidable? Explain.

Answer: Yes, the deed is voidable. Clearly, decedent had trust and confidence in Larry and was completely dependent on him during the time she lived with him. He helped her with her finances and held her power of attorney. After she moved in with Larry, she depended on him to take her places. Because Larry made it clear to decedent's other children that they were not welcome in his home, he drove a wedge between them and their mother, with whom they had previously had a very close relationship.

He did not even advise them of her death. We conclude that there was a confidential relationship between decedent and Larry and that he held a position of dominance

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 11: Conduct Invalidating Assent

over her.

A confidential or fiduciary relationship exists between two persons if one has gained the confidence of the other and purports to act or advise with the other's interest in mind. In such a relationship, the court will scrutinize critically any transaction between the two parties, especially where age, infirmity, and instability are involved, to see that no injustice has occurred. In this case, the circumstances leading up to the conveyance, and the preparation and signing of the deed, lead us to conclude that it was the product of undue influence exerted by Larry on his mother

25. Vernon and Janene Lesher agreed to purchase an eighteen-acre parcel of real property

from the Strids with the intention of using it to raise horses. In purchasing the property, the Leshers relied on their impression that at least four acres of the subject property had a right to irrigation from Slate Creek. The earnest money agreement to the contract provided: D. Water Rights are being conveyed to Buyer at the close of escrow.… Seller will provide Buyer with a written explanation of the operation of the irrigation system, water right certificates, and inventory of irrigation equipment included in sale.

The earnest money agreement also provided: THE SUBJECT PROPERTY IS BEING SOLD “AS IS” subject to the Buyer's approval of the tests and conditions as stated herein. Buyer declares that Buyer is not depending on any other statement of the Seller or licensees that is not incorporated by reference in this earnest money contract [Bold in original].

Before signing the earnest money agreement, the Strids presented to the Leshers a Water Resources Department water rights certificate and a map purporting to show an area of the subject property to be irrigated (“area to be irrigated” map), which indicated that the property carried a four-acre water right. These documents were from eighteen years earlier. Both parties believed that the property carried the irrigation rights and that the Leshers needed such rights for their horse farm. The Leshers did not obtain the services of an attorney or a water rights examiner before purchasing the property.

After purchasing the property and before establishing a pasture, the Leshers learned that the property did not carry a four-acre water right. Explain whether the Leshers may rescind the contract.

Answer: Yes, the Leshers may rescind the contract. Lesher v. Strid, 165 Or. App. 34, 996 P.2d 988 (Court of Appeals of Oregon, 2000).

Grounds for rescission on the basis of a mutual mistake of fact or innocent misrepresentation must be proved by clear and convincing evidence. An innocent misrepresentation of fact renders a contract voidable by a party if the party is relying on the material misrepresentation by the other party. A mutual mistake of fact renders a contract voidable by the adversely affected party, if the mistake is so fundamental that it frustrates the purpose of the contract. Even though it appears that the trial court did not apply the clear and convincing standard, the plaintiffs' evidence meets that standard. Both defendant and plaintiffs testified that they believed that the four acres of water rights were appurtenant to the subject property. Defendant does not dispute that the 1977 water rights certificate and the “area to be irrigated” map are her representation about the water right. Plaintiffs also established by clear and convincing evidence that the existence of the four-acre water right was material and essential to the contract. Vernon testified that the motivation for the purchase was to

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 11: Conduct Invalidating Assent

expand his ability to raise horses from property they already owned where they had a two-acre irrigation right and that the subject property's water right was essential to the contract. Certainly, a smaller water right would limit, not expand, the plaintiffs' ability to raise horses. The mistake, therefore, goes to the very essence of the contract.

The defendant argues that the plaintiffs bore the risk of that mistake. The Restatement (Second) of Contracts § 154 explains that a party bears the risk of a mistake, in part, if the risk is allocated to the party by agreement of the parties, or if the risk is allocated to the party “by the court on the ground that it is reasonable in the circumstances to do so.” There is nothing in the contract that would allocate to plaintiffs the risk of a mistake as to the existence of a four-acre water right.

Defendant argues in the alternative that the plaintiffs' mistake of fact is the result of the defendant's misrepresentation, on which plaintiffs could not reasonably rely. An “innocent misrepresentation may support a claim for rescission of a real estate agreement if the party who relied on the misrepresentations of another establishes a right to have done so.” Defendant argues that her representations about the four-acre water right were extrinsic to the contract and that the contract's “as is” clause expressly excluded reliance on such extrinsic representations. The “as is” clause specifically contemplated reliance on any statements by the seller that were “incorporated by reference” in the earnest money agreement. The earnest money agreement specifically referred to the conveyance of water rights.

ANSWERS TO “TAKING SIDES” PROBLEMS Mrs. Audrey E. Vokes, a widow of fifty-one years without family, purchased fourteen separate dance courses from J. P. Davenport’s Arthur Murray, Inc., School of Dance. The fourteen courses totaled in the aggregate 2,302 hours of dancing lessons at a cost to Mrs. Vokes of $31,090.45. Mrs. Vokes was induced continually to reapply for new courses by representations made by Mr. Davenport that her dancing ability was improving, that she was responding to instruction, that she had excellent potential, and that they were developing her into an accomplished dancer. In fact, she had no dancing ability or aptitude and had trouble “hearing the musical beat.” Mrs. Vokes brought action to have the contracts set aside. a. What are the arguments that the contract should be set aside? b. What are the arguments that the contract should be enforced? c. What is the proper outcome? Explain.

Answer: (a) Ordinarily, for a misrepresentation to be actionable, it must be one of fact rather than of opinion. Whereas here, however, a statement is made by a party having superior knowledge, that statement may be taken as one of fact, although it would be considered an opinion if the parties were dealing on equal terms. Here, it could be said that Mr. Davenport had superior knowledge as to Mrs. Vokes’ dancing potential and as to her degree of improvement and that he set forth those “facts” in a greatly exaggerated fashion to induce her to enter into new contracts. Even in contractual situations where a party to a transaction owes no duty to disclose facts within his knowledge or to answer inquires as to those facts, if he undertakes to speak, he must disclose the whole truth. Because of his superior knowledge, Davenport’s statements regarding Mrs. Vokes’ dancing ability and potential may be taken as statements of fact.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 11: Conduct Invalidating Assent

(b) The defendant would argue that the comments they made were opinion and not fact; that they were merely trying to help an older woman enjoy her life and give her positive feedback. She enjoyed her dance lessons and freely and voluntarily entered into all of her contracts. (c) Mrs. Vokes should prevail. Vokes v. Arthur Murray, Inc. Florida Court of Appeals, 1968, 212 So.2d 906.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 12: Consideration

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 12: Consideration

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems .............................................................................. 11

ANSWERS TO ETHICAL DILEMMA Should a Spouse’s Promise Be Legally Binding?

1.

What should Joan Kantor do in this situation? What is the scope of her counseling responsibilities?

2. Should agreements between married parties be enforced in a court of law? If so, what types of agreements should be enforceable?

3. What are the individual interests at stake in this situation? Is it reasonable to assume that spouses make many private agreements and that generally these agreements are made without the intention of their being legally binding?

Answer: 1. Joan Kantor may not give legal advice; rather, her advice must remain within the realm of counseling for family and psychological problems. While informing the patient of her inability to assess the legal implications, Joan should nevertheless recognize that legal issues are presented and should discuss the option of seeking legal counsel with the patient.

2. There is a wide range of views with respect to the degree to which agreements entered into during marriage should be enforced. As the Court in Pyeatte, (above) noted, when one spouse puts the other through school, it is usually a sacrifice made with the expectation that both parties will eventually enjoy a higher standard of living.

When one spouse works to put the other through school, there may be little accumulated property for equitable distribution in a divorce proceeding. The equities weigh in favor of the working spouse who is supporting the education with the expectation of future rewards.

3. The interests at stake include the right to privacy within the context of a marriage, balanced against the ethical responsibility of society to deter or redress injustices in the private domain. It is easy to see the critical importance of legal intervention in blatant cases of abuse (e.g., spousal abuse or child abuse). More difficult cases are presented when monetary expectations are defeated. In the present case, the equities appear in favor of Koronetsky.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 12: Consideration

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. In consideration of $1,800 paid to him by Joyce, Hill gave Joyce a written option to purchase his house for $180,000 on or before April 1. Prior to April 1, Hill verbally agreed to extend the option until July 1. On May 18, Hill, known to Joyce, sold the house to Gray, who was ignorant of the unrecorded option. On May 20, Joyce sent an acceptance to Hill who received it on May 25. Is there a contract between Joyce and Hill? Explain.

Answer: No. Consideration was paid to Hill for holding the property for the specified time subject to the right of Joyce to exercise the option whether to buy or not. When the time limit expired, the contract was at an end and the right under the option was extinguished. Of course, if that right were extended by some valid binding agreement, then it could be enforced. Joyce did not attempt to exercise the option and complete a contract of purchase within the time limited by the written agreement.

It is true that before the expiration of the time stated, Hill verbally agreed or promised to extend the time for the exercise of the option from April 1 to July 1, and that it was within this latter or extended period and after the property had been sold and conveyed to Gray that Joyce became ready to accept the property and pay the price.

However, such acceptance came too late. There was no consideration for the verbal promise or agreement to extend the time, and such promise was therefore not enforceable. After April 1 the verbal agreement operated simply as a mere offer continuing until withdrawn or otherwise ended by some act of the offeror, Hill. The sale to Gray was known to Joyce and resulted in a revocation of the offer. (NOTE: In addition, the Statute of Frauds would require an extension of the option to be in writing because such an option deals with an “interest in” or “concerns” land.)

2.

a. Ann owed $2,500 to Barry for services Barry rendered to Ann. The debt was due June 30, 2022. In March 2023, the debt was still unpaid. Barry was in urgent need of ready cash and told Ann that if she would pay $1,500 on the debt at once, Barry would release her from the balance. Ann paid $1,500 and stated to Barry that all claims had been paid in full. In August 2023, Barry demanded the unpaid balance and subsequently sued Ann for $1,000. Result? b. Modify the facts in (2. a.) by assuming that Barry gave Ann a written receipt stating that all claims had been paid in full. Result? c. Modify the facts in (2. a.) by assuming that Ann owed Barry the $2,500 for her purchase of his motorcycle instead of receiving his services. Result?

Answer: (a) Decision for Barry. As this debt arose out of a contract for services, the common law of contracts would apply. At common law the payment of a lesser sum of money in full satisfaction of a liquidated, undisputed debt in a greater amount is legally insufficient consideration for a promise of the creditor to discharge the entire debt. There is no legal detriment to the promisee or legal benefit to the promisor. (b) Decision for Barry unless you can apply UCC Section 1-107 (any claim or right arising out of any breach can be discharged in whole or in part “without consideration” by a written waiver or renunciation signed and delivered by the aggrieved party). It is unclear whether Section 1-107 is meant to apply to transactions like this one which are outside of the Code. If it does not, then the written receipt would not change

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 12: Consideration

the result in question 2a. If Section 1-107 applies, then the written receipt would discharge the debt. (c) This transaction would be subject to the Uniform Commercial Code. Under Section 2-209 (1) a contract for the sale of goods can be validly modified by the parties without new consideration provided they so intend and act in good faith. This problem presents a question of intent and good faith. Since payment was already due and Barry was acting under economic urgency, the modification is probably not binding.

However, if Barry gave Ann a written release as was done in (2) (b), the result would most likely differ. UCC Section 1-107 expressly provides that any claim or right arising out of any breach can be discharged in whole or in part “without consideration” by a written waiver or renunciation signed and delivered by the aggrieved party. Consequently, under the Code, consideration is no longer required to discharge a debt. The only requirement is that the creditor sign and deliver a sufficient writing, which Barry did. Barry’s only defense would be that of economic duress, which should be found to exist under the facts as stated.

3.

a. Judy orally promises her daughter, Liza, that she will give her a tract of land for her home. Liza, as intended by Judy, gives up her homestead and takes possession of the land. Liza lives there for six months and starts construction of a home. Is Judy bound to convey the real estate? Why or why not? b. Ralph, knowing that his son, Ed, desires to purchase a tract of land, promises to give him the $25,000 he needs for the purchase. Ed, relying on this promise, buys an option on the tract of land. Can Ralph rescind his promise? Why or why not?

Answer: (a) Yes, decision for Liza. Usually, gift promises are ruled as lacking consideration and are not binding agreements. In this case, Liza justifiably relied on the promise and acted to her detriment by selling her home, moving onto the property, and starting construction of a new house. The doctrine of promissory estoppel applies to such promises that induce action by the promisee that would be reasonably expected by the promisor. Judy becomes liable for having induced the change in position by Liza. Moreover, under the Statute of Frauds, an oral contract for the transfer of an interest in land may be enforced if the party seeking enforcement has so changed his position in reasonable reliance on the contract that a court can prevent injustice only by enforcing the contract. (b) Yes, judgment for Ralph. The doctrine of promissory estoppel does not make every gift promise binding just because the promisee has changed positions. There must be a justifiable reliance on the promise to the extent that the promisee takes definite and substantial action. Since Ed purchased only an option to buy the property, this probably would not be construed as a substantial action on his part.

4. George owed Keith $800 on a personal loan. Neither the amount of the debt nor George’s liability to pay the $800 was disputed. Keith had also rendered services as a carpenter to George without any agreement as to the price to be paid. When the work was completed, an honest and reasonable difference of opinion developed between George and Keith with respect to the value of Keith’s services. Upon receiving Keith’s bill for the carpentry services for $600, George mailed in a properly stamped and addressed envelope his check for $800 to Keith. In an accompanying letter, George stated that the enclosed check was in full settlement of both claims. Keith endorsed and cashed the check. Thereafter, Keith unsuccessfully sought to collect from George an alleged unpaid balance of $600. May Keith recover the $600 from George? Explain.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 12: Consideration

Answer: Decision, in part, in favor of Keith. This common law problem presents questions attending the payment or settlement of (1) a past due, undisputed or liquidated debt and (2) a disputed debt. In Pinnel’s Case, (5 Coke 117, and Cumber v.

Wayne, 1 Strange, 426,) the question presented and decided was “that payment of a lesser sum on the day in satisfaction of a greater, cannot be in satisfaction for the whole,” although the parties agreed that such payment should satisfy the whole. An accord and satisfaction is a contract and like any other contract must be supported by a valid consideration. Consideration consists of a benefit to the promisor or a detriment to the promisee. Because of the past due undisputed debt, George was under legal obligation to pay $800. By paying $800 in full settlement of both obligations, George did not suffer a legal detriment as to the second (carpentry) contract. George merely did something which he was already legally bound to do. The payment of the $800 discharged the undisputed obligation but, since it did not constitute consideration for the disputed debt, that debt remains. In short, Keith still had a claim for $600 which George could, of course, contest, as to the amount. Had George paid an amount greater than $800, he would have a better argument as to settlement of both debts.

5. The Snyder Mfg. Co., being a large user of coal, entered into separate contracts with several coal companies. In each contract, it was agreed that the coal company would supply coal during the year in such amounts as the manufacturing company might desire to order, at a price of $55 per ton. In February of that year, the Snyder Company ordered one thousand tons of coal from Union Coal Company, one of the contracting parties. Union Coal Company delivered five hundred tons of the order and then notified Snyder Company that no more deliveries would be made and that it denied any obligation under the contract. In an action by Union Coal to collect $55 per ton for the five hundred tons of coal delivered, Snyder files a counterclaim, claiming damages of $1,500 for failure to deliver the additional five hundred tons of the order and damages of $4,000 for breach of agreement to deliver coal during the balance of the year. What contract, if any, exists between Snyder and Union?

Answer: Snyder Mfg. Co. owes Union the rate of $55 per ton for 500 tons of coal already delivered. Moreover, the alleged contracts, to the extent executory, are probably not binding on either party. These agreements to supply Snyder with such amounts of coal as “it might desire to order” contain illusory promises. Snyder did not agree to order or to buy any coal. It was therefore not contractually bound to do so.

Where one party to an agreement is not bound, neither party is bound. Even though the contracts come within the UCC, its good faith provisions could, but probably would not validate these illusory promises. These alleged contracts would not constitute requirements contracts because Snyder has contracted with several companies and has not promised any of them that it would buy all its requirements of coal from them.

6. On February 5, Devon entered into a written agreement with Gordon whereby Gordon agreed to drill a well on Devon’s property for the sum of $5,000 and to complete the well on or before April 15. Before entering into the contract, Gordon had made test borings and had satisfied himself as to the character of the subsurface. After two days of drilling, Gordon struck hard rock. On February 17, Gordon removed his equipment and advised Devon that the project had proved unprofitable and that he would not continue. On March 17, Devon went to Gordon and told Gordon that he would assume the risk of the enterprise and would pay Gordon $100 for each day required to drill the well, as compensation for labor, the use of Gordon’s equipment, and Gordon’s services in supervising the work, provided Gordon would furnish certain special equipment designed to cut through hard

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 12: Consideration

rock. Gordon said that the proposal was satisfactory. The work was continued by Gordon and completed in an additional fifty-eight days. Upon completion of the work, Devon failed to pay, and Gordon brought an action to recover $5,800. Devon answered that he had never become obligated to pay $100 a day and filed a counterclaim for damages in the amount of $500 for the month’s delay based on an alleged breach of contract by Gordon. Explain who will prevail and why.

Answer: Decision in favor of Gordon. As a general rule, a promise to do what one is already bound to do by a valid contract will not be sufficient consideration for a new agreement. However, Section 89 of the Restatement, Second, Contracts provides that a “promise modifying a duty under a contract not fully performed on either side is binding (a) if the modification is fair and equitable in view of the circumstances not anticipated by the parties when the contract was made…”

Alternatively, although of dubious validity in this problem, the same result may be reached on the ground of a substituted contract: that the original contract was rescinded by mutual agreement and that new promises were then made which furnished consideration for each other.

7. Discuss and explain whether there is valid consideration for each of the following promises: a. A and B entered into a contract for the purchase and sale of goods. A subsequently promised to pay a higher price for the goods when B refused to deliver at the contract price. b. A promised in writing to pay a debt, which was due from B to C, on C's agreement to extend the time of payment for one year. c. A orally promised to pay $150 to her son, B, solely in consideration of past services rendered to A by B, for which there had been no agreement or request to pay.

Answer: (a) At common law there would be no legally sufficient consideration. A’s promise to pay a higher price is not supported by anything other than what B had already agreed to do. The consideration on the part of the promisee does not involve any legal detriment to him. However, under Section 2-209 (1) of the Code, the new agreement would be binding without consideration if it was entered into voluntarily and in good faith. (b) Valid consideration. Agreement to extend the time of payment is a legal detriment. (c) No valid consideration. In general, past consideration is no consideration.

8. Alan purchased shoes from Barbara on open account. Barbara sent Alan a bill for $10,000.

Alan wrote back that two hundred pairs of the shoes were defective and offered to pay $6,000 and give Barbara his promissory note for $1,000. Barbara accepted the offer, and Alan sent his check for $6,000 and his note in accordance with the agreement. Barbara cashed the check, collected on the note, and one month later sued Alan for $3,000. Is Barbara bound by her acceptance of the offer?

Answer: Yes, decision in favor of Alan and against Barbara. The problem indicates that a genuine dispute occurred between Alan and Barbara. Where a check is tendered by the debtor to the creditor in full payment or settlement, the cashing of the check constitutes an accord and satisfaction. Revised 3-311. The fact that Alan gave Barbara his promissory note for $1,000 and that Barbara collected on the note strengthens the conclusion stated. Moreover, under UCC Section 2-209 (1), consideration to modify a contract is not needed.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 12: Consideration

9. Nancy owed Sharon $1,500, but Sharon did not initiate a lawsuit to collect the debt within the time period prescribed by the statute of limitations. Nevertheless, Nancy promises Sharon that she will pay the barred debt. Thereafter, Nancy refuses to pay. Sharon brings suit to collect on this new promise. Is Nancy’s new promise binding? Explain.

Answer: Decision in favor of Sharon. Section 82 of the Restatement, Second, Contract provides: “A promise to pay all or part of an antecedent contractual or quasicontractual indebtedness owed by the promisor is binding if the indebtedness is still enforceable or would be except for the effect of the statute of limitations.” It should be noted that a number of states require by statute that such a promise be in writing to be binding.

10. Anthony lends money to Frank, who dies without having repaid the loan. Frank’s widow, Carol, promises Anthony to repay the loan. Upon Carol’s refusal to pay the loan, Anthony brings suit against Carol for payment. Is Carol bound by her promise to pay the loan?

Answer: No. The general rule is that where a promise is made to satisfy a pre-existing moral obligation, it is unenforceable due to a lack of consideration. Anthony should instead bring suit against Frank's estate.

11. The parties entered into an oral contract in June under which the plaintiff agreed to construct a building for the defendant on a time and materials basis, at a maximum cost of $56,146, plus sales tax and extras ordered by the defendant. When the building was 90 percent completed, the defendant told the plaintiff he was unhappy with the whole job as “the thing just wasn’t being run right.” The parties then, on October 17, signed a written agreement lowering the maximum cost to $52,000 plus sales tax. The plaintiff thereafter completed the building at a cost of $64,155. The maximum under the June oral agreement, plus extras and sales tax, totaled $61,040. Explain whether the defendant is obligated to pay only the lower maximum fixed by the October 17 agreement.

Answer: The Supreme Court of Washington held that the October 17th modification agreement was not binding for lack of consideration and plaintiff was entitled to recover under the original agreement, stating: “Applying our holding to the facts in this case, we must conclude that no consideration existed to support the October 17th agreement. Under the oral contract plaintiff had an antecedent duty to complete the building; defendant had an antecedent duty to pay a maximum of $56,146 plus extras, plus sales tax. Under the October 17th agreement plaintiff had the same duty while defendant had a lesser duty, unsupported by consideration. This is not a case of the mutual surrender of rights constituting consideration.” Rosellini v. Banchero, 83 Wash. 2d 268, 272, 517 P. 2d 955, 958 (1974).

12. Taylor assaulted his wife, who then took refuge in Ms. Harrington’s house. The next day, Mr. Taylor entered the house and began another assault on his wife. Taylor’s wife knocked him down and, while he was lying on the floor, attempted to cut his head open or decapitate him with an ax. Harrington intervened to stop the bloodshed and was hit by the ax as it was descending. The ax fell upon her hand, mutilating it badly, but sparing Taylor his life. Afterwards, Taylor orally promised to compensate Harrington for her injury. Is Taylor’s promise enforceable? Explain.

Answer: No. Taylor may have a moral obligation to honor his promise but not a binding contractual one. Harrington's humanitarian act "voluntarily performed, is not such consideration as would entitle her to recover at law." The Restatement takes a contrary position (which is a minority position) regarding such situations and provides that a promise after the rendering of emergency services is binding even if not

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 12: Consideration

supported by consideration. Section 86, comment d. Harrington v. Taylor, 225 N.C. 690, 36 S.E. 2d 227 (1945).

13. Jonnel Enterprises, Inc., contracted to construct a student dormitory at Clarion State College. On May 6, Jonnel entered into a written agreement with Graham and Long as electrical contractors to perform the electrical work and to supply materials for the dormitory. The contract price was $70,544.66. Graham and Long claim that they believed the May 6 agreement obligated them to perform the electrical work on only one wing of the building, but that three or four days after work was started, a second wing of the building was found to be in need of wiring. At that time, Graham and Long informed Jonnel that they would not wire both wings of the building under the present contract, so the parties orally agreed upon a new contract. Under the new contract, Graham and Long were obligated to wire both wings and were to be paid only $65,000, but they were relieved of the obligations to supply entrances and a heating system. Graham and Long resumed their work, and Jonnel made seven of the eight progress payments called for.

When Jonnel did not pay the final payment, Graham and Long brought this action. Jonnel claims that the May 6 contract is controlling. Is Jonnel correct in its assertion? Why or why not?

Answer: No. The substituted contract was enforceable. It was entered into to settle a disputed claim and since both parties still had rights under the original contract, giving up those rights constitutes valid consideration. Graham v. Jonnel Enterprises, Inc. 435 Pa. 396, 257 A. 2d 256 (1969).

14. Baker entered into an oral agreement with Healey, the state distributor of Ballantine & Sons’ liquor products, that Ballantine would supply Baker with its products on demand and that Baker would have the exclusive agency for Ballantine within a certain area of Connecticut. Shortly thereafter, the agreement was modified to give Baker the right to terminate at will. Eight months later, Ballantine & Sons revoked its agency. May Baker enforce the oral agreement? Explain.

Answer: No. To agree to do something and reserve the right to cancel the agreement at will is no agreement at all. By the valid addition to their oral agreement, Baker had an unconditional right to terminate the contract at will. His promise under the agreement, then, was merely illusory. As such, it was insufficient consideration to support Ballantine’s promise of an exclusive agency to Baker. R.F. Baker & Co., Inc. v. P. Ballantine & Sons. Supreme Court of Errors of Connecticut. 127 Conn. 680, 20 A. 2d 82.

(1941).

15. PLM, Inc., entered into an oral agreement with Quaintance Associates, an executive “headhunter” service, for the recruitment of qualified candidates to be employed by PLM. As agreed, PLM’s obligation to pay Quaintance did not depend on PLM actually hiring a qualified candidate presented by Quaintance. After several months, Quaintance sent a letter to PLM, admitting that it had so far failed to produce a suitable candidate, but included a bill for $9,806.61, covering fees and expenses. PLM responded that Quaintance’s services were only worth $6,060.48, and that payment of the lesser amount was the only fair way to handle the dispute. Accordingly, PLM enclosed a check for $6,060.48, writing on the back of the check “IN FULL PAYMENT OF ANY CLAIMS QUAINTANCE HAS AGAINST PLM, INC.” Quaintance cashed the check and then sued PLM for the remaining $3,746.13. Decision?

Answer: Judgment for PLM, Inc. When there is a good faith dispute as to the amount due, it makes no difference that the creditor protests or states that he does not accept the amount offered in full satisfaction of the debt. The creditor either must accept what is offered with the condition upon which it is offered, or refuse the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 12: Consideration

payment entirely. Quaintance Associates, Inc. v. PLM, Inc., 95 Ill. App. 818, 420 N.E. 2d 567 (1981).

16. Red Owl Stores told the Hoffman family that upon the payment of approximately $518,000, a grocery store franchise would be built for them in a new location. On the advice of Red Owl, the Hoffmans bought a small grocery store in their hometown in order to get management experience. After the Hoffmans operated at a profit for three months, Red Owl advised them to sell the small grocery, assuring them that Red Owl would find them a larger store elsewhere. Although selling at that point would cost them much profit, the Hoffmans followed Red Owl’s directions. Additionally, to raise the required money for the deal, the Hoffmans sold their bakery business in their hometown. The Hoffmans also sold their house and moved to a new home in the city where their new store was to be located. Red Owl then informed the Hoffmans that it would take $524,100, not $518,000, to complete the deal. The family scrambled to find the additional funds. However, when told by Red Owl that it would now cost them $534,000 to get their new franchise, the Hoffmans decided to sue instead. Should Red Owl be held to its promises? Explain.

Answer: Yes. All the requirements of promissory estoppel are present in these facts. 1) Was the promise one which the promisor should reasonably expect to induce action or forbearance of a substantial character by the promisee; 2) Did the promise in fact induce such action or forbearance; and 3) Can injustice be avoided only by enforcement of the promise? Note that the promise need not be so definite as to translate into a contract were consideration exchanged. Hoffman v. Red Owl Stores, Inc., 26 Wis. 2d 683, 133 N.W. 2d 267 (1965).

17. The plaintiff, Brenner, entered into a contract with the defendant, Little Red School House, Ltd., which stated that in return for a nonrefundable tuition of $1,080, Brenner’s son could attend the defendant’s school for a year. When Brenner’s ex-wife refused to enroll their son, the plaintiff sought and received a verbal promise of a refund. The defendant now refuses to refund the plaintiff’s money for lack of consideration. Did mutual consideration exist between the parties? Explain.

Answer: Yes, judgment for Brenner. A contract modification must be supported by consideration to be binding. Such consideration can be found in the promisee refraining from doing anything he has a legal right to do in exchange for the modification. Here, Brenner relinquished the right to have his son attend the Little Red School House. This detriment constituted sufficient consideration to support the school's promise to refund his money.

18. Tender Loving Care, Inc. (TLC), a corporation owned and operated by Virginia Bryant, eventually went out of business. The Secretary of State canceled its corporate charter, and a check drawn on TLC’s account made out to the Department of Human Resources (DHR) to pay state unemployment taxes was returned for insufficient funds. Subsequently, Bryant filed individually for bankruptcy, listing the DHR as a creditor. This claim was not allowed, because Bryant was held not to be personally liable on the debts of TLC to the DHR. The DHR later called Bryant to its offices, where she was told that she needed to pay the debt owed to the DHR by TLC. Unable to contact her lawyer, Bryant was persuaded to sign a personal guarantee to cover the debt. Later, when Bryant refused to pay, the DHR filed suit. Decision?

Answer: Judgment for Bryant. The contract of personal guarantee fails for lack of consideration. It is a basic rule of law that for a contract to be enforceable it must be supported by consideration. The consideration is sufficient if there is a benefit to the promisor or detriment to the promisee. A promise by the creditor to refrain from legal

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 12: Consideration

proceedings, or an extension of time within which the debtor may pay the creditor are both examples of adequate consideration. Obviously, however, there has been no benefit to Bryant, since the guarantee agreement puts her in the position of paying a debt which she had no obligation to pay. Additionally, there is no benefit to TLC, for TLC is already in default, and the guarantee agreement does not change TLC’s position.

Finally, there has been no inconvenience to the DHR by forbearing to sue TLC. Even though a claim is perfectly valid, forbearance to press it is not sufficient consideration if there is no possibility of enforcement and collection, making both the claim and the forbearance valueless. Since there was no consideration supporting it, the personal guarantee agreement signed by Bryant is unenforceable. State ex Rel. Ludwick v.

Bryant, 237 Kan. 47, 697 P. 2d 858 (1985).

19. Ben Collins was a full professor with tenure at Wisconsin State University in 2022. In March 2022, Parsons College, in an attempt to lure Dr. Collins from Wisconsin State, offered him a written contract promising him the rank of full professor with tenure and a salary of $65,000 for the 2022-23 academic year. The contract further provided that the College would increase his salary by $2,000 each year for the next five years. In return, Collins was to teach two trimesters of the academic year beginning in October 2022. In addition, the contract stipulated, by reference to the College’s faculty bylaws, that tenured professors could be dismissed only for just cause and after written charges were filed with the Professional Problems Committee. The two parties signed the contract, and Collins resigned his position at Wisconsin State.

In February 2024, the College tendered a different contract to Collins to cover the following year. This contract reduced his salary to $55,000 with no provision for annual increments but left his rank of full professor intact. It also required that Collins waive any and all rights or claims existing under any previous employment contracts with the College. Collins refused to sign this new contract, and Parsons College soon notified him that he would not be employed the following year. The College did not give any grounds for his dismissal; nor did it file charges with the Professional Problems Committee. As a result, Collins was forced to take a teaching position at the University of North Dakota at a substantially reduced salary. He sued to recover the difference between the salary Parsons College promised to pay him until 2028 and the amount he earned. Will he prevail? Explain.

Answer: Yes, judgment for Collins. The College’s promise to employ Collins permanently (with tenure), at a specified salary with increments to 2013, must be supported by consideration from Collins to be enforceable. Collins did not promise to serve permanently or even until 2013 in exchange for the College’s promise.

Consideration, however, may consist of a detriment to the promisee (Collins) and benefit need not move to the promisor (the College). Parsons College promised Collins tenure, knowing that he would have to resign his permanent, tenured position at Wisconsin State. Therefore, Collins’ surrender of his former position to accept the College’s offer constituted binding consideration.

20. Rodney and Donna Mathis (Mathis) filed a wrongful death action against St. Alexis Hospital and several physicians, arising out of the death of their mother, Mary Mathis. Several weeks before trial, an expert consulted by Mathis notified the trial court and Mathis’s counsel that, in his opinion, Mary Mathis’s death was not proximately caused by the negligence of the physicians. Shortly thereafter, Mathis voluntarily dismissed the wrongful death action. Mathis and St. Alexis entered into a covenant not to sue, in which Mathis agreed not to pursue any claims against St. Alexis or its employees in terms of the medical care of Mary Mathis. St. Alexis, in return, agreed not to seek sanctions, including attorney fees and costs incurred in defense of the previously dismissed wrongful death

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 12: Consideration

action. Subsequently, Mathis filed a second wrongful death action against St. Alexis Hospital, among others. Mathis asked the court to rescind the covenant not to sue, arguing that because St. Alexis was not entitled to sanctions in connection with the first wrongful death action, there was no consideration for the covenant not to sue. Is this contention correct? Explain.

Answer: No, they are wrong, and so the trial court granted summary judgment for St. Alexis. A promise to forbear pursuit of a legal claim can be sufficient consideration to support a contract when the promisor has a good faith belief in the validity of the claim. However, the standard for evaluating the validity of a forborne claim is a subjective one. St. Alexis sufficiently asserted a good faith belief in the validity of its sanctions claims based on the fact that the only expert testimony presented on the issue indicated that St. Alexis’ actions did not proximately cause Mary Mathis’ death.

Thus, foregoing the claim would constitute sufficient consideration for the covenantnot-to-sue.

Mathis also argues that St. Alexis has not shown that Mathis engaged in any frivolous conduct, i.e., that he did act in good faith and not without cause. However, the standard for evaluating the validity of a forborne claim is a subjective one. St. Alexis sufficiently asserted a good faith belief in the validity of its sanctions claims. St. Alexis asserted that its belief in the validity of its sanctions claim was based on Mathis’ complete failure to produce any expert testimony on the issue of proximate cause.

Since the only expert testimony presented on the issue indicated that St. Alexis’ actions did not proximately cause Mary Mathis’ death, St. Alexis’ belief in the validity of its sanctions claim was reasonable. Thus, foregoing the claim would constitute sufficient consideration for the covenant-not-to-sue.

21. Harold Pearsall and Joe Alexander were friends for more than twenty-five years. About twice a week they would get together after work and proceed to a liquor store, where they would purchase what the two liked to refer as a “package”—a half-pint of vodka, orange juice, two cups, and two lottery tickets. Occasionally, these lottery tickets would yield modest rewards of two or three dollars, which the pair would then “plow back” into the purchase of additional tickets. On December 16, Pearsall and Alexander visited the liquor store twice, buying their normal “package” on both occasions. For the first package, Pearsall went into the store alone, and when he returned to the car, he said to Alexander, in reference to the tickets, “Are you in on it?” Alexander said, “Yes.” When Pearsall asked him for his half of the purchase price, though, Alexander replied that he had no money.

When they went to Alexander’s home, Alexander snatched the tickets from Pearsall’s hand and “scratched” them, only to find that they were both worthless. Later that same evening Alexander returned to the liquor store and bought a second “package.” This time, Pearsall snatched the tickets from Alexander and said that he would “scratch” them. Instead, he gave one to Alexander, and each man scratched one of the tickets. Alexander’s was a $20,000 winner. Alexander cashed the ticket and refused to give Pearsall anything. Can Pearsall recover half of the proceeds from Alexander? Explain.

Answer: Yes, Pearsall can recover half the winnings. The conduct of the two men on the evening of December 16, when the ticket was purchased, clearly demonstrates a meeting of the minds. After purchasing the first pair of tickets, Pearsall asked Alexander if he was "in on it." Not only did Alexander give his verbal assent, but later, when the two reached Alexander's home, Alexander, who had contributed nothing to the purchase price of the tickets, snatched both tickets from Pearsall and anxiously "scratched" them. It is evident from this that Alexander considered himself "in on" an agreement to share in the fortunes of the tickets purchased by his friend. It is equally clear that in giving over tickets he had purchased, Pearsall gave his assent to the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 12: Consideration

agreement he had proposed earlier in the car. Moreover, this conduct took place within the context of a long-standing pattern of similar conduct, analogous to a "course of conduct" as described in the UCC, which included their practice of "plowing back" small returns from winning tickets into the purchase of additional tickets.

It is also clear to us that, by exchanging mutual promises to share in the proceeds of winning tickets, adequate consideration was given by both parties. An exchange of promises is consideration, so long as it is bargained-for. Restatement (Second) Contracts, §75 (1932). Moreover, consideration may consist of detriment to the promisee. The giving over of one-half of the proceeds of a winning ticket would be a detriment to either man. Therefore, Pearsall's promise to share, as expressed in his question to Alexander, "Are you in it?" induced a detriment in Alexander. Likewise, Alexander's promise to share, as contained in his assent, induced a detriment in Pearsall.

ANSWERS TO “TAKING SIDES” PROBLEMS Anna Feinberg began working for the Pfeiffer Company in 1978 at age seventeen. By 2015, she had attained the position of bookkeeper, office manager, and assistant treasurer. In appreciation for her skill, dedication, and long years of service, the Pfeiffer board of directors resolved to increase Feinberg’s monthly salary to $4,000 and to a retirement plan create for her. The plan allowed that Feinberg would be given the privilege of retiring from active duty at any time she chose and that she would receive retirement pay of $2,000 per month for life, although the Board expressed the hope that Feinberg would continue to serve the company for many years. Feinberg, however, chose to retire two years later. The Pfeiffer Company paid Feinberg her retirement pay until 2024. The company thereafter discontinued payments. a. What are the arguments that the company’s promise to pay Feinberg $2,000 per month for life is enforceable? b. What are the arguments that the company’s promise is not enforceable? c. What is the proper outcome? Explain.

Answer: (a) Plaintiff could argue that her continuing to work for the defendant for another two years, on which date she retired, was consideration for the defendant’s promise and that the promise therefore was enforceable as a contract. In addition, plaintiff could contend that the promise is enforceable under the doctrine of promissory estoppel because she would not have quit the defendant’s employ had she not known and relied upon the promise of defendant to pay her $2,000 a month for life. (b) Defendant would argue that the resolution adopted by its Board of Directors was a mere promise to make a gift, and that no contract resulted from the resolution.

They would argue that plaintiff did not give any consideration for the promise.

Moreover, a promise to make a gift is not binding unless supported by a legal consideration, that the only apparent consideration for the adoption of the foregoing resolution was the “many years of long and faithful service” expressed, and that past services are not a valid consideration for a promise. There is nothing in the resolution that made its effectiveness conditional upon plaintiff's continued employment, stated she was not under contract to work for any length of time but was free to quit whenever she wished, and noted she had no contractual right to her position and could have been discharged at any time.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 12: Consideration

(c) Resolution: (1) There was no contract. No language in the resolution predicates plaintiff’s right to a pension upon her continued employment. She was not required to work for the defendant for any period of time as a condition to gaining such retirement benefits. She was told that she could quit the day upon which the resolution was adopted, as she herself testified, and it is clear from her own testimony that she made no promise or agreement to continue in the employ of the defendant in return for its promise to pay her a pension. Hence there was lacking that mutuality of obligation, which is essential to the validity of a contract.

(2) There was promissory estoppel. Section 90 of the Restatement of the Law of Contracts states that “[a] promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.”

Was there such an act on the part of plaintiff, in reliance upon the promise contained in the resolution, as will estop the defendant, and therefore create an enforceable promise under the doctrine of promissory estoppel? Yes. At the time she retired plaintiff was fifty-seven years of age. At the time the payments were discontinued she was more than sixty-three years of age. It is a matter of common knowledge that it is very difficult for a person of that age to find satisfactory employment, much less a position comparable to that which plaintiff enjoyed at the time of her retirement. The plaintiff's retirement from a lucrative position was action or forbearance of a definite and substantial character and was made in reliance upon the defendant's promise to pay her an annuity or pension.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 13: Illegal Bargains

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 13: Illegal Bargains

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems ..............................................................................13

ANSWERS TO ETHICAL DILEMMA When Is a Bargain Too Hard?

1.

Is the bargaining power of Penguin too great to assume that the terms of the agreement resulted from a fair negotiation process?

2. Do the terms of this agreement appear fair and reasonable to both parties?

3. Has Penguin acted unethically?

Answer: 1. Determining whether the bargaining power of Penguin is too great to assume that the terms of the agreement resulted from a fair negotiation process requires knowing additional facts about the legal sophistication of Williams. However, given that (1) one party is a commercial seller and the other a consumer and (2) the oppressiveness of the terms of the contract, it seems very likely that there was not a fair negotiation process leading to this contract.

2. The terms of the contract appear greatly unbalanced and raise serious questions of sharp practice and irresponsible business dealings.

3. It would appear the Penguin took advantage of its greater bargaining power to extract extremely harsh terms. Such conduct appears to be unethical.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Johnson and Wilson were the principal shareholders in Matthew Corporation, located in the city of Jonesville, Wisconsin. This corporation was engaged in the business of manufacturing paper novelties, which were sold over a wide area in the Midwest. The corporation was also in the business of binding books. Johnson purchased Wilson's shares of the Matthew Corporation and, in consideration thereof, Wilson agreed that for a period of two years he would not (a) manufacture or sell in Wisconsin any paper novelties of any kind that would compete with those sold by the Matthew Corporation or (b) engage in the bookbinding business in the city of Jonesville. Discuss the validity and effect, if any, of this agreement.

Answer:

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 13: Illegal Bargains

(a) The agreement to refrain from doing business in the State of Wisconsin was no more than necessary to prevent competition upon the part of Wilson. The restraints as to both time and territory are reasonable. See Restatement, Second, Sections 186 and 188. The view has been taken, however, in some cases that agreements to refrain from doing business in an entire state, even though no more than necessary to prevent competition, are invalid and unenforceable for the reason that it is against the policy of the state that the people of the whole state should be deprived of the industry and skill of a person in an employment useful to the public, or that such person should be compelled either to engage in another business or move from the state and cease to be a citizen thereof. (b) Even if contracts in general restraint of trade are deemed void, as being contrary to public policy, contracts in partial restraint of trade are valid if the restraint imposed is reasonable both as to time and as to limits of the area in which such restraint is imposed. Agreements not to engage in a particular business within a city for a period of two years have generally been held to be valid and enforceable.

The second portion of Wilson's agreement would be binding upon him.

2. Wilkins, a Texas resident licensed by that state as a certified public accountant (CPA), rendered service in his professional capacity in Louisiana to Coverton Cosmetics Company.

He was not registered as a CPA in Louisiana. His service under his contract with the cosmetics company was not the only occasion on which he had practiced his profession in that state. The company denied liability and refused to pay him, relying on a Louisiana statute declaring it unlawful for any person to perform or offer to perform services as a CPA for compensation until he has been registered by the designated agency of the state and holds an unrevoked registration card. The statute provides that a CPA certificate may be issued without examination to any applicant who holds a valid unrevoked certificate as a CPA under the laws of any other state. The statute provides further that rendering services of the kind performed by Wilkins, without registration, is a misdemeanor punishable by a fine or imprisonment in the county jail or by both fine and imprisonment. Discuss whether Wilkins would be successful in an action against Coverton seeking to recover a fee in the amount of $1,500 as the reasonable value of his services.

Answer: Decision in favor of Coverton Cosmetics Company. The statute is a regulatory measure designed to protect the public by permitting only persons with the necessary qualifications to practice accounting. The statute declares that it shall be unlawful for a person to perform services as a CPA for compensation without a license and prescribes a penalty for its violation. Contracts for the rendition of services as a CPA by an unlicensed person are void and incapable of enforcement. Where the statute does not contain an express provision rendering void a contract entered into by one not qualified under its provisions but, as in the problem, imposes a penalty for its violation, it is generally held that the penalty implies the prohibition. Restatement, Second, Contracts, Section 181.

3. Michael is interested in promoting the passage of a bill in the state legislature. He agrees with Christy, an attorney, to pay Christy for her services in writing the required bill, obtaining its introduction in the legislature, and making an argument for its passage before the legislative committee to which it will be referred. Christy renders these services.

Subsequently, on Michael’s refusal to pay Christy, Christy sues Michael for damages for breach of contract. Will Christy prevail? Explain.

Answer: Yes. Decision in favor of Christy. There is nothing in the agreement which offends public policy. It is perfectly legitimate for a citizen to seek to have a bill introduced in the legislature and to promote its passage. Here, Christy merely agreed

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 13: Illegal Bargains

to engage in what she considered services for procuring the legislation desired. The services were legal in nature and Christy is entitled to remuneration from Michael.

4. Anthony promises to pay McCarthy $100,000 if McCarthy informs the public that Washington is a communist. Washington is not a communist and never has been.

McCarthy successfully persuades the media to report that Washington is a communist and now seeks to recover the $100,000 from Anthony, who refuses to pay. McCarthy initiates a lawsuit against Anthony. What will be the result?

Answer: Decision for Anthony. The promise is unenforceable on grounds of public policy. A promise to commit, or induce commission of, a tort is unenforceable.

Restatement, Second, Contracts, Section 192. In this case the tort is defamation and both parties would be liable to Washington, although McCarthy cannot recover the money from Anthony, that doesn’t leave Anthony in the clear. Both Anthony and McCarthy may find themselves in trouble for inducing commission of a tort under these facts.

5. The Dear Corporation was engaged in the business of making and selling harvesting machines. It sold everything pertaining to its business to the HI Company, agreeing “not again to go into the manufacture of harvesting machines anywhere in the United States.”

The Dear Corporation, which has national and international goodwill in its business, now begins the manufacture of such machines contrary to its agreement. Should the court stop it from doing so? Explain.

Answer: The question is whether the restraint is reasonable and therefore binding upon Dear Corporation. Since Dear Corp. sells harvesting machines throughout the country, the nationwide restraint arguably amounted merely to reasonable protection to the purchaser of the business, the HI Company. The purchaser of a business may protect the good will by exacting a restrictive covenant that is reasonable with respect to the area within which it operates. The controlling fact that determines the reasonableness of the area is the territorial extent of the business of the purchased company. Restatement, Second, Contracts, Section 188. A more serious problem to the validity of the restraint is the fact that the covenant is not limited as to its duration but lasts into perpetuity. Thus, the covenant is of dubious validity. An argument that can be raised in favor of its validity is the fact that it prohibits the manufacture but not the sale of machines in the United States.

6. Charles Leigh, engaged in the industrial laundry business in Central City, employed Tim Close, previously employed in the home laundry business, as a route salesperson. Leigh rents linens and industrial uniforms to commercial customers; the soiled linens and uniforms are picked up at regular intervals by the route drivers and replaced with clean ones. Every employee is assigned a list of customers whom she services. The contract of employment stated that in consideration of being employed, on termination of his employment, Close would not “directly or indirectly engage in the linen supply business or any competitive business within Central City, Illinois, for a period of one year from the date when his employment under this contract ceases.” On May 10 of the following year, Close’s employment was terminated by Leigh for valid reasons. Close then accepted employment with Ajax Linen Service, a direct competitor of Leigh in Central City. He began soliciting former customers he had called on for Leigh and obtained some of them as customers for Ajax. Will Leigh be able to enforce the provisions of the contract? Why or why not?

Answer: Leigh is entitled to the relief sought. Close was permitted, under the contract, to engage in the home laundry business in which he was previously employed before

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 13: Illegal Bargains

entering Leigh's employment. He was not being deprived of this means of earning a living. The restriction was held to be reasonable in that it was only for one year and applied only to laundry business with commercial customers. In Bailey v. King, 398 S.W. 2d 906, the court stated: "To say that this contract was unreasonable would actually have the effect of saying that no employment agreement in the laundry or linen supply business could be upheld…."

"Whether a provision in an employment contract restraining an employee from competing with his employer after termination of employment is reasonable and thus valid is a matter to be determined under the particular circumstances involved."

"Numerous cases support the enforceability or protective covenants where the consideration is based simply upon employment."

In accord: Restatement, 2nd, Contracts, Sect 188. The breach of a covenant not to compete is, of course, of a continuing nature, and an action for damages is hardly adequate, mainly because of the extreme difficulty in determining the amount of damage caused by a loss of business. It appears that the only realistic relief for a breach of this type of contract is by injunction.

One further question which may be discussed is whether the fact that Close was terminated by Leigh should alter the result. The facts only state that Close was discharged for valid reasons and thus the equities involved are not known.

7. Bill and Donald entered into a bet on the outcome of the next congressional election in their district. After the election, Bill, who bet on the winner, approached Donald, seeking to collect the $3,000 Donald had wagered. Donald paid Bill the wager but now seeks to recover the funds from Bill. Result?

Answer: Decision for Bill. As the wager was illegal the contract was unenforceable on grounds of public policy. Neither party can successfully sue the other for breach nor recover for any performance rendered. The courts will not aid one wrongdoer by granting him restitution of a benefit conferred upon another party.

8. Carl, a salesperson for Smith, comes to Benson’s home and sells him a complete set of “gourmet cooking utensils” that are worth approximately $300. Benson, an eighty-year-old man who lives alone in a one-room efficiency apartment, signs a contract to buy the utensils for $1,450 plus a credit charge of $145 and to make payments in ten equal monthly installments. Three weeks after Carl leaves with the signed contract, Benson decides he cannot afford the cooking utensils and has no use for them. What can Benson do? Explain.

Answer: Benson is not bound to his obligation. The doctrine of "unconscionability" as set forth in the UCC would probably apply here. If it did, Benson could obtain release from the obligation for that reason. Smith may have used high pressure tactics and taken advantage of Benson's malleability as evidenced by the unreasonable price agreed to by Benson. As in Williams v. Walker-Thomas Furniture Company, 350 F. 2d 445: Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. Whether a meaningful choice is present in a particular case can only be determined by consideration of all the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 13: Illegal Bargains

circumstances surrounding the transaction. In many cases the meaningfulness of the choice is negated by a gross inequality of bargaining power. The manner in which the contract was entered is also relevant to this consideration.

9. Consider the facts in Question 8 but assume that the price was $350. Assume further that Benson wishes to avoid the contract based on the allegation that Carl befriended and tricked him into the purchase. Discuss.

Answer: Decision for Benson. Benson could argue that the contract was induced by Carl's fraudulent conduct. Contracts based on fraud are voidable by the victimized party.

10. Adrian rents a bicycle from Barbara. The bicycle rental contract Adrian signed provides that Barbara is not liable for any injury to the renter caused by any defect in the bicycle or the negligence of Barbara. Adrian is injured when she is involved in an accident due to Barbara’s improper maintenance of the bicycle. Adrian sues Barbara for damages. Will Barbara be protected from liability by the provision in their contract?

Answer: Decision for Adrian; Barbara is still liable to Adrian. Most courts would hold that this exculpatory clause is void against public policy. In deciding this question courts look at such factors as: "(1) It concerns a business of a type generally thought suitable for public regulation. (2) The party seeking exculpation is engaged in performing a service of great importance to the public which is often a matter of practical necessity for some members of the public. (3) The party holds himself out as willing to perform this service for any member of the public who seeks it, or at least any member coming within certain established standards. (4) As a result of the essential nature of the service, in the economic setting of the transaction, the party invoking exculpation possesses a decisive advantage of bargaining strength against any member of the public who seeks his services. (5) In exercising a superior bargaining power, the party confronts the public with a standardized adhesion contract of exculpation, and makes no provision whereby a purchaser may pay additional fees and obtain protection against negligence. (6) Finally, as a result of the transaction, the person or property of the purchaser is placed under the control of the seller, subject to the risk of carelessness by the seller or his agents." See Tunkl v. Regents of the University of California (1963) 60 Cal. 2d 92, 32 Cal. Rptr. 33, 383 P. 2d 441.

11. Makayla was a Java programmer employed with Sun Microsystems in Palo Alto, California.

Upon beginning employment, Makayla signed a contract that included a noncompete clause that prevented her, within three months of terminating her employment, from taking another Java programming position with any of five companies Sun listed as “direct competitors.” Later that year, Makayla resigned and two months later accepted a position with Hewlett-Packard (HP) in Houston, Texas. HP was listed in Makayla’s contract as a “direct competitor,” but she argues that due to the significant geographic distance between both jobs, the contract is not enforceable. Explain whether the contract is enforceable.

Answer: In National Business Services, Inc. v. Wright, courts determined that geographic location is not a factor when considering Internet-related non-compete clauses. The three-month non-compete time also appears reasonable. If Sun can show that it acted reasonably to protect its interest it will prevail. Nevertheless, it may be very difficult to show how Makayla going to work for HP can injure them.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 13: Illegal Bargains

12. Merrill Lynch employed Post and Maney as account executives. Both men elected to be paid a salary and to participate in the firm’s pension and profit-sharing plans rather than take a straight commission. Thirteen years later, Merrill Lynch terminated the employment of both Post and Maney without cause. Both men began working for a competitor of Merrill Lynch. Merrill Lynch then informed them that all of their rights in the companyfunded pension plan had been forfeited pursuant to a provision of the plan that permitted forfeiture in the event an employee directly or indirectly competed with the firm. Is Merrill Lynch correct in its assertion? Why or why not?

Answer: No, Merrill-Lynch is not correct; judgment for Post and Maney. Employment contracts prohibiting competition create a tension between the freedom of individuals to contract and the reluctance to see one barter away his freedom. Nevertheless, the state will enforce limited restraints on an employee's employment mobility where a mutuality of obligation is freely bargained for by the parties. An essential aspect of that relationship, however, is the employer's continued willingness to employ the party while he does not compete. Where the employer terminates the employment relationship without cause, his action necessarily destroys the mutuality of obligation on which the covenant rests as well as the employer's ability to impose a forfeiture.

Thus, the forfeiture of the pension benefits is unreasonable as a matter of law, and Post and Maney are entitled to the benefits due. Post v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 N.Y. 2d 84, 397 N.B. 2d 358, 421 N.Y.S. 2d 847 (1979).

13. Tovar applied for the position of resident physician in Paxton Community Memorial Hospital. The hospital examined his background and licensing and assured him that he was qualified for the position. Relying upon the hospital’s promise of permanent employment, Tovar resigned from his job and began work at the hospital. He was discharged two weeks later, however, because he did not hold a license to practice medicine in Illinois as required by state law. He had taken the examination but had never passed it. Tovar claims that the hospital promised him a position of permanent employment and that by discharging him, it breached their employment contract. Who is correct? Discuss.

Answer: Judgment for Paxton Hospital. The purpose of the licensing statute is not to generate revenue but rather to protect the public by assuring them of adequately trained physicians. Since the purpose of the licensing requirements is to protect the public from unqualified persons, any contract relating to the licensed activity and entered into with an unlicensed person is illegal. The contact between the hospital and Tovar was illegal, and therefore is unenforceable as against public policy. Tovar v.

Paxton Community Memorial Hospital, 29 Ill. App. 3d 218, 330 N.E. 2d 247 (1975).

14. Carolyn Murphy, a welfare recipient with very limited education and with four minor children, responded to an advertisement that offered the opportunity to purchase televisions without a deposit or credit history. She entered into a rent- to-own contract for a twenty-five-inch television set that required seventy-eight weekly payments of $16 (a total of $1,248, which was two and one-half times the retail value of the set). Under the contract, the renter could terminate the agreement by returning the television and forfeiting any payments already made. After Murphy had paid $436 on the television, she read a newspaper article criticizing the lease plan. She stopped payment and sued the television company. In response, the television company has attempted to take possession of the set. What will be the outcome? Explain.

Answer: Judgment for Murphy. The contract was unconscionable because the television company failed to inform Murphy of the true purchase price and required her to pay two and one half times the retail sales price. Murphy was lured into a

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contract in which she had unequal bargaining power by the company’s deceptive advertising. Moreover, it is usurious to charge a consumer with unequal bargaining power an excessive price; two and one half times the retail value of an item is excessive. Murphy v. McNamara, 36 Conn. Sup. 183, 416 A. 2d 170 (1979).

15. Albert Bennett, an amateur cyclist, participated in a bicycle race conducted by the United States Cycling Federation. During the race, Bennett was hit by an automobile. He claims that employees of the Federation improperly allowed the car onto the course. The Federation claims that it cannot be held liable to Bennett because Bennett signed a release exculpating the Federation from responsibility for any personal injury resulting from his participation in the race. Is the exculpatory clause effective?

Answer: Judgment for Bennett; the clause is not effective. A valid exculpatory clause must be clear, explicit, unambiguous and comprehensible to both of the parties. The terms of the agreement also must apply to the specific misconduct of the defendant.

In this case, Bennett waived the right to sue based on foreseeable misconduct on the part of the Federation. He did not, however, waive the Federation’s liability for actions deviating from normal race procedures, including the presence of automobiles on the course. Bennett v. United States Cycling Federation, 193 Cal. App. 3d 1485, 239 Cal. Rptr. 55 (1987).

16. In February, Brady, a general contractor, signed a written contract with the Fulghums to build a house for them in North Carolina. The contract price of the house was $206,850, and construction was to begin in March of that year. Neither during the contract negotiations nor during the commencement of construction was Brady licensed as a general contractor as required by North Carolina law. In fact, Brady did not obtain his license until late October of that year, at which time he had completed more than twothirds of the construction on the Fulghums’ house. The Fulghums submitted to Brady total payments of $204,000 on the house. Brady sues for $2,850 on the original contract and $29,000 for additions and changes requested by the Fulghums during construction. Is Fulghum liable to Brady? Explain.

Answer: No. Fulghum is not liable. Generally, contracts entered into by unlicensed general contractors, in violation of a statute passed for the protection of the public, are unenforceable by the contractor. Since a contractor must rely on his illegal act (contracting and working without a license) to enforce the contract, courts have held that there is no legal remedy for that which is illegal itself. Furthermore, the contract cannot be validated by the subsequent procurement of a license. Even though Brady eventually obtained his license before completing the house, he did not have one when he negotiated the contract or began construction. Also, Brady is not entitled to recover for extras, additions, or changes made pursuant to this contract. However, it must be noted that the contract is not void. Others, such as the Fulghums or subcontractors, not regulated by the licensing contract, which was passed for their own protection, do not act illegally in becoming parties to such contracts. Therefore, other parties may enforce the contract against the unlicensed contractor. Brady v. Fulghum, 308 S.E. 2d 327 (N.C. 1983).

17. Robert McCart owned and operated an H&R Block tax preparation franchise. When Robert became a district manager for H&R Block, he was not allowed to continue operating a franchise. So, in accordance with company policy, he signed over his franchise to his wife June. June signed the new franchise agreement, which included a covenant not to compete for a two-year period within a fifty-mile radius of the franchise territory should the H&R Block franchise be terminated, transferred, or otherwise disposed of. June and Robert were both aware of the terms of this agreement, but June chose to terminate her

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franchise agreement anyway. Shortly thereafter, June sent letters to H&R Block customers, criticizing H&R Block’s fees and informing them that she and Robert would establish their own tax preparation services at the same address as the former franchise location. Each letter included a separate letter from Robert detailing the tax services to be offered by the McCarts’ new business. Should H&R Block be able to obtain an injunction against June? Against Robert? Explain.

Answer: Yes on both injunctions. Judgment for H&R Block. A covenant in general restraint of trade is void as against public policy. However, a covenant which is clear, specific, and reasonable as to duration and geographic limitation will be enforced. Both the two-year duration and the 50-mile radius of this covenant not to compete, in this situation, are reasonable. Nonetheless, Robert contends that since he was not a party to the new franchise agreement containing the covenant not to compete, such a restraint of trade should not apply to him. The rule, however, that a stranger to a covenant may be enjoined from aiding and assisting the covenanter in violating the covenant is supported by the overwhelming weight of authority. Robert had knowingly participated and aided June in violating her contract with H&R Block. Robert, as well as June, is therefore properly within the scope of the injunction. McCart v. H&R Block, Inc. 70 N.E. 2d 756 (1984).

18. Michelle Marvin and actor Lee Marvin began living together, holding themselves out to the general public as man and wife without actually being married. The two orally agreed that while they lived together, they would share equally any and all property and earnings accumulated as a result of their individual and combined efforts. In addition, Michelle promised to render her services as “companion, homemaker, housekeeper, and cook” to Lee. Shortly thereafter, she gave up her lucrative career as an entertainer to devote her full time to being Lee’s companion, homemaker, housekeeper, and cook. In return, he agreed to provide for all of her financial support and needs for the rest of her life. After living together for six years, Lee compelled Michelle to leave his household but continued to provide for her support. One year later, however, he refused to provide further support.

Michelle sued to recover support payments and half of their accumulated property. Lee contended that their agreement was so closely related to the supposed “immoral” character of their relationship that its enforcement would violate public policy. The trial court granted Lee’s motion for judgment on the pleadings. Decision?

Answer: Judgment for Michelle Marvin. Adults who voluntarily live together and engage in sexual relations can, nonetheless, make arrangements concerning their earnings and property rights. They cannot, however, contract to pay for the performance of sexual services; such a contract is essentially an agreement for prostitution and is illegal.

Here, the Marvins' agreement does not rest, explicitly or entirely, upon a promise of sexual services or any other illicit consideration. The allocation of their finances and property rights as they choose does not violate public policy. Therefore, their agreement furnishes a suitable basis upon which a trial court can render relief. Marvin v. Marvin, 18 Cal. 3d 660, 557 P. 2d 106 (1976).

19. Richard Brobston was hired by Insulation Corporation of America (ICA) in 2011. Initially, he was hired as a territory sales manager but was promoted to national account manager in 2015 and to general manager in 2019. In 2021, ICA was planning to acquire computerassisted design (CAD) technology to upgrade its product line. Prior to acquiring this technology, ICA required that Brobston and certain other employees sign employment contracts that contained restrictive covenants or else be terminated, and the company also changed their employment status to “at will” employees. These restrictive covenants provided that in the event of Brobston’s termination for any reason, Brobston would not

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reveal any of ICA’s trade secrets or sales information and would not enter into direct competition with ICA within three hundred miles of Allentown, Pennsylvania, for a period of two years from the date of termination. The purported consideration for Brobston’s agreement was a $2,000 increase in his base salary and proprietary information concerning the CAD system, customers, and pricing. Brobston signed the proffered employment contract. In October 2021, Brobston became vice president of special products, which included responsibility for sales of the CAD system products as well as other products. Over the course of the next year, Brobston failed in several respects to perform his employment duties properly, and on August 13, 2022, ICA terminated Brobston’s employment. In December 2022, Brobston was hired by a competitor of ICA who was aware of ICA’s restrictive covenants. Can ICA enforce the employment agreement by enjoining Brobston from disclosing proprietary information about ICA and by restraining him from competing with ICA? If so, for what duration and over what geographic area?

Explain.

Answer: Preliminary injunction affirmed to the extent it enjoins Brobston from disclosing trade secrets and reversed to the extent that it restricts Brobston from competing with ICA. In order for a “noncompetition” covenant to be valid, it must relate to a contract for employment, be supported by adequate consideration and be reasonably limited in both time and territory. More specifically, where a restrictive covenant has been entered into between an employer and its employee, courts have permitted the enforcement of post-employment restraints only where they are ancillary to an employment relationship between the parties, the restrictions are reasonably necessary to protect the employer, and the restrictions are reasonably limited in duration and geographic extent. Brobston’s agreement was ancillary since it was supported by new consideration in the form of the $2,000 annual raise and a change in employment status from “at-will” to a written year to year contract.

The more salient issue in this case is whether the restrictions in Brobston’s contract were reasonable. The determination of reasonableness involves the weighing of competing interests—that of the employer’s need for protection—against the hardship of the restriction upon the employee. Notably, there is a significant factual distinction between the hardship imposed by the enforcement of a restrictive covenant on an employee who voluntarily leaves his employer and that imposed upon an employee who is terminated for failing to do his job. In this case, Brobston was terminated for poor performance. Where an employer determines that an employee has failed to promote the employer’s legitimate business interests, it clearly suggests an implicit decision on the part of the employer that its business interests are best promoted without the employee in its service. Such a determination by an employer diminishes the employer’s need to protect itself and it is unreasonable as a matter of law to permit the employer to retain unfettered control over that which it has effectively deemed worthless to its business interests. Moreover, the non-disclosure agreement in this case renders the non-competition agreement unnecessary. As the agreement states, its purpose was to protect the proprietary CAD technology. However, Brobston never actually received sufficient training to operate the CAD technology. He had access only to sales and profit margin information, the security of which is addressed adequately by the non-disclosure agreement. Therefore, in this case, ICA’s interests are sufficiently protected without enforcement of the noncompetition agreement.

Insulation Corporation of America v. Brobston, 667 A. 2d 729 (1995).

20. Henrioulle, an unemployed widower with two children, received public assistance in the form of a rent subsidy. He entered into an apartment lease agreement with Marin

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Ventures that provided “INDEMNIFICATION: Owner shall not be liable for any damage or injury to the tenant, or any other person, or to any property, occurring on the premises, or any part thereof, and Tenant agrees to hold Owner harmless for any claims for damages no matter how caused.” Henrioulle fractured his wrist when he tripped over a rock on a common stairway in the apartment building. At the time of the accident, the landlord had been having difficulty keeping the common areas of the apartment building clean. Will the exculpatory clause effectively bar Henrioulle from recovery? Explain.

Answer: No. Judgment for Henrioulle. The criteria used to identify when an exculpatory clause is invalid as against public policy include whether: (1) it concerns a business of a type generally thought suitable for public regulation; (2) the party seeking exculpation is engaged in performing a service of great importance to the public, which is often a matter of practical necessity for some members of the public; (3) the party seeking exculpation is in a superior bargaining position; (4) the exculpatory clause is part of a standard adhesion contract in which the terms of the contract are put on a “take-it-or-leave-it” basis. Here, the transaction, a residential rental agreement, meets these criteria and, therefore, the exculpatory clause is invalid as contrary to public policy. Accordingly, Henrioulle is entitled to recover for his injuries. Henrioulle v. Marin Ventures, Inc., 20 Cal. 3d 512, 573 P. 2d 465, 143 Cal. Rptr. 247 (1978).

21. Universal City Studios, Inc. (Universal) entered into a general contract with Turner Construction Company (Turner) for the construction of the Jurassic Park ride. Turner entered into a subcontract with Pacific Custom Pools, Inc. (PCP) for PCP to furnish and install all water treatment work for the project for the contract price of $959,131. PCP performed work on the project from April 2022 until June 2023 for which it was paid $897,719. PCP's contractor's license, however, was under suspension from October 12, 2022 to March 14, 2023. In addition, PCP's license had expired as of January 31, 2022, and it was not renewed until May 5, 2023. California Business and Professions Code Section 7031 provides that no contractor may bring an action to recover compensation for the performance of any work requiring a license unless he or she was “a duly licensed contractor at all times during the performance of that [work], regardless of the merits of the cause of action brought by the contractor.” The purpose of this licensing law is to protect the public from incompetence and dishonesty in those who provide building and construction services. PCP brought suit against Universal and Turner, the defendants, for the remainder of the contract price. Explain who should prevail.

Answer: Universal and Turner should prevail. As a general rule, the failure to comply with a regulatory license prevents the noncomplying party from recovering for services rendered if (1) the statute provides that a noncomplying agreement is unenforceable or (2) the public policy behind the regulatory purpose clearly outweighs the noncomplying party’s interest in being paid for services rendered. In this case, the statute expressly provides that a noncomplying agreement is unenforceable. This problem is based on the case of Pacific Custom Pools, Inc. v. Turner Construction Company, Court of Appeal, Second District, Division 4, California, 2000, 79 Cal. App. 4th 1254, 94 Cal. Rptr. 2d 756, which held: California law (Section 7031) provides that a contractor may not maintain an action for the recovery of compensation for the performance of work requiring a license unless it was “a duly licensed contractor at all times during the performance of that” work. The purpose of the licensing law is to protect the public from incompetence and dishonesty in those who provide building and construction services. Section 7031 advances this purpose by withholding judicial aid from those who seek compensation for unlicensed contract work. The statutory intent is to discourage persons who have failed to comply with the licensing law from offering

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 13: Illegal Bargains

or providing their unlicensed services for pay. It is well settled that Section 7031 applies despite injustice to the unlicensed contractor.

An exception may be made if the contractor proves that it had been licensed before performing work, acted reasonably in trying to maintain a license, and did not know or reasonably should not have known that it was not licensed. Such a case might occur where noncompliance with licensure requirements was the result of inadvertent clerical error or other error or delay not caused by the negligence of the licensee. In this case, however, (1) PCP was aware in November 1995 that its license was suspended for failure to file a judgment bond and that the deadline date for license renewal was January 31, 1996; (2) PCP knew shortly after February 23, 1996, that a renewal application sent in February 1996 was untimely; and (3) PCP was advised on April 22, 1996, that its license had not been renewed because PCP’s filing fee check had been dishonored. The court found under these facts that PCP did not act reasonably or in good faith to maintain its license. Pacific Custom Pools, Inc. v. Turner Construction Company, Court of Appeal, Second District, Division 4, California, 2000, 79 Cal. App. 4th 1254, 94 Cal. Rptr. 2d 756].

22. Octavio Sanchez worked as a delivery driver at a Domino’s Pizza restaurant owned by

Western Pizza. He drove his own car in making deliveries. His hourly wage ranged from the legal minimum wage to approximately $0.50 above minimum wage. Western Pizza reimbursed him at a fixed rate of $0.80 per delivery regardless of the number of miles driven or actual expenses incurred. Sanchez brought this class action against Western Pizza, alleging that the flat rate at which drivers were reimbursed for delivery expenses violated wage and hour laws and that the drivers were paid less than the legal minimum wage.

Sanchez and Western Pizza are parties to an undated arbitration agreement. The agreement states that (1) the execution of the agreement “is not a mandatory condition of employment”; (2) any dispute that the parties are unable to resolve informally will be submitted to binding arbitration before an arbitrator approved by both parties and “selected from the then-current Employment Arbitration panel of the Dispute Eradication Services”; (3) the parties waive the right to a jury trial; (4) the arbitration fees will be borne by Western Pizza, and except as otherwise required by law, each party will bear its own attorney fees and costs; (5) small claims may be resolved by a summary small claims procedure; and (6) the parties waive the right to bring class arbitration.

Should Sanchez be compelled to submit to arbitration to resolve his complaint? Explain.

Answer: No because the arbitration agreement is procedurally and substantively unconscionable. Sanchez v. Western Pizza Enterprises, Inc., 172 Cal. App. 4th 154 (Court of Appeals of California, Second District, Division Three, 2009).

Procedural and substantive unconscionability must both be present to justify the refusal to enforce a contract or clause based on unconscionability. Procedural unconscionability focuses on oppression or unfair surprise, while substantive unconscionability focuses on overly harsh or one-sided terms. The more procedural unconscionability is present, the less substantive unconscionability is required to justify a determination that a contract or clause is unenforceable. Conversely, the less procedural unconscionability is present, the more substantive unconscionability is required to justify such a determination.

A finding of procedural unconscionability does not mean that a contract will not be enforced, but rather that courts will scrutinize the substantive terms of the contract to ensure they are not manifestly unfair or one-sided. There are degrees of procedural unconscionability. At one end of the spectrum are contracts that have been freely

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 13: Illegal Bargains

negotiated by roughly equal parties, in which there is no procedural unconscionability.

Although certain terms in these contracts may be construed strictly, courts will not find these contracts substantively unconscionable, no matter how one-sided the terms appear to be. Contracts of adhesion that involve surprise or other sharp practices lie on the other end of the spectrum. A contract that contains no element of procedural unconscionability is tantamount to saying that, no matter how one-sided the contract terms, a court will not disturb the contract because of its confidence that the contract was negotiated or chosen freely, that the party subject to a seemingly one-sided term is presumed to have obtained some advantage from conceding the term or that, if one party negotiated poorly, it is not the court's place to rectify these kinds of errors or asymmetries.

The Arbitration Agreement Is Procedurally Unconscionable Procedural unconscionability focuses on oppression or unfair surprise. Oppression results from unequal bargaining power when a contracting party has no meaningful choice but to accept the contract terms. Unfair surprise results from misleading bargaining conduct or other circumstances indicating that a party's consent was not an informed choice.

The record indicates a degree of procedural unconscionability in two respects. First, the inequality in bargaining power between the low-wage employees and their employer makes it likely that the employees felt at least some pressure to sign the arbitration agreement. Second, the arbitration agreement suggests that there are multiple arbitrators to choose from (“the then-current Employment Arbitration panel of the Dispute Eradication Services”) and fails to mention that the designated arbitration provider includes only one arbitrator. This renders the arbitrator selection process illusory and creates a significant risk that Western Pizza as a “repeat player” before the same arbitrator will reap a significant advantage. These circumstances indicate that the employees' decision to enter into the arbitration agreement likely was not a free and informed decision but was marked by some degree of oppression and unfair surprise, i.e., procedural unconscionability. Thus, the court must scrutinize the terms of the arbitration agreement to determine whether it is so unfairly one-sided as to be substantively unconscionable.

The Arbitrator Selection Provision Is Substantively Unconscionable Substantively unconscionable terms may take various forms but may generally be described as unfairly one-sided. “Given the lack of choice and the potential disadvantages that even a fair arbitration system can harbor for employees, we must be particularly attuned to claims that employers with superior bargaining power have imposed one-sided, substantively unconscionable terms as part of an arbitration agreement. ‘Private arbitration may resolve disputes faster and cheaper than judicial proceedings. Private arbitration, however, may also become an instrument of injustice imposed on a “take it or leave it” basis.’”

Sanchez contends the arbitration agreement is substantively unconscionable in several respects. He cites the class arbitration waiver, the small claims provision, the absence of any provision requiring a written arbitration award, the designation of an arbitration provider consisting of a single arbitrator, and the absence of any express provision for discovery. An arbitration agreement must provide for a neutral arbitrator. Here, the designation of a “panel” of arbitrators consisting of a single arbitrator selected by Western Pizza created a false appearance of mutuality in the selection of an arbitrator.

Moreover, the effective designation of a single arbitrator in what appears to be a

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 13: Illegal Bargains

standard arbitration agreement applicable to a large number of corporate employees gives rise to a significant risk of financial interdependence between Western Pizza and the arbitrator, and an opportunity for Western Pizza to gain an advantage through its knowledge of and experience with the arbitrator. Thus, this provision is unfairly onesided and substantively unconscionable.

The Entire Arbitration Agreement Is Unenforceable The arbitration agreement here includes a class arbitration waiver that is contrary to public policy and an unconscionable arbitrator selection clause. These are important provisions that, if they were not challenged in litigation, could create substantial disadvantages for an employee seeking to arbitrate a modest claim. Although it may be true that neither of these provisions alone would justify the refusal to enforce the entire arbitration agreement, together these provisions indicate an effort to impose on an employee a forum with distinct advantages for the employer. Thus, the arbitration agreement is permeated by an unlawful purpose. Accordingly, the denial of the motion to compel arbitration was proper.

23. Louis Dunnam borrowed $35,000 from Ken Burns and agreed to repay the principal plus $5,000 six months later. After Dunnam defaulted on the loan, Burns sued to recover.

Dunnam defended by claiming the loan was usurious. Under the relevant state statute, for transactions between private persons, the maximum allowable rate of interest is 18 percent if the parties agree on a rate of interest and 6 percent if they do not. The statute further provides that persons who contract for or collect usurious interest are subject to penalties that may exceed the total value of the contract. Decision? Explain.

Answer: This problem is based on Dunnam v. Burns, 901 S.W. 2d 628 (1995). When money is advanced in exchange for an obligation to repay the advance plus an additional amount, the added amount is interest that may not exceed the statutory maximum. Thus, the defendant’s absolute obligation to pay $5,000 in addition to the principal renders the additional amount interest. A document that contains an absolute obligation to repay a loan together with interest in excess of the amount permitted by statute is usurious on its face. The instrument embodies a usurious transaction, and plaintiff, as the lender, contracted for usurious interest.

ANSWERS TO “TAKING SIDES” PROBLEMS EarthWeb provided online products and services to business professionals in the information technology (IT) industry. EarthWeb operated through a family of websites offering information, products, and services for IT professionals to use for facilitating tasks and solving technology problems in a business setting. EarthWeb obtained this content primarily through licensing agreements with third parties. Schlack began his employment with EarthWeb in its New York City office. His title at EarthWeb was Vice President, Worldwide Content, and he was responsible for the content of all of EarthWeb’s websites. Schlack’s employment contract stated that he was an employee at will and included a section titled “Limited Agreement Not To Compete.”

That section provided: (c) For a period of twelve (12) months after the termination of Schlack’s employment with EarthWeb, Schlack shall not, directly or indirectly: (1) work as an employee…or in any other…capacity for any person or entity that directly competes with EarthWeb. For the purpose of this section, the term “directly competing” is defined as a person or entity or division on an entity that is

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(i) an online service for Information Professionals whose primary business is to provide Information Technology Professionals with a directory of third-party technology, software, and/or developer resources; and/or an online reference library, and or (ii) an online store, the primary purpose of which is to sell or distribute third party software or products used for Internet site or software development.

About one year later, Schlack tendered his letter of resignation to EarthWeb. Schlack revealed at this time that he had accepted a position with ITworld.com. a. What arguments would support EarthWeb’s enforcement of the covenant not to compete? b. What arguments would support Schlack’s argument that the covenant is not enforceable? c. Which side should prevail? Explain.

Answer: (a) EarthWeb would argue that a contract should be upheld since both parties voluntarily entered into the agreement. In addition, Schlack could reveal trade secrets to a competitor that could injure EarthWeb. Finally, the covenant not to compete is reasonable in both time and space. (b) Schlack would argue that the position waiting for him at IDG is so different that he would have no occasion to divulge any trade secrets belonging to EarthWeb. Schlack also would contend that whatever he knows about EarthWeb’s strategic planning is likely to become obsolete rather quickly because the company’s websites are constantly changing. In addition, EarthWeb plans to revamp its software infrastructure in the near future, so any knowledge Schlack has may soon become obsolete.

In contrast to EarthWeb’s emphasis on obtaining the products and services of third parties through acquisitions and licensing agreements and then making those materials readily accessible on its websites, ITworld.com will rely on original content for over 70 percent of its website’s material. Schlack contends that ITworld.com will also be distinguishable from EarthWeb in the type of audience it targets. (c) Decision for Schlack. Even if the terms of EarthWeb’s restrictive covenant reached Schlack’s prospective employment at ITworld.com, EarthWeb would still have to establish that the restraint is reasonable and necessary to protect its legitimate interests. In New York, noncompete covenants will be enforced only if reasonably limited in scope and duration, and only “to the extent necessary (1) to prevent an employee’s solicitation or disclosure of trade secrets, (2) to prevent an employee’s release of confidential information regarding the employer’s customers, or (3) in those cases where the employee’s services to the employer are deemed special or unique.” Applying these principles here, the court found that EarthWeb’s restrictive covenant failed to pass muster even if Schlack’s position at ITworld.com fell within the provision’s relatively narrow parameters.

The court further ruled that the one-year duration of EarthWeb’s restrictive covenant is too long given the dynamic nature of this industry. Moreover, Schlack’s services are not “unique and extraordinary.” This criterion usually refers to an employee with special talents, such as musicians, professional athletes, actors, and the like. To justify enforcement of a restrictive covenant, the employer must show that the employee’s services “are of such character as to make his replacement impossible or that the loss of such services would cause the employer irreparable injury.”

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 14: Contractual Capacity

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 14: Contractual Capacity

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems .............................................................................. 11

ANSWERS TO ETHICAL DILEMMA Should a Merchant Sell to One Who Lacks Capacity?

1. What would you do?

2. What responsibility does a retail store have in stopping a sale where a reasonable person would assume that the customer lacks capacity? What business policies are appropriate?

3. What are the dangers in assuming a protective position? How can a retailer avoid discrimination and extend appropriate protection?

4. What alternatives does a family have when an elderly member begins to lose capacity?

Answer: 1. The retail store has a responsibility to avoid taking undue advantage of a customer who apparently is in a confused state of mind. On the other hand, management should not institute arbitrary policies which could result in discrimination, embarrassment or the infliction of emotional distress on the customer. As a practical matter, leaving these delicate decisions in the hands of a single employee on the store floor is probably a bad idea. It may be advisable for employees to be instructed to alert the store’s manager or the manager’s superior in such situations.

2. Difficult questions are raised in terms of the store’s ethical responsibility to the confused customer. Should Ms. Johnson be free to purchase anything she wishes, even while in a confused state of mind? Is it unfair to abridge her freedom even in an attempt to protect her?

To what extent, should protection be extended? Should management inquire as to whether Johnson plans to drive home? Should her family be called? If she has no family, should the store’s security personnel be contacted, and if so, what guidelines should be applied? What should be the response if Johnson become hostile? These are all difficult business policy decisions which should be addressed.

3. The danger in protecting Johnson is that Johnson’s freedom and dignity are compromised.

4. One response to the decline in capacity of an elderly family member is to institute guardianship proceedings. In some cases, this measure may go too far in limiting the elderly person’s rights.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 14: Contractual Capacity

The family could encourage Johnson to execute a durable power of attorney. The durable power of attorney is a less drastic means of placing authority in another person to carry out express duties (i.e., the power of access to safe deposit boxes, the power to settle tax disputes, the power to pursue litigation). The power must be executed when the principal has capacity, and remains effective even if the principal becomes incapacitated or disabled. In this case, if Johnson already lacks capacity, the durable power could not be used as a planning tool. Whether the durable power could adequately prevent the spendthrift problem depends on the facts of each case and on how broadly the power is drafted. It may not necessarily provide the solution.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Mark, a minor, operates a one-man automobile repair shop. Rose, having heard of Mark’s good work on other cars, takes her car to Mark’s shop for a thorough engine overhaul.

Mark, while overhauling Rose’s engine, carelessly fits an unsuitable piston ring on one of the pistons, with the result that Rose’s engine is seriously damaged. Mark offers to return the sum that Rose paid him for his work but refuses to pay for the damage. Rose sues Mark in tort for the damage to her engine. Can Rose recover from Mark in tort for the damage to her engine? Why or why not?

Answer: No. Decision for Mark. It is clear that the negligence by Mark in carelessly fitting an unsuitable piston ring on one of the pistons, thereby seriously damaging the engine in Rose’s car, grew out of a voidable contract (the contract of a minor—Mark); it would not have occurred had there been no contract, and it is inextricably bound to and interwoven into the contract. To allow recovery for the tort would indirectly enforce the contract, which the court would not permit.

2. Explain the outcome of each of the following transactions: a. On March 20, Andy Small turned seventeen years old, but he appeared to be at least twenty-one. On April 1, he moved into a rooming house in Chicago and orally agreed to pay the landlady $800 a month for room and board, payable at the end of each month.

On April 30, he refused to pay his landlady for his room and board for the month of April. b. On April 4, he went to Honest Hal’s Carfeteria and signed a contract to buy a used car on credit with a small down payment. He made no representation as to his age, but Honest Hal represented the car to be in top condition, which it subsequently turned out not to be. On April 25, he returned the car to Honest Hal and demanded a refund of his down payment. c. On April 7, Andy sold and conveyed to Adam Smith a parcel of real estate that he owned. On April 28, he demanded that Adam Smith reconvey the land although the purchase price, which Andy received in cash, had been spent in riotous living.

Answer: (a) Even where a minor is liable for necessaries, he is not liable at the contract rate but only for the reasonable value. Here, Andy is liable for the reasonable value of the room and board for April. The court must determine what is a reasonable rate for the room and board. (b) Andy did not misrepresent his age. He may disaffirm the contract and, upon returning the car to Honest Hal, since he still has it, he will be entitled to a refund of his down payment, and will not be liable for the balance of the purchase price.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 14: Contractual Capacity

Hal may be charged with fraudulent inducement if he had knowledge of the car’s poor condition. (c) Where a minor sells real property he may not disaffirm the transaction until his majority. Upon reaching majority and within a reasonable time thereafter he may disaffirm the sale. A minor need only return the consideration received, under the majority rule, if he still has it in his possession at the time of disaffirmance.

3. Jones, a minor, owned a 2021 automobile. She traded it to Stone for a 2022 car. Jones went on a three-week trip and found that the 2022 car was not as good as the 2021 car.

She asked Stone to return the 2021 car but was told that it had been sold to Tate. Jones thereupon sued Tate for the return of the 2021 car. Is Jones entitled to regain ownership of the 2021 car? Explain.

Answer: No. Although Jones could avoid the sale as against Stone, he could not recover the car from Tate who purchased the car in good faith and for value from Stone.

At common law Jones, the minor, could recover the car from the third person, Tate, to whom Stone, the other party to the contract with Jones had transferred it, even though the third person did not know of the minority and purchased the car for value.

However, the UCC repudiates this rule, Section 2-403(1) provides that "a person with voidable title has power to transfer a good title to a good faith purchaser for value."

4. On May 7, Roy, a minor, a resident of Smithton, purchased an automobile from Royal Motors, Inc., for $12,750 in cash. On the same day, he bought a motor scooter from Marks, also a minor, for $1,750 and paid him in full. On June 5, two days before attaining his majority, Roy disaffirmed the contracts and offered to return the car and the motor scooter to the respective sellers. Royal Motors and Marks each refused the offers. On June 16, Roy brought separate appropriate actions against Royal Motors and Marks to recover the purchase price of the car and the motor scooter. By agreement on July 30, Royal Motors accepted the automobile. Royal then filed a counterclaim against Roy for the reasonable rental value of the car between June 5 and July 30. The car was not damaged during this period. Royal knew that Roy lived twenty-five miles from his place of employment in Smithton and that he probably used the car, as he did, for transportation. What is the decision as to a. Roy’s action against Royal Motors, Inc., and its counterclaim against Roy; and b. Roy’s action against Marks?

Answer: (a) Roy, a minor, had the right to disaffirm the contract for the purchase of the automobile, if it is a non-necessary. On the other hand, if the car is considered a necessary, Roy would be liable for the reasonable value of the automobile unless Royal allows Roy to disaffirm. Here, since Royal accepted the return of the automobile it may have forfeited its right to the reasonable value of the automobile. Thus, it would seem that whether a necessary or not, Roy has legally effected a disaffirmance. What are Roy’s duties with respect to the automobile after disaffirmance? The courts do not agree on this question. The majority hold that the minor must return any property received from the other party to the contract, provided she is in possession of it at the time of disaffirmance. Other states require at least the payment of a reasonable amount for the use of the property or of the amount by which the property depreciated while in the hands of the minor. (b) Decision for Roy and against Marks for the return of the purchase price of the motor scooter. The general rule that the contracts of a minor are voidable at his option applies to an executed contract between two minors. To hold the rule

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 14: Contractual Capacity

inapplicable, the court, in Hurwitz v. Barr, D.C. App., 193 A. 2d 360 said: “would convert the privilege of infancy, which the law intends as a shield to protect the minor, into a sword to be used to the possible injury of others.” While Marks as a minor has the option of disaffirming the contract, this option cannot nullify any rights or privileges which Roy, also a minor, is capable of asserting. Accordingly, Marks cannot destroy Roy’s right to rescind, and the contract was therefore voidable by Roy. 5. On October 1, George Jones entered into a contract with Johnson Motor Company, a dealer in automobiles, to buy a car for $10,600. He paid $1,100 down and agreed to make monthly payments thereafter of $325 each. Although he made the first payment on November 1, he failed to make any more payments. Jones was seventeen years old at the time he made the contract, but he represented to the company that he was twenty-one years old because he was afraid the company would not sell the car to him if it knew his real age.

His appearance was that of a man of twenty-one years of age. On December 15, the company repossessed the car under the terms provided in the contract. By that time, the car had been damaged and needed repairs. On December 20, George Jones became of age and at once disaffirmed the contract and demanded the return of the $1,425 paid on the contract. When the company refused to do so, Jones brought an action to recover the $1,425, and the company set up a counterclaim of $1,500 for expenses it incurred in repairing the car. Who will prevail? Why? Answer: George Jones may disaffirm the contract even though he deliberately misrepresented his age. Most courts would hold that Jones is not estopped from asserting his minority in order to sue Johnson Motor Company. At the same time, many courts would not grant Jones the relief sought unless he offered to return the car and also to account to the company for depreciation and the value of the use of the car where he has falsified his age. Here, the car has already been repossessed by Johnson Motor Company. This problem is based upon the leading case of Myers v.

Hurley Motor Co., 273 U.S. 18, 47 S. Ct. 277, 71 L. Ed. 515, 50 A.L.R. 1181, where a minor appeared to be more than 21 but made no misrepresentation to induce the making of the contract for the purchase of an automobile. The seller repossessed the car, and the minor, after attaining his majority, sought to recover the amount paid on the purchase price. The seller sought to recover a somewhat larger amount for damages to the car while in the minor's possession. The United States Supreme Court stated that: "The defense, in effect, is that the plaintiff was guilty of tortious conduct to the injury of the defendant in the transaction out of which his own cause of action arose. In such case it is well settled that the relief is by way of recoupment." The seller was held entitled to a setoff up to but not exceeding the amount of the plaintiff's claim.

The company would be entitled to a setoff for depreciation in value, against the amount of Jones' claim.

6. Rebecca entered into a written contract to sell certain real estate to Mary, a minor, for $80,000, payable $4,000 on the execution of the contract and $800 on the first day of each month thereafter until paid. Mary paid the $4,000 down payment and eight monthly installments before attaining her majority. Thereafter, Mary made two additional monthly payments and caused the contract to be recorded in the county where the real estate was located. Mary was then advised by her lawyer that the contract was voidable. After being so advised, Mary immediately tendered the contract to Rebecca, together with a deed reconveying all of Mary’s interest in the property to Rebecca. Also, Mary demanded that Rebecca return the money paid under the contract. Rebecca refused the tender and declined to repay any portion of the money paid to her by Mary. Can Mary cancel the contract and recover the amount paid to Rebecca? Explain.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 14: Contractual Capacity

Answer: No. Decision in favor of Rebecca. A minor may disaffirm a contract for the sale of real property made by her during minority within a reasonable time after attaining her majority and she may, by acts recognizing the contract after becoming of age, ratify it. Since Mary had made two payments and caused the contract to be recorded, after she became of age, she ratified the contract and will not be permitted to say that she performed these acts of ratification in ignorance of her right to disaffirm. Moreover, she was not induced by fraud or misrepresentation to enter into the contract.

7. Anita sold and delivered an automobile to Marvin, a minor. Marvin, during his minority, returned the automobile to Anita, saying that he disaffirmed the sale. Anita accepted the automobile and said she would return the purchase price to Marvin the next day. Later in the day, Marvin changed his mind, took the automobile without Anita’s knowledge, and sold it to Chris. Anita had not returned the purchase price when Marvin took the car. On what theory, if any, can Anita recover from Marvin? Explain.

Answer: Marvin, the minor, having made a contract for the purchase of the car from Anita, and having received possession thereof, was the owner of the car, subject to disaffirmance. The act of disaffirmance, however, is not a new contract, which the minor, in turn, may disaffirm. Upon disaffirmance he merely had the right to the return of the purchase price. Therefore, when Marvin changed his mind and returned the car to Anita, he created no new rights in himself. He had retransferred possession and title to the car to Anita. Marvin's taking the car constituted the tort of conversion, and Marvin would be liable in an appropriate action based upon his tortious act.

8. Ira, who in 2022 had been found not guilty of a criminal offense because of insanity, was released from a hospital for the criminally insane during the summer of 2023, and since that time, has been a reputable and well-respected citizen and businessperson. On February 1, 2024, Ira and Shirley entered into a contract in which Ira would sell his farm to Shirley for $300,000. Ira now seeks to void the contract. Shirley insists that Ira is fully competent and has no right to avoid the contract. Who will prevail? Why? Answer: Shirley should prevail. As Ira was not under guardianship, he would have to establish that he was unable to comprehend the subject of the contract, its nature and probable consequences in order to avoid the contract. The facts of this problem do not establish such a situation.

9. Daniel, while under the influence of alcohol to the extent that he did not know the nature and consequences of his acts, agreed to sell his 2013 automobile to Belinda for $13,000.

The next morning when Belinda went to Daniel’s house with the $13,000 in cash, Daniel stated that he did not remember the transaction but that “a deal is a deal.” One week after completing the sale, Daniel decides that he wishes to avoid the contract. What is the result?

Answer: Judgment for Belinda. Even if Daniel at the time of entering into the agreement had been unable to comprehend the nature and effect of the transaction because of intoxication, Daniel affirmed the contract the next morning and is thereby precluded from avoiding the contract.

10. Langstraat, age seventeen, owned a motorcycle that he insured against liability with Midwest Mutual Insurance Company. He signed a notice of rejection attached to the policy indicating that he did not desire to purchase uninsured motorists’ coverage from the insurance company. Later he was involved in an accident with another motorcycle owned and operated by a party who was uninsured. Langstraat now seeks to recover from the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 14: Contractual Capacity

insurance company, asserting that his rejection was not valid because he is a minor. Can Langstraat recover from Midwest? Explain.

Answer: Judgment for Midwest Mutual Insurance Company. This is not a case in which the minor seeks to disaffirm a contract. What Langstraat seeks here is to ratify and retain the benefits of the policy but to avoid the one provision which has become burdensome. A minor is not permitted this selective choice. Ratification and disaffirmance go to the whole contract. Since Langstraat did not wish to disaffirm the insurance policy, the notice of rejection is valid, and he is not entitled to recover.

Langstraat v. Midwest Mutual Ins. Co., 217 N.W. 2d 570 (Iowa 1974).

11. G.A.S. married his wife, S.I.S., on January 19, 2006. He began to have mental health problems in 2019; that year, he was hospitalized at the Delaware State Hospital for eight weeks. Similar illnesses occurred in 2017 and in the early part of 2023, with G.A.S. suffering from symptoms such as paranoia and loss of a sense of reality. In early 2024, G.A.S. was still committed to the Delaware State Hospital, attending a regular job during the day and returning to the hospital at night. G.A.S., however, was never adjudicated to be incompetent by any court. During this time, he entered into a separation agreement prepared by his wife’s attorney which was grossly unfair to G.A.S. However, G.A.S. never spoke with the attorney about the contents of the agreement, nor did he read it prior to signing. Moreover, G.A.S. was not independently represented by counsel when he executed this agreement. Can G.A.S. disaffirm the separation agreement? Explain.

Answer: Yes, he may disaffirm it. Only competent persons can make a contract, and where there is no capacity to understand, there is no contract. Although petitioner was still under commitment to Delaware State Hospital at the time of the separation agreement, he had not been judicially adjudicated mentally incompetent, and therefore the agreement is not void but may be voidable. The mental incapacity sufficient to permit the cancellation of an agreement must render the individual incapable of understanding the nature and effect of the transaction, and unable to properly, intelligently and fairly protect and preserve his property rights.

The domestic relations court held that even if the mental weakness of the petitioner in this case did not rise to the level of contractual incapacity, such weakness is a circumstance that operates to make the separation agreement voidable when coupled with the evidence of lack of independent counsel, undue influence, and unfairness in the transaction that is present in this case. GAS v. SIS, 407 A. 2d 253 (Del. 1978).

12. L. D. Robertson bought a pickup truck from King and Julian, who did business as the Julian Pontiac Company. At the time of purchase, Robertson was seventeen years old, living at home with his parents and driving his father’s truck around the county to different construction jobs. According to the sales contract, he traded in a passenger car for the truck and was given $723 credit toward the truck’s $1,743 purchase price, agreeing to pay the remainder in monthly installments. After he paid the first month’s installment, the truck caught fire and was rendered useless. The insurance agent, upon finding that Robertson was a minor, refused to deal with him. Consequently, Robertson sued to exercise his right as a minor to rescind the contract and to recover the purchase price he had already paid ($723 credit for the car traded in plus the one month’s installment). The defendants argue that Robertson, even as a minor, cannot rescind the contract because it was for a necessary item. Are they correct? Explain.

Answer: No, judgment for Robertson. A minor may rescind a contract to purchase where the property involved is not a necessary. There was no evidence that Robertson, who lived at home with his parents, needed the truck in connection with any work he

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 14: Contractual Capacity

was doing. Since the defendant failed to prove that the truck was a necessary item, Robertson, as a minor, may rescind.

Upon avoidance of the contract, Robertson was entitled to recover the car he had traded in, but the defendants had already disposed of it. Robertson was therefore entitled to receive only the actual value of the traded-in car, even if the actual value of the trade-in is less than the credit given for it. Neither party is bound by the contract value. Thus, Robertson is entitled to recover the reasonable market value of the car at the time of trade-in (which in this case is $250), rather than the value stated in the contract ($723). Robertson v. King, 225 Ark. 276, 280 S.W. 2d 402 (1955).

13. A fifteen-year-old minor was employed by Midway Toyota, Inc. On August 18, 2022, the minor, while engaged in lifting heavy objects, injured his lower back. In October 2022,he underwent surgery to remove a herniated disk. Midway Toyota paid him the appropriate amount of temporary total disability payments ($153.36 per week) from August 18, 2022, through November 15, 2023. In February 2024, a final settlement was reached for 150 weeks of permanent partial disability benefits totaling $18,403.40. Tom Mazurek represented Midway Toyota in the negotiations leading up to the agreement and negotiated directly with the minor and his mother, Hermoine Parrent. The final settlement agreement was signed by the minor only. Mrs. Parrent was present at the time and did not object to the signing, but neither she nor anyone else of “legal guardian status” cosigned the agreement. The minor later sought to disaffirm the agreement and reopen his workers’ compensation case. The workers’ compensation court denied his petition, holding that Mrs. Parrent “participated fully in consideration of the offered final settlement and … ratified and approved it on behalf of her ward …to the same legal effect as if she had actually signed [it]… .” The minor appealed. Decision?

Answer: Judgment for the minor. The Montana statute allows a minor to disaffirm his contract. Because the minor claimant signed the petition for final settlement in his own behalf, he alone was the contracting party. Tom Mazurek chose to contract with the claimant; he must be prepared to accept the consequences of claimant's disaffirmance of the petition. The person who deals with an infant does so at his own peril. Defendant claims that the mother, Hermoine Parrent, was present at all times during the signing of the contract, that the mother approved of the contract; that there was no objection to the contract; that the adjuster negotiated with the mother and the claimant prior to and after the signing of the contract, the mother was aware of the contract rights of claimant and did not object to the same. Nevertheless, since the mother did not sign the agreement and since the minor is not bound by the agreement, the agreement is unenforceable. Parrent v. Midway Toyota, 626 P. 2d 848 (Mont. 1981).

14. Rose, a minor, bought a new Buick Riviera from Sheehan Buick. Seven months later, while still a minor, he attempted to disaffirm the purchase. Sheehan Buick refused to accept the return of the car or to refund the purchase price. Rose, at the time of the purchase, gave all the appearance of being of legal age. The car had been used by him to carry on his school, business, and social activities. Can Rose successfully disaffirm the contract? Why or why not?

Answer: Decision for Sheehan Buick; Rose cannot disaffirm the contract. The car is a necessary item for Rose to carry out his schooling, business and other activities.

Therefore, he cannot avoid the obligation. Rose v. Sheehan Buick, Inc., 204 So. 2d 903 (1967).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 14: Contractual Capacity

15. Haydocy Pontiac sold Jennifer Lee a used automobile for $7,500, of which $6,750 was financed with a note and security agreement. At the time of the sale, Lee, age twenty, represented to Haydocy that she was twenty-one years old, the age of majority then, and capable of contracting. After receiving the car, Lee allowed John Roberts to take possession of it. Roberts took the car and has not returned. Lee has failed to make any further payments on the car. Haydocy has sued to recover on the note, but Lee disaffirms the contract, claiming that she was too young to enter into a valid contract. Can Haydocy recover the money from Lee? Explain.

Answer: Judgment for Haydocy for the value of the automobile not to exceed its contract price. Although the law allows infants the privilege of disaffirming contracts which operate to their detriment, an infant is estopped from using this defense when the other party has contracted in good faith and it is the infant who induces the contract through false representation. Under the minority rule, which Ohio follows, the infant in such cases may not disaffirm the contract without returning the consideration to the other party. Haydocy Pontiac, Inc. v. Lee, 19 Ohio App. 2d 217, 250 N.E. 2d 898 (1969).

16. Carol White ordered a $225 pair of contact lenses through an optometrist. White, an emancipated minor, paid $100 by check and agreed to pay the remaining $125 at a later time. The doctor ordered the lenses, incurring a debt of $110. After the lenses were ordered, White called to cancel her order and stopped payment on the $100 check. The lenses could be used by no one but White. The doctor sued White for the value of the lenses. Will the doctor be able to recover the money from White? Explain.

Answer: Judgment for doctor in the amount of $150 (amount considered reasonable by the court). The contact lenses are considered necessaries and are of no value to anyone except White. Due to the nature of the goods, the doctor cannot be compensated for his loss except by payment of a reasonable amount. An infant may be held liable for the fair value of necessaries despite a contract to pay more. Cidis v.

White, 71 Misc. 2d 481, 336 N.Y.S. 2d 362 (1972).

17. Halbman, a minor, purchased a used car from Lemke for $11,250. Under the terms of the contract, Halbman would pay $1,000 down and the balance in $250 weekly installments.

Halbman purchased the car as a way to get around and have some fun. Upon making the down payment, Halbman received possession of the car, but Lemke retained the title until the balance was paid. After Halbman had made his first four payments, a connecting rod in the car’s engine broke. Lemke denied responsibility but offered to help Halbman repair the engine if Halbman would provide the parts. Halbman, however, placed the car in a garage where the repairs cost $1,637.40. Halbman never paid the repair bill.

Hoping to avoid any liability for the vehicle, Lemke transferred title to Halbman even though Halbman never paid the balance owed. Halbman returned the title with a letter disaffirming the contract and demanded return of the money paid. Lemke refused. As the repair bill remained unpaid, the garage removed the car’s engine and transmission and towed the body to Halbman’s father’s house. Vandalism during the period of storage rendered the car unsalvageable. Several times Halbman requested Lemke to remove the car. Lemke refused. Halbman sued Lemke for the return of his consideration, and Lemke countersued for the amount still owed on the contract. Decision?

Answer: Judgment for Halbman. Halbman, as a minor, had an absolute right to disaffirm the contract for the purchase of the car, if it is not a necessary item. He is also entitled to recover all consideration he has conferred incident to the transaction.

As a disaffirming minor, he is under an enforceable duty to return only that much of

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 14: Contractual Capacity

the consideration as remained in his possession; he need not make restitution for that which he does not possess. If there was a misrepresentation by Halbman or willful destruction of the car, Lemke could have recovered damages in tort. Otherwise, to require a disaffirming minor to make restitution for diminished value is to bind the minor to a part of the obligation that by law he is privileged to avoid. Halbman v.

Lemke, 298 N.W. 2d 562 (Wisc. 1980).

18. On April 29, Kirsten Fletcher and John E. Marshall III jointly signed a lease to rent an apartment for the term beginning on July 1 and ending on June 30 of the following year, for a monthly rent of $525 per month. At the time the lease was signed, Marshall was not yet eighteen years of age. Marshall turned eighteen on May 30. The couple moved into the apartment. About two months later, Marshall moved out to attend college, but Fletcher remained. She paid the rent herself for the remaining ten months of the lease and then sought contribution for Marshall’s share of the rent plus court costs in the amount of $2,500. Can Fletcher collect from Marshall? Explain.

Answer: Yes. A contract of a minor is not void, but is voidable at the election of the minor. After attaining majority, a minor may either disaffirm or ratify a contract that he entered into while he was still a minor. Also, once a contract is ratified by the minor it cannot then be disaffirmed by subsequent conduct. After becoming 18 years of age, Marshall moved into the apartment and paid rent. He lived in the apartment for about 2 months and never took any action to disaffirm the lease before moving out.

Marshall’s occupancy and payment of rent constitute unequivocal ratification of the lease. Because he had already ratified the lease, his later attempt to disaffirm it by moving out of the apartment and refusing to make further payments was of no effect.

Marshall remained liable for the rent for the remainder of the lease term and is therefore liable to Fletcher for the rent payments she made on his behalf.

19. Rogers was a nineteen-year-old high school graduate (the age of majority then being twenty-one) pursuing a civil engineering degree when he learned that his wife was expecting a child. As a result, he quit school and sought assistance from Gastonia Personnel Corporation in finding a job. Rogers signed a contract with the employment agency providing that he would pay the agency a service charge if it obtained suitable employment for him. The employment agency found him such a job, but Rogers refused to pay the service charge, asserting that he was a minor when he signed the contract.

Gastonia sued to recover the agreed-upon service charge from Rogers. Should Rogers be liable under his contract? If so, for how much?

Answer: Yes. Judgment for Gastonia Personnel Corp. In general, a contract with a minor is voidable by the minor unless the contract is for necessaries. The law is based on the idea that society has a moral obligation to protect the interests of minors from overreaching adults. In its effort to protect "older minors" from improvident or unfair contract, however, the law should not deny them the opportunity and the right to obligate themselves for articles of property or services that are reasonably necessary to enable them to provide for the proper support of themselves and their dependents.

Since the service provided by the employment agency in finding Rogers a suitable job qualifies as such a service, the contract is not voidable, and the agency can recover the charge.

20. On September 29, just under two weeks before his eighteenth birthday, Bagley, a highly skilled and experienced snowboarder, purchased a season pass from the Mt. Bachelor ski resort. Upon purchasing the season pass, he executed a release agreement as required by Mt. Bachelor. The significant portions of the release agreement were also printed on the pass. Beginning on November 18, after his eighteenth birthday, Bagley used his season

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 14: Contractual Capacity

pass to ride Mt. Bachelor’s lifts at least 119 times over the course of twenty-six days spent snowboarding at the ski area. However, on February 16 of the following year, while snowboarding over a manmade jump in Mt. Bachelor’s “air chamber” terrain park, Bagley sustained serious injuries resulting in permanent paralysis. Bagley sued Mt. Bachelor for negligence, claiming that he had timely disaffirmed the release agreement by notifying Mt. Bachelor of the injury. Mt. Bachelor argued that Bagley had manifested his intent to ratify by (a) failing to disaffirm the voidable release agreement within a reasonable period of time after reaching the age of majority, and (b) by accepting the benefits of that agreement. Explain whether Bagley has ratified the contract.

Answer: Bagley has ratified the contact. Bagley v. Mt. Bachelor, Inc., 310 P. 3d 692, 258 Or. App. 390 (2013). [On appeal, the Oregon Supreme Court held that enforcement of the release at issue in this case would be unconscionable. See Chapter 13.]

In Oregon, a former minor may disaffirm a contract within a "reasonable time" after reaching the age of majority, see Highland v. Tollisen, 75 Or. 578, 587, 147 P. 558 (1915), or, conversely, may ratify a contract after reaching the age of majority by manifesting an intent to let the contract stand, see Haldeman v. Weeks, 90 Or. 201, 205, 175 P. 445 (1918); see also Richard A. Lord, 5 Williston on Contracts § 9:17, 166-70 (4th ed. 2009) ("[I]f an infant after reaching the age of majority engages in any conduct that objectively manifests an intent to regard the bargain as binding, the former minor will be held as a matter of law to have ratified the contract."). Further, as particularly relevant here, although what constitutes a reasonable period of time after reaching the age of majority varies widely depending on the circumstances, it is well established that ratification of a voidable contract abolishes a party's power to later disaffirm it.

See Brown et ux. v. Hassenstab et ux., 212 Or. 246, 256, 319 P. 2d 929 (1957) ("The two courses of action are inconsistent and the taking of one will preclude the other."); Snyder v. Rhoads, 47 Or. App. 545, 553-54, 615 P. 2d 1058, rev. den., 290 Or. 157 (1980) (similar).

Applying those principles to these facts, we agree with Mt. Bachelor and conclude that no objectively reasonable juror could find that Bagley disaffirmed the release agreement within a reasonable time after turning 18. Rather, the record gives rise to only one reasonable conclusion: By using the season pass at least 119 times over the course of 26 days between November 18, 2005, and February 16, 2006, Bagley objectively manifested his intent to let the release stand—affirmatively electing to ride the lifts and snowboard under the terms of the agreement (i.e., to accept the benefits of the agreement). His actions after the date of injury—at which time the release had already been ratified and Bagley's power to disaffirm it thereby defeated—are immaterial. Cf. Highland, 75 Or. at 587, 147 P. 558 (former minor's disaffirmance held valid under circumstances where she had neither taken any affirmative action on the contract nor received any benefit from it); see also Restatement (Second) of Contracts § 85 comment b (1981) (power of disaffirmance may be lost, inter alia, "by exercise of dominion over things received"); Lord, 5 Williston on Contracts § 9:17 at 170 ("[I]f the infant after attaining majority voluntarily receives performance in whole or in part from the other party to the contract, this will amount to a ratification.").

In reaching that conclusion, we emphasize that Bagley was less than two weeks short of the age of majority when he signed the release agreement and did not begin snowboarding under its terms until well over a month after turning 18. He was also an experienced snowboarder, had signed release agreements at other ski resorts in the past, and had purchased a season pass and signed a release agreement for each of the preceding three years that he spent snowboarding at Mt. Bachelor. See Haldeman, 90 Or. at 205, 175 P. 445 (considering former minor's maturity and life experience in

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 14: Contractual Capacity

determining whether contract had been ratified). Moreover, the language of the release was unambiguous, as discussed further below, and that language was both heavily emphasized and omnipresent—having been reproduced on the back of the physical season pass that Bagley was required to carry at all times and in large part on signage at each of the lift terminals to which Bagley was exposed at least 119 times. Indeed, given the exculpatory language on Bagley's pass and the signage directing his attention to it, it is not implausible that Bagley released Mt. Bachelor from liability for negligence each time that he rode one of the lifts.

Nevertheless, Bagley affirmatively chose to accept the benefits of the agreement after reaching the age of majority and, as noted, continued to do so until the date of injury notwithstanding the pass's and signage's continuing reminders of the existence of the agreement and provision of ample exposure to its terms.

ANSWERS TO “TAKING SIDES” PROBLEMS Joseph Eugene Dodson, age sixteen, purchased a used pickup truck from Burns and Mary Shrader. The Shraders owned and operated Shrader’s Auto Sales. Dodson paid $14,900 in cash for the truck. At the time of sale, the Shraders did not question Dodson’s age, but thought he was eighteen or nineteen. Dodson made no misrepresentation concerning his age. Nine months after the date of purchase, the truck began to develop mechanical problems. A mechanic diagnosed the problem as a burnt valve but could not be certain.

Dodson, who could not afford the repairs, continued to drive the truck until one month later, when the engine “blew up.” Dodson parked the vehicle in the front yard of his parents’ home and contacted the Shraders to rescind the purchase of the truck and to request a full refund. a. What arguments would support Dodson’s termination of the contract? b. What arguments would support Shrader’s position that the contract is not voidable? c. Which side should prevail? Explain.

Answer: (a) A contract of minor is voidable during the infant’s minority and for a reasonable time thereafter. A minor upon reaching majority can determine what contracts are fair and reasonable and which ones are not. (b) The Shraders would argue that this rule is not fair and that a minor should, at a minimum, pay the reasonable value of the use of the good. The refund provided to the minor should not be complete, but it is only fair to deduct the minor’s benefit from the use of the automobile. (c) The court ruled that the rule to be followed hereafter, in reference to a contract of a minor, to be where the minor has not been overreached in any way, and there has been no undue influence, and the contract is a fair and reasonable one, and the minor has actually paid money on the purchase price, and taken and used the article purchased, that he ought not to be permitted to recover the amount actually paid, without allowing the vendor of the goods reasonable compensation for the use of, depreciation, and willful or negligent damage to the article purchased, while in his hands. This rule is best adapted to modern conditions under which minors are permitted to, and do in fact, transact a great deal of business for themselves, long before they have reached the age of legal majority.

The court noted that in this case, some nine (9) months after the date of purchase, the truck purchased by Dodson began to develop mechanical problems. Dodson was informed of the probable nature of the difficulty. Nevertheless, Dodson

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continued to drive the vehicle until the engine “blew up” and the truck became inoperable. Whether or not this involved gross negligence or intentional conduct on his part is a matter for determination at the trial level. The determination of the fair market value of the vehicle at the time of tender is also an issue for the trier of fact. Dodson v. Shrader, Supreme Court of Tennessee, 1992, 824 S.W. 2d 545.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 15: Contracts in Writing

Solution and Answer Guide Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 15: Contracts in Writing

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ..............................................................................15

ANSWERS TO ETHICAL DILEMMA What’s (Wrong) in a Contract?

1. What would you do?

2. Is the team legally obligated to pay the additional $400,000? Is it ethically obligated to do so?

3. What policy interests are served by the team’s decision not to pay Rick the extra money?

Would the fact that NBA policy makes it impossible for a player to leave a team and play for another NBA team change your answer?

4. What responsibility does the university bear in this situation?

5. What is the nature of Rick’s responsibility with respect to these facts? What should he do?

Answer: 1. Student responses will vary. The instructor should encourage the students to explain and justify their answers.

2. The contract for the extra $400,000 between Rick and the Suns was not binding because of the statute of frauds. Any contract which cannot, by its terms, be completed within one year must be in writing and signed by the party to be charged to be enforceable. Since this was a three year deal which could not be completed prior to the end of that period it was not legally binding on either party.

From an ethical standpoint, when one makes an agreement with someone else, they are bound by that agreement absent any mitigating circumstances. No such unforeseen circumstances were present here. The Suns assumed the risk of Rick’s poor performance. Ethics involves acting in accordance with certain moral values or beliefs. And in today’s society, that includes honoring an agreement. Breaching a contract is legally acceptable because of the notion of remedies, but it is completely unethical without a valid reason. The unintentional inadequacy of the opposite party’s consideration is not a valid social or moral reason to support a breach.

3. The only social policy issues that are served by the Suns’ decision not to pay Rick the extra money involves keeping contract levels at a more reasonable amount. This will help keep ticket prices down and allow more fans to attend the games.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 15: Contracts in Writing

The fact that an NBA player cannot leave a team, even by breaching the contract, until the contract is completed, only makes Rick’s position ethically stronger. While the avoidance of disclosure is definitely unethical, it does not affect the ethical sanctity of the contract. It might be well to note that the free agency policy of the NBA is more ethical than the one found in professional football. But it still serves to prevent a professional basketball player from playing for a team of their choice until the contract has been completed. Thus, the above decision is only reinforced by this policy.

4. With respect to the contract problem, the University’s responsibility is indirect but extremely important. By failing to provide an adequate education but raising Rick’s expectations through the conferring of a degree, Donaldson University is as responsible for Rick not seeking counsel as is anyone. Darrel Lang in his January 1992 article in Current Health suggests that only 2% of college athletes ever sign a professional contract. Education should be the primary purpose for their college experience.

Additionally, the college should have provided advice on the use of sports agents. The field has become so important that seventeen states now specifically regulate sports agents. In West’s Advanced Topics and Contemporary Issues, Frank B. Cross states that a California statute is probably the most comprehensive and even requires the posting of a sizable bond by the agent. This is how important advice by the University would have been.

In today’s society education is taking on an even more important role than before.

Students expect and want to be prepared for the outside world. It is just this idea that is behind the controversial NCAA rule known as Proposition 48. Minimum requirements for athletic scholarship and participation are meant to foster such behavior. The University has, in this case, failed Rick and society.

5. Rick had a responsibility to perform as well as he could both in school and on the court. He also has a responsibility to perform at his best for the Suns. As long as he has done this, he has performed his duties ethically and legally. But in this case, he has put himself into an awkward ethical position both with the school and with the deal with the Suns. If he had taken his education seriously and gone to classes as he should have yet the school pushed him through without really being qualified, he might have legal recourse against the university. If this was not the case, he should complete his degree on his own.

With respect to the Suns, as has already been mentioned, he acted totally unethically by helping to avoid the disclosure of the additional deal. The reasons are unimportant because a lie in this case cannot be considered ethical.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Rafferty was the principal shareholder in Continental Corporation, and as a result, he received the lion’s share of Continental Corporation’s dividends. Continental Corporation was anxious to close an important deal for iron ore products to use in its business. A written contract was on the desk of Stage Corporation for the sale of the iron ore to Continental Corporation. Stage Corporation, however, was cautious about signing the contract, and it did not sign until Rafferty called Stage Corporation on the telephone and stated that if Continental Corporation did not pay for the ore, he would pay. Business reversals struck Continental Corporation, and it failed. Stage Corporation sued Rafferty.

What defense, if any, has Rafferty?

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 15: Contracts in Writing

Answer: Rafferty has the defense that his oral agreement to pay for the iron ore was a contract to guarantee the payment of the debt of another which the statute of frauds requires to be in writing to be enforceable. Rafferty's oral promise to pay Continental Corporation's debt was collateral to the debt or liability of Continental Corporation.

Rafferty's promise cannot be said to be an original promise or undertaking even though he was the principal shareholder in Continental Corporation. However, the main purpose doctrine will be available to Stage Corporation and can bind Rafferty to his oral promise.

2. Green was the owner of a large department store. On Wednesday, January 26, he talked to Smith and said, “I will hire you to act as sales manager in my store for one year at a salary of $48,000. You are to begin work next Monday.” Smith accepted and started work on Monday, January 31. At the end of three months, Green discharged Smith. On May 15, Smith brought an action against Green to recover the unpaid portion of the $48,000 salary.

Is Smith’s employment contract enforceable? Explain.

Answer: No, decision in favor of Green. The oral contract of employment between Green and Smith was entered into on Wednesday, January 26, but Smith was not required to begin work until Monday, January 31, five days after the making of the contract. The agreement was thus not capable of performance within one year from the day on which it was made and is within the statute of frauds. The contract is, hence, not enforceable. Where a contract of service is for the term of a year beginning or which may begin on the day of the making of the contract, the statute of frauds is inapplicable. An oral contract for a year’s services, as here, to begin more than one day after the contract is entered into is impossible of performance within one year from the date of making and is therefore unenforceable under the statute of frauds. Part performance of an oral contract not performable within a year does not take a contract out of the statute of frauds.

3. Rowe was admitted to the hospital suffering from a critical illness. He was given emergency treatment and later underwent surgery. On at least four occasions, Rowe’s two sons discussed with the hospital the payment for services to be rendered by the hospital.

The first of these four conversations took place the day after Rowe was admitted. The sons informed the treating physician that their father had no financial means but that they themselves would pay for such services. During the other conversations, the sons authorized whatever treatment their father needed, assuring the hospital that they would pay for the services. After Rowe’s discharge, the hospital brought this action against the sons to recover the unpaid bill for the services rendered to their father. Are the sons’ promises to the hospital enforceable? Explain.

Answer: Decision for the hospital; the promises are enforceable. The promise of the sons is not to answer for the debt of another. The oral promise of the sons is an original undertaking by themselves to pay the hospital expenses to be incurred by Rowe. The sons did not guarantee to pay the hospital in the event Rowe did not pay the bill; they agreed, instead, in the first instance, to pay the father’s bill. Peterson v.

Rowe, 63 N.M. 135, 314 P. 2d 892 (1957).

4. Ames, Bell, Cain, and Dole each orally ordered LCD (liquid crystal display) televisions from Marvel Electronics Company, which accepted the orders. Ames’s television was to be encased in a specially designed ebony cabinet. Bell, Cain, and Dole ordered standard televisions described as “Alpha Omega Theatre.” The price of Ames’s television was $1,800, and the televisions ordered by Bell, Cain, and Dole were $700 each. Bell paid the company $75 to apply on his purchase; Ames, Cain, and Dole paid nothing. The next day, Marvel sent Ames, Bell, Cain, and Dole written confirmations captioned “Purchase Memorandum,”

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 15: Contracts in Writing

and numbered 12345, 12346, 12347, and 12348, respectively. Each memorandum was sent in duplicate with the request that one copy be signed and returned to the company. None of the four purchasers returned a signed copy. Ames promptly called the company and repudiated the oral contract, which it received before beginning manufacture of the set for Ames or making commitments to carry out the contract. Cain sent the company a letter reading in part, “Referring to your Contract No. 12347, please be advised I have canceled this contract. Yours truly, (Signed) Cain.” The four televisions were duly tendered

by Marvel to Ames, Bell, Cain, and Dole, all of whom refused to accept delivery. Marvel brings four separate actions against Ames, Bell, Cain, and Dole for breach of contract.

Decide liability for each claim. Explain.

Answer: (a) Decision for Ames. The UCC has tightened the so-called special order rule. The Code requires, in order that such an oral contract be enforceable against the buyer, that the seller, before receiving notice of repudiation and under circumstances which reasonably indicate that the goods are for the buyer, either make a substantial beginning of their manufacture or commitments for their procurement.

Section 2-201 (3). Ames repudiated before Marvel commenced manufacture of the set or made commitments for procurement of the goods. (b) Decision for Marvel. Bell has made part payment of the purchase price. Section 2201(3) (c) of the UCC provides that a contract which does not satisfy the requirements of the UCC statute of frauds but which is valid in other respects is enforceable "with respect to goods for which payment has been made and accepted or which have been received and accepted." Where the contract is indivisible, as here, there is a division of authority as to whether part payment makes the whole contract enforceable. The majority rule is that part payment and acceptance makes the entire contract enforceable. (c) Decision for Marvel. Cain has signed a writing sufficient to indicate that a contract for sale has been made between Marvel and himself. Section 2-201(1). (d) Decision for Dole. Dole is not liable on the contract. He has done nothing to make his oral contract enforceable.

5. Moriarity and Holmes enter into an oral contract by which Moriarity promises to sell and Holmes promises to buy Blackacre for $10,000. Moriarity repudiates the contract by writing a letter to Holmes in which she states accurately the terms of the bargain but adds “our agreement was oral. It, therefore, is not binding upon me, and I shall not carry it out.” Thereafter, Holmes sues Moriarity for specific performance of the contract. Moriarity interposes the defense of the statute of frauds, arguing that the contract is within the statute and hence unenforceable. What will be the result? Discuss.

Answer: Judgment for Holmes. Moriarity, the party whom Holmes seeks to charge, signed a letter stating the terms of the oral contract. By signing the letter, which serves as a memorandum, Moriarity complied with the requirements of the statute of frauds. Thus, the contract is enforceable and Holmes is entitled to specific performance of the contract. Specific performance is available because land is a unique commodity.

6. On March 1, Lucas called Craig on the telephone and offered to pay him $90,000 for a house and lot that Craig owned. Craig accepted the offer immediately on the telephone.

Later in the same day, Lucas told Annabelle that if she would marry him, he would convey to her the property then owned by Craig that was the subject of the earlier agreement. On March 2 Lucas called Penelope and offered her $16,000 if she would work for him for the year commencing March 15, and she agreed. Lucas and Annabelle were married on June 25. By this time, Craig had refused to convey the house to Lucas. Thereafter, Lucas

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 15: Contracts in Writing

renounced his promise to convey the property to Annabelle. Penelope, who had been working for Lucas, was discharged without cause on July 5; Annabelle left Lucas and instituted divorce proceedings in July.

Explain what rights, if any, have (a) Lucas against Craig for his failure to convey the property; (b) Annabelle against Lucas for failure to convey the house to her; and (c) Penelope against Lucas for discharging her before the end of the agreed term of employment.

Answer: (a) Lucas has no rights against Craig for his failure to convey the property. To be enforceable, a contract for the sale of land must be in writing. (b) Annabelle has no rights against Lucas for failure to convey the property to her. No action shall be brought upon a promise or contract in consideration of marriage unless there is a written contract or a memorandum of the agreement signed by the party to be charged. There is no writing here. In this case the contract is not merely a mutual promise to marry, but involves consideration in addition to the promises to marry. (c) Penelope has no rights against Lucas for breach of the contract of employment.

This contract cannot be performed within one year from the date of entering into the oral agreement—March 1.

7. Blair orally promises Clay to sell him five crops of potatoes to be grown on Blackacre, a farm in Idaho, and Clay promises to pay a stated price for them on delivery. Is the contract enforceable? Explain.

Answer: The contract may not be enforceable. Where an oral agreement cannot be performed within one year from the date of the making of the contract it is within the statute of frauds. The contract is within the statute of frauds for the reason that it is impossible in Idaho for five crops of potatoes to mature in one year, but if they could, then the contract would be enforceable.

8. Rachel leased an apartment to Bertha for a one-year term beginning May 1, at $800 a month, “payable in advance on the first day of each and every month of said term.” At the time the lease was signed, Bertha told Rachel that she received her salary on the tenth of the month, and that she would be unable to pay the rent before that date each month.

Rachel replied that would be satisfactory. On June 2, Bertha not having paid the June rent, Rachel sued Bertha for the rent. At the trial, Bertha offered to prove the oral agreement as to the date of payment each month. Explain whether Rachel should succeed. Why or why not?

Answer: Decision for Rachel. The lease expressly provided that the rent for each month was payable in advance on the first day of the month. The oral agreement that the lessee could pay each month's rent on the 10th of the month would not be admissible to change the terms of the lease, because it is contemporaneous parole evidence that contradicts an integrated document. If Rachel had allowed Bertha to make the payment on the 10th of the month for several months, her actions may give Bertha a stronger argument for enforcement of the oral agreement under a course of performance argument.

9. Ann bought a car from the Used Car Agency (Used) under a written contract. She purchased the car in reliance on Used’s agent’s oral representations that it had never been in a wreck and could be driven at least two thousand miles without adding oil. Thereafter, Ann discovered that the car had, in fact, been previously wrecked and rebuilt, that it used

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excessive quantities of oil, and that Used’s agent was aware of these facts when the car was sold. Ann brought an action to rescind the contract and recover the purchase price.

Used objected to the introduction of oral testimony concerning representations of its agent, contending that the written contract alone governed the rights of the parties.

Should Ann succeed?

Answer: Yes, decision for Ann. The used car agency's objection to the introduction of the oral testimony would be overruled. The oral representations by used car agency's agent that the car had never been in a wreck and could be driven two thousand miles without adding oil were fraudulent. The parol evidence rule does not exclude the admission of evidence to establish fraud. The reason for the rule is that where the parties have reduced their contract to writing, they intend that all of the terms of the contract are incorporated in the writing. Consequently, the introduction of extrinsic evidence to vary, alter, change, or add to the terms contained in writing would be changing the contract made by the parties. However, fraudulent misrepresentations which induced the contract are not part of the contract but separate and apart from it. The introduction of evidence of fraud, therefore, is not prohibited by the parol evidence rule. Restatement, Second, Contracts, Section 214.

10. In a contract drawn up by Goldberg Company, it agreed to sell and Edwards Contracting Company agreed to buy wood shingles at $650. After the shingles were delivered and used, Goldberg Company billed Edwards Company at $650 per bunch of nine hundred shingles. Edwards Company refused to pay because it thought the contract meant $650 per thousand shingles. Goldberg Company brought action to recover on the basis of $650 per bunch. The evidence showed that there was no applicable custom or usage in the trade and that each party held its belief in good faith. Decision?

Answer: Decision for Edwards Contracting Company. In the absence of an applicable custom or trade usage, the contract is ambiguous. As it was written by the seller, Goldberg Company, under ordinary rules of construction, it would be construed most strongly against Goldberg Company as the party drafting it. Goldberg Company in good faith believed that the price of the wood shingles was $650 per bunch of 900 shingles, whereas Edwards Contracting Company in good faith believed that each bunch contained 1,000 shingles. As the contract did not define the number of shingles to be contained in each bunch, Goldberg Company would not be able to recover at the rate of $650 per bunch of 900 shingles. Edwards Contracting Company is unable to establish any basis for its contention that each bunch should contain 1,000 shingles. It appears, therefore, that the parties never reached an agreement on the price.

However, they did intend to make a contract, and the shingles were actually delivered to and used by the buyer. Consequently, Edwards Contracting Company is under a duty to pay the Goldberg Company a reasonable price for the shingles which it received. UCC Section 2-305.

11. Amos orally agrees to hire Elizabeth for an eight-month trial period. Elizabeth performs the job magnificently, and after several weeks Amos orally offers Elizabeth a six-month extension at a salary increase of 20 percent. Elizabeth accepts the offer. At the end of the eight-month trial period, Amos discharges Elizabeth, who brings suit against Amos for breach of contract. Is Amos liable? Why or why not?

Answer: Judgment for Amos. The modified contract is unenforceable because employment contracts for one year or longer must be in writing. In this case, Amos extended the contract orally to a period of time in excess of one year.

12. Halsey, a widower, was living without family or housekeeper in his house in Howell, New York. Burns and his wife claim that Halsey invited them to give up their house and

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business in Andover, New York, to live in his house and care for him. In return, they allege, he promised them the house and its furniture upon his death. Acting upon this proposal, the Burnses left Andover, moved into Halsey’s house, and cared for him until he died five months later. No deed, will, or memorandum exists to authenticate Halsey’s promise.

McCormick, the administrator of the estate, claims the oral promise is unenforceable under the statute of frauds. Explain whether McCormick is correct.

Answer: Judgment for McCormick. In general, a contract to convey an interest in land must be in writing to satisfy the statute of frauds. As an exception, equity will sometimes enforce an oral agreement affecting rights in land if the one who will gain the interest has partially performed his promise under the agreement. However, to satisfy this exception, the partial performance must be “unequivocally referable” to the agreement–such as possession or improvement of the promised land.

Here, the Burnses never occupied the land as owners or under claim of present right.

As boarders, they did not even have possession. Halsey maintained possession; they were merely his personal servants or guests. Though likely to have been rewarded in some fashion, their services to Halsey are not unequivocally referable to his promise to convey the land. Therefore, in the absence of a writing confirming it, his promise is unenforceable.

13. Ethel Greenberg acquired the ownership of the Carlyle Hotel on Miami Beach but had little experience in the hotel business. She asked Miller to participate in and counsel her operation of the hotel, which he did. He claims that because his efforts produced a substantial profit, Ethel made an oral agreement for the continuation of his services. Miller alleges that in return for his services, Ethel promised to marry him and to share the net income resulting from the operation of the hotel. Miller maintains that he rendered his services to Ethel in reliance upon her promises and that the couple planned to wed in the fall. Ethel, due to physical illness, decided not to marry. Miller sued for damages for Ethel’s breach of agreement. Is the oral contract enforceable? Discuss.

Answer: Judgment for Ethel Greenberg. Any oral promise or agreement made in consideration of marriage, other than a mutual promise to marry, is within the statute of frauds. If the marriage is not the real end or purpose of the agreement but a mere incident or condition, then the statute is not applicable. The statute applies in full force and effect when, despite other inducements, marriage is in whole or in part the real consideration for the agreement.

In this case, the oral agreement was supported by two promises by Ethel–to marry and to share the net income of the hotel. Her promise of marriage was an essential element of the indivisible contract and cannot be removed without destroying the parties’ intentions. Since the consideration of marriage was not merely incidental but was the real consideration for their agreement, the statute applies. Thus, their oral agreement is unenforceable. Miller v. Greenberg, 1958. 104 So. 2d 457 (Fla. 1958).

14. Dean was hired on February 12 as a sales manager of the Co-op Dairy for a minimum period of one year with the dairy agreeing to pay his moving expenses. By February 26, Dean had signed a lease, moved his family from Oklahoma to Arizona, and reported for work. After he worked for a few days, he was fired. Dean then brought this action against the dairy for his salary for the year, less what he was paid. The dairy argues that the statute of frauds bars enforcement of the oral contract because the contract was not to be performed within one year. Is the dairy correct in its assertion? Explain.

Answer: Judgment for Dean. A contract of employment to start in the future and to continue for one year is within the statute of frauds because the one-year period runs

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from the date the contract is made, not the date when performance is to begin. A contract for one year’s employment to commence the day following the making of the contract is not within the statute of frauds. The contract here did not prohibit Dean from commencing work until he had moved from Oklahoma. Since he could have reported to work the next day, there was the possibility that the contract could have been performed within one year. The statute of frauds is not applicable if there is the slightest possibility that the contract can be fully performed within one year.

Therefore, Dean can recover on the contract even though it was not in writing. Co-op Dairy, Inc. v. Dean, Supreme Court of Arizona, 1968. 102 Ariz. 573, 435 P. 2d 470.

15. Yokel, a grower of soybeans, had sold soybeans to Campbell Grain and Seed Company and other grain companies in the past. Campbell entered into an oral contract with Yokel to purchase soybeans from him. Promptly after entering into the oral contract, Campbell signed and mailed to Yokel a written confirmation of the oral agreement. Yokel received the written confirmation but did not sign it or object to its content. Campbell now brings this action against Yokel for breach of contract upon Yokel’s failure to deliver the soybeans. Is the agreement binding? Explain.

Answer: Judgment for Campbell—the agreement is binding. Under the Code a written confirmation between merchants satisfies the statute of frauds provision of the Code against the recipient as well as the sender unless the recipient gives written notice of his objection within ten days after receiving the confirmation. Yokel, however, insists that he is not a "merchant" within the meaning of the Code, and, therefore, the written confirmation provision is not applicable. The term "merchant" means a person who deals in goods of the kind sold, or otherwise by his occupation holds himself out as having knowledge or skill particular to the practices or goods involved. Yokel is a dealer in soybeans and hence is a merchant within the meaning of the Code. The written confirmation to which Yokel failed to object, therefore, satisfies the statute of frauds provision of the Code. Campbell v. Yokel, 20 Ill. App. 3d 702, 313 N.E. 2d 628 (1974).

16. Presti claims that he reached an oral agreement with Wilson by telephone in October to buy a horse for $60,000. Presti asserts that he sent Wilson a bill of sale and a postdated check, which Wilson retained. Presti also claims that Wilson told him that for tax reasons he wished not to consummate the transaction until January 1 of the following year. The check was neither deposited nor negotiated. Wilson denies that he ever agreed to sell the horse or that he received the check and bill of sale from Presti. Presti’s claim is supported by a copy of his check stub and by the affidavit of his executive assistant, who says that he monitored the telephone call and prepared and mailed both the bill of sale and the check. Wilson argues that the statute of frauds governs this transaction and that because there was no writing, the contract claim is barred. Is Wilson correct? Explain.

Answer: Yes, Wilson is correct. The sale of a horse is governed by the Uniform Commercial Code covering sales of goods. Presti sought to avoid the writing requirement of 2-201 based on two exceptions found in 2-210: first, that the statute does not apply if Wilson admitted the contract was made; and second, that it does not apply where payment was made and accepted. However, Wilson denied under oath that any agreement was made. The exception for part performance or for payment and acceptance involves mutual participation and not unilateral acts. It requires objective evidence of the assent of both parties. That evidence is missing here, because the only evidence of payment was Presti's testimony that the check was to be held until January of the following year to gain a tax advantage. The check was never deposited in the defendant's account or negotiated by him. The testimony that exists is evidence that the plaintiff could create, and therefore, it is not an objective manifestation of

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 15: Contracts in Writing

assent to the contract such as to make it enforceable without a writing. Presti v.

Wilson, 348 F. Supp. 543 (N.D.N.Y. 1972).

17. After working for the Phelps Dodge Corporation under an oral contract for approximately twenty-three years, Louie E. Brown was suspended from work for unauthorized possession of company property. The next year, Phelps Dodge fired Brown after discovering that he was using company property without permission and building a trailer on company time. Brown sued Phelps Dodge for benefits under an unemployment benefit plan. According to the plan, “in order to be eligible for unemployment benefits, a laid-off employee must: (1) Have completed 2 or more years of continuous service with the company, and (2) Have been laid off from work because the company had determined that work was not available for him.”

The trial court held that the wording of the second condition was ambiguous and should be construed against Phelps Dodge, the party who chose the wording. A reading of the entire contract, however, indicates that the plan was not intended to apply to someone who was fired for cause. Explain what the correct interpretation of this contract is.

Answer: Decision for Phelps Dodge. A reading of the entire contract indicates that no ambiguity exists. The contract was not meant to apply to someone who was dismissed for cause. Brown was not entitled to recover under the plan. Phelps Dodge Corp. v.

Brown, 112 Ariz. 179, 540 P. 2d 651 (1975).

18. Katz offered to purchase land from Joiner, and after negotiating the terms, Joiner accepted. On October 13, over the telephone, both parties agreed to extend the time period for completing and mailing the written contract until October 20. Although the original paperwork deadline in the offer was October 14, Katz stated he had inserted that provision “for my purpose only.” All other provisions of the contract remained unchanged.

Accordingly, Joiner completed the contract and mailed it on October 20. Immediately after, however, Joiner sent Katz an overnight letter stating that “I have signed and returned contract, but have changed my mind. Do not wish to sell property.” Joiner now claims an oral modification of a contract within the statute of frauds is unenforceable.

Katz counters that the modification is not material and therefore does not affect the underlying contract. Explain who is correct.

Answer: Judgment for Katz. This problem emphasizes the difficulty of determining fixed limits of the statute of frauds. Look to the written contract before modification, and to the modification itself. If neither the portion of the written contract affected by the subsequent modification nor the matter encompassed by the modification itself is required by the statute of frauds to be in writing, then the oral modification will not render the contract unenforceable. Here, the oral modification concerned only an extension of time for finishing paperwork—the underlying land sale was unaffected.

19. When Mr. McClam died, he left the family farm, heavily mortgaged, to his wife and children. To save the farm from foreclosure, Mrs. McClam planned to use insurance proceeds and her savings to pay off the debts. She was unwilling to do so, however, unless she had full ownership of the property. Mrs. McClam wrote her daughter, stating that the daughter should deed over her interest in the family farm to her mother. Mrs. McClam promised that upon her death all the children would inherit the farm from their mother equally. The letter further explained that if foreclosure occurred, each child would receive very little, but if they complied with their mother’s plan, each would eventually receive a valuable property interest upon her death. Finally, the letter stated that all the other children had agreed to this plan. The daughter also agreed. Years later, Mrs. McClam tried to convey the farm to her son Donald. The daughter challenged, arguing that the mother was contractually bound to convey the land equally to all children. Donald says this was an oral agreement to sell land and is unenforceable. The daughter says the letter

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satisfies the statute of frauds, making the contract enforceable. Who gets the farm?

Explain.

Answer: Judgment for the daughter, so all children share equally upon Mrs. McClam's death. The letter signed by Mrs. McClam, reasonably identifies the subject matter of the contract (here the family farm), sufficiently indicates the parties to the contract (here Mrs. McClam and all her children), and the essential terms of the contract can be ascertained with reasonable certainty. Smith v. McClam, 346 S.E. 2d 720 (S.C. 1986).

20. Butler Brothers Building Company sublet all of the work in a highway construction contract to Ganley Brothers, Inc. Soon thereafter, Ganley brought this action against Butler for fraud in the inducement of the contract. The contract, however, provided: “The contractor [Ganley] has examined the said contracts …, knows all the requirements, and is not relying upon any statement made by the company in respect thereto.” Can Ganley introduce into evidence the oral representations made by Butler? Why or why not?

Answer: Yes, decision for Ganley. Parol evidence is admissible to show that the making of the contract was procured by fraudulent representations. This does not vary the terms of the contract. It is merely to show the presence of fraud which permits an avoidance of the contract. The fact that the contract has been reduced to writing does not change the rule. The contract as written was induced by fraud. The law should not and does not permit a covenant of immunity to be drawn that will protect a person against his own fraud. No agreement of parties can preclude the defense that fraud in the inducement of the agreement renders the agreement voidable. Ganley Brothers, Inc. v. Butler Brothers Building Company, 170 Minn. 373, 212 N.W. 602 (1927).

21. Alice solicited an offer from Robett Manufacturing Company to manufacture certain clothing that Alice intended to supply to the government. Alice contends that in a telephone conversation, Robett made an oral offer that she immediately accepted. She then received the following letter from Robett, which, she claims, confirmed their agreement: Confirming our telephone conversation, we are pleased to offer the 3,500 shirts at $14.00 each and the trousers at $13.80 each with delivery approximately ninety days after receipt of order. We will try to cut this to sixty days if at all possible.

This, of course, is quoted f.o.b. Atlanta and the order will not be subject to cancellation, domestic pack only. Thanking you for the opportunity to offer these garments, we are Very truly yours, ROBETT MANUFACTURING CO., INC. Explain whether the agreement is enforceable against Robett.

Answer: No, judgment for Robett Manufacturing Company. Since the alleged transaction involved a sale of goods for more than $500, the memorandum must satisfy the statute of frauds. Under the Uniform Commercial Code, the memorandum need not contain all the terms of the agreement. It must, however: (1) evidence a contract for the sale of goods between the parties; (2) be signed by the party to be charged; and (3) specify a quantity.

Here, Robett admits the signing of the letter and that the letter specifies a quantity.

Nevertheless, the writing does not evidence a contract for the sale of goods; it merely constitutes an offer to sell. Hence, the memorandum does not satisfy the minimum requirements of the statute of frauds and the agreement is unenforceable. Alice v.

Robett Manufacturing Co., United States District Court, District of Georgia, 1970. 328 F.Supp. 1377.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 15: Contracts in Writing

22. Enrique Gittes was a financial consultant for NCC, an English holding company that invested capital in other businesses in return for a stake in those businesses. One of NCC’s investments was a substantial holding in Simplicity Pattern Company. Gittes’s consulting contract was subsequently transferred to Simplicity, and Gittes was elected to the Simplicity board of directors.

When NCC fell into serious financial straits, it became imperative that it sell its interest in Simplicity. Accordingly, a buyer was found. The buyer insisted that before closing the deal all current Simplicity directors, including Gittes, must resign. Gittes, however, refused to resign. Edward Cook, the largest shareholder of NCC and the one with the most to lose if the Simplicity sale was not completed, orally offered Gittes a five-year, $50,000-per-year consulting contract with Cook International if Gittes would resign from the Simplicity board.

Gittes and Cook never executed a formal contract. However, Cook International did issue two writings—a prospectus and a memo—that mentioned the employment of Gittes for five years at $50,000 per year. Neither writing described the nature of Gittes’s job or any of his duties. In fact, Gittes was given no responsibilities and was never paid. Gittes sued to enforce the employment contract. Cook International contended that the statute of frauds made the oral contract unenforceable. Decision?

Answer: Judgment for Gittes. Since the alleged contract was for a five-year duration, it clearly falls within the statute of frauds and requires a sufficient writing in order to be enforceable. It is well established that several writings other than a formal contract can satisfy the statute of frauds by setting forth the essential terms of the agreement.

A term is essential if it seriously affects the rights and obligations of the parties and there is significant evidentiary dispute as to its content.

Cook International concedes that two essential terms, duration and compensation, are contained in the prospectus and memo. Cook International insists, though, that the nature of Gittes’ duties is also an essential term and is not mentioned in either writing.

The issue in this case, however, is not whether Gittes performed adequately, but whether the parties had any obligation to perform at all. The two writings contain all the essential terms concerning the parties’ obligations of performance and therefore satisfy the statute of frauds. Gittes v. Cook International, 598 F. Supp. 717.

23. Shane Quadri contacted Don Hoffman, an employee of Al J. Hoffman & Co. (Hoffman), to procure car insurance. Later, Quadri’s car was stolen. Quadri contacted Hoffman, who arranged with Budget Rent-a-Car for a rental car for Quadri until his car was recovered.

Hoffman authorized Budget Rent-a-Car to bill the Hoffman Agency. Later, when the stolen car was recovered, Hoffman telephoned Goodyear and arranged to have four new tires put on Quadri’s car to replace those damaged during the theft. Budget and Goodyear sued Hoffman for payment of the car rental and tires. Is Hoffman liable on his oral promise to pay for the car rental and the four new tires? Why or why not?

Answer: Judgment for Budget and Goodyear against Hoffman. Although the statute of frauds makes unenforceable oral contracts to pay the debts of a third person, it does not apply to original promises to pay for services rendered to a third person. Hoffman initiated the transactions with both Budget and Goodyear by telephone, indicating that Quadri was insured, and authorized the billing of the Hoffman Agency. By signing the rental agreement and tire invoice, Quadri merely obtained the benefits of the transactions authorized by Hoffman. Since credit was extended solely to the Hoffman Agency, the statute does not apply to Hoffman's oral promises. Thus, they are enforceable against Hoffman.

24. On July 5, 2013, Richard Price signed a written employment contract as a new salesman with the Mercury Supply Company. The contract was of indefinite duration and could be

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 15: Contracts in Writing

terminated by either party for any reason upon fifteen days’ notice. Between 2013 and 2021, Price was promoted several times. In 2015, Price was made vice president of sales. In September of 2021, however, Price was told that his performance was not satisfactory and that if he did not improve, he would be fired. In February of 2024, Price received notice of termination. Price claims that in 2018, he entered into a valid oral employment contract with Mercury Supply Company in which he was made vice president of sales for life or until he should retire. Is the alleged oral contract barred by the one-year provision of the statute of frauds? Explain.

Answer: Yes. Judgment for Mercury Supply Co. The statute of frauds requires that all contracts that cannot possibly be completed within a year must be in writing in order to be enforceable. Conversely, contracts that can possibly be performed within a year may still be enforced even if they are oral. The alleged oral contract of 2018 could be performed within a year because Price could have died or chosen to retire within that first year. Therefore, Mercury Supply Company could discharge Price at any time without breaching the oral contract. Price v. Mercury Supply Co. 682 S.W. 2d 924.

25. Thomson Printing Company is a buyer and seller of used machinery. On April 10, the president of the company, James Thomson, went to the surplus machinery department of B.F. Goodrich Company in Akron, Ohio, to examine some used equipment that was for sale. Thomson discussed the sale, including a price of $9,000, with Ingram Meyers, a Goodrich employee and agent. Four days later, on April 14, Thomson sent a purchase order to confirm the oral contract for purchase of the machinery and a partial payment of $1,000 to Goodrich in Akron. The purchase order contained Thomson Printing’s name, address, and telephone number, as well as certain information about the purchase, but did not specifically mention Meyers or the surplus equipment department. Goodrich sent copies of the documents to a number of its divisions, but Meyers never learned of the confirmation until weeks later, by which time the equipment had been sold to another party. Thomson Printing brought suit against Goodrich for breach of contract. Goodrich claimed that no contract had existed and that at any rate the alleged oral contract could not be enforced because of the statute of frauds. Is the contract enforceable? Why or why not?

Answer: Yes, the contract is enforceable; thus, judgment for Thomson Printing. The merchants’ confirmation exception to the statute of frauds provides that an oral contract between merchants may be enforced by the sender of a written confirmation of the agreement where the recipient of the confirmation has reason to know its contents and does not object to them in writing within ten days. Goodrich acknowledged receipt of the purchase order but claimed that it was not received by anyone who had reason to know its contents and that Thomson erred in not designating Meyers or the surplus equipment department on any of the materials it sent. The “merchants’” exception, however, does not expressly require that the confirmation be received by a particular individual. Moreover, even if such a requirement were in force, Section 1-201 of the Uniform Commercial Code states that notice received by an organization “is effective…from the time when it would have been brought to [the attention of the individual conducting that transaction] if the organization had executed due diligence.” If Goodrich had exercised due diligence in this situation, the items would have come to Meyer’s attention reasonably promptly.

The purchase order should have immediately alerted the mailroom to the type of transaction involved and the intended destination of the documents. Alternatively, the mailroom could have placed a simple phone call to Thomson Printing. Thomson Printing v. B.F. Goodrich, 714 F. 2d 744.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 15: Contracts in Writing

26. Plaintiffs leased commercial space from the defendant to open a florist shop. After the lease was executed, the plaintiffs learned that they could not place a freestanding sign along the highway to advertise their business because the Deschutes County Code allowed only one freestanding sign on the property, and the defendant already had one in place.

The plaintiffs filed this action, alleging that defendant had breached the lease by failing to provide them with space in which they could erect a freestanding sign. Paragraph 16 of the lease provides as follows: “Tenant shall not erect or install any signs…visible from outside the leased premises with out [sic] the previous written consent of the Landlord.” Explain whether this evidence is admissible.

Answer: Yes, the evidence is admissible. The parol evidence rule is a rule of integration. It prohibits oral evidence of those aspects of the bargain that the parties intended to memorialize in their written agreement. If the parties did not intend the writing to represent their entire agreement, the agreement is only partially integrated, and prior consistent additional terms not evidenced by the writing may still form part of the entire agreement. An oral agreement is not integrated in a contemporaneous writing if it is not inconsistent with the written agreement and is such an agreement as the parties might naturally make as a separate agreement. We start with a presumption that the parties intend the writing to be a complete integration. The integration clause in the lease indicates that the lease was intended to be a complete agreement, but it is not conclusive. Defendant testified that he told plaintiffs that they could have a sign and that he did not require them to obtain his written consent, despite the words in paragraph 16 of the lease. There was evidence to support the trial court’s holding that the parties did not intend the written lease to reflect their entire agreement, thereby overcoming the presumption of integration. The next question is whether a separate oral agreement to allow a freestanding sign was inconsistent with the written lease. No provision of the lease prohibits a freestanding sign; thus, the disputed parol evidence was not inconsistent with the written agreement.

27. Jesse Carter and Jesse Thomas had an auto accident with a driver insured by Allstate.

Carter and Thomas hired an attorney, Joseph Onwuteaka, to represent them. Mr. Onwuteaka sent a demand letter for settlement of the plaintiffs’ claims to Allstate’s adjustor, Ms. Gracie Weatherly. Mr. Onwuteaka claims Ms. Weatherly made, and he orally accepted, settlement terms on behalf of the plaintiffs. When Allstate did not honor the agreements, Carter and Thomas filed a suit for breach of contract. Discuss the enforceability of the oral agreement.

Answer: The appellants contend the alleged oral agreement is not governed by the statute of frauds. Allstate claims the statute of frauds is applicable to the alleged agreement under the suretyship provision, which allows “a promise by another person to answer for the debt, default, or miscarriage of another person.”

One test for determining whether a promise to pay the debt of another is within or without the statute of frauds is whether the promisor is a surety, only secondarily liable, or has accepted primary responsibility for the debt. If the party is primarily liable, its promise to pay a debt is not required to be in writing by the statute of frauds. However, if the party is a surety, the promise to pay the debt of a third party is required to be in writing.

If Allstate were merely a surety, its obligation would have been to pay its insured's debt upon default by its insured. However, as an insurer, Allstate contracted with its insured to assume responsibility for the liability of its insured, at least to the limits of the insurance policy. By Allstate’s oral promise to settle, it was settling not only its insured’s potential liability but its own possible obligation to pay and its own duty to

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 15: Contracts in Writing

defend its insured. The oral promise to settle was an original undertaking, not a promise to answer for the debt of the insured. Therefore, the suretyship provision of the statute of frauds does not apply to Allstate’s promise to settle.

28. Mary Iacono and Carolyn Lyons had been friends for almost thirty-five years. Mary suffers from advanced rheumatoid arthritis and is in a wheelchair. Carolyn invited Mary to join her on a trip to Las Vegas, Nevada, for which Carolyn paid. Mary contended that she was invited to Las Vegas by Carolyn because Carolyn thought Mary was lucky. Sometime before the trip, Mary had a dream about winning on a Las Vegas slot machine. Mary’s dream convinced her to go to Las Vegas, and she accepted Carolyn’s offer to split “50–50” any gambling winnings. Carolyn provided Mary with money for gambling. Mary and Carolyn started to gamble but after losing $47, Carolyn wanted to leave to see a show. Mary begged Carolyn to stay, and Carolyn agreed on the condition that Carolyn put the coins into the machines, because doing so took Mary too long. Mary agreed and led Carolyn to a dollar slot machine that looked like the machine in her dream. The machine did not pay on the first try. Mary then said, “Just one more time,” and Carolyn looked at Mary and said, “This one’s for you, Puddin’.” They hit the jackpot, winning $1,908,064 to be paid over a period of twenty years. Carolyn refused to share the winnings with Mary. Is Mary entitled to one-half of the proceeds? Explain.

Answer: The defendant Carolyn asserted that the agreement, if any, was unenforceable under the statute of frauds because it could not be performed within one year. There is no dispute that the winnings were to be paid over a period of 20 years.

The one year provision of the statute of frauds does not apply if the contract, from its terms, could possibly be performed within a year—however improbable performance within one year may be.

To determine the applicability of the statute of frauds with indefinite contracts, this Court may use any reasonably clear method of ascertaining the intended length of performance. The method is used to determine the parties’ intentions at the time of contracting. The fact that the entire performance within one year is not required, or expected, will not bring an agreement within the statute.

Assuming without deciding that the parties agreed to share their gambling winnings, such an agreement possibly could have been performed within one year. For example, if the plaintiff and defendant had won $200, they probably would have received all the money in one pay-out and could have split the winnings immediately.

Therefore, the defendant was not entitled to summary judgment based on her affirmative defense of the statute of frauds. Iacono v. Lyons, Court of Appeals of Texas, 2000, 16 S.W. 3d 92.

29. On February 9, George Jackson and his neighbors, Karen and Steve Devenyn, drafted and signed a document that purported to convey a seventy-nine-acre parcel of land owned by Jackson. By the terms of the agreement, Jackson wished to reserve a 1.3-acre portion of the parcel. Although the agreement contained a drawing and dimensions of the conveyance, it did not contain a specific description of the parcel. Jackson died on May 8, and his estate refused to honor the agreement. The Devenyns then filed a petition with the probate court to order a conveyance. Based on the parol evidence rule, the estate of Jackson objected to the admission of the witnesses’ testimony that they could point out the specific area, based on conversations with Jackson. Explain whether the oral evidence is admissible.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 15: Contracts in Writing

Answer: The oral evidence is not admissible. Estate of Jackson v. Devenyns, 892 P. 2d 786 (Supreme Court of Wyoming, 1995).

A written memorandum purporting to convey real estate must sufficiently describe the property to comply with the requirements of the statute of frauds and permit specific performance. A valid contract to convey land must expressly contain a description of the land, certain in itself or capable of being rendered certain by reference to an extrinsic source that the writing itself designates. It is expressly prohibited to supply the writing's essential provisions by inferences or presumptions deduced from oral testimony. This writing insufficiently describes the property it purports to convey, to reserve, and for which it grants an option to purchase. The writing’s description of the property to be conveyed states: “George Jackson agrees to sell 79 acres…” Such a description is insufficiently definite to identify the land without recourse to extrinsic evidence. When a writing states only the total acreage without any description of the location of the land involved, the statute of frauds' requirement that the subject matter be reasonably certain is not satisfied and the contract is void. The present description provides only the total acreage and does not provide any certainty that this particular tract was intended to be conveyed. Therefore, this agreement is too uncertain to be enforced.

ANSWERS TO “TAKING SIDES” PROBLEMS Stuart Studio, an art studio, prepared a new catalog for the National School of Heavy Equipment, a school run by Gilbert and Donald Shaw. When the artwork was virtually finished, Gilbert Shaw requested Stuart Studio to purchase and supervise the printing of twenty-five thousand catalogs. Shaw told the art studio that payment of the printing costs would be made within ten days after billing and that if the “National School would not pay the full total that he would stand good for the entire bill.” Shaw was chairman of the board of directors of the school, and he owned 100 percent of its voting stock and 49 percent of its nonvoting stock. The school became bankrupt, and Stuart Studio was unable to recover the sum from the school. Stuart Studio then brought an action against Shaw on the basis of his promise to pay the bill. a. What are the arguments that Shaw is not liable on his promise? b. What are the arguments that Shaw is liable on his promise? c. Is Shaw obligated to pay the debt in question? Explain.

Answer: (a) Shaw would argue that his promise is that of a surety and thus must be in writing to be enforceable. Because Shaw is promising to pay the debt of National School if National fails to pay the debt, it is clearly a case of a surety promising to pay the debt of another. (b) Stuart Studio would argue that, since because Shaw was chairperson of the board of National School and owned 100 percent of National’s voting shares, the main purpose rule exception to the statute of frauds would apply. The economic benefit of Stuart’s performance was to the economic benefit of Shaw. (c) Gilbert Shaw is liable for the debt. The statute of frauds requires promises to answer for the duties of another to be in writing to be enforceable. Where the promise is collateral and it appears that the promisor’s main purpose in guaranteeing the obligation was to secure an advantage or economic benefit for himself, the promise is enforceable even though it was not in writing. The benefit accruing to a party merely by virtue of his position as a stockholder, officer, or director of a corporation alone is not such personal, immediate, and economic benefit as to invoke the main purpose © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 15: Contracts in Writing

rule. Rather, the court will examine the surety’s position and ownership interest in the corporation to determine whether he has enough control of the corporation to benefit directly. Here, Gilbert Shaw exercised sufficient control over the National School to render his oral promise enforceable. Stuart Studio, Inc. v. Heavy Equipment, Inc., 25 N.C. App. 544, 214 S.E. 2d 192 (1975).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 16: Third Parties to Contracts

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 16: Third Parties to Contracts

TABLE OF CONTENTS Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems ............................................................................. 10

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

On December 1, Euphonia, a famous singer, contracted with Boito to sing at Boito’s theatre on December 31 for a fee of $45,000 to be paid immediately after the performance. a. Euphonia, for value received, assigns this fee to Carter. b. Euphonia, for value received, assigns this contract to sing to Dumont, an equally famous singer. c. Boito sells his theatre to Edmund and assigns his contract with Euphonia to Edmund. d. State the effect of each of these assignments.

Answer: (a) The assignment by Euphonia of her fee is valid, and Carter can collect it from Boito. Euphonia has assigned her right to the payment of money, as represented by the fee to be paid to her for singing at Boito’s theater. It makes no legal difference to Boito whether he pays the fee to Euphonia or to Carter, so long as such payment absolves him from his obligation to pay. (b) The delegation of the contractual duty to Dumont is invalid. The personal element is the dominant feature of the contract. Dumont may be equally famous as a singer and yet Boito may, for perfectly valid reasons, not wish Dumont to sing in his theater. (c) This contract is assignable. The contract required Euphonia’s special skill as a singer, but Euphonia was not required to perform any differently for Edmund than for Boito. Should this not be the case, it may be that the contract is not assignable because of its personal nature.

2. The Smooth Paving Company entered into a paving contract with the city of Chicago. The contract contained the clause “contractor shall be liable for all damages to buildings resulting from the work performed.” In the process of construction, one of the bulldozers of the Smooth Paving Company struck and broke a gas main, causing an explosion and a fire that destroyed the house of John Puff. Puff brought an action for breach of the paving contract against the Smooth Paving Company to recover damages for the loss of his house. Can Puff recover under this contract? Explain.

Answer: Yes, Puff can recover for the loss of his house. Even though the contract did not clearly designate the party to whom the contractor was to be liable, the terms of the contract express clearly and unequivocally that the contractor assumed liability to the property owner. By so doing, the contractor assumed liability to protect the © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 16: Third Parties to Contracts

property owner, and, as a result, the property owner was a third party beneficiary and entitled to sue and recover. It is not essential to the third person’s right to enforce a contract made for his benefit that he be expressly named in the contract if he is otherwise sufficiently described or designated, and he may even be one of a class of persons if the class is sufficiently indicated.

3. Anne, who was unemployed, registered with the Speedy Employment Agency. A contract was then made under which Anne, in consideration of such position as the agency would obtain for her, agreed to pay the agency one half of her first month’s salary. The contract also contained an assignment by Anne to the agency of one half of her first month’s salary. Two weeks later, the agency obtained a permanent position for Anne with the Bostwick Co. at a monthly salary of $1,900. The agency also notified Bostwick Co. of the assignment by Anne. At the end of the first month, Bostwick Co. paid Anne her salary in full. Anne then quit and disappeared. The agency now sues Bostwick Co. for $950 under the assignment. Who will prevail? Explain.

Answer: Decision for Bostwick Co. Bostwick Co. is not liable under the assignment because at the time the assignment was made by Anne she had no employment agreement with Bostwick Co. Although the potential right to money, such as wages to be earned under an existing employment contract, is assignable, the existence of a contract to which the assignor is a party is essential to the validity of the assignment.

A purported assignment of a right expected to arise under a contract not in existence operates only as a promise to assign the right when it arises.

4. Georgia purchased an option on Greenacre from Pamela for $10,000. The option contract contained a provision by which Georgia promised not to assign the option contract without Pamela’s permission. Georgia, without Pamela’s permission, assigned the contract to Michael. Michael now seeks to exercise the option, and Pamela refuses to sell Greenacre to him. Must Pamela sell the land to Michael? Explain.

Answer: Yes. Decision for Michael. A provision in a contract prohibiting an assignment of the contract, unless a different intention is manifested, gives the obligor a right to damages for breach of the terms forbidding assignment but does not render the assignment ineffective. Therefore, since an option contract is assignable, the assignment is valid. However, since Georgia did assign the contract without Pamela’s permission Georgia did breach her contract and is liable to Pamela for damages, if any, caused by the assignment.

5. Julia contracts to sell to Hayden, an ice cream manufacturer, the amount of ice Hayden may need in his business for the ensuing three years to the extent of not more than 250 tons a week at a stated price per ton. Hayden makes a corresponding promise to Julia to buy such an amount of ice. Hayden sells his ice cream plant to Reed and assigns to Reed all Hayden’s rights under the contract with Julia. On learning of the sale, Julia refuses to furnish ice to Reed. Can Reed successfully collect damages from Julia? Explain.

Answer: The contract between Julia and Hayden is bilateral and executory, involving rights and duties on each side. Only rights are assignable. Duties are never assignable, but their performance may be delegated to another whenever delectus personae, choice of the person, is not integral to the performance. Hayden’s assignment of the entire contract to Reed involves a delegation to Reed of Julia’s duties under her contract with Hayden. These duties are related to the ice cream factory’s operating requirements for ice. Even though these requirements may be substantially different for a factory operated by Reed than for the same factory operated by Hayden, the contract places a maximum quantity upon the contract—250 tons per week. Therefore,

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 16: Third Parties to Contracts

it appears that the contract is both assignable and delegable. Cf. Restatement, Second, Contracts, Section 317, Illus. 5.

6. Brown enters into a written contract with Ideal Insurance Company under which, in

consideration of Brown’s payment of her premiums, the insurance company promises to pay Williams College the face amount of the policy, $100,000, on Brown’s death. Brown pays the premiums until her death. Thereafter, Williams College makes demand for the $100,000, which the insurance company refuses to pay on the ground that Williams College was not a party to the contract. Can Williams successfully enforce the contract?

Why or why not?

Answer: Yes. Decision for Williams College. This is an intended third-party donee beneficiary type of contract. Privity of contract between the promisor Ideal and the donee beneficiary under the policy is not required. The right arises from the intention of Brown to confer a benefit upon Williams College, and the promise of the insurance company to Brown is enforceable directly by the intended third-party beneficiary.

7. Grant and Debbie enter into a contract binding Grant personally to do some delicate

cabinetwork. Grant assigns his rights and delegates performance of his duties to Clarence. a. On being informed of this, Debbie agrees with Clarence, in consideration of Clarence’s promise to do the work, that Debbie will accept Clarence’s work, if properly done, instead of the performance promised by Grant. Later, without cause, Debbie refuses to allow Clarence to proceed with the work, though Clarence is ready to do so, and makes demand on Grant that Grant perform. Grant refuses. Can Clarence recover damages from Debbie? Can Debbie recover from Grant? Explain. b. Instead, assume that Debbie refuses to permit Clarence to do the work, employs another carpenter, and brings an action against Grant, claiming as damages the difference between the contract price and the cost to employ the other carpenter.

Explain whether Debbie will prevail.

Answer: (a) The facts indicate that the parties have entered into a novation. By so doing, Grant has been discharged from his contract with Debbie, and Debbie has entered into a new and binding agreement with Clarence. Accordingly, Clarence can recover from Debbie for Debbie’s breach of her contractual obligations, and Debbie cannot recover from Grant. (b) Section 318 of the Restatement, Contract, Second, provides: “(2) Unless otherwise agreed, a promise requires performance by a particular person only to the extent that the obligee has a substantial interest in having that person perform or control the acts promised.”

Thus, the question becomes whether Debbie had a substantial interest in having Grant perform the contract. It would seem that the decision hinges upon whether Debbie contracted with Grant due to Grant’s special expertise or with Grant merely because he was a competent, skilled carpenter. If the former, Debbie will prevail; if the latter, Grant will prevail.

8. Rebecca owes Lewis $2,500 due on November 1. On August 15, Lewis assigns this right for value received to Julia, who gives notice on September 10 of the assignment to Rebecca.

On August 25, Lewis assigns the same right to Wayne, who in good faith gives value and has no prior knowledge of the assignment by Lewis to Julia. Wayne gives Rebecca notice of the assignment on August 30. What are the rights and obligations of Rebecca, Lewis, Julia, and Wayne?

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 16: Third Parties to Contracts

Answer: The majority rule provides that the first assignee in point of time prevails over subsequent assignees. Under this approach, Julia prevails over Wayne. Lewis is liable to Wayne for the successive assignment. Rebecca is obligated to pay Julia.

The English rule, followed by a minority of states, provides that the first assignee that notifies the obligor prevails. This would permit Wayne to prevail over Julia because he notified Rebecca first in time. Julia would have to seek redress against Lewis, while Rebecca would be obligated to Wayne.

9. Lisa hired Jay in the spring, as she had for many years, to set out in beds the flowers Lisa had grown in her greenhouses during the winter. The work was to be done in Lisa’s absence for $300. Jay became ill the day after Lisa departed and requested his friend, Curtis, to set out the flowers, promising to pay Curtis $250 when Jay received his payment. Curtis agreed. On completion of the planting, an agent of Lisa’s, who had authority to dispense the money, paid Jay, and Jay paid Curtis. Within two days, it became obvious that the planting was a disaster. Because he did not operate Lisa’s automatic watering system properly, everything set out by Curtis died of water rot. May Lisa recover damages from Curtis? May Lisa recover damages from Jay, and, if so, does Jay have an action against Curtis? Explain.

Answer: Lisa may maintain an action against Curtis for breach of the contract between Jay and Curtis. Lisa is an intended beneficiary of the contract between Jay and Curtis.

Lisa may maintain an action against Jay. A promisor cannot delegate or relieve himself of his duties under a contract, even though they are of such type or character as to be delegable. “Unless the obligee agrees otherwise, neither delegation of performance nor a contract to assume the duty made with the obligor by the person delegated discharges any duty or liability of the delegating obligor.” Restatement, Second, Contracts, Section 318(3).

Lisa may recover damages against Jay and Curtis. Jay has an action against Curtis based upon their assignment and delegation agreement.

10. Caleb, operator of a window-washing business, dictated a letter to his secretary addressed to Apartments, Inc., stating, “I will wash the windows of your apartment buildings at $4.10 per window to be paid on completion of the work.” The secretary typed the letter, signed Caleb’s name, and mailed it to Apartments, Inc. Apartments, Inc., replied, “Accept your offer.”

Caleb wrote back, “I will wash them during the week starting July 10 and direct you to pay the money you will owe me to my son, Bernie. I am giving it to him as a wedding present.”

Caleb sent a signed copy of the letter to Bernie.

Caleb washed the windows during the time stated and demanded payment to him of $8,200 (2,000 windows at $4.10 each), informing Apartments, Inc., that he had changed his mind about having the money paid to Bernie. What are the rights of the parties?

Answer: The right to receive the money was assigned to Bernie. There is no required form by which an assignment must be made. What is required is a manifestation by the assignor that he is presently giving up whatever rights he has in the contract. The signed order was sent both to the obligor and the assignee, and Caleb’s words “I direct” and “I am giving” make it clear that Caleb is expressing an intention to transfer presently the right to the money to Bernie. There is, therefore, an assignment of that right to Bernie.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 16: Third Parties to Contracts

“An assignment of a right to payment expected to arise out of an existing employment or other continuing business relationship is effective in the same way as an assignment of an existing right.” Restatement, Second, Contracts, Section 321(1). The weight of modern authority is to the effect that the delivery of a written gift assignment to the assignee makes the assignment irrevocable. 4 Corbin on Contracts, Section 921. Restatement, Second, Contracts, Section 332, states: “(1) Unless a contrary intention is manifested, a gratuitous assignment is irrevocable if (a) the assignment is in writing either signed or under seal that is delivered by the assignor.”

In the problem the assignment, although gratuitous, is contained in a signed writing and had been delivered both to the assignee and the obligor. The weight of modern authority would hold that it was irrevocable.

11. Members of Local 100, Transport Workers Union of America (TWU), engaged in an elevenday mass transit strike that paralyzed the life and commerce of the city of New York.

Jackson, Lewis, Schnitzler & Krupman, a Manhattan law firm, brought a class action suit against the TWU for the direct and foreseeable damages it suffered as a result of the union’s illegal strike. The law firm sought to recover as a third-party beneficiary of the collective bargaining agreement between the union and New York City. The agreement contains a no-strike clause and states that the TWU agreed to cooperate with the city to provide a safe, efficient, and dependable mass transit system. The law firm argues that its members are a part of the general public that depends on the mass transit system to go to and from work. Therefore, they are in the class of persons for whose benefit the union has promised to provide dependable transportation service. Are the members of the class action suit entitled to recover? Explain.

Answer: Judgment for the TWU. A third-party beneficiary must have been contemplated by the contracting parties and intended to receive a benefit from the contract. The government agency which negotiated for the transit services contract in this case was under no obligation to provide such service to the public. Therefore, no duty existed on behalf of the union to the general public.

12. Northwest Airlines leased space in the terminal building at the Portland Airport from the

Port of Portland. Crosetti entered into a contract with the Port to furnish janitorial services for the building, which required Crosetti to keep the floor clean, to indemnify the Port against loss due to claims or lawsuits based upon Crosetti’s failure to perform, and to provide public liability insurance for the Port and Crosetti. A patron of the building who was injured by a fall caused by a foreign substance on the floor at Northwest’s ticket counter brought suit for damages against Northwest, the Port, and Crosetti. Upon settlement of this suit, Northwest sued Crosetti to recover the amount of its contribution to the settlement and other expenses on the grounds that Northwest was a third-party beneficiary of Crosetti’s contract with the Port to keep the floors clean and, therefore, within the protection of Crosetti’s indemnification agreement. Will Northwest prevail? Why or why not?

Answer: No. The court held that only two types of third-party beneficiaries are entitled to recover; and that Northwest was not a creditor beneficiary as it was not a creditor of the Port since its lease contained no agreement by the Port to indemnify it; nor was it a donee beneficiary as there was no evidence of any intention of the Port in its contract with Crosetti to make a gift to Northwest or confer upon Northwest a right to indemnity. At most, Northwest was an incidental beneficiary, and as such had no right of recovery. Northwest Airlines, Inc. v. Crosetti Bros. Inc., 483 P. 2d 70 (Or. 1971).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 16: Third Parties to Contracts

13. Tompkins-Beckwith, as the contractor on a construction project, entered into a subcontract with a division of Air Metal Industries. Air Metal procured American Fire and Casualty Company to be surety on certain bonds in connection with contracts it was performing for Tompkins-Beckwith and others. As security for these bonds, on January 3, Air Metal executed an assignment to American Fire of all accounts receivable under the Tompkins-Beckwith subcontract. On November 26 of that year, Boulevard National Bank lent money to Air Metal. To secure the loans, Air Metal purported to assign to the bank certain accounts receivable it had under its subcontract with Tompkins-Beckwith.

In June of the following year, Air Metal defaulted on various contracts bonded by American Fire. On July 1, American Fire served formal notice on Tompkins-Beckwith of Air Metal’s assignment. Tompkins-Beckwith acknowledged the assignment and agreed to pay.

In August, Boulevard National Bank notified Tompkins-Beckwith of its assignment.

Tompkins-Beckwith refused to recognize the bank’s claim and, instead, paid all remaining funds that had accrued to Air Metal to American Fire. The bank then sued to enforce its claim under Air Metal’s assignment. Is the assignment effective? Why or why not?

Answer: It depends upon which rule is followed in the state governing the contract.

There are two rules of priority concerning successive assignments of the same contract right. The American (majority) rule gives priority to the first assignee in point of time of the assignment without regard to notice to the debtor. Under this rule, the bank would lose. In contrast, the English (minority) rule gives preference to the assignment of which the debtor was first given notice. Under this rule, since American Fire was the first assignee to give proper notice to the debtor Tompkins-Beckwith, its claim takes precedence over the bank’s claim. Boulevard National Bank of Miami v. Air Metal Industries, 176 So. 2d 94 (Fla. 1965).

14. The International Association of Machinists (the “union”) was the bargaining agent for the

employees of Powder Power Tool Corporation. On August 24, the union and the corporation executed a collective bargaining agreement providing for retroactively increased wage rates for the corporation’s employees effective as of the previous April 1.

Three employees who were working for Powder before and for several months after April 1, but who were not employed by the corporation when the agreement was executed on August 24, were paid to the time their employment terminated at the old wage scale. The three employees assigned their claims to Springer, who brought this action against the corporation for the extra wages. Decision? Explain.

Answer: Decision for Springer as assignee of the employees’ claims. The assignment is a valid assignment of the right to payment of money. The employees are intended third-party beneficiaries of the contract between the union and Powder Power Tool Corporation. The three employees were employed by Powder Power Tool during a period covered by the contract and thus are intended beneficiaries who are entitled to back wages for the period between April 1, and the time their employment ceased.

Springer v. Powder Power Tool Corporation, 348 P. 2d 1112 (1960).

15. In March, Adrian Saylor sold government bonds owned exclusively by him and with $6,450 of the proceeds opened a savings account in a bank in the name of “Mr. or Mrs. Adrian M. Saylor.” In June of the following year, Saylor deposited the additional sum of $2,132 of his own money in the account. There were no other deposits and no withdrawals prior to the death of Saylor in May a year later. Is the balance of the account on Saylor’s death payable wholly to Adrian Saylor’s estate, wholly to his widow, or half to each? Explain.

Answer: The entire account is payable to the widow. When Mr. Saylor deposited money, a contract was created between Mr. Saylor and the bank. The account was

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 16: Third Parties to Contracts

established and maintained in the names of Mr. Saylor and his wife. In the absence of evidence to the contrary, there is a rebuttable presumption that Mr. Saylor intended to and did make his wife a third-party beneficiary of the contract. This presumption may be rebutted by evidence of a contrary intention. In the absence of such evidence, the stated circumstances are consistent with the intent to give her a right of survivorship.

Saylor v. Saylor, 389 S.W. 2d 904 (Ky. 1965).

16. Linda King was found liable to Charlotte Clement as the result of an automobile accident.

King, who was insolvent at the time, declared bankruptcy and directed her attorney, Prestwich, to list Clement as an unsecured creditor. The attorney failed to carry out this duty, and consequently King sued him for legal malpractice. When Clement pursued her judgment against King, she received a written assignment of King’s legal malpractice claim against Prestwich. Clement has attempted to bring the claim, but Prestwich alleges that a claim for legal malpractice is not assignable. Decision? Explain.

Answer: Judgment against Clement. The court held that a claim for legal malpractice is not an asset which may be assigned in a bankruptcy action. Moreover, the assignment of an action for legal malpractice is not permitted for public policy reasons. The breach of duty by an attorney to a client is personal to the client.

Clement v. Prestwich, 114 Ill. App. 3d 479, 488 N.E. 2d 1039 (1983).

17. Rensselaer Water Company contracted with the city of Rensselaer to provide water to the

city for use in homes, public buildings, industry, and fire hydrants. During the term of the contract a building caught fire. The fire spread to a nearby warehouse and destroyed it and its contents. The water company knew of the fire but failed to supply adequate water pressure at the fire hydrant to extinguish the fire. The warehouse owner sued the water company for failure to fulfill its contract with the city. Can the owner of the warehouse enforce the contract? Explain.

Answer: Judgment against the warehouse owner. The contract between the water company and the city created a duty to the city but not to its residents who are incidental beneficiaries. The court viewed the potential burden of liability of the water company to every inhabitant of the city as too great compared to the rewards of the contract. Payment of water fees would be insufficient consideration for such an extended risk. H.R. Moch, Inc. v. Rensselaer Water Co., 247 N.Y. 160, 159 N.E. 896 (1928).

18. McDonald’s has an undeviating policy of retaining absolute control over who receives new

franchises. McDonald’s granted to Copeland a franchise in Omaha, Nebraska. In a separate letter, it also granted him a right of first refusal for future franchises to be developed in the Omaha-Council Bluffs area. Copeland then sold all rights in his six McDonald’s franchises to Schupack. When McDonald’s offered a new franchise in the Omaha area to someone other than Schupack, he attempted to exercise the right of first refusal.

McDonald’s would not recognize the right in Schupack, claiming that it was personal to Copeland and, therefore, nonassignable without its consent. Schupack brought an action for specific performance, requiring McDonald’s to accord him the right of first refusal. Is Schupack correct in his contention? Explain.

Answer: No, Schupack is not correct. Judgment for McDonald’s. Contracts for personal services or involving relations of personal confidence and trust are not assignable without the consent of the other party to the contract.

Whether the right of first refusal is personal and, therefore, not assignable depends on the intent of the parties to the original contract. It is the “basic and undeviating policy of McDonald’s to retain the rigid and absolute control over who receives new

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 16: Third Parties to Contracts

franchises.” Here, the right was granted solely to Copeland and independently of the franchise contract. Furthermore, McDonald's granted the right on the basis of the personal confidence and trust that it placed in Copeland. The intent and purpose of the letter granting the right was to look to the personal performance of Copeland.

These factors indicate that McDonald’s intended the right of first refusal to be personal to Copeland and nonassignable without its consent. Schupack v. McDonald’s System, Inc., 264 N.W. 2d 827 (Neb. 1978).

19. While under contract to play professional basketball for the Philadelphia 76ers, Billy

Cunningham, an outstanding player, negotiated a three-year contract with the Carolina Cougars, another professional basketball team. The contract with the Cougars was to begin at the expiration of the contract with the 76ers. In addition to a signing bonus of $125,000, Cunningham was to receive under the new contract a salary of $100,000 for the first year, $110,000 for the second, and $120,000 for the third. The contract also stated that Cunningham “had special, exceptional and unique knowledge, skill and ability as a basketball player” and that Cunningham therefore agreed the Cougars could enjoin him from playing basketball for any other team for the term of the contract. In addition, the contract contained a clause prohibiting its assignment to another club without Cunningham’s consent. In 1971, the ownership of the Cougars changed, and Cunningham’s contract was assigned to Munchak Corporation, the new owners, without his consent.

When Cunningham refused to play for the Cougars, Munchak Corporation sought to enjoin his playing for any other team. Cunningham asserts that his contract was not assignable.

Was the contract assignable? Explain.

Answer: Yes, the contract is assignable. Judgment for Munchak. Generally, the right to performance of a personal service contract requiring special skills and based upon the personal relationship between the parties cannot be assigned without the consent of the party rendering those services. Such contracts may be assigned, however, when the character of the performance and the obligation will not change following the assignment. Although the contract required his special skills as a ballplayer, Cunningham was not obligated to perform any differently for Munchak than for the original owners. Moreover, the contract prohibited its assignment to another club without his consent but did not prohibit assignment to another owner of the same club. Therefore, under these facts, his contract is assignable. Munchak Corporation v.

Cunningham, 331 F. Supp. 872 (M.D.N.C. 1971).

20. Pauline Brown was shot and seriously injured by an unknown assailant in the parking lot of National Supermarkets. Pauline and George Brown brought a negligence action against National; Sentry Security Agency; and T. G. Watkins, a security guard and Sentry employee.

The Browns maintained that the defendants have a legal duty to protect National’s customers, both in the store and in the parking lot, and that this duty was breached. The defendants denied this allegation. What will the Browns have to prove to prevail? Explain.

Answer: The Browns will prevail only if they prove that they are third-party beneficiaries to the security contract between National and Sentry. The Browns need to show that National and Sentry entered into a contract whereby Sentry was to provide protection against criminal activities for National and its patrons both inside and outside the store. Depending upon the terms of the contract and the surrounding circumstances, National and Sentry may or may not have assumed a duty to the Browns. If the contract was formed for the primary benefit of such third parties as the Browns, then the Browns are third-party beneficiaries to the agreement. In such a situation, the Browns, as third-party beneficiaries, may sue in tort or contract for any

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 16: Third Parties to Contracts

contract breach by Sentry or its employees. Brown v. National Supermarkets, 679 S.W. 2d 307 (Mo. Ct. App. 1984).

21. Potomac Electric Power Company (PEPCO) is an electric utility serving the metropolitan

Washington, D.C., area. Panda-Brandywine, L.P. (Panda) is a “qualified facility” under the Public Utility Regulatory Policies Act of 1978. In August, 1991, PEPCO and Panda entered into a power purchase agreement (PPA) calling for (1) the construction by Panda of a new 230-megawatt cogenerating power plant in Prince George’s County, Maryland; (2) connection of the facility to PEPCO’s high-voltage transmission system by transmission facilities to be built by Panda but later transferred without cost to PEPCO; and (3) upon commencement of the commercial operation of the plant, for PEPCO to purchase the power generated by that plant for a period of twenty-five years. The plant was built at a cost of $215 million. The PPA is 113 pages in length, is single-spaced, and is both detailed and complex. It gave PEPCO substantial authority to review; influence; and, in some instances, determine important aspects of both the construction and operation of the Panda facility. Section 19.1 of the PPA provided that the agreement was not assignable and not delegable without the written consent of the other party, which consent could not be unreasonably withheld. In 1999, Maryland enacted legislation calling for the restructuring of the electric industry in an effort to promote competition in the generation and delivery of electricity. PEPCO’s proposed restructuring involved a complete divestiture of its electric generating assets and its various PPAs, to be accomplished by an auction. The sale to the winning bidder was to be accomplished by an Asset Purchase and Sale Agreement (APSA) that included the PPA to which PEPCO and Panda were parties. Under the APSA, the buyer was authorized to take all actions that PEPCO could lawfully take under the PPA with Panda. On June 7, 2000, Southern Energy, Inc. (SEI) was declared the winning bidder.

On September 27, 2000, the Public Service Commission (PSC) entered an order declaring, among other things, that the provisions in the APSA did not constitute an assignment or transfer within the meaning of Section 19.1 of the Panda PPA, that PEPCO was not assigning “significant obligations and rights under the PPA,” that Panda would not be harmed by the transaction, and that the APSA did not “fundamentally alter” the contract between Panda and PEPCO. The PSC thus concluded that Panda’s consent to the proposed APSA was not required. Panda disagreed. Is Panda correct? Explain.

Answer: Panda is correct. Through the APSA, PEPCO effectively and improperly delegated its duties under the PPA to SEI. Public Service Commission of Maryland v.

Panda-Brandywine, L.P., 375 Md. 185, 825 A. 2d 462 (Court of Appeals of Maryland, 2003).

In a bilateral contract, each party ordinarily has both rights and duties—the right to expect performance from the other party to the contract and the duty to perform what the party has agreed to perform. Although both are often the subjects of transfer, the law does distinguish between them, using the term “assignment” to refer to the transfer of contractual rights and the term “delegation” to refer to the transfer of contractual duties.

The Restatement (Second) of Contracts permits a contractual right to be assigned unless:

(a) the substitution of a right of the assignee for the right of the assignor would

materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce its value to him,

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 16: Third Parties to Contracts

(b) the assignment is forbidden by statute or is inoperative on grounds of public policy, or

(c) assignment is validly precluded by contract.

Section 19.1 of the PPA very clearly prohibits both the assignment of rights and the delegation of duties of performance, absent express written consent. The issue, then, is not whether PEPCO can make such an assignment or delegation but only whether it has, in fact, done so. The answer to that lies in the effect that the provisions of the APSA have on the contractual relationship between PEPCO and Panda.

The APSA involves a great deal more than merely a resale of electricity purchased from Panda and even more than the effective substitution of one customer for another.

Much of Panda’s control over its own facility and business was subject to the approval and cooperation of PEPCO; indeed, to a large extent, the operation of the facility was, in many important respects, almost a joint venture. In agreeing to that kind of arrangement, Panda necessarily was relying on its perceptions of PEPCO’s competence and managerial style. One does not ordinarily choose a business partner by auction or lottery, and there is no evidence that Panda did so in this case. Panda has “a substantial interest in having [PEPCO] perform or control the acts promised.” Under the APSA that control has been delegated irrevocably to SEI—a stranger to Panda— with the ability of SEI to delegate it to others. Virtually none of the rights and responsibilities transferred to SEI under the APSA are permitted under Section 19.1 of the PPA. Thus, the APSA constitutes an assignment of rights and obligations under the PPA in contravention of Section 19.1 of that agreement and it is therefore invalid and unenforceable.

ANSWERS TO “TAKING SIDES” PROBLEMS Pizza of Gaithersburg and The Pizza Shops (Pizza Shops) contracted with Virginia Coffee Service (Virginia) to install vending machines in each of their restaurants. One year later, the Macke Company (a provider of vending machines) purchased Virginia’s assets, and the vending machine contracts were assigned to Macke. Pizza Shops had dealt with Macke before but had chosen Virginia because they preferred the way it conducted its business. When Pizza Shops attempted to terminate their contracts for vending services, Macke brought suit for damages for breach of contract. a. What arguments would support Pizza Shop’s termination of the contracts? b. What arguments would support Macke’s suit for breach of contract? c. Which side should prevail? Explain.

Answer: (a) The Pizza Shop could argue that (i) when they contracted with Virginia, they relied on Virginia’s skill, judgment and reputation; (ii) the nature of the duties is personal in that they have a substantial interest in having Virginia perform the contract; (iii) they were justified in refusing to recognize Virginia’s delegation of its duties to Macke because there was a material difference between the performance of Virginia and that of Macke discharging them from their obligations under the contract. (b) Macke could argue that (i) the contract was not for personal services; (ii) the difference between the service the Pizza Shops received from Virginia and what they expected to get from Macke was not a material change in the performance of obligations under the agreements; and (iii) thus the delegation of duty by Virginia to

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 16: Third Parties to Contracts

Macke was permitted under the terms of the contract. (c) Macke should prevail. The Macke Company v. Pizza of Gaithersburg, Inc., 259 Md. 479, 270 A. 2d 645 (1970).

In the absence of a contrary provision—and there was none here—rights and duties under an executory bilateral contract may be assigned and delegated, subject to the exception that duties under a contract to provide personal services may never be delegated, nor rights be assigned under a contract where choice of person was part of the bargain. A contractual duty may be delegated, and the promisee cannot rescind the contract if the quality of the performance remains materially the same. Here, the original contract was for the installation, maintenance, and stocking of a vending machine. It involved either a license granted to Virginia by the Pizza Shops or a lease of a portion of their premises. It did not involve a contract for personal services. Since the quality of performance remained substantially the same under Macke, Virginia’s delegation of its duties was entirely permissible and enforceable. Contractual duties, unless otherwise stated, are delegable if quality of performance remains materially the same.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 17: Performance, Breach, and Discharge

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 17: Performance, Breach, and Discharge

TABLE OF CONTENTS Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems .............................................................................. 11

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

A-1 Roofing Co. entered into a written contract with Jaffe to put a new roof on the latter’s residence for $1,800, using a specified type of roofing, and to complete the job without unreasonable delay. A-1 undertook the work within a week thereafter, but when all the roofing material was at the site and the labor 50 percent completed, the premises were totally destroyed by fire caused by lightning. A-1 submitted a bill to Jaffe for $1,200 for materials furnished and labor performed up to the time of the destruction of the premises. Jaffe refused to pay the bill, and A-1 now seeks payment from Jaffe. Should A-1 prevail? Explain.

Answer: Yes. Decision for A-1 Roofing Co. As a general rule, and in the absence of a provision to the contrary in the contract, if the act to be performed is necessarily dependent upon the continued existence of a specific thing, its destruction before the time of performance, without the fault of the promisor, will excuse nonperformance of the contract, unless such destruction could have been reasonably anticipated. The rule is based on an implied condition of the continued existence of a particular thing.

However, the out-of-pocket expenses present a question as to whether restitution is appropriate.

In the United States, courts have generally taken the view that when a contract is discharged by impossibility or frustration the parties must make restitution for the benefits conferred upon them. Sometimes, the concept of “benefit” is stretched to include expenses incurred in preparation for performance. There is increasing recognition that restitution, when employed to unwind a contract that cannot be performed, is concerned with equitable readjustment of the gains and losses sustained by the parties and not merely the redressing of unjust enrichment.

2. By contract dated January 5, Rebecca agreed to sell to Nancy, and Nancy agreed to buy from Rebecca, a certain parcel of land then zoned commercial. The specific intent of Nancy, which was known to Rebecca, was to erect a manufacturing plant on the land; and the contract stated that the agreement was conditioned upon Nancy’s ability to construct such a plant upon the land. The closing date for the transaction was set for April 1. On February 15, the city council rezoned the land from commercial to residential, which precluded the erection of the plant. As the closing date drew near, Nancy made it known to Rebecca that she did not intend to go through with the purchase because the land could no longer be used as intended. On April 1, Rebecca tendered the deed to Nancy, who

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 17: Performance, Breach, and Discharge

refused to pay Rebecca the agreed purchase price. Rebecca brought an action against Nancy for breach of contract. Can Rebecca enforce the contract? Why or why not?

Answer: No, Rebecca cannot enforce the contract. Decision for Nancy. Since both parties entered into the sales contract with the purpose of erecting a manufacturing plant and the rezoning by the city council from commercial to residential thereby frustrated the expressed intent, the parties were discharged from their obligations under the contract.

3. The Perfection Produce Company entered into a written contract with Hiram Hodges for the purchase of three hundred tons of potatoes to be grown on Hodge’s farm in Maine at a stipulated price per ton. Though the land would ordinarily produce one thousand tons and although the planting and cultivation were properly done, Hodges was able to deliver only one hundred tons because an unprecedented drought caused a partial crop failure.

Perfection accepted the one hundred tons but paid only 80 percent of the stipulated price per ton. Hodges sued the produce company to recover the unpaid balance of the agreed price for one hundred tons of potatoes accepted by Perfection. Perfection counterclaimed against Hodges for his failure to deliver the additional two hundred tons. Who will prevail?

Explain.

Answer: Decision in favor of Hodges upon (a) his claim for the unpaid balance and (b) the counterclaim of the Perfection Produce Company. Impossibility of performance may arise from physical causes and may excuse performance and discharge both parties from their contractual duties. The impossibility is objective because only potatoes grown upon a particular farm may be delivered under the contract. The failure of the crop to produce more than 100 tons of potatoes absolved Hodges from liability for his failure to deliver to the Perfection Produce Company any additional potatoes. Although not required to accept the 100 tons of potatoes, Perfection is liable for the contract price of the goods accepted. Hodges is therefore entitled to the damages claimed by it. Section 265 of the Restatement, Second, Contracts, pertinently provides: Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.

4. On November 23, Sally agreed to sell to Bart her Buick automobile for $7,000, delivery and payment to be made on December 1. On November 26, Bart informed Sally that he wished to rescind the contract and would pay Sally $350 if Sally agreed. Sally agreed and took the $350 in cash. On December 1, Bart tendered to Sally $6,650 and demanded that Sally deliver the automobile. Sally refused, and Bart initiated a lawsuit. May Bart enforce the original contract? Explain.

Answer: No, the original contract may not be enforced. Decision for Sally. The parties have entered into a valid accord and satisfaction which discharges the parties from their performance. Bart after entering into this accord and satisfaction cannot now unilaterally reinstate the original contract. Section 281 of the Restatement, Second, Contracts, provides as follows: An accord is a contract under which an obligee promises to accept a stated performance in satisfaction of the obligor's existing duty. Performance of the accord discharges the original duty.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 17: Performance, Breach, and Discharge

5. Webster, Inc., dealt in automobile accessories at wholesale. Although it manufactured a few items in its own factory, among them windshield wipers, Webster purchased most of its inventory from a large number of other manufacturers. In January, Webster entered into a written contract to sell Hunter two thousand windshield wipers for $1,900, delivery to be made June 1. In April, Webster’s factory burned to the ground and Webster failed to make delivery on June 1. Hunter, forced to buy windshield wipers elsewhere at a higher price, is now trying to recover damages from Webster. Will Hunter be successful in its claim? Why or why not?

Answer: Yes. Decision for Hunter. This is not a case of impossibility of performance by Webster, Inc. Although Webster, Inc., may have expected to manufacture the windshield wipers in his factory, the agreement did not require him to do so. This is not a case of commercial impracticability because the nonoccurrence of the subsequent event (the factory being in existence) was not a “basic assumption” made by both parties when entering into the contract. Windshield wipers purchased from other manufacturers would have served the purpose and were available since Hunter was able to buy them elsewhere. Had Webster, Inc., instead specifically contracted to manufacture the wipers in his factory and sell them to Hunter, who contracted to buy, and thereafter Webster's factory was destroyed by fire, without his fault, the contract would be discharged. There would have been destruction of the specific means of performance, rendering performance impossible. In the problem, however, the fact that Webster's factory burned to the ground did not constitute destruction of the specific means or source of performance.

6. Erwick Construction Company contracted to build a house for Charles. The specifications called for the use of Karlene Pipe for all plumbing. Erwick, nevertheless, got a better price on Boynton Pipe and substituted the equally good Boynton Pipe for Karlene Pipe. Charles’s inspection revealed the change, and Charles now refuses to make the final payment. The contract price was for $200,000, and the final payment is $20,000. Erwick now brings suit seeking the $20,000. Will Erwick succeed in its claim? Explain.

Answer: Judgment for Erwick Construction Company. Although Erwick deviated from the contract specifications, its conduct would be evaluated as to whether it constituted a material breach. The critical question is whether Charles received substantially what he had bargained for. Since the substitution of the comparable (“equally good”) pipe, which is a commodity, did not qualitatively alter the value of the house, there is no material breach. Charles is not entitled to a discharge of his obligations to perform the contract. Charles may recover any damages he sustained because of the substitution, but it seems unlikely there will have been any.

7. Green owed White $3,500, which was due and payable on June 1. White owed Brown $3,500, which was due and payable on August 1. On May 25, White received a letter signed

by Green stating, “If you will cancel my debt to you, in the amount of $3,500, I will pay, on the due date, the debt you owe Brown, in the amount of $3,500.” On May 28, Green received a letter signed by White stating, “I received your letter and agree to the proposals recited therein. You may consider your debt to me canceled as of the date of this letter.”

On June 1, White, needing money to pay his income taxes, made a demand upon Green to pay him the $3,500 due on that date. Is Green obligated to pay the money demanded by White? Why or why not?

Answer: White is not entitled to collect the money from Green because there has been a valid substitution of performance. Restatement, Second, Contracts, Section 278(1).

White need not have accepted Green’s offer, but upon choosing to accept it Green

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 17: Performance, Breach, and Discharge

became discharged in accordance with the terms of the offer. Section 278, comment a.

8. By written contract, Ames agreed to build a house on Bowen’s lot for $145,000, commencing within ninety days of the date of the contract. Prior to the date for beginning construction, Ames informed Bowen that he was repudiating the contract and would not perform. Bowen refused to accept the repudiation and demanded fulfillment of the contract. Eighty days after the date of the contract, Bowen entered into a new contract with Curd for $142,000. The next day, without knowledge or notice of Bowen’s contract with Curd, Ames began construction. Bowen ordered Ames from the premises and refused to allow him to continue. Will Ames be able to collect damages from Bowen? Explain.

Answer: Judgment for Bowen. An anticipatory repudiation constitutes a breach that discharges the nonrepudiating party’s duty to perform and permits her to bring suit immediately. Nonetheless, the nonbreaching party may wait until the time the performance is due, to see whether the repudiator will retract his repudiation and perform his contractual duties. A repudiator may retract the repudiation provided the retraction comes to the attention of the injured party before she materially changes her position in reliance on the repudiation or indicates to the other party that she considers the repudiation to be final. If the retraction is effective and the repudiator does perform, then there is a discharge by performance; if the repudiator does not perform, there is a material breach. Accordingly, Bowen will prevail since he materially changed his position in that he hired Curd to construct the house.

9. Judy agreed in writing to work for Northern Enterprises, Inc., for three years as superintendent of Northern’s manufacturing establishment and to devote herself entirely to the business, giving it her full time, attention, and skill, for which she was to receive $72,000 per annum in monthly installments of $6,000. Judy worked and was paid for the first twelve months, when, through no fault of her own or Northern’s, she was arrested and imprisoned for one month. It became imperative for Northern to employ another, and it treated the contract with Judy as breached and abandoned, refusing to permit Judy to resume work on her release from jail. Explain what rights, if any, Judy has under the contract.

Answer: None. Judy's arrest and imprisonment constituted a substantial breach of the contract, which justified Northern Enterprises, Inc., the employer, in treating the contract as abandoned and in employing another person in her place. In order to recover on the contract without full performance upon the ground that her employer refused to allow her to serve out her time, she must allege and prove her ability, readiness and an offer to perform. This, Judy cannot do, and she cannot recover beyond the services actually rendered. The fact that Judy was unable to perform her part of the contract by reason of causes which she could neither foresee nor control does not aid Judy. Where neither party is at fault, the absence of the employee from her employment, irrespective of the cause, for an unreasonable length of time, will authorize the employer in treating the contract as abandoned. Here, the time was unreasonable. Restatement, Second, Sections 265, 267.

10. The Park Plaza Hotel awarded its valet and laundry concession to Larson for a three-year term. The contract contained the following provision: “It is distinctly understood and agreed that the services to be rendered by Larson shall meet with the approval of the Park Plaza Hotel, which shall be the sole judge of the sufficiency and propriety of the services.” After seven months, the hotel gave a month’s notice to discontinue services based on the failure of the services to meet its approval. Larson brought an action against the hotel, alleging that its dissatisfaction was unreasonable. The hotel defended on the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 17: Performance, Breach, and Discharge

ground that subjective or personal satisfaction may be the sole justification for termination of the contract. Who is correct? Explain.

Answer: Decision for Park Plaza Hotel on the assumption that its dissatisfaction with the services of Larson, while not reasonable, was nevertheless in good faith. The question is whether the test of dissatisfaction in a contract such as this, where the promise to perform is made expressly conditional on approval or satisfaction, is objective or subjective. If objective, the dissatisfaction must be reasonable. If subjective, it need only be genuine and in good faith and is not required to meet the standard of a reasonable person. This contract specifically provided that the services must meet the approval of the Hotel, who solely was to be the judge of its adequacy, and therefore was subjective.

11. Schlosser entered into an agreement to purchase a cooperative apartment from Flynn Company. The written agreement contained the following provision: “This entire agreement is conditioned on Purchaser’s being approved for occupancy by the board of directors of the Cooperative. In the event approval of the Purchaser shall be denied, this agreement shall thereafter be of no further force or effect.” When Schlosser unilaterally revoked her “offer,” Flynn sued for breach of contract. Schlosser claims the approval provision was a condition precedent to the existence of a binding contract and, thus, she was free to revoke. Decision? Explain.

Answer: Judgment for Flynn Company. The critical question in this case is the legal effect of the contract provision. In this case the contract provision is a condition precedent to the duty to perform, but not a condition precedent to the creation of the contract since the agreement was formed through the mutual assent of the parties.

Their intention was clear as evidenced by the writing. The contract to purchase was created without reliance on a prior conditional approval. Schlosser must perform the contract unless the required approval is denied.

12. Jacobs, owner of a farm, entered into a contract with Earl Walker in which Walker agreed to paint the buildings on the farm. As authorized by Jacobs, Walker acquired the paint from Jones with the bill to be sent to Jacobs. Before the work was completed, however, Jacobs without good cause ordered Walker to stop. Walker made offers to complete the job, but Jacobs declined to permit Walker to fulfill his contract. Jacobs refused to pay Jones for the paint Walker had acquired for the job. Explain whether Jones and Walker would be successful in an action against Jacobs for breach of contract.

Answer: Judgment for Jones and Walker. By her order to Walker to cease work and by refusing to permit either Walker or Jones to complete the work, which they were willing to do, Jacobs breached the contract and excused further performance on the part of Walker. Under the circumstances the law implies a promise on the one party not to prevent, hinder, or delay the performance of the other party. Under the facts, Jones was entitled to be paid for the value of the paint furnished and used upon Jacobs's barns and house, and Walker was entitled to recover for the reasonable value of the work completed by him in accordance with the contract. Jacobs v. Jones, 161 Colo. 505, 423 P. 2d 321 (1967).

13. Barta entered into a written contract to buy the K&K Pharmacy, located in a local shopping center. Included in the contract was a provision stating that “this Agreement shall be contingent upon Buyer’s ability to obtain a new lease from Landlord for the premises presently occupied by Seller. In the event Buyer is unable to obtain a lease satisfactory to Buyer, this Agreement shall be null and void.” Barta planned to sell “high-traffic” grocery items, such as bread, milk, and coffee, to attract customers to his drugstore. A grocery

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 17: Performance, Breach, and Discharge

store in the shopping center, however, already held the exclusive right to sell grocery items. Barta, therefore, could not obtain a leasing agreement meeting his approval. Barta refused to close the sale. In a suit by K&K Pharmacy against Barta for breach of contract, who will prevail? Explain.

Answer: Barta will prevail. Barta's obligation to perform under the contract is dependent upon a condition precedent, that is, an event which must first take place.

Here, Barta was contractually bound to purchase K&K Pharmacy only if he first obtained a leasing agreement that was satisfactory to him. Note that according to these facts, Barta need only be honestly dissatisfied with the lease agreement.

Assuming good faith, unless expressly provided for there is no requirement that Barta's dissatisfaction be reasonable. K&K Pharmacy, Inc. v. Barta, 222 Neb. 215, 382 N.W. 2d 363 (1986).

14. Victor Packing Co. (Victor) contracted to supply Sun Maid Raisin Growers 1,800 tons of raisins from the current year’s crop. After delivering 1,190 tons of raisins by August, Victor refused to supply any more. Although Victor had until the end of the crop season to ship the remaining 610 tons of raisins, Sun Maid treated Victor’s repeated refusals to ship any more raisins as a repudiation of the contract. To prevent breaching its own contracts, Sun Maid went into the marketplace to “cover” and bought the raisins needed. Unfortunately, between the time Victor refused delivery and Sun Maid entered the market, disastrous rains had caused the price of raisins to skyrocket. May Sun Maid recover from Victor the difference between the contract price and the market price before the end of the current crop year? Why or why not?

Answer: Sun Maid may bring suit immediately, and treat the anticipatory repudiation as if it were a breach. Sun Maid can protect itself by covering, and may recover from Victor the difference between the cost of cover (market price) and the contract price, plus incidental and consequential damages, less expenses saved due to the breach.

Alternatively, Sun Maid could wait until the time for performance passes, and the anticipatory repudiation becomes in fact a breach, and then sue for damages.

However, Sun Maid would then not be entitled to consequential damages it could have prevented by effectuating cover. See text under Remedies of the Buyer-Cover. Sun Maid Raisin Growers v. Victor Packing Co., 146 Cal. App. 3d 787, 194 Cal Rptr. 612 (Cal. App. 5 Dist. 1983).

15. On August 20, Hildebrand entered into a written contract with the city of Douglasville whereby he was to serve as community development project engineer for three years at a monthly fee of $1,583.33. This salary figure could be changed without affecting the other terms of the contract. One of the provisions for termination of the contract was written notice by either party to the other at any time at least ninety days prior to the intended date of termination. The contract listed a substantial number of services and duties Hildebrand was to perform for the city; among the lesser duties were (a) keeping the community development director (Hildebrand’s supervisor) informed at all times of his whereabouts and how he could be contacted and (b) attending meetings at which his presence was requested. Two years later, by which time Hildebrand’s fee had risen to $1,915.83 per month, the city fired Hildebrand effective immediately, citing “certain material breaches…of the…agreement.” The city specifically charged that he did not attend the necessary meetings although requested to do so and seldom if ever kept his supervisor informed of his whereabouts and how he could be contacted. Will Hildebrand prevail in a suit against the mayor and city for the amount of $5,747.49 for breach of his employment contract because of the city’s failure to give him ninety days’ notice prior to termination? Explain.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 17: Performance, Breach, and Discharge

Answer: Yes, Hildebrand will prevail. The only way the city could repudiate the contract without giving proper notice is in response to a material breach or substantial failure to perform on the part of Hildebrand. An incidental breach, or one that does not defeat the object of the parties in forming the contract, does not warrant a termination. In order to trigger the right to terminate, “the act failed to be performed must go to the root of the contract.” The two specific charges made against Hildebrand by the city neither alone nor collectively constitute substantial and fundamental noncompliance. Since Hildebrand substantially performed his duties under the contract, the city was obliged to give him ninety days' notice of termination.

Hildebrand may recover damages for his actual contractual loss of three months' compensation. Mayor & City of Douglasville v. Hildebrand, 333 S.E. 2d 674 (Ga. Ct. App. 1985).

16. Walker & Co. contracted to provide a sign for Harrison to place above his dry cleaning business. According to the contract, Harrison would lease the sign from Walker, making monthly payments for thirty-six months. In return, Walker agreed to maintain and service the sign at its own expense. Walker installed the sign in July, and Harrison made the first rental payment. Shortly thereafter, someone hit the sign with a tomato. Harrison also claims he discovered rust on its chrome and little spiderwebs in its corners. Harrison repeatedly called Walker for the maintenance work promised under the contract, but Walker did not respond immediately. Harrison then notified Walker that, due to Walker’s failure to perform the maintenance services, he held Walker in material breach of the contract. A week later, Walker sent out a crew, which did all of the requested maintenance services. Has Walker committed a material breach of contract? Explain.

Answer: No. Judgment for Walker & Co. Walker did send a service crew a week after Harrison’s notification. A failure to perform a promise promptly is a material breach if time is of the essence; that is, if the parties have clearly indicated that a failure to perform by a stated time is material; otherwise, the aggrieved party may recover damages only for loss caused by the delay. While the delay may have been irritating to Harrison, it provided Walker with the essence of what he contracted for and was not sufficient to constitute a material breach on Walker's part. Walker & Co. v. Harrison, 347 Mich. 630, 81 N.W. 2d 352 (1957).

17. In May, Watts was awarded a construction contract, based on its low bid, by the Cullman County Commission. The contract provided that it would not become effective until approved by the state director of the Farmers Home Administration (now part of the U.S. Department of Agriculture Rural Development Office). In September, construction still had not been authorized and Watts wrote to the County Commission requesting a 5 percent price increase to reflect seasonal and inflationary price increases. The County Commission countered with an offer of 3.5 percent. Watts then wrote the commission, insisting on a 5 percent increase and stating that if this was not agreeable, it was withdrawing its original bid. The commission obtained another company to perform the project, and on October 14, informed Watts that it had accepted the withdrawal of the bid. Watts sued for breach of contract. Explain whether Watts will prevail.

Answer: No, Watts will not prevail. Judgment for Cullman County. Watt’s letter withdrawing his bid and the commission’s letter accepting that withdrawal effectively rescinded any contract that might have existed. Parties to a contract may by mutual consent and without other consideration rescind the contract. Once the contract between Watts and Cullman County had been rescinded, Watts cannot recover damages for breach of contract. Watts Construction Company v. Cullman County, 382 So. 2d 520 (Ala. S.C., 1980).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 17: Performance, Breach, and Discharge

18. K & G Construction Co. was the owner of and the general contractor for a housing subdivision project. Harris contracted with the company to do excavating and earthmoving work on the project. Certain provisions of the contract stated that (a) K & G was to make monthly progress payments to Harris; (b) no such payments were to be made until Harris obtained liability insurance; and (c) all of Harris’s work on the project must be performed in a workmanlike manner. On August 9, a bulldozer operator, working for Harris, drove too close to one of K & G’s houses, causing the collapse of a wall and other damage.

When Harris and his insurance carrier denied liability and refused to pay for the damage, K & G refused to make the August monthly progress payment. Harris, nonetheless, continued to work on the project until mid-September, when the excavator ceased its operations due to K & G’s refusal to make the progress payment. K & G had another excavator finish the job at an added cost of $1,450. It then sued Harris for the bulldozer damage, alleging negligence, and for the $1,450 damages for breach of contract. Harris claims that K & G defaulted first, having no legal right to refuse the August progress payment. Did K & G default first? Explain.

Answer: K & G did not default. Judgment for K & G Construction Co. Contractual obligations are either independent of each other or mutually dependent. They are independent if the parties intend that performance by each of them is in no way conditioned upon performance by the other. Failure of one party to perform its independent promise does not excuse the other’s nonperformance. On the other hand, promises are concurrent conditions and mutually dependent if the parties intend performance by one to be conditioned upon performance by the other. A material breach of a mutually dependent promise by one party excuses the other’s performance of his contractual obligations. The modern rule is that there is a presumption that mutual promises are concurrent and dependent, and are to be so regarded, whenever possible.

Here, the bulldozer operator’s negligent damage to the house was a material breach of Harris’s promise to perform in a workmanlike manner. Under a reasonable interpretation of the circumstances and the contract, the progress payment was conditioned upon Harris’s nonnegligent, workmanlike performance. Hence, the promises are concurrent and mutually dependent. K & G then had a right to refuse making the progress payment without canceling the contract, based upon Harris’s negligence.

19. Mountain Restaurant Corporation (Mountain) leased commercial space in the ParkCenter Mall to operate a restaurant called Zac’s Grill. The lease specified that the lessee shall “at all times have a nonexclusive and nonrevocable right, together with the other tenants and occupants of…the shopping center, to use the parking area … for itself, its customers and employees.” Zac’s Grill was to be a fast-food restaurant where tables were anticipated to “turn over” twice during lunch. Zac’s operated successfully until parking close to the restaurant became restricted. Two other restaurants opened and began competing for parking spaces, and the parking lot would become full between 12:00 and 12:30 P.M. Parking, however, was always available at other areas of the mall. Business declined for Zac’s, which fell behind on the rent due to ParkCenter until finally the restaurant closed.

Mountain claims that it was discharged from its obligations under the lease because of material breach. Is Mountain correct? Explain.

Answer: No, Mountain was not discharged from its obligations. Judgment for ParkCenter Mall. Mountain Restaurant argues that the location of parking was very important because in a lunch-oriented business customers will not walk very far from their cars to a restaurant. The specific location of parking for Mountain Restaurant’s customers was not stated in the lease. Rather, the relevant lease provision, Article

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 17: Performance, Breach, and Discharge

V(A), provided that the lessee shall “at all times have a nonexclusive and nonrevocable right, together with the other tenants and occupants of…the shopping center, to use the parking area…for itself, its customers and employees.” Although Mountain Restaurant may have believed that it was extremely important to its business to have parking available right next to its location, the lease did not so provide. Thus, the fact that spaces in close proximity to the restaurant were generally not available during the lunch hour does not provide support for the claim that there was a material breach of the lease because the lease simply did not provide that parking in that area would be reserved for Mountain Restaurant’s customers.

20. In late 2020 or early 2021, the plaintiff, Lan England, agreed to sell 258,363 shares of stock to the defendant, Eugene Horbach, for $2.75 per share, for a total price of $710,498.25.

Although the purchase money was to be paid in the first quarter of 2021, the defendant made periodic payments on the stock at least through September 2021. The parties met in May of 2022 to finalize the transaction. At this time, the plaintiff believed that the defendant owed at least $25,000 of the original purchase price. The defendant did not dispute that amount. The parties then reached a second agreement whereby the defendant agreed to pay to the plaintiff an additional $25,000 and to hold in trust 2 percent of the stock for the plaintiff. In return, the plaintiff agreed to transfer the stock and to forgo his right to sue the defendant for breach of the original agreement.

In December 2023, the plaintiff made a demand for the 2 percent stock, but the defendant refused, contending that the 2 percent agreement was meant only to secure his payment of the additional $25,000. The plaintiff sued for breach of the 2 percent agreement. Prior to trial, the defendant discovered additional business records documenting that he had, before entering into the second agreement, actually overpaid the plaintiff for the purchase of the stock. The defendant asserts the plaintiff could not enforce the second agreement as an accord and satisfaction because (a) it was not supported by consideration and (b) it was based upon a mutual mistake that the defendant owed additional money on the original agreement. Is the defendant correct in his assertions? Explain.

Answer: No, the defendant is not correct. An accord and satisfaction arises when the parties to a contract mutually agree that a performance different than that required by the original contract will be made in substitution of the performance originally agreed upon and that the substituted agreement calling for a different performance will discharge the obligation created under the original agreement. The elements of an accord and satisfaction include: (1) a bona fide dispute or uncertainty over an unliquidated amount; (2) a payment tendered in full settlement of the entire dispute; and (3) an acceptance of the payment. In addition, for an accord and satisfaction to have any legal effect, the elements of a contract, including consideration, must be present. It is clear that consideration for an accord may consist of a compromise of a bona fide dispute or uncertainty as to the amount actually owing. Moreover, it is not necessary for the dispute to be well-founded so long as it is in good faith. Thus, if the parties in good faith believe there is a disputed or uncertain claim, mere settlement of the amount due and acceptance of that amount constitutes the consideration necessary to support the contract. At the meeting in May 2022, the parties both believed that there was a dispute as to the amount that had been paid. Although unfounded, the plaintiff asserted in good faith that he believed additional money was still owing. The defendant accepted this representation without dispute and accepted the plaintiff’s settlement proposal. Therefore, the settlement agreement is supported by consideration.

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The defendant is also not correct in his assertion that the accord and satisfaction is unenforceable because of a mutual mistake of fact. A mutual mistake occurs when both parties, at the time of contracting, share a misconception about a basic assumption or vital fact upon which they based their bargain. It is true that, when the settlement agreement was made, neither party was aware that defendant had already paid the original purchase agreement in full. However, this mistake did not go to the terms of the parties’ accord; rather, it merely demonstrates their accord was indeed a compromise of a bona fide dispute which was not necessarily well-founded, but was made in good faith. The accord and satisfaction accurately reflects the intent of the parties at the time it was entered. Therefore, as there was no mistake regarding a basic assumption underlying the accord and satisfaction, it is enforceable.

21. An artist once produced a painting now called The Plains of Meudon. For a while, the parties in this case thought that the artist was Theodore Rousseau, a prominent member of the Barbizon school, and that the painting was quite valuable. With this idea in mind, the Kohlers consigned the painting to Leslie Hindman, Inc. (Hindman), an auction house. Among other things, the consignment agreement between the Kohlers and Hindman defined the scope of Hindman, Inc.’s authority as agent. First, Hindman was obliged to sell the painting according to the conditions of sale spelled out in the auction catalog. Those conditions provided that neither the consignors nor Hindman made any warranties of authenticity. Second, the consignment agreement gave Hindman extensive and exclusive discretionary authority to rescind sales if in its “sole discretion” it determined that the sale subjected the company or the Kohlers to any liability under a warranty of authenticity.

Despite having some doubts about its authenticity, Thune was still interested in the painting but wanted to have it authenticated before committing to its purchase. Unable to obtain an authoritative opinion about its authenticity before the auction, Leslie Hindman and Thune made a verbal agreement that Thune could return the painting within approximately thirty days of the auction if he was the successful bidder and if an expert then determined that Rousseau had not painted it. Neither Leslie Hindman nor anyone else at Hindman told the Kohlers about the questions concerning the painting or about the side agreement between Thune and Hindman. At the auction, Thune prevailed in the bidding with a high bid of $90,000, and he took possession of the painting without paying.

He then sent it to an expert in Paris who decided that it was not a Rousseau. Thune returned the painting to Hindman within the agreed-upon period. Explain whether the Kohlers would be successful in a lawsuit against either Hindman or Thune.

Answer: The district court ruled that Hindman, Inc. and Thune were entitled to judgment on all of the Kohlers’ claims against them. Indeed, all of the Kohlers’ claims depend upon how the consignment agreement defined the scope of Hindman, Inc.’s authority as the Kohlers’ agent. If Hindman, Inc. acted at all times within its authority, the Kohlers cannot prevail on any of their claims.

The district court focused on Paragraph 14 of the consignment agreement, which authorized Hindman, Inc. to rescind a sale when the company, in its “sole discretion,” determined that it or its consignor was subject to liability under a warranty of authenticity. The district court concluded that this grant of discretion allowed Hindman, Inc. to rescind a sale whenever it perceived the threat of such liability, notwithstanding the auction catalog’s emphatic disclaimers. Hindman, Inc. had the power to rescind or to make a conditional promise to rescind inside agreements with prospective buyers.

Ultimately, for lack of objective criteria, we must conclude that Hindman, Inc.’s exercise of its authority is bounded only by its satisfaction as limited, of course, by

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good faith. Under the side agreement, Hindman, Inc. maintained Thune’s incentive to bid as if the painting were really a Rousseau; therefore, it maximized the chances of a lucrative result for the auction. This was indeed an act of good faith, and it was made within the limits of Hindman, Inc.’s authority under the consignment agreement. The district court correctly ruled that Hindman, Inc. had not breached the consignment agreement.

ANSWERS TO “TAKING SIDES” PROBLEMS Associated Builders, Inc., provided labor and materials to William M. Coggins and Benjamin W. Coggins, doing business as Ben & Bill’s Chocolate Emporium, to complete a structure on Main Street in Bar Harbor, Maine. After a dispute arose regarding compensation, Associated and the Cogginses executed an agreement stating that there existed an outstanding balance of $70,000 and setting forth the following terms of repayment: It is agreed that two payments will be made by the Cogginses to Associated Builders as follows: Twenty-Five Thousand Dollars ($25,000) on or before June 1, 2022, and TwentyFive Thousand Dollars ($25,000) on or before June 1, 2023. No interest will be charged or paid providing payments are made as agreed. If the payments are not made as agreed, then interest shall accrue at 10 percent per annum figured from the date of default. It is further agreed that Associated Builders will forfeit the balance of Twenty Thousand Dollars and No Cents ($20,000) providing the above payments are made as agreed.

The Cogginses made their first payment in accordance with the agreement. The second payment, however, was delivered three days late on June 4, 2023. Claiming a breach of the contract, Associated contended that the remainder of the original balance of $20,000, plus interest and cost, were now due. a.

What arguments would support Associated’s claim for $20,000? b.

What arguments would support the claim by the Cogginses that they were not liable for $20,000? c.

For what damages, if any, are the Cogginses liable? Explain.

Answer: (a) Associated could argue that (i) time was of the essence; (ii) the late payment was a material breach of the accord; (iii) it could recover damages for either breach of the accord or the original contract; and (iii) thus it was entitled to $20,000 plus interest and costs. (b) The Cogginses could argue that (i) time was not of the essence; (ii) the three-day late payment was not a material breach of the accord; (iii) they were liable only for breach of the accord and not liable for breach of the original contract; and (iv) thus they at most were liable for interest for three days at the rate of 10% per annum. (c) Judgment for the Cogginses. Associated Builders, Inc. v. William M. Coggins et al., Supreme Judicial Court of Maine, 1999, 1999 ME 12, 722 A. 2d 1278.

“An accord ‘is a contract under which an obligee promises to accept a substituted performance in future satisfaction of the obligor’s duty.’” Settlement of a disputed claim is sufficient consideration for an accord and satisfaction.

This agreement was an accord.

Satisfaction is the execution or performance of the accord. If the obligor breaches the accord, the obligee may enforce either the original duty or any duty

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pursuant to the accord. The obligor’s breach of the accord, however, must be material. The question, therefore, was whether the Cogginses’ late payment constituted a material breach of the accord. A material breach is a nonperformance of a duty that is so material and important as to justify the injured party in regarding the whole transaction as at an end. The Cogginses’ payment to Associated after a three-day delay was not a material breach and, therefore, satisfied the accord.

By receiving the second and final payment of $25,000, Associated was not deprived of the benefit that it reasonably expected. Further, the Cogginses’ late payment was not made in bad faith. Finally, neither the purpose of the accord nor the language of the accord suggests that time was of the essence. Because the late payment was not a material breach of the accord, the Cogginses have complied with the agreement relieving them of further liability to Associated.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 18: Contract Remedies

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 18: Contract Remedies

TABLE OF CONTENTS Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems ............................................................................... 9

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Edward, a candy manufacturer, contracted to buy one thousand barrels of sugar from Marcia. Marcia failed to deliver, and Edward was unable to buy any sugar in the market. As a direct consequence he was unable to make candies to fulfill unusually lucrative contracts for the Christmas trade. (a) What damages is Edward entitled to recover? (b) Would it make any difference if Marcia had been told by Edward that he wanted the sugar to make candies for the Christmas trade and that he had accepted lucrative contracts for delivery for the Christmas trade? Explain.

Answer: (a) Edward is entitled to recover monetary damages in compensation for such losses as are the usual, probable, ordinarily-to-be expected consequences of the breach itself.

Hadley v. Baxendale, 9 Exchange 341 (1854). Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made. Restatement, Second, Contracts, Section 351(1).

Accordingly, Edward may recover the lost ordinary profits he would have made from the candy he could have produced from the 1,000 barrels of sugar. It is unlikely he could recover additional damages for the unusually large profits he would have made from the lucrative contracts for the Christmas trade. (b) Yes, it would make a difference. Edward would be entitled to recover damages for such losses, though unusual, as may fairly and reasonably be supposed to have been within the contemplation of the parties when they made the contract, provided such losses are neither uncertain in their nature nor remote as to their cause. Hadley v.

Baxendale. Loss may be foreseeable as a probable result of a breach because it follows from the breach as a result of special circumstances, beyond the ordinary course of events, if the party in breach had reason to know of these circumstances.

Restatement, Second, Contracts, Sect. 351 (2).

2. Daniel agreed that he would erect an apartment building for Steven for $12 million, and that Daniel would suffer a deduction of $12,000 per day for every day of delay. Daniel was twenty days late in finishing the job, losing ten days because of a strike and ten days because the material suppliers were late in furnishing him with materials. Daniel claims that he is entitled to payment in full (a) because the agreement as to $12,000 a day is a penalty and (b) because Steven has not shown that he has sustained any damage. Discuss each contention and decide.

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Answer: (a) The contention that the agreement as to $12,000 a day is a penalty is not tenable. The provision is a modest liquidated damages provision. The agreed amount of damages is reasonable, considering the cost of the apartment building and that actual damages are not readily ascertainable. Restatement, Second, Contracts, Section 356. (b) Steven does not have to prove damages. One of the principal purposes of a liquidated damages provision is to obviate the necessity of proving damages.

3. Sharon contracted with Jane, a shirtmaker, for one thousand shirts for men. Jane manufactured and delivered five hundred shirts, for which Sharon paid. At the same time, Sharon notified Jane that she could not use or dispose of the other five hundred shirts and directed Jane not to manufacture any more under the contract. Nevertheless, Jane made up the other five hundred shirts and tendered them to Sharon. Sharon refused to accept the shirts. Jane then sued for the purchase price. Is she entitled to the purchase price? If not, is she entitled to any damages? Explain.

Answer: Jane may not recover the purchase price, but she is entitled to recover such damages as she sustained not enhanced by her act in manufacturing the second lot of 500 shirts. When Sharon notified Jane that she could not use or dispose of the other 500 shirts and directed Jane to discontinue manufacturing them under the contract, Jane should have sought to minimize the damages. If completing manufacture mitigated damages, Jane is entitled to compensatory damages for the second lot.

Jane “may in the exercise of reasonable commercial judgment for the purposes of avoiding loss and of effective realization either complete the manufacture and wholly identify the goods to the contract or cease manufacture and resell for scrap or salvage value or proceed in any other reasonable manner.” UCC, Section 2-704 (2). Comment 2 to this section states that “the seller is given express power to complete manufacture or procurement of goods for the contract unless the exercise of reasonable commercial judgment as to the facts as they appear at the time he learns of the breach makes it clear that such action will result in a material increase in damages.

The burden is on the buyer to show the commercially unreasonable nature of the seller’s action in completing manufacture.” There are not sufficient facts to determine whether Jane’s decision to complete manufacture minimized damages, but the burden is on Sharon to prove that Jane’s actions were commercially unreasonable.

4. Stuart contracts to act in a comedy for Charlotte and to comply with all theater regulations for four seasons. Charlotte promises to pay Stuart $1,800 for each performance and to allow Stuart one benefit performance each season. It is expressly agreed “Stuart shall not be employed in any other production for the period of the contract.” Stuart and Charlotte, during the first year of the contract, have a terrible quarrel. Thereafter, Stuart signs a contract to perform in Elaine’s production and ceases performing for Charlotte. Charlotte seeks (a) to prevent Stuart from performing for Elaine and (b) to require Stuart to perform his contract with Charlotte. What result? Explain.

Answer: (a) Injunction against Stuart’s performing for Elaine would probably be granted if Elaine is a competitor of Charlotte and if Stuart’s services are unique or extraordinary.

Restatement, Second, Contracts, Section 367, Comment C. (b) Specific Performance. Specific performance will not be granted. Restatement, Second, Contracts, Section 367 provides that “a promise to render personal services will not be specifically enforced.” Otherwise, this would allow for involuntary servitude.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 18: Contract Remedies

5.

Louis leased a building to Pam for five years at a rental of $1,000 per month. Pam was to deposit $10,000 as security for performance of all her promises in the lease, which was to be retained by Louis in case of any breach on Pam’s part. Pam defaulted in the payment of rent for the last two months of the lease. Louis refused to return any of the deposit, claiming it as liquidated damages. Pam sued Louis to recover $8,000 (the $10,000 deposit less the amount of rent due Louis for the last two months). What amount of damages should Pam be allowed to collect from Louis? Explain.

Answer: Decision for Pam. A liquidated provision will be enforced if it amounts to a reasonable forecast of the loss that may or does result from the breach. If, however, the sum agreed on as liquidated damages bears no reasonable relationship to the amount of probable loss, it is unenforceable as a penalty. By examining the substance of the provision, the nature of the contract, and the extent of probable harm that a breach may reasonably be expected to cause the promisee, the courts will determine whether the agreed amount is proper as liquidated damages or unenforceable as a penalty. If a liquidated damages provision is not enforceable, the injured party nevertheless is entitled to the ordinary remedies for breach of contract.

The amount of $10,000 deposited as security for performance of all of Pam’s covenants in the lease, to be retained by Louis in case of any breach on Pam’s part, was a provision for a penalty rather than one for liquidated damages. For the slightest infraction of the lease by Pam she would forfeit the entire $10,000. This amount does not bear a rational relationship to such actual damages as might accrue in the event of any and all breaches of the contract, so it will not be enforced. Louis is limited to $2,000, for recovery of damages for breach of contract. The remaining $8,000 should be returned to Pam.

6. In which of the following situations is specific performance available as a remedy?

a. Mary and Anne enter into a written agreement under which Mary agrees to sell and

Anne agrees to buy for $100 per share 100 shares of the 300 shares outstanding of the capital stock of the Infinitesimal Steel Corporation, whose shares are not listed on any exchange and are closely held. Mary refuses to deliver when tendered the $10,000. b. Modifying (a), assume that the subject matter of the agreement is stock of the U.S. Steel Corporation, which is traded on the New York Stock Exchange. c. Modifying (a), assume that the subject matter of the agreement is undeveloped farmland of little commercial value.

Answer: (a) Anne may obtain specific performance on this contract. Where shares of stock in a corporation have no market value and are not on the market for sale, money damages do not afford an adequate remedy for breach of contract for the sale of a part of these corporate shares and the purchaser may obtain specific performance of the contract. Hills v. McMunn, 232 Ill. 488, 83 N.E. 963. In accord, Restatement, Second, Contracts, Section 360. (b) Specific performance is not available on this contract. Specific performance is denied where the remedy at law is adequate. Money damages may be recovered in an action at law for breach of contract. Shares of U.S. Steel Corporation are readily available on the market. Therefore, the legal remedy is adequate. (c) Anne may obtain specific performance on this contract. A contract for the sale of land may be specifically enforced in equity. Land is unique, and one parcel of land

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 18: Contract Remedies

is not the same as any other parcel. The lack of commercial value or the undeveloped condition of the land is immaterial.

7.

On March 1, Joseph sold to Sandra fifty acres of land in Oregon that Joseph at the time represented to be fine black loam, high, dry, and free of stumps. Sandra paid Joseph the agreed price of $140,000 and took from Joseph a deed to the land. Sandra subsequently discovered that the land was low, swampy, and not entirely free of stumps. Sandra, nevertheless, undertook to convert the greater part of the land into cranberry bogs. After one year of cranberry culture, Sandra became entirely dissatisfied, tendered the land back to Joseph, and demanded from Joseph the return of the $140,000. On Joseph’s refusal to repay the money, Sandra brought an action at law against him to recover the $140,000. What judgment? Explain.

Answer: Judgment in favor of Joseph. Sandra was induced by fraudulent misrepresentations of material fact to purchase the fifty acres of land. Upon discovery of the fraud perpetrated upon her, Sandra had an election of remedies. She could have rescinded the contract and have sued to recover the $140,000 paid to Joseph upon tendering to Joseph a deed for the land or she could have retained the land and sued Joseph in tort for damages resulting from the fraud. Instead of rescinding the contract, Sandra affirmed the contract when she proceeded to convert the land into cranberry bogs for one year. Although not entitled to recover the purchase price paid to Joseph, Sandra can recover from Joseph in tort for her damages, assuming the statute of limitations has not barred the action.

8.

James contracts to make repairs to Betty’s building in return for Betty’s promise to pay $12,000 on completion of the repairs. After partially completing the repairs, James is unable to continue. Betty refuses to pay James and hires another builder, who completes the repairs for $5,000. The building’s value to Betty has increased by $10,000 as a result of the repairs by James, but Betty has lost $500 in rents because of the delay caused by James’s breach. James sues Betty. How much, if any, may James recover in restitution from Betty?

Answer: Restitution is the act of returning to a party the consideration, or its value, that he gave to the other party. Restitution is available in several contractual situations including to a party in default. James may recover $4,500 in restitution from Betty: $10,000 – 5,000 – 500 $ 4,500

9.

benefit conferred by James damages sustained by Betty in hiring another builder damages sustained by Betty because of delay amount recoverable in restitution

Linda induced Sally to enter into a purchase of a home theater receiver by intentionally misrepresenting the power output to be seventy-five watts at rated distortion, when in fact it delivered only forty watts. Sally paid $450 for the receiver. Receivers producing forty watts generally sell for $200, whereas receivers producing seventy-five watts generally sell for $550. Sally decides to keep the receiver and sue for damages. How much may Sally recover in damages from Linda?

Answer: Linda committed fraudulent misrepresentation. A minority of states allow the injured party to recover, under the “out-of-pocket” rule. The great majority of states, however, permit the intentionally defrauded party to recover, under the “benefit-ofthe-bargain” rule.

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Under the “benefit-of-bargain” rule, Sally may recover $350 in damages from Linda: $ 550 value of receiver as promised – 200 value of receiver delivered $ 350 damages (benefit of bargain)

Under the “out-of-pocket” rule, Sally may recover $250 in damages from Linda: $ 450 amount Sally paid for receiver – 200 value of receiver delivered $ 250 damages (out of pocket)

10. Virginia induced Charles to sell Charles’s boat to Virginia by misrepresentation of material fact on which Charles reasonably relied. Virginia promptly sold the boat to Donald, who paid fair value for it and knew nothing concerning the transaction between Virginia and Charles. Upon discovering the misrepresentation, Charles seeks to recover the boat. What are Charles’s rights against Virginia and Donald?

Answer: Charles may not recover the boat from Donald who is a bona fide purchaser for value because the transaction between Virginia and Charles was voidable not void.

Charles may recover damages for fraud from Virginia.

11. Felch was employed as a member of the faculty of Findlay College, a private college, under a contract that permitted dismissal only for cause. He was dismissed by action of the president and board of trustees, who did not comply with a contractual provision for dismissal that requires a hearing. Felch requested the court to grant specific performance of the contract and require Findlay College to continue Felch as a member of the faculty and to pay him the salary agreed upon. Is Felch entitled to specific performance? Explain.

Answer: Judgment for Findlay College. In general, specific performance is not available to enforce a provision in a contract for the performance of personal services requiring special knowledge, ability, experience, or the exercise of judgment, skill, taste, discretion, labor, tact, energy, or integrity, particularly where the performance of such services would be continuous over a long period of time. Equity will not grant specific performance of affirmative promises in a personal service contract on the grounds that (1) mischief is likely to result from enforced continuance of the relationship after it has become obnoxious to one of the parties, and (2) the enforcement of a decree requiring specific performance of such a contract would impose too great a burden on the courts. The refusal of affirmative specific enforcement in these cases is based in part upon the undesirability of compelling the continuance of personal association after disputes have arisen and confidence and loyalty are gone. Felch v. Findlay College, 119 Ohio App. 357, 200 N.E. 2d 353 (1963).

12. Copenhaver, the owner of a laundry business, contracted with Berryman, the owner of a large apartment complex, to allow Copenhaver to own and operate the laundry facilities within the apartment complex. Berryman terminated the five-year contract with Copenhaver with forty-seven months remaining. Within six months, Copenhaver placed the equipment into use in other locations and generated at least as much income as he would have earned at Berryman’s apartment complex. He then filed suit, claiming that he was entitled to conduct the laundry operations for an additional forty-seven months and that, through such operations, he would have earned a profit of $13,886.58, after deducting Berryman’s share of the gross receipts and other operating expenses. Decision? Explain.

Answer: Judgment in part for Copenhaver. Although Berryman is liable for the monetary loss sustained by Copenhaver, Copenhaver must exercise reasonable efforts in an attempt to minimize his damages. Copenhaver suffered no damages after the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 18: Contract Remedies

six-month period because all his equipment was in use in other locations and was generating at least as much income. Therefore, Copenhaver may recover only for the losses sustained during the six-month period. Copenhaver v. Berryman, 602 S.W. 2d 540 (Tex. Civ. App. 1980).

13. Billy Williams Builders and Developers (Williams) entered into a contract with Hillerich under which Williams agreed to sell to Hillerich a certain lot and to construct on it a house according to submitted plans and specifications. The house built by Williams was defectively constructed. Hillerich brought suit for specific performance of the contract and for damages resulting from the defective construction and delay in performance.

Williams argued that Hillerich was not entitled to have both specific performance and damages for breach of the contract because the remedies were inconsistent and Hillerich had to elect one or the other. Explain whether Williams is correct in this assertion.

Answer: No, Williams is incorrect. Judgment for Hillerich. The remedies of specific performance and damages are not inconsistent in this case. Contracts for the sale of real estate are specifically enforceable in equity, and if the quantity of land owned by the seller is less than the quantity he has contracted to convey, the buyer may obtain specific performance to the extent the seller can transfer title and damages for the difference between the actual performance and such performance as would have fulfilled the terms of the contract, plus damages for delay in performance. There is no reason to distinguish between a deficiency in quantity (short acreage or lack of title) and deficiency of quality (defective construction). Billy Williams Builders & Developers, Inc. v. Hillerich, 446 S.W. 2d 280 (Ky. 1969).

14. Developers under a plan approved by the city of Rye had constructed six luxury cooperative apartment buildings and were to construct six more. To obtain certificates of occupancy for the six completed buildings, the developers were required to post a bond with the city to assure completion of the remaining buildings. The developers posted a $100,000 bond upon which Public Service Mutual Insurance Company, as guarantor or surety, agreed to pay $200 for each day after the contractual deadline that the remaining buildings were not completed. After the contractual deadline, more than 500 days passed without completion of the buildings. The city claims that its inspectors and employees will be required to devote more time to the project than anticipated because it has taken extra years to complete. It also claims that it will lose tax revenues for the years the buildings are not completed. Should the city prevail in its suit against the developers and the insurance company to recover $100,000 on the bond? Explain.

Answer: No, the city will not prevail. Judgment for the insurance company. A contract may contain a liquidated damage provision, but the sum agreed upon must be a reasonable measure of the anticipated harm. Where, however, damages flowing from a breach are difficult to ascertain, a provision fixing the damages in advance will be upheld if the amount is a reasonable measure of the anticipated probable harm (Ward v. Hudson Riv. Bldg. Co., 125 N.Y. 230, 235, 26 N.E. 256, 257; Restatement, Contracts, s 339; 5 Corbin, Contracts, ss 1059, 1063). If, on the other hand, the amount fixed is grossly disproportionate to the anticipated probable harm or if there were no anticipatable harm, the provision will not be enforced. The amount of the bond was not a reasonable estimate of probable monetary harm or damage to the city but rather was a penalty. The harm which the city contends it would suffer is minimal and speculative. The effect on increased inspectorial services or on tax revenue is not likely to be substantial. There is nothing to show that either the sum of $200 per day or the aggregate amount of the bond bear any reasonable relationship to the pecuniary harm likely to be suffered or in fact suffered. Since the agreement to pay $200 a day

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was actually a penalty provision, the court will not enforce it. City of Rye v. Public Service Mutual Insurance Co., 34 N.Y. 2d 470, 358 N.Y.S. 2d 391, 315 N.E. 2d 458 (1974).

15. Kerr Steamship Company sent a telegram at a cost of $26.78 to the Philippines through the Radio Corporation of America. The telegram, which contained instructions in unintelligible code for loading cargo on one of Kerr’s ships, was mislaid and never delivered. Consequently, the ship was improperly loaded and the cargo was lost. Kerr sued the Radio Corporation for the $6,675.29 in profits the company lost on the cargo because of the Radio Corporation’s failure to deliver the telegram. Should Kerr be allowed to recover damages from Radio? Explain.

Answer: Judgment for Kerr in the amount of $26.78, the cost of transmitting the telegram. The settled doctrine of this court confines the liability of a telegraph company for failure to transmit a message within the limits of the rule in Hadley v.

Baxendale. Where the terms of the telegram disclose the general nature of the transaction, which is the subject of the message, the company is answerable for the natural consequences of its neglect in relation to the transaction thus known or foreseen. On the other hand, where the terms of the message give no hint of the nature of the transaction, the liability is for nominal damages or for the cost of carriage if the tolls have been prepaid. Notice of the business, if it is to lay the basis for special damages, must be sufficiently informing to be notice of the risk. This coded message did not provide such notice. General damages in an action by the sender of the message and the carrier are not the same as damages in an action by the sender of the message against the receiver of the message. The carrier of the message has a duty to deliver the message and no more. Thus, the damages recoverable for breach of the duty to deliver the message can be no more than the value of the performance of that duty. The Radio Corporation is not in a position to measure accurately every sender’s risk of loss and thus cannot be responsible for insuring lost profits for undelivered telegrams. Kerr Steamship Co. v. Radio Corporation of America, 245 N.Y. 284, 157 N.E. 140 (1927).

16. El Dorado Tire Company fired Bill Ballard, a sales executive. Ballard had a five-year contract with El Dorado but was fired after only two years of employment. Ballard sued El Dorado for breach of contract. El Dorado claims that any damages due to breach of the contract should be mitigated because of Ballard’s failure to seek other employment after he was fired. El Dorado did not provide any proof showing the availability of comparable employment. Explain whether El Dorado is correct in its contention.

Answer: Judgment for Ballard. The general rule is that an employee's damages for employer’s breach of contract will be mitigated by the amount she would earn if she found similar employment immediately after termination. The burden of showing the availability of such employment, however, is of the breaching party. The defendant must raise the issue of mitigation and prove the availability of similar employment.

This means that El Dorado could meet its burden of proof only by showing the availability of a managerial-type position in the tire industry. Were the contrary true, the rule requiring the employer to prove the availability of similar employment would be meaningless. El Dorado did not meet this burden. Ballard v. El Dorado Tire Co., 512 F. 2d 901 (5th Cir. 1975).

17. California and Hawaiian Sugar Company (C and H) is an agricultural cooperative in the business of growing sugarcane in Hawaii and transporting the raw sugar to its refinery in California for processing. Because of the seasonal nature of the sugarcane crop, availability of ships to transport the raw sugar immediately after harvest is imperative.

After losing the services of the shipping company it had previously used, C and H decided

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to build its own ship, a Macababoo, which had two components, a tug and a barge. C and H contracted with Halter Marine to build the tug and with Sun Ship to build the barge. In finalizing the contract for construction of the barge, both C and H and Sun Ship were represented by senior management and by legal counsel. The resulting contract called for a liquidated damages payment of $17,000 per day that delivery of the completed barge was delayed. Delivery of both the barge and the tug was significantly delayed. Sun Ship paid the $17,000 per day liquidated damages amount and then sued to recover it, claiming that without the liquidated damages provision, C and H’s legal remedy for money damages would have been significantly less than that paid by Sun Ship pursuant to the liquidated damages provision. Decision? Discuss.

Answer: The liquidated damages provision was valid. Although the actual damages sustained ($368,000) were less than the liquidated damages ($4,403,000), C and H introduced evidence of consequential damages from loss of charter revenues, which it alleged amounted to $3,732,000. These losses influenced the parties’ agreement on the amount of liquidated damages. The Code provides that liquidated damages are considered reasonable in light of the anticipated or actual harm. Moreover, exact damages to C and H were impossible to calculate at the inception of the contract, and the liquidated damages provision had been adopted by the parties after an arm’slength negotiation in which they were all represented by sophisticated representatives.

California and Hawaiian Sugar Company v. Sun Ship, Inc. 18. Bettye Gregg offered to purchase a house from Head & Seeman, Inc. (seller). Though she represented in writing that she had between $15,000 and $20,000 in equity in another home that she would pay to the seller after she sold the other home, she knew that she did not have such equity. In reliance upon these intentionally fraudulent representations, the seller accepted Gregg’s offer and the parties entered into a land contract. After taking occupancy, Gregg failed to make any of the contract payments. The seller’s investigations then revealed the fraud. Head & Seeman then brought suit seeking rescission of the contract, return of the real estate, and restitution. Restitution was sought for the rental value for the five months of lost use of the property and the seller’s out-of-pocket expenses made in reliance upon the bargain. Gregg contends that under the election of remedies doctrine, the seller cannot both rescind the contract and recover damages for its breach. Is Gregg correct? Explain.

Answer: No. Order reversed. The election of remedies doctrine bars a plaintiff from maintaining inconsistent theories or forms of relief. Its purpose is to prevent a double recovery for the same wrong. Under the doctrine, a defrauded party must choose either (1) to rescind, or (2) to affirm the contract and seek damages. This rule applies where the defrauded party is seeking benefit-of-the-bargain damages. It does not, however, prevent a defrauded party from rescinding and recovering “restorative” damages that put the defrauded party back in his position prior to the making of the contract. Rescission and restitutionary (restorative) damages are consistent remedies, not subject to election of remedies doctrine.

Here, the restoration of the rental value and out-of-pocket expenses works consistently with rescission of the contract to restore Head & Seeman to its precontract position. There is no possibility of the corporation obtaining an inconsistent or double recovery. The election of remedies does not apply. Head & Seemann, Inc. v. Gregg, 104 Wis. 2d 156, 311 N.W. 2d 667 (1981).

19. Watson agreed to buy Ingram’s house for $355,000. The contract provided that Watson deposit $15,000 as earnest money and that “in the event of default by the Buyer, earnest money shall be forfeited to Seller as liquidated damages, unless Seller elects to seek

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actual damages or specific performance.” Because Watson did not timely comply with all of the terms of the contract, nine months after the Watson sale was to occur, Ingram sold the house to a third party for $355,000. Is Ingram entitled to Watson’s $15,000 earnest money as liquidated damages? Explain?

Answer: Yes. The trial court found that the earnest money “was clearly intended by both parties to be non-refundable” if Watson defaulted and determined that $15,000 was a reasonable forecast by Ingram and Watson of damages that would be incurred if Watson failed to complete the purchase. Liquidated damages clauses are upheld if the amount fixed is a reasonable forecast of just compensation for the harm that is caused by the breach and the harm is such that it is incapable or very difficult of ascertainment. Watson v. Ingram, 124 Wash. 2d 845, 881 P. 2d 247 (1994).

20. Real Estate Analytics, LLC (REA), a limited liability company, became interested in Theodore Tee Vallas’s 14.13-acre Lanikai Lane property located in Carlsbad, California.

REA’s primary goal in purchasing the property was to make a profit for its investors and the company. In March, REA and Vallas entered into a written agreement for Vallas to sell the property to REA. Under the agreement, the sales price was $8.5 million, with REA to pay an immediate $100,000 deposit, and then pay $2.9 million at closing. In return, Vallas agreed to finance the remaining $5.5 million, with the unpaid balance to be paid over a five-year period. On June 14, Vallas cancelled the contract. The next day, REA brought a breach of contract action seeking specific performance. Explain whether REA is entitled to specific performance.

Answer: Yes, REA is entitled to specific performance. Real Estate Analytics, LLC v.

Vallas, Court of Appeal, Fourth District, Division 1, California, 2008, 160 Cal. App. 4th 463, 72 Cal. Rptr. 3d 835; review denied (2008).

To obtain specific performance after a breach of contract, a plaintiff must generally show the following: (1) the inadequacy of his legal remedy, (2) an underlying contract that is both reasonable and supported by adequate consideration, (3) the existence of a mutuality of remedies, (4) contractual terms which are sufficiently definite to enable the court to know what it is to enforce, and (5) a substantial similarity of the requested performance to that promised in the contract.

In this case, the trial court refused to specifically enforce the contract based on its finding that the first element (inadequacy of legal remedy) was not satisfied because REA sought to purchase the property as an investment, and not for some particular use of the land. A damage award is generally an inadequate remedy for a breach of real estate contract, and therefore courts generally grant a plaintiff’s request for specific performance. Most jurisdictions have rules requiring special treatment of land sale contracts, reflecting the enduring view that (1) each parcel of land is unique and therefore there can be no adequate replacement after a breach and (2) monetary damages are difficult to calculate after a party refuses to complete a land sales contract, particularly expectation damages.

ANSWERS TO “TAKING SIDES” PROBLEMS Sanders agreed in writing to write, direct, and produce a motion picture on the subject of lithography (a method for printing using stone or metal) for the Tamarind Lithography Workshop.

After the completion of this film, Four Stones for Kanemitsu, litigation arose concerning the parties’ rights and obligations under their agreement. Tamarind and Sanders resolved this dispute by a written settlement agreement that provided for Tamarind to give Sanders a screen

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credit stating: “A Film by Terry Sanders.” Tamarind did not comply with this agreement and failed to include the agreed-upon screen credit for Sanders. Sanders sued Tamarind seeking damages for breach of the settlement agreement and specific performance to compel Tamarind’s compliance with its obligation to provide the screen credit. a. What arguments would support the claim of Sander for specific performance in addition to damages? b. What arguments would support Tamarind’s claim that Sanders was not entitled to specific performance in addition to damages? c. Which side’s arguments are most convincing? Explain.

Answer: (a) Sanders could argue that (i) a jury’s damage award would not adequately compensate Sanders for future exhibitions of the film without Sanders’ screen credits, (ii) that an accurate assessment of damages would be far too difficult and require too much speculation, and (iii) that any future exhibitions might be deemed to be a continuous breach of contract and thereby create the danger of an untold number of lawsuits. It is only fair to give Sanders the agreed-upon credit that he deserved. (b) Tamarind could argue that (i) a jury’s damage award could adequately compensate Sanders for future exhibitions of the film without Sanders’ credits, and (ii) a jury might readily compute the advertising value of the screen credit. (c) Decision for Sanders granting specific performance. Tamarind Lithography Workshop, Inc. v. Sanders, Court of Appeal of California, Second District, 1983, 143 Cal. App. 3d 571, 193 Cal. Rptr. 409.

To obtain specific performance, Sanders must show (i) the inadequacy of his legal remedy, (ii) an underlying contract that is both reasonable and supported by adequate consideration, (iii) the existence of mutuality of remedies, (iv) contractual terms that are sufficiently definite, and (v) a substantial similarity of the requested performance to that promised in the contract. Sanders’s legal remedy is inadequate here because, first, an accurate assessment of damages for lost public acclaim is far too difficult and requires too much speculation; and, second, any future showings of the film might be deemed a further breach creating “the danger of an untold number of lawsuits.” The remedy of specific performance avoids these difficulties and provides Sanders with the contracted-for public acclaim. Because the other requisites for granting specific performance have been met, Sanders is entitled to a writ of specific performance requiring Tamarind to add a screen credit to the film.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 19: Introduction to Sales and Leases

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 19: Introduction to Sales and Leases

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ..............................................................................12

ANSWERS TO ETHICAL DILEMMA What Constitutes Unconscionability in a Business?

1.

Did Frank’s Maintenance and Repair have a reasonable opportunity to understand the terms of its contract with C. A. Roberts Co.? Given the contract that Frank’s received, was the company able to make a meaningful choice with regard to the terms of the agreement? Why or why not?

2. Who bears the responsibility in a situation such as this when both parties are businesspersons and thus should know enough to read all contracts carefully and thoroughly?

3. With or without the stamp, did Roberts act unconscionably in drawing up its contract?

Moreover, should Roberts have the right to restrict a buyer’s remedies if its steel may have a latent defect?

Answer: 1. Frank’s had the opportunity to understand the terms, but the Roberts Co. did not make them apparent enough to avoid being unconscionable. Even if Frank’s had read, understood, and agreed to all the contract terms, they are unconscionable due to the latent nature of the defect.

2. The doctrine of caveat emptor would suggest that the buyer should take the responsibility for understanding the contract. In this case, however, merely understanding the contract would not have made it fair. The fact that the defect was hidden and not readily discoverable and the “apparent” stamp on the front strongly favors Frank’s in this case.

3. The requirement for prompt discovery of latent defects is a difficult one. If the parties fully understand the allocation of risk and have equal bargaining power, the contract might be fair; otherwise, as in this case, it appears to be unconscionable.

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ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Dickinson orders 1,000 widgets at $5 per widget from International Widget to be delivered within sixty days. After the contract is consummated and signed, Dickinson orally requests that International deliver the widgets within thirty days rather than sixty days.

International agrees. Is the contractual modification binding? Why or why not?

Answer: No. This problem brings out two significant problems: (1) can the contract be modified without consideration and (2) what is the effect, if any, of the statute of frauds upon the modification. Concerning the first point, the UCC, Section 2-209(1) provides that ”an agreement modifying a contract within this article needs no consideration to be binding.” However, the UCC statute of frauds provision, Section 2201, renders this oral modification unenforceable. A contract for the sale of goods costing $500 or more must be in writing or otherwise comply with the requirements of the statute of frauds. The key question concerning a modification of a prior contract is whether the modification brings or retains the contract within the statute of frauds, i.e., whether the contract as modified is for $500 or more. In this case, the contract is for $5,000 and the modification does not change that, so the contract is within the statute of frauds.

2. In Question 1, explain what effect, if any, would the following letter have?

International Widget: In accordance with our agreement of this date you will deliver the 1,000 previously ordered widgets within thirty days. Thank you for your cooperation in this matter. (signed) Dickinson Answer: Ten days after receiving the letter, International Widget would be bound by the written memorandum as if they signed it. UCC Section 2-201(2) provides that, between merchants, a written confirmation that is sufficient against the sender is also sufficient against the recipient unless the recipient gives written notice of their objection within ten days of receipt of the confirmation.

3. Hicks, a San Francisco company, orders from U.S. Electronics, a New York company, 10,000 electronic units. Hicks’s order form provides that any dispute would be resolved by an arbitration panel located in San Francisco. U.S. Electronics executes and delivers to Hicks its acknowledgment form accepting the order and containing the following provision: “All disputes will be resolved by the state courts of New York.” A dispute arises concerning the workmanship of the parts, and Hicks wishes the case to be arbitrated in San Francisco. What would be the result? Explain.

Answer: The matter should be arbitrated in San Francisco. The common law “mirror image” rule, by which the acceptance cannot vary or deviate from the terms of the offer, is modified by the code. Section 2-207 provides: 1.

A definite and reasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

2. The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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(a) the offer expressly limits acceptance of the terms of the offer; (b) they materially alter it; or (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

Thus, the UCC alleviates this “Battle of the Forms” problem by focusing upon the intent of the parties. If the seller definitely and reasonably expresses his acceptance of the offer and does not expressly make his acceptance conditional upon the buyer's assent to the additional or different terms a contract is formed. Section 2-207(1). The issue then becomes whether seller's additional terms become part of the contract. If the contract is between merchants, the terms will be part of the contract provided they do not materially alter the agreement and are not objected to either in the offer itself or within a reasonable period of time. Section 2-207(2). Different terms, as here presented (arbitration in San Francisco versus litigation in New York), do not become part of the contract unless specifically accepted by the original offeror.

4. Explain how the result in Question 3 might change if the U.S. Electronics form contained the following provisions: a. “The seller’s acceptance of the purchase order to which this acknowledgment responds is expressly made conditional on the buyer’s assent to any or different terms contained in this acknowledgment.” b. “The seller’s acceptance of the purchase order is subject to the terms and conditions on the face and reverse side hereof, which the buyer accepts by accepting the goods described herein.” c. “The seller’s terms govern this agreement—this acknowledgment merely constitutes a counteroffer.”

Answer: (a) The clause provides that the seller's acceptance is expressly conditional on its terms and hence no contract is formed. Section 2-207(1). (b) The offeree cannot make himself the offeror by this trick of hand. In actuality, the seller is merely accepting the buyer's offer to buy and is attempting to make the buyer's silence (acceptance of the goods) an acceptance of the seller's terms. (c) If the seller is not accepting the offer as stated, there is no contract. If the seller ships the goods without an acceptance from the buyer, then the seller should be considered as accepting the buyer's offer. Here, however, the seller is attempting to indicate that he rejects the buyer’s offer and is making the offer. The key question is whether the seller is accepting or rejecting the buyer's offer. Most courts would consider the seller accepting the buyer’s offer if the seller ships the goods without the buyer accepting the counteroffer.

NOTE: In parts (a) and (c) the seller is risking the loss of a sale for a provision(s) which in the great majority of cases will never be utilized (arbitration in San Francisco versus litigation in New York). Parties to a potential contract must carefully weigh the provisions in question versus the risk of losing a contract.

5. Reinfort executed a written contract with Bylinski to purchase an assorted collection of shoes for $3,000. A week before the agreed shipment date, Bylinski called Reinfort and said, “We cannot deliver at $3,000; unless you agree to pay $4,000, we will cancel the order.” After considerable discussion, Reinfort agreed to pay $4,000 if Bylinski would ship as agreed in the contract. After the shoes had been delivered and accepted by Reinfort, Reinfort refused to pay $4,000 and insisted on paying only $3,000. Is the contractual modification binding? Explain.

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Answer: This problem raises three separate but interrelated issues: (a) Modification of a prior contract. As indicated in the answer to problem 1, the Code, Section 2-209(1), does not require consideration to be given in order to validly modify an existing contract, all that is necessary is a good faith intent to alter the contract. (b) Oral modification of a contract for the sale of goods costing $500 or more. Under the Code, Section 2-201, this oral modification (to a cost of $4,000) would keep the transaction within the statute of frauds and therefore to be valid must comply with its requirements. (c) Compliance with the statute of frauds by delivery and acceptance of the goods— UCC Section 2-201(3)(c) provides that an oral agreement is valid, even though it is for a sale of goods costing $500 or more, if the goods have been received and accepted as in this case.

Consequently, Reinfort must pay Bylinski $4,000, unless Reinfort can prove lack of intent to enter into the contract (for example, economic duress).

6. On November 23, Blackburn, a dress manufacturer, mailed to Conroy a written and signed offer to sell 1,000 sundresses at $50 per dress. The offer stated that it would “remain open for ten days” and that it could “not be withdrawn prior to that date.”

Two days later, Blackburn, noting a sudden increase in the price of sundresses, changed his mind. Blackburn therefore sent Conroy a letter revoking the offer. The letter was sent on November 25 and received by Conroy on November 28.

Conroy chose to disregard the letter of November 25; instead, she happily continued to watch the price of sundresses rise. On December 1, Conroy sent a letter accepting the original offer. The letter, however, was not received by Blackburn until December 9, due to a delay in the mail.

Conroy has demanded delivery of the goods according to the terms of the offer of November 23, but Blackburn has refused. Does a contract exist between Conroy and Blackburn? Explain.

Answer: Yes. Blackburn’s offer of November 23 constituted a firm offer and could not be revoked for the specified period of time (10 days). Hence Blackburn’s attempted revocation of his firm offer on November 25 is ineffective. A firm offer is a written offer signed by a merchant which by its terms gives assurance that is will be held open for a period of time, which cannot exceed three months. UCC, Section 2-205.

Conroy validly accepted Blackburn’s offer on December 1, while the offer was still open, by dispatching, vis-a-vis a reasonable means of acceptance, her acceptance. It is irrelevant on what date the acceptance was received by Blackburn.

7. Henry and Wilma, an elderly immigrant couple, agreed to purchase from Harris a refrigerator with a fair market value of $450 for twenty-five monthly installments of $60 per month. Henry and Wilma now wish to void the contract, asserting that they did not realize the exorbitant price they were paying. Explain the result.

Answer: The contract price of $1500 for a $450 refrigerator should be held unconscionable and void as against public policy, especially in light of the plaintiffs' ages and immigrant backgrounds. The challenged contract is clearly unreasonable and should not be enforced by a court of law.

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8. Courts Distributors needed 200 compact refrigerators on a rush basis. It contacted Eastinghouse Corporation, a manufacturer of refrigerators. Eastinghouse said it would take some time to quote a price on an order of that size. Courts replied, “Send the refrigerators immediately and bill us later.” The refrigerators were delivered three days later, and the invoice arrived ten days after that. The invoice price was $140,000. Courts believe that the wholesale market price of the refrigerators is only $120,000. Do the parties have a contract? If so, what is the price? Explain.

Answer: Parties to a contract for the sale of goods do not necessarily have to reach an agreement on price. The Code provides that the price will be a reasonable one based on the time and place of delivery. Three requirements must be met in order for this provision to apply: a) the agreement must say nothing as to price, b) the agreement must provide that the parties shall agree later on price and they subsequently fail to agree, and c) the agreement fixes the price in terms of some agreed upon market or other standard which has not been set. Judgment could be for Courts depending on how the contract deals with factor (c). UCC 2-305(1). However, if Eastinghouse had additional costs because of the “rush basis” of the contract, the invoice price could be found reasonable.

9. While adjusting a television antenna beside his mobile home and underneath a highvoltage electric transmission wire, Prince received an electric shock resulting in personal injury. He claims the high-voltage electric current jumped from the transmission wire to the antenna. The wire, which carried some 7,200 volts of electricity, did not serve his mobile home but ran directly above it. Prince sued the Navarro County Electric Co-Op, the owner and operator of the wire, for breach of implied warranty of merchantability under the UCC. He contends that the Code’s implied warranty of merchantability extends to the container of a product—in this instance, the wiring—and that the escape of the current shows that the wiring was unfit for its purpose of transporting electricity. The electric company argues that the electricity passing through the transmission wire was not being sold to Prince and that, therefore, there was no sale of goods to Prince. Is the contract covered by the UCC? Explain.

Answer: Yes, it is covered by the UCC. UCC 2-105. Judgment for Navarro County Electric Co-Op. To be within the UCC's definition of a good, electricity must be (1) a thing, (2) existing, and (3) movable, with #2 and #3 occurring simultaneously. Electricity can be measured in order to establish a purchase price by the amount of current which passes through the meter, thus fulfilling the existing and movable requirements.

Also, it is legally considered personal property, subject to ownership, and may be bartered, sold, and, in fact, stolen. Therefore, the sale of electricity is a sale of goods subject to Article 2's statute of limitations. Helvey v. Wabash County REMC, Court of Appeals of Indiana, First District, 1972. 151 Ind. App. 176, 278 N.E. 2d 608.

10. HMT, already in the business of marketing agricultural products, decided to try its hand at marketing potatoes for processing. Nine months before the potato harvest, HMT contracted to supply Bell Brand with 100,000 sacks of potatoes. At harvest time, Bell Brand would accept only 60,000 sacks. HMT sues for breach of contract. Bell Brand argues that custom and usage in marketing potatoes for processing allows buyers to give estimates in contracts, not fixed quantities, as the contracts are established so far in advance. HMT responds that the quantity term in the contract was definite and unambiguous. Can custom and trade usage be used to interpret an unambiguous contract?

Discuss.

Answer: Custom and trade usage are used to interpret this contract. Unless carefully negated, trade usage and custom become an element of the meaning of the words

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used in the contract. Since contracts are executed so far in advance, the custom in the potato processing industry is to treat the quantity solely as a reasonable estimate.

The fact that HMT was a newcomer to the trade was no defense. Persons carrying on a particular trade are deemed to be aware of prominent trade customs applicable to their industry. The knowledge may be actual or constructive, and it is constructive if the custom is of such general and universal application that the party must be presumed to know of it. Heggblade-Marguleas-Tenneco, Inc. v. Sunshine Biscuit, Inc., 59 Cal. App. 3d 948, 131 Cal. Rptr. 183 (1976).

11. Schreiner, a cotton farmer, agreed over the telephone to sell 150 bales of cotton to Loeb & Co. Schreiner had sold cotton to Loeb & Co. for the past five years. Written confirmation of the date, parties, price, and conditions was mailed to Schreiner, who did not respond to the confirmation in any way. Four months later, when the price of cotton had doubled, Loeb & Co. sought to enforce the contract. Shreiner argues that he is not a merchant.

Explain whether the contract is enforceable.

Answer: Judgment for Schreiner. The critical determination is whether a farmer is a “merchant” within the meaning of the UCC. A merchant must: 1) be a dealer in the goods; 2) who by his occupation holds himself out as having knowledge or skill peculiar to the goods or practices involved; or 3) who employs an agent or broker whom he holds as having such knowledge or skill. A farmer does not solely by his occupation hold himself out as being a professional merchant. Therefore, if Schreiner is not a merchant, the statute of frauds requires a writing signed by Schreiner in order to enforce the contract against him. Loeb and Company, Inc. v. Schreiner, 321 So. 2d 199 (Ala. 1975).

12. American Sand & Gravel, Inc., agreed to sell sand to Clark at a special discount if at least 20,000 tons were ordered. The discount price was $0.45 per ton, compared with the normal price of $0.55 per ton. Clark ordered and received, 1,600 tons of sand from American Sand & Gravel. Clark refused to pay more than $0.45 per ton. American Sand & Gravel sued for the remaining $0.10 per ton. Decision? Explain.

Answer: American Sand & Gravel win. The special discount price on sand was conditioned on the purchase of 20,000 to 25,000 tons. Performance of this condition (purchase of this amount) had to take place before the special price became operative.

Additionally, two years’ time was an unreasonable length of time to make the seller wait for the buyer to decide to take advantage of the offer. Even if Clark had purchased the required amount, the special price offer has lapsed. American Sand and Gravel, Inc. v. Clark and Fray Construction Company, Conn. Cir. 284, 196 A. 2d 68 (1963).

13. In September, Auburn Plastics submitted price quotations to CBS for the manufacture of eight cavity molds to be used in making parts for CBS’s toys. Each quotation specified that the offer would not be binding unless accepted within fifteen days. Furthermore, CBS would be subject to an additional 30 percent charge for engineering services upon delivery of the molds. In December and January of the following year, CBS sent detailed purchase orders to Auburn Plastics for cavity molds. The purchase order forms stated that CBS reserved the right to remove the molds from Auburn Plastics without an additional or “withdrawal” charge. Auburn Plastics acknowledged the purchase order and stated that the sale would be subject to all conditions contained in the price quotation. CBS paid Auburn for the molds, and Auburn began to fabricate toy parts from the molds for CBS. Later, Auburn announced a price increase, and CBS demanded delivery of the molds.

Auburn refused to deliver the molds unless CBS paid the additional charge for engineering services. CBS claimed that the contract did not provide for a withdrawal charge. Who will prevail? Why?

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Answer: CBS will prevail. “The earliest communications between the parties shown in this record are the defendant's price quotations. While it appears that the quotations were sufficiently detailed and specific so as to constitute offers, the plaintiff did not respond to them until months after 15 days had passed. Thus, the purchase orders submitted by the plaintiff did not create enforceable contracts since they had no binding effect upon the defendant.

In our view then, the plaintiff's purchase orders constituted offers to buy the molds, and the defendant's acknowledgments of those orders represented its acceptance of the offers. While the acknowledgments incorporate the conditions contained in the price quotations and therefore conflict with the terms of the offers with respect to the mold acquisition charge, the acknowledgments are nonetheless operable as acceptances since they are not expressly made conditional on the plaintiff's assent to the different terms.

Whether the condition in the defendant's acknowledgments calling for an additional 30 percent charge became a part of the contracts requires the application of subdivision 2 of section 2-207. The parties are clearly merchants; therefore, since the purchase orders expressly limited acceptance to their terms and also because notification of objection to a withdrawal charge was implicitly given by the plaintiff, the provision for such a charge did not become a part of the contract.” CBS v. Auburn Plastics, 413 N.Y.S. 2d 50 (1979).

14. The defendant, Gray Communications, desired to have a television tower built. After a number of negotiation sessions conducted by telephone between the defendant and the plaintiff, Kline Iron, the parties allegedly reached an oral agreement under which the plaintiff would build a tower for the defendant for a total price of $1,485,368. A few days later, the plaintiff sent a written document, referred to as a proposal, for execution by the defendant. The proposal indicated that it had been prepared for immediate acceptance by the defendant and that prior to formal acceptance by the defendant it could be modified or withdrawn without notice. A few days later, without having executed the proposal, the defendant advised the plaintiff that a competitor had provided a lower bid for construction of the tower. The defendant requested that the plaintiff explain its higher bid price, which the plaintiff failed to do. The defendant then advised the plaintiff by letter that it would not be retained to construct the tower. The plaintiff then commenced suit, alleging breach of an oral contract, and asserting that the oral agreement was enforceable because the common law of contracts, not the UCC, governed the transaction and that under the common law a writing is not necessary to cover this type of transaction. Even if the transaction was subject to the UCC, the plaintiff alternatively argued, the contract was within the UCC “merchant’s exception.” Explain whether the contract is enforceable.

Answer: No, it is not enforceable, but for different reasons than asserted by the plaintiff. The contract for construction of the tower was one for the sale of goods, rather than for services, and thus was subject to the writing requirement of the UCC statute of frauds. Even though services were performed, they were merely incidental to the sale of the tower. The appropriate inquiry is which facet of the transaction, goods or services is the predominant factor. Thus, under the UCC, the proposal and letter sent by Kline to the defendant did not constitute confirmation of an oral contract so as to bring the transaction within the “merchant’s exception” since the writings, by their terms, required further action by the defendant to become operative.

The writings expressly required the defendant to sign and return the proposal to indicate acceptance of its terms, which the defendant did not do. Kline Iron & Steel v.

Gray Communications, 715 F. Supp. 135.

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15. Dorton, as a representative for The Carpet Mart, purchased carpets from Collins & Aikman that were supposedly manufactured of 100 percent Kodel polyester fiber but were, in fact, made of cheaper and inferior fibers. Dorton then brought suit for compensatory and punitive damages against Collins & Aikman for its fraud, deceit, and misrepresentation in the sale of the carpets. Collins & Aikman moved for a stay pending arbitration, claiming that Dorton was bound to an arbitration agreement printed on the reverse side of Collins & Aikman’s printed sales acknowledgment form. A provision printed on the face of the acknowledgment form stated that its acceptance was “subject to all of the terms and conditions on the face and reverse side thereof, including arbitration, all of which are accepted by buyer.” Holding that there existed no binding arbitration agreement between the parties, the district court denied the stay. Collins & Aikman appealed. Explain whether the arbitration clause is enforceable.

Answer: The arbitration clause would be enforceable unless it materially alters the terms of the original oral offer. Therefore, the case should be remanded to district court for additional findings of fact. The UCC recognizes some contracts in which an acceptance or confirmation contains additional or different terms from the offer. To do so, however, the offeree's intent to accept must be definitely expressed and the acceptance must not be made expressly conditional on the offeror's assent to the additional or different terms. If these two stipulations are met, then a contract is formed and the additional or different terms are treated as “proposals” to the contract. If the transaction is between merchants, then the additional terms become part of the contract unless they materially alter it or the offeror objects to the additions.

Here, the provision on the face of the Collins & Aikman acknowledgment form did not make acceptance conditional upon the additional or different terms. Since it was not made expressly conditional upon Dorton's assent, the acknowledgment form constituted an acceptance and created a binding contract. In addition, Dorton did not object to the arbitration agreement. Therefore, unless it materially alters the terms of Dorton's original oral offer, the arbitration clause is part of the binding contract. The case is remanded to the trial court to determine whether the arbitration clause materially altered the contract. Dorton v. Collins & Aikman Corp., 453 F. 2d 1161 (6th Cir. 1972).

16. Emery Industries (Emery) contracted with Mechanicals, Inc. (Mechanicals), to install a pipe system to carry chemicals and fatty acids under high pressure and temperature. The system required stainless steel “stub ends” (used to connect pipe segments), which Mechanicals ordered from McJunkin Corporation (McJunkin). McJunkin in turn ordered the stub ends from the Alaskan Copper Companies, Inc. (Alaskan). McJunkin’s purchase order required the seller to certify the goods and to relieve the buyer of liabilities that might arise from defective goods. After shipment of the goods to McJunkin, Alaskan sent written acknowledgment of the order, containing terms and conditions of sale different from those in McJunkin’s purchase order. The acknowledgment provided a disclaimer of warranty and a requirement for inspection of the goods within ten days of receipt. The acknowledgment also contained a requirement that the buyer accept all of the seller’s terms.

The stub ends were delivered to Mechanicals in several shipments over a five-month period. Each shipment included a document reciting terms the same as those on Alaskan’s initial acknowledgment. Apparently, McJunkin never objected to any of the terms contained in any of Alaskan’s documents.

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After the stub ends were installed, they were found to be defective. Mechanicals had to remove and replace them, causing Emery to close its plant for several days. McJunkin filed a complaint alleging that Mechanicals had failed to pay $26,141.88 owed on account for the stub ends McJunkin supplied. Mechanicals filed an answer and counterclaim against McJunkin, alleging $93,586.13 in damages resulting from the replacement and repair of the defective stub ends. McJunkin filed a third-party complaint against Alaskan, alleging that Alaskan was liable for any damages Mechanicals incurred as a result of the defective stub ends. What result? Explain.

Answer: Judgment for McJunkin Corp. McJunkin’s form will control and Alaskan’s attempt to disclaim its warranty liability will be of no avail. The problem underlying any “battle of the forms” is that parties engaged in commerce have failed to incorporate into one formal, signed contract the explicit terms of their contractual relationship. Instead, each has been content to rely upon standard terms that each has included in its purchase orders or acknowledgments, terms which often conflict with those in the other party's documents. Usually, these standard terms mean little, for a contract looks to its fulfillment and rarely anticipates its breach. Hope springs eternal in the commercial world and expectations are usually, but not always, realized.

It is only when the good faith expectations of the parties are frustrated that the legal obligations and rights of the parties must be precisely determined. This case presents a situation typical in any battle of the forms: it is not that the parties’ forms have said too little, but rather that they have said too much yet have expressly agreed upon too little. McJunkin Corp. v. Mechanicals, Inc., United States Court of Appeals, Sixth Circuit, 1989 888 F. 2d 481.

17. Click2Boost, Inc. (C2B) entered into an Internet marketing agreement with the New York Times Company (NYT). Under the agreement, C2B was to solicit subscribers for home delivery of The New York Times newspaper by means of “pop up ads” on Internet Web sites with which C2B maintained “[m]arketing [a]lliances.” According to C2B's description of the Internet marketing system it used in connection with the agreement, a person who clicked on the popup ad was invited to submit his or her ZIP code; if the ZIP code was suitable for home delivery of The New York Times, the person was prompted to provide additional information needed for a subscription; upon submission of this information, the C2B system displayed a confirmation of the subscription. The agreement required NYT to pay C2B a fee or commission for each home delivery subscription C2B submitted to NYT. Explain whether this contact is covered by the UCC. Answer: No, this transaction is not covered by the UCC because it does not involve goods but rather is a contract for services. Wall Street Network, Ltd. v. New York Times Co., 164 Cal. App. 4th 1171 (Court of Appeal, 2nd Appellate Dist., 4th Div., 2008).

WSN [assignee of C2B] contends that C2B's submissions constitute “goods” under California's version of the Uniform Commercial Code (UCC), and that C2B's performance must therefore be assessed under the principles applicable to contracts for the sale of goods under the UCC. The crux of WSN's argument is that there are triable issues as to whether NYT accepted the goods—i.e., the submissions—under the UCC by failing to reject them in a timely manner (Cal. U. Com. Code, § 2606, subd. (1)).

We disagree. “It is established that where the commercial agreement between the parties involves the performance of services, the [California Uniform] Commercial Code has no application. [Citations.]” (North American Chemical Co. v. Superior Court (1997) 59 Cal. App. 4th 764, 781 [69 Cal. Rptr. 2d 466].) As explained below, the agreement before us involves the provision of services, not the sale of goods.

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Under the California Uniform Commercial Code, the terms “goods” encompasses “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities…and things in action.” (Cal. U. Com. Code, § 2105, subd. (1).)

In determining whether the agreement was for the sale of goods or the provision of services, “‘we must look to the “essence” of the agreement. When service predominates, the incidental sale of items of personal property[] does not alter the basic transaction.'“ (Filmservice Laboratories, Inc. v. Harvey Bernhard Enterprises, Inc. (1989) 208 Cal. App. 3d 1297, 1305 [256 Cal. Rptr. 735], quoting North American Leisure Corp. v. A & B Duplicators, Ltd. (2d Cir. 1972) 468 F. 2d 695, 697.) Here, the agreement stated that NYT and C2B “intend[ed] to form a business relationship whereby [NYT] advertises and promotes its products and services on C2B’s POPS[] cross selling system in return for a fee from [NYT] to C2B.” Under the agreement, C2B was obliged to place popup ads at the Web sites of its marketing partners, and then relay information from customers who responded to the ads to NYT. Although no California court has confronted the issue presented here, other state courts have concluded that contracts for the placement of advertising do not involve the sale of goods under the UCC. (Directory v. Lake Country (N.Y. Sup. Ct. 2002) 193 Misc. 2d 799 [753 N.Y.S. 2d 660, 662-663] [contract for the placement of advertisements in yellow pages is for services and not for sale of goods]; Lochabay v.

Southwestern Bell Media (Tex. App. 1992) 828 S.W. 2d 167, 171 [same]; Southwestern Bell Telephone v. FDP Corp. (Tex. 1991) 811 S.W. 2d 572, 576 [same]; Vails v.

Southwestern Bell Tel. Co. (W.D. Okla. 1980) 504 F. Supp. 740, 743 [same].) Moreover, other courts have held that contracts for the transmission of data from an external source are for services. (Kaplan v. Cablevision of Pa, Inc. (1996) 448 Pa. Super. 306 [671 A.2d 716, 722-723] [contract for provision of television programs via cable is for services]; Whitmer v. Bell Telephone Co. of Pa. (1987) 361 Pa. Super. 282 [522 A.2d 584, 585] [contract for use of public pay phone is for services].) In a case similar to this one, Pichey v. Ameritech Interactive Media Services (W.D. Mich. 2006) 421 F. Supp. 2d 1038, 1041-1042, an Internet Web site designer agreed to create a Web site for a furniture retailer that would advertise the retailer's products, and permit interested parties to contact the retailer by e-mail. The court concluded that the contract was for services, and thus fell outside the scope of the UCC. (421 F. Supp. 2d at p. 1050.)

We reach the same conclusion here.

Pointing to Big Farmer, Inc. v. Agridata Resources, Inc. (1991) 221 Ill. App. 3d 244 [163 Ill. Dec. 629, 581 N.E. 2d 783] (Big Farmer), WSN contends that C2B provided goods to NYT because it identified potential subscribers to The New York Times and was paid a fee for each potential subscriber. In Big Farmer, the publisher of a farming magazine bought a list of farmers within an income group from a business that sold demographic information and mailing lists, and used the list to solicit potential subscribers. (Id., 581 N.E. 2d at p. 784.) The parties subsequently fell into a dispute about whether the purchase agreement obliged the publisher to pay a fee for each name on the list, or each new subscriber. (Id. at p. 784.) The court concluded that the names and addresses sold constituted “goods” because they were “moveable.” (Id. at p. 785.) Here, C2B did not sell NYT names and addresses of persons to whom NYT intended—by its own efforts—to send solicitations for subscriptions; rather, C2B agreed to solicit subscribers for NYT by placing subscription advertisements for NYT in designated locations, and to forward responses to the advertisements. Whereas the provider in Big Farmer sold personal information it had compiled, C2B merely promised to transmit information from customers of C2B’s marketing partners who chose to provide the information through the popup ads. In our view, C2B thus agreed to

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provide a service for NYT. That NYT paid a fee for each submission does not establish that the submissions constituted “goods.” (See Brown v. Lee (1967) 242 Ark. 122 [412 S.W. 2d 273, 274] [agreement that obliged a housebuilder to pay a commission for each building contract a broker obtained for the housebuilder was not for sale of goods].)

18. Construction Associates (CA) was the successful bidder to construct a water supply line for the city of Breckenridge, Minnesota. CA purchased a large amount of polyvinyl chloride pipe manufactured by the Johns-Manville Sales Corporation (J-M) to construct the pipeline. CA, however, did not have any direct contact with J-M; instead, it purchased the pipe through an intermediate supply company. J-M shipped the pipe directly to the work site and included with each shipment an installation guide written for those who directed the installation of the pipe. On page 3 of the installation guide, J-M expressly warranted the pipe to be free from defects in workmanship and materials. In addition, J-M set forth a limitation of liability clause, which stated there would be no liability except for breach of the express warranty and that J-M would be responsible only for resupplying a like quantity of nondefective pipe. J-M stated that it would not be liable for any incidental, consequential, or other damages. Eventually the Breckenridge pipeline developed more than seventy leaks. The only way these leaks could be repaired was to remove the defective joints and replace them with stainless steel sleeves. After incurring more than $140,000 in repairs to the pipeline, CA sued J-M. In response, J-M claimed that the limitation of liability clause should be enforced, and therefore J-M is only responsible for resupplying a like quantity of nondefective pipe. Decision? Explain.

Answer: Decision for CA. Procedural and substantive unconscionability makes the limitation of liability clause unenforceable. Construction Associates, Inc. v. Fargo Water Equipment Co., North Dakota Supreme Court, 1989, 446 N.W. 2d 237.

The Uniform Commercial Code (UCC) expressly allows a party to a contract to limit or exclude consequential damages, unless the limitation or exclusion is unconscionable.

The UCC, however, also states that: if the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may limit the application of any unconscionable clause as to avoid any unconscionable result.

Courts will determine whether the unconscionability in question is procedural or substantive in nature. Procedural unconscionability includes unfair surprise, oppression, and inequality of bargaining power, while harshness or one-sidedness of contractual provisions are types of substantive unconscionability. From a procedural viewpoint, the limitation of liability clause was never negotiated, and in fact was only seen by lower-level CA employees at the work site. In addition, even though this is a commercial setting, there is significant inequality of bargaining power between the local contractor CA and the international conglomerate J-M. Substantively, all J-M is required to do under the limitation of liability clause is resupply more pipe. Since the only way to repair the installed pipe is with stainless steel sleeves, this remedy is virtually worthless. Given both the procedural and substantive unconscionability in this instance, the decision of the trial court in favor of CA is affirmed.

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ANSWERS TO “TAKING SIDES” PROBLEMS Terminal Grain Corporation brought an action against Glen Freeman, a farmer, to recover damages for breach of an oral contract to deliver grain. According to Terminal Grain, Freeman orally agreed to two sales of wheat to Terminal Grain of four thousand bushels each at $6.21 a bushel and $6.41 a bushel, respectively. Dwayne Maher, merchandising manager of Terminal Grain, sent two written confirmations of the agreements to Freeman. Freeman never made any written objections to the confirmations. After the first transaction had occurred, the price of wheat rose to between $6.75 and $6.80 per bushel, and Freeman refused to deliver the remaining four thousand bushels at the agreed-upon price. Freeman denies entering into any agreement to sell the second four thousand bushels of wheat to Terminal Grain but admits that he received the two written confirmations sent by Maher. a. What arguments support considering Freeman be a merchant who is bound by the written confirmations? b. What arguments support considering Freeman not to be a merchant seller and thus not bound by the written confirmations? c. What is the appropriate decision?

Answer: (a) Sellers don’t have to be on equal levels of expertise to be considered merchants. A merchant may (1) be a dealer in the goods, or (2) by his occupation hold himself out as having knowledge or skill peculiar to the goods or practices involved, or (3) employs an agent or broker whom he holds out as having such knowledge or skill.

Freeman is certainly not a small-time seller; he has knowledge peculiar to the selling of grain. (b) The average farmer has no particular skill or knowledge in the buying or selling of wheat with dealers such as Terminal Grain. Whatever knowledge a farmer may have regarding the production of grain does not make him an expert in the marketplace on a level with a grain company. (c) Judgment for Freeman. Freeman is not a merchant. Terminal Grain Corp. v.

Freeman, 270 N.W. 2d 806 (S.D. 1978).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 20: Performance

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 20: Performance

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ..............................................................................12

ANSWERS TO ETHICAL DILEMMA Should a Buyer Refuse to Perform a Contract Because a Legal Product May Be Unsafe?

1.

Should Carson and Olson attempt to invalidate the contract? Compare the social value of enforcing promises made with the good faith intention of being legally bound against the value of protecting the public from health or environmental threats.

2. Is it premature to characterize Chem-Care products as a threat to health or the environment?

3. Should the law excuse the performance of contracts that involve products that are under investigation for posing health or environmental problems?

4. As a practical matter, what should Carson and Olson do? Given the question as to the safety of Chem-Care products, does Olson’s suggestion of getting new customers for Chem-Care products make sense from an ethical or a business standpoint?

Answer: 1. There is a concern that Chem-Care products will cause health or environmental problems. These concerns should take precedence over the social value in enforcing contracts in the ordinary case.

2. Many products are studied and unjustified panics have occurred over the safety of various goods. The specific reasons why Chem-Care is under examination should be considered. The study may have been precipitated by actual cases of harm. On the other hand, the product may have been included in a broad study on an arbitrary basis.

3. The question posed is a difficult one. There are numerous types of product safety studies. One may argue that if there is significant evidence of harm, the product should be tentatively banned pending final investigation. A prohibition on the product would operate as an excuse to the performance of the contract. The more difficult case is the one involving a product not officially banned, but merely under study.

4. From an ethical, business, and legal standpoint it would be inappropriate to expand such sales. It would be unfair to the public to make sales without fully exposing the product's questionable status. Expanded use of the product could expose the parties to expanded tort liability as well.

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ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Tammie contracted with Kristine to manufacture, sell, and deliver to Kristine and put in running order a certain machine. After Tammie set up the machine and put it in running order, Kristine found it unsatisfactory and notified Tammie that she rejected the machine.

She continued to use it for three months but continually complained of its defective condition. At the end of the three months, she notified Tammie to come and get it. Has Kristine lost her right (a) to reject the machine? (b) to revoke acceptance of the machine?

Explain.

Answer: (a) After the buyer has rejected the goods, the Code allows her to exercise no ownership of them. As a result, Kristine has lost her right to reject the machine, although she has a cause of action for damages against the seller if there is a breach of warranty. Upon learning that the machine was defective and that it did not conform to the contract of sale, Kristine could have rejected it by promptly notifying the seller and returning it to the seller or tendering it to him. However, Kristine's continued use of the machine for three months after knowledge of the defect was an acceptance of the goods, which precludes rejection. UCC §2-607. (b) Kristine would have the right to revoke if (1) she accepted the machine on the reasonable assumption that its nonconformity would be cured, (2) it has not been seasonably cured and (3) the nonconformity substantially impairs the value of the machine. If these conditions are met Kristine, as seems likely on the facts, may revoke her acceptance if she does so within a reasonable time after the seller fails to seasonably cure. UCC §2-608(2).

2. Smith, having contracted to sell to Beyer thirty tons of described fertilizer, shipped to Beyer by carrier thirty tons of fertilizer that he stated conformed to the contract. Nothing was stated in the contract as to time of payment, but Smith demanded payment as a condition of handing over the fertilizer to Beyer. Beyer refused to pay unless he was given the opportunity to inspect the fertilizer. Who is correct? Explain.

Answer: Judgment for Beyer who has the right of inspection under Section 2-513 of the UCC The contract did not by its terms provide for payment of the price upon presentation of documents of title, nor did Beyer in any other way waive his right of inspection. The refusal of Smith to permit Beyer to inspect the goods, where Beyer has not agreed or contracted to give up his right of inspection, is justification for Beyer’s refusal to pay for the goods.

3. Benny and Sheree entered into a contract for the sale of one hundred barrels of flour. No mention was made of any place of delivery. Thereafter, Sheree demanded that Benny deliver the flour at her place of business, and Benny demanded that Sheree come and take the flour from his place of business. Neither party acceded to the demand of the other. Has either one a right of action against the other? Explain.

Answer: Benny would have a cause of action against Sheree. Section 2-308(a) of the UCC provides that unless otherwise agreed, the place for delivery of the goods is Benny’s place of business. The conforming goods were in a deliverable state at the place where Sheree was under a duty to accept them. The demand of Sheree that Benny deliver the flour to Sheree's place of business indicates an unwillingness to accept delivery at the place where the flour was located and would excuse any further tender by Benny. Sheree would not have a cause of action against Benny because of Sheree’s failure to accept on demand the specific goods at the place where they were

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deliverable, and also by reason of her failure to make a tender of payment of the price as required by §2-511 of the Code.

4. Johnson, a manufacturer of air-conditioning units, made a written contract with Maxwell to sell to Maxwell forty units at a price of $200 each and to deliver them at a certain apartment building owned by Maxwell for installation by Maxwell. On the arrival of Johnson’s truck for delivery at the apartment building, Maxwell examined the units on the truck, counted only thirty units, and asked the driver if that was the total delivery. The driver replied that it was as far as he knew. Maxwell told the driver that she would not accept delivery of the units. The next day, Johnson telephoned Maxwell and inquired why delivery was refused. Maxwell stated that the units on the truck were not what she ordered, that she ordered forty units, that only thirty were tendered, and that she was going to buy air-conditioning units elsewhere. In an action by Johnson against Maxwell for breach of contract, Maxwell defends on the ground that the tender of thirty units was improper, because the contract called for delivery of forty units. Is this a valid defense?

Explain.

Answer: Yes, it is a valid defense since the contract was for forty units; Maxwell does not have to accept delivery of 30 units. The perfect tender rule provides that if the goods or tender of delivery fail in any respect to conform to the contract, Maxwell may reject the whole.

5. Edwin sells a sofa to Jack for $800. Edwin and Jack both know that the sofa is in Edwin’s warehouse, located approximately ten miles from Jack’s home. The contract does not specify the place of delivery, and Jack insists that the place of delivery is either his house or Edwin’s store. Is Jack correct? Why or why not?

Answer: No. UCC Section 2-308 provides that in the absence of a specified place for delivery of “identified goods which to the knowledge of the parties at the time of contracting are in some other place [than seller’s business], that is the place of their delivery.”

6. On November 4, Kim contracted to sell to Lynn five hundred sacks of flour at $4 each to be delivered to Lynn by December 12. On November 27, Kim shipped the flour. By December 5, when the shipment arrived, containing only 450 sacks, the market price of flour had fallen. Lynn refused to accept delivery or to pay. Kim shipped 50 more sacks of flour, which arrived December 10. Lynn refused delivery. Kim resold the five hundred sacks of flour for $3.00 per sack. Explain what Kim’s rights are against Lynn.

Answer: Kim should prevail. Tender entitles the seller to acceptance of goods and payment of the purchase price. UCC Section 2-507. Where any tender is rejected because non-conforming and the time for performance has not expired, the seller may seasonably notify the buyer of his intention to cure and may then, within the contract time, make a conforming delivery. UCC §2-508.

The contract was for delivery by December 12. Since the second shipment cured the deficiency in quantity before the time of performance had expired, Kim has performed her obligations under the contract. Lynn breached by wrongfully rejecting the goods.

Kim is entitled to damages for breach of contract.

7. Farley and Trudy entered into a written contract whereby Farley agreed to sell and Trudy agreed to buy six thousand bushels of wheat at $10.33 per bushel, deliverable at the rate of one thousand bushels a month commencing June 1, the price for each installment being payable ten days after delivery thereof. Though Farley delivered and received payment for the June installment, he defaulted by failing to deliver the July and August installments.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 20: Performance

By August 15, the market price of wheat had increased to $12.00 per bushel. Trudy thereupon entered into a contract with Albert to purchase five thousand bushels of wheat at $12.00 per bushel deliverable over the ensuing four months. In late September, the market price of wheat started to decline and by December 1 was $9.25 per bushel. Explain whether Trudy would succeed in a legal action against Farley for breach of contract.

Answer: Yes, Trudy would prevail. Farley's failure to deliver the July and August installments substantially impaired the value of the whole contract and therefore was a breach of the whole contract. Section 2-612(3) UCC It was a breach that excused Trudy of any further duty under the contract. Trudy's contract with Albert to purchase 5,000 bushels of wheat in substitution for the quantity which Farley had contracted to deliver to Trudy was a “cover” made by the buyer in good faith and without unreasonable delay. Section 2-712 of the UCC provides that the buyer may “cover” in this type of situation and may recover from the seller as damages the difference between the cost of cover and the contract price. Trudy may recover $8,350 from the seller as damages, which is the difference between the cost of cover ($60,000) and the contract price ($51,650).

8. Bain ordered from Marcum a carload of lumber, which he intended to use in the construction of small boats for the U.S. Navy, pursuant to contract. The order specified that the lumber was to be free from knots, wormholes, and defects. The lumber was shipped, and immediately on receipt Bain looked into the door of the fully loaded car, ascertained that there was a full carload of lumber, and acknowledged to Marcum that the carload had been received. On the same day, Bain moved the car to his private siding and sent to Marcum full payment in accordance with the terms of the order.

A day later, the car was moved to the work area and unloaded in the presence of the Navy inspector, who refused to allow three-fourths of it to be used because of excessive knots and wormholes in the lumber. Bain then informed Marcum that he was rejecting the order and requested refund of the payment and directions on disposition of the lumber. Marcum replied that because Bain had accepted the order and unloaded it, he was not entitled to return of the purchase price. Who is correct? Explain.

Answer: Bain is entitled to return of the purchase price. Unless otherwise agreed, the buyer has a right to inspect the goods before acceptance and is allowed a reasonable time to do so. Bain inspected the goods on the next day after delivery by the carrier, which is within a reasonable time. Upon inspection of the goods and finding them to be nonconforming to the contract, he had the right to reject them within a reasonable time after discovery of the nonconformity. Bain gave the seller prompt notice of rejection as required by Section 2-602(1).

9. The plaintiff, a seller of milk, had for ten years bid on contracts to supply milk to the defendant school district, and had supplied milk to other school districts in the area. On June 15, the plaintiff contracted to supply the defendant’s requirements of milk for the next school year, at a price of $0.0759 per half-pint. The price of raw milk delivered from the farm had for years been controlled by the U.S. Department of Agriculture. On June 15, the department’s administrator for the New York/New Jersey area had mandated a price for raw milk of $8.03 per hundredweight. By December, the mandated price had been raised to $9.31 per hundredweight, an increase of nearly 20 percent. If required to complete deliveries at the contract price, the plaintiff would lose $7,350.55 on its contract with the defendant and would face similar losses on contracts with two other school districts. Is the plaintiff correct in its assertion (a) that its performance had become impracticable and (b) that it is entitled to relief from performance? Explain.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 20: Performance

Answer: The UCC recognizes that performance may be excused in instances where it would be commercially impracticable. This is not to say that mere inconvenience or financial hardship would be sufficient. Commercial impracticability requires more than mere hardship or increased cost of performance. For a party to be discharged, performance must be rendered impracticable as a result of an unforeseen supervening event not within the contemplation of the parties at the time of contracting. Moreover, the nonoccurrence of the event must have been a “basic assumption” that both parties made when entering into the contract. Increased production cost alone does not excuse performance by the seller. The impediment to performance must be something that was unforeseen and not within contemplation of the parties at the time the contract was formed.

10. In April, F. W. Lang Company (Lang) purchased an ice cream freezer and refrigeration compressor unit from Fleet for $2,160. Although the parties agreed to a written installment contract providing for an $850 down payment and eighteen installment payments, Lang made only one $200 payment upon receipt of the goods. One year later, Lang moved to a new location and took the equipment along without notifying Fleet. Then, in May or June of the following year, Lang disconnected the compressor from the freezer and used it to operate an air conditioner. Lang continued to use the compressor for that purpose until the sheriff seized the equipment and returned it to Fleet pursuant to a court order. Fleet then sold the equipment for $500 in what both parties conceded was a fair sale. Lang then brought an action charging that the equipment was defective and unusable for its intended purpose and sought to recover the down payment and expenses incurred in repairing the equipment. Fleet counterclaimed for the balance due under the installment contract less the proceeds from the sale. Who will prevail? Why? Answer: Judgment for Fleet. To effectively reject goods the buyer must reject the goods within a reasonable time after their delivery or tender and then seasonably notify the seller of the rejection. The alleged rejection was not effective in that Lang failed to notify Fleet of the rejection, kept the equipment for his own use, moved it to a new location without notifying Fleet, and then used it to operate an air conditioner.

These acts were inconsistent with Fleet’s ownership of the goods and therefore constituted an acceptance. F.W. Lang Co. v. Fleet, 193 Pa. Super. 365, 165 A. 2d 258 (1960).

11. Deborah McCullough bought a new car from Bill Swad Chrysler, Inc. The car was protected by both a limited warranty and an extended warranty. McCullough immediately encountered problems with the automobile’s brakes, transmission, and air-conditioning and discovered a number of cosmetic defects as well. She returned the car to Swad for repairs, but Swad did not fix the brakes properly or perform any of the cosmetic work.

Moreover, new problems appeared with respect to the car’s steering mechanism.

McCullough returned the car twice more for repairs, but on each occasion, old problems persisted and new ones emerged. After the engine abruptly shut off on a short trip away from home and the brakes again failed on a more extensive excursion, McCullough presented Swad with a list of thirty-two of the car’s defects and demanded their correction. When Swad failed to remedy more than a few of the problems, McCullough wrote a letter to Swad calling for rescission of the purchase agreement and a refund of the purchase price and offering to return the car upon receiving from Swad instructions regarding where to return it. Swad did not respond to the letter, and McCullough brought an action against Swad. She continued to operate the vehicle until the time of trial, some seventeen and one-half months (and twenty-three thousand miles) later. Can McCullough rescind the agreement? Why or why not?

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 20: Performance

Answer: Yes. The UCC provides that buyer may revoke acceptance within a reasonable time after discovering a nonconformity that substantially impairs the value of the product to the buyer. Swad contends that McCullough gave up her right to revoke acceptance of the car by using it after notifying Swad of her revocation. Continued use, however, does not invalidate a revocation if the use is reasonable. This use of the car was reasonable for two reasons: (1) Swad did not inform McCullough of how to return the car; and (2) McCullough was in no financial position to return the car and get a second one. Swad further claims that McCullough’s continued use of the vehicle proves that the car's nonconformities did not substantially impair its value to McCullough. But conditions beyond McCullough's control mandated her continued operation of the car in spite of its nonconformities. Finally, Swad incorrectly maintains that the car’s defects were trivial. The steering, transmission, and brake problems were quite significant, and even cosmetic defects can have an important impact on the value of the good in the buyer's eyes. McCullough therefore satisfies the requirements for an effective revocation and may rescind the agreement and regain the purchase price. McCullough v. Bill Swad Chrysler-Plymouth, Inc. 5 Ohio St. 3d 181, 449 N.E. 2d 1289 (1983).

12. On March 17, Peckham bought a new car from Larsen Chevrolet for $16,400. During the first one and one-half months after the purchase, Peckham discovered that the car’s hood was dented, its gas tank contained no baffles, its emergency brake was inoperable, the car did not have a jack or a spare tire, and neither the clock nor the speedometer worked.

Larsen claimed that Peckham knew of the defects at the time of the purchase. Peckham, on the other hand, claimed that he did not know the extent of the defects and that despite his repeated efforts, the defects were not repaired until June 11. Then, on July 15, the car’s dashboard caught fire, leaving the car’s interior damaged and the car itself inoperable. Peckham then returned to Larsen Chevrolet and told Larsen that Larsen had to repair the car at its own expense or that he, Peckham, would either rescind the contract or demand a new automobile. Peckham also claimed that at the end of their conversation, he notified Larsen Chevrolet that he was electing to rescind the contract and demanded the return of the purchase price. Larsen denied having received that oral notification. On October 12, Peckham sent a written notice of revocation of acceptance to Larsen. Discuss what the rights of the parties are.

Answer: Judgment for Peckham. Although Peckham sought the common law remedy of rescission, the relief sought was equivalent to the Code concept of revocation of acceptance. For Peckham to revoke his acceptance, he had to show (1) that the car was nonconforming, (2) that the nonconformity substantially impaired the value of the car, (3) that if Peckham knew of the defects when he accepted delivery of the car, then he acted under a reasonable assumption that they would be repaired and they were not, (4) that if he did not know of the defects when he accepted delivery of the car, then he must show that his acceptance was reasonably induced either by the difficulty of discovering the defects before acceptance or by Larsen's assurances, (5) that his revocation of acceptance occurred within a reasonable time after he discovered or should have discovered the defect and before any substantial change in the condition of the car not caused by its own defects, and (6) that he notified Larsen Chevrolet of the revocation at which time the revocation became effective. Peckham v.

Larsen Chevrolet, 99 Idaho 675, 587 P. 2d 816 (1978).

13. Joc Oil bought a cargo of fuel oil for resale. The certificate from the foreign refinery stated that the sulfur content of the oil was 0.5 percent. Joc Oil entered into a written contract with Con Ed for the sale of this oil. The contract specified a sulfur content of 0.5 percent.

Joc Oil knew, however, that Con Ed was authorized to buy and burn oil of up to 1 percent

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 20: Performance

sulfur content and that Con Ed often bought and mixed oils of varying contents to stay within this limit. The oil under contract was delivered to Con Ed, but independent testing revealed a sulfur content of 0.92 percent. Con Ed promptly rejected the nonconforming shipment. Joc Oil immediately offered to substitute a conforming shipment of oil, although the time for performance had expired after the first shipment of oil. Con Ed refused to accept the substituted shipment. Joc Oil sues Con Ed for breach of contract.

Explain which party should prevail.

Answer: Cure by the Seller. Judgment for Joc Oil. The Uniform Commercial Code provides the seller opportunity to cure, even if the time for performance is past, if 1) the seller had reasonable grounds to believe that the nonconforming tender would be acceptable to the buyer, and 2) if the seller seasonably notifies the buyer of the intention to cure. The first shipment of 0.92% oil was still within the limits usable by Con Ed. Joc Oil therefore had reasonable grounds to believe this shipment would be acceptable. Upon rejection, Joc Oil acted seasonably to notify Con Ed of its intention to cure, offering “immediately” to substitute a conforming shipment.

14. The plaintiff, a German wine producer and exporter, contracted to ship 620 cases of wine to the defendant, a distributor in North Carolina. The contract was silent as to the shipment destination. During the next several months, the defendant called repeatedly to find out the status of the shipment. Later, without notifying the defendant, the plaintiff delivered the wine to a shipping line in Rotterdam, destined for Wilmington, N.C. The ship and the wine were lost at sea en route to Wilmington. When the defendant refused to pay on the contract, the plaintiff sued. Decision? Discuss.

Answer: Here the risk of loss is still borne by the West German wine producer. Failure to give the buyer (here defendant) notice of the shipment of the wine prevented the buyer from making arrangements for insurance or other protective measures. When there is no specified destination in the contract, the risk of loss passes from the seller to the buyer once the goods have been duly delivered to the carrier. However, “duly delivered” requires prompt notification of shipment. But, lack of notification is a ground for rejection by the buyer only if material delay or loss ensues. RheinbergKellerei GMBH v. Vineyard Wine Company, Inc., N.C. App., 281 S.E. 2d 425 (1981).

15. Can-Key Industries, Inc., manufactured a turkey-hatching unit, which it sold to Industrial Leasing Corporation (ILC), which leased it to Rose-A-Linda Turkey Farms. ILC conditioned its obligation to pay on Rose-A-Linda’s acceptance of the equipment. Rose-A-Linda twice notified Can-Key that the equipment was unacceptable and asked that it be removed.

Over a period of fifteen months Can-Key made several unsuccessful attempts to solve the problems with the equipment. During this time, Can-Key did not instruct Rose-A-Linda to refrain from using the equipment. Rose-A-Linda indicated its dissatisfaction with the equipment, and ILC refused to perform its obligations under the contract. Can-Key then brought suit against ILC for breach of contract. It argued that Rose-A-Linda accepted the equipment, because it used it for fifteen months. ILC countered that the equipment was unacceptable and asked that it be removed. It claimed that Can-Key refused and failed to instruct Rose-A-Linda to refrain from using the equipment. Therefore, ILC argued, Rose-ALinda effectively rejected the turkey-hatching unit, relieving ILC of its contractual obligations. Who is correct? Explain.

Answer: Judgment for ILC. Since ILC's acceptance was conditioned upon the acceptance by its lessee, Rose-A-Linda, it was only obligated to pay for the unit if Rose-A-Linda accepted it. Under the Code, Rose-A-Linda accepted the unit only if it either: (1) failed to make an effective rejection after a reasonable opportunity to inspect it, or (2) performed any act inconsistent with Can-Key's ownership of it. Rose-

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 20: Performance

A-Linda twice notified Can-Key that the equipment was unacceptable and asked that it be removed, which constituted an effective rejection. Furthermore, the fifteen months' use related to Rose-A-Linda's initial inspection of the equipment and CanKey's subsequent efforts to remedy the “bugs.” During this time, Can-Key did not instruct Rose-A-Linda to refrain from using the equipment nor did it argue that RoseA-Linda's own tests and modifications damaged the equipment in any way. Therefore, Rose-A-Linda did not perform any act inconsistent with Can-Key’s ownership. Since Rose-A-Linda did not accept the turkey-hatching unit, ILC is under no duty to pay.

Can-Key Industries, Inc. v. Industrial Leasing Corp., 593 P. 2d 1125 (Or. 1979).

16. Frederick Manufacturing Corporation ordered 500 dozen units of Import Traders’ rubber pads for $2,580. The order indicated that the pads should be “as soft as possible.” Import Traders delivered the rubber pads to Frederick Manufacturing on November 19. Frederick failed to inspect the goods upon delivery, even though the parties recognized that there might be a problem with the softness. Frederick finally complained about the nonconformity of the pads in April of the following year, when Import Traders requested the contract price for the goods. Can Import Traders recover the contract price from Frederick? Why or why not?

Answer: Yes. Under the Code, the contract price may be recovered by a seller when a buyer accepts the goods. Here, acceptance occurred when Frederick failed to make an effective rejection after having had a reasonable opportunity to inspect the pads. Its five-month silence after receiving the goods, which at the time of ordering were of questionable quality, constituted acceptance. Therefore, Import Traders is entitled to recover the $2,580 contract price for the rubber pads. Import Traders, Inc. v. Fredrick Manufacturing Corp., Civil Court of the City of New York, Kings County, 1983, 117 Misc.

2d 305, 457 N.Y.S. 2d 742.

17. Neptune Research & Development, Inc. (the buyer), manufacturer of solar-operated valves used in scientific instruments, saw advertised in a trade journal a hole-drilling machine with a very high degree of accuracy, manufactured and sold by Teknics Industrial Systems, Inc. (the seller). Because the machine’s specifications met the buyer’s needs, the buyer contacted the seller in late March and ordered one of the machines to be delivered in mid-June. There was no “time-is-of-the-essence” clause in the contract.

Although the buyer made several calls to the seller throughout the month of June, the seller never delivered the machine and never gave the buyer any reasons for the nondelivery. By late August, the buyer desperately needed the machine. The buyer went to the seller’s place of business to examine the machine and discovered that the still-unbuilt machine had been redesigned, omitting a particular feature that the buyer had wanted.

Nonetheless, the buyer agreed to take the machine, and the seller promised that it would be ready on September 5. The seller also agreed to call the buyer on September 3 to give the buyer two days to arrange for transportation of the machine.

The seller failed to telephone the buyer on September 3 as agreed. On September 4 the buyer called the seller to find out the status of the machine and was told by the seller that “under no circumstances” could the seller have the machine ready by September 5.

At this point, the buyer notified the seller that the order was canceled. One hour later, still on September 4, the seller called the buyer, retracted its earlier statement, and indicated that the machine would be ready by the agreed September 5 date. The buyer sued for the return of its $3,000 deposit. Should the buyer prevail? Explain.

Answer: Yes. The seller repudiated the contract when it stated on September 4 that “under no circumstances” could the second agreed-upon delivery date (September 5)

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 20: Performance

be met. This repudiation impaired the value of the contract to the buyer. A contract need not expressly state that time is of the essence in order for timely delivery to be deemed essential. Here the seller delayed delivery for an inordinate amount of time.

Nonetheless, under some circumstances a party may retract a repudiation. The Code states that “until the repudiating party’s next performance is due, he can retract his repudiation unless the aggrieved party has since the repudiation canceled or materially changed his position or otherwise indicated that he considers the repudiation final.”

Here, the buyer communicated its cancellation of the contract to the seller before the attempted retraction. Therefore, the cancellation by the buyer is effective.

18. ALPAC and Eagon are corporations that import and export raw logs. In April, Setsuo Kimura, ALPAC’s president, and C.K. Ahn, Eagon’s vice president, entered into a contract for ALPAC to ship about fifteen thousand cubic meters of logs between the end of July and the end of August. Eagon agreed to purchase them. Subsequently, the market for logs began to soften, making the contract less attractive to Eagon. ALPAC became concerned that Eagon would try to cancel the contract. Kimura and Ahn began a series of meetings and letters, apparently to assure ALPAC that Eagon would purchase the logs.

Eagon was troubled by the drop in timber prices and initially withheld approval of the shipment. Ahn sent numerous internal memoranda to the home office indicating that it might not wish to complete the deal, but that accepting the logs was “inevitable” under the contract.

On August 23, Eagon received a fax from ALPAC suggesting a reduction in price and volume of the contract, but Eagon did not respond. Soon after, Kimura asked Ahn whether he intended to accept the logs; Ahn admitted that he was having trouble getting approval. On August 30, Ahn informed the home office that he would attempt to avoid accepting the logs but that it would be difficult and suggested holding ALPAC responsible for shipment delay. Kimura thereafter believed that Eagon would not accept the shipment and eventually canceled the vessel reserved to ship the logs, believing that Eagon was canceling the contract. The logs were not loaded or shipped by August 31, but Ahn and Kimura continued to discuss the contract. On September 7, Ahn told Kimura that he would try to convince the firm to accept the delivery and indicated that he did not want Kimura to sell the logs to another buyer. The same day, Ahn informed Eagon that it should consider accepting the shipment in September or October.

By September 27, ALPAC had not shipped the logs and sent a final letter to Eagon stating that because it failed to take delivery of the logs, it had breached the contract. Eagon responded to the letter, stating that there was “no contract” because ALPAC’s breach (not shipping by the deadline) excused Eagon’s performance. Explain whether either party breached the agreement.

Answer: Common law supports the position that, when the parties have not indicated that time is of the essence, late delivery is not a material breach. However, as a contract for the sale of goods, this contract is governed by the UCC, Article II which replaced the common law doctrine of material breach with the “perfect tender” rule.

Under this rule, “if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may…reject the whole.” UCC § 2-601(a). Thus, ALPAC breached its duty under the contract and released Eagon from its duty to accept the logs.

ALPAC next contends that, even if failure to timely deliver is a breach, the parties modified the delivery date or Eagon waived timely delivery. The UCC changed the common law of contracts to eliminate the need for consideration in contract modifications but did not otherwise alter the common law. UCC § 2-209(1). Mutual

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assent is still required, and one party may not unilaterally modify a contract. If both parties to a contract allow the reasonable time for delivery to pass without complaint, a court may infer that the parties have extended the time for performance. Ahn and Kimura continued to negotiate until September 7, at least a week after the shipment date. Thus, Eagon may initially have waived the original shipment date as negotiations continued. However, by the end of September, when they exchanged their final correspondence, ALPAC still had not shipped the logs. Thus, even if the parties did waive the original date, ALPAC still had a duty to deliver the logs within a reasonable time. Its failure to ship the logs for an additional 20 days, while the price of logs continued to drop, was a breach.

ALPAC's third contention is that a material factual issue exists about whether it requested assurances from Eagon and Eagon failed to respond. The UCC provides that: A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.

The written demand for assurances under UCC § 2-609 must generally be clear and unequivocal. While the parties here both knew that the contract was no longer favorable to Eagon, there is no showing that Eagon would not perform, or that ALPAC expressed its belief that Eagon would not perform. The letter Kimura sent to Ahn stated only that ALPAC was willing to negotiate new terms for the contract, not that it believed Eagon would not perform. Therefore, neither the parties’ interactions nor their correspondence rose to the level of a demand for assurances.

ALPAC’s final contention is that Eagon repudiated the contract prior to the delivery date. An anticipatory breach must be a clear and positive statement or action that expresses an intention not to perform the contract. Therefore, as a matter of law, neither Eagon’s expressed unhappiness about the drop in the price of timber nor its problems completing the contract rise to the level of repudiation.

19. In August, Bunge Corporation, a grain dealer, and Recker, a farmer, entered into a written contract under which Recker agreed to sell to Bunge ten thousand bushels of No. 2 yellow soybeans to be grown in the United States at $3.35 per bushel. Delivery of the grain was to be made at Bunge’s place of business, Price's Landing, Missouri, during January of the following year. Nothing in the contract required Recker to grow the beans on his own land, to grow the beans himself, or to operate a farm. The contract also provided that Bunge could extend the time of delivery. Severe winter weather struck the southeastern Missouri area in the early part of January, making it impossible for Recker to harvest approximately 865 acres of his beans. Agents of Bunge visited Recker’s farm in mid-January and observed that the beans were unharvestable. Shortly thereafter, Bunge directed a letter to Recker, calling attention to the fact that the 10,000 bushels of beans due under the contract had not been delivered. By the same communication, Bunge extended the time for delivery to March 31. From January 31 to March 31, the market price of beans increased by 10 percent. When delivery was not made by March 31, Bunge commenced an action to recover damages for breach of contract. Recker answered by admitting the failure to deliver but argued that he was excused from performance by the destruction of part of his crop. Explain which party should prevail.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 20: Performance

Answer: Bunge Corporation (appellant) should prevail as Recker (appellee) was not excused from performance. Bunge Corporation v. Recker, Bunge Corporation v. Recker, 519 F. 2d 449 (United States Court of Appeals, Eighth Circuit, 1975).

The record is clear that Recker did not perform the contract according to its terms by failing to deliver 10,000 bushels of beans. Appellee's only defense in his pleadings and during the course of trial was that an act of God prevented his performance.

2-613 Casualty to identified goods Where the contract requires for its performance goods identified when the contract is made, and the goods suffer casualty without fault of either party before the risk of loss passes to the buyer, or in a proper case under a ‘no arrival, no sale’ term (section 400.2-324) then: (a) if the loss is total the contract is avoided; and (b) if the loss is partial or the goods have so deteriorated as no longer to conform to the contract the buyer may nevertheless demand inspection and at his option either treat the contract as avoided or accept the goods with due allowance from the contract price for the deterioration or the deficiency in quantity but without further right against the seller. (Emphasis supplied.)

Since the beans were not identified other than by kind and amount, we agree with the trial judge that the destruction by weather did not constitute an act of God which would excuse performance under either the provisions of the Missouri Uniform Commercial Code or the decisional law of that state.

Obviously, appellee could have fulfilled its contractual obligation by acquiring the beans from any place or source as long as they were grown within the United States.

Consequently, we are in total agreement with the district judge in his finding and conclusion that appellee was liable in damages for breach of the contract.

20. Seller manufactures furnace-grade carbon black, a filler used in tires and other rubber and plastic products. Buyer was a longtime customer of seller, purchasing three grades of carbon black for use in numerous rubber products it supplies to customers. Buyer and Seller entered into a supply agreement as of January 1, in which Seller agreed to supply all of Buyer’s requirements for carbon black. When the demand for carbon black subsequently increased and its market price began to rise, Seller notified Buyer on April 14 of the following year that Seller was implementing a two-cents-per-pound base price increase to Buyer effective June 1. Buyer rejected Seller's request for a price increase and insisted that Seller provide adequate assurance that Seller would fill Buyer’s orders under the contract. On April 26, Buyer sent Seller a purchase order for carbon black and requested that Seller confirm the order. When Seller failed to do so, Buyer sent several additional requests for confirmation, but Seller still did not confirm the order. Explain whether either party has breached the contract.

Answer: Seller has repudiated the contract by failing to provide timely adequate assurance of performance. This problem is based on BRC Rubber & Plastics v.

Continental Carbon Co., 949 F. Supp. 2d 862, United States District Court, N.D. Indiana, Fort Wayne Division (2013).

“A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired.” IND.CODE § 26-1-2-609(1). “When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance…” IND.CODE

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 20: Performance

§ 26-1-2-609(1). Here, [Seller] failed to provide [Buyer] with adequate assurance of performance and, in doing so, repudiated the Agreement. Under the UCC, a failure to timely provide adequate assurance of performance under the circumstances of the particular case is a repudiation of the contract.

ANSWERS TO “TAKING SIDES” PROBLEMS On February 26, 2023, William Stem purchased a used BMW from Gary Braden for $26,600.

Stem’s primary purpose for buying the car was to use it to drive his child to school and various activities. Braden indicated to Stem that the car had not been wrecked and that it was in good condition. Stem thought the car had been driven only seventy thousand miles.

Less than a week after the purchase, Stem discovered a disconnected plug that, when plugged in, caused the oil warning light to turn on. When Stem then took his car to a mechanic, the mechanic discovered that the front end was that of a 2013 BMW and the rear end was that of a 2009 BMW. Further investigation revealed that the front half had been driven one hundred and seventy thousand miles. On March 10, 2023, Stem sent a letter informing Braden that he refused the automobile and that he intended to rescind the sale.

Braden refused. Stem then drove the automobile for seven months and nearly nine thousand miles before filing an action against Braden, seeking to revoke his acceptance and to obtain the return of the purchase price. a. What arguments would support Stem’s revocation of his acceptance and the return of the purchase price? b. What arguments would support Braden’s denial of Stem’s claim? c. Who should prevail? Explain.

Answer: (a) Stem could argue that he had revoked his acceptance of a product within a reasonable time after discovering a nonconformity that substantially impaired the value of the goods to him. In addition, he needed to drive the car while it was still in his possession because he had no other mode of transporting his child. (b) Braden could argue that Stem’s use of the automobile for seven months and nearly nine thousand miles before bringing suit were clearly inconsistent with the seller’s ownership of the automobile and therefore constituted an “acceptance” under the Uniform Commercial Code (UCC). Consequently, Stem forfeited his right to rescind and to obtain the return of the purchase price. Moreover, by continuing to drive the car, Stem demonstrated that the car was appropriate for its intended use and was not substantially impaired. (c) Stem will prevail. In re Stem, Alabama Supreme Court, 1990 571 So. 2d 1112

http://scholar.google.com/scholar_case?case=231020927669747631&q=571+ So.2d+1112&hl=en&as_sdt=2,34 The UCC provides that a buyer may revoke acceptance of a product within a reasonable time after discovering a nonconformity that substantially impairs the value of the product to the buyer. Although the trial court permissibly could have considered Stem’s use of the car as evidence that its value was not substantially impaired, Dickson v. U-J Chevrolet Co., 454 So. 2d 964, 967 (Ala. 1984), it was not compelled to do so. Accordingly, the trial court could have determined that the automobile’s nonconformities substantially impaired its value to Stem. There is no substantial dispute either that Stem’s revocation occurred within a reasonable time or that Stem properly notified Braden, and the trial court could have found that Stem revoked his

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 20: Performance

acceptance within a reasonable time and that he met the notice requirements of Section 7-2-608.

A buyer who asserts a right to revoke acceptance has the same duties and obligations as a buyer who asserts a right to reject the goods before acceptance. After rejection of goods, any exercise of dominion and ownership rights is considered wrongful as against the seller.

Many cases involve extensive use of automobiles and motor homes after revocation; the cases emphasize the practical consideration that an individual who buys an automobile or a motor home may very well be unable, without extraordinary financial difficulty, to tender the automobile or motor home and do without it until the litigation concerning it is completed.

Additionally, we note that if Stem had exercised any of his options available under Alabama’s commercial code concerning storing or returning the vehicle, he would have been put in the position of doing without a vehicle for transporting his child, which was one of the primary purposes for which he bought the vehicle, until trial of this case or else he would have been required to purchase or lease an additional suitable vehicle. Under these circumstances Stem’s continued use of the automobile was not an act of continued use that constituted an acceptance of ownership after revocation.

With uniformity, the courts have held that the “wrongful” use entitles the seller to prove the reasonable value of the buyer’s use and to recover that amount as a setoff, and many courts have awarded setoffs in circumstances similar to those of the present case.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 21: Transfer of Title and Risk of Loss

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 21: Transfer of Title and Risk of Loss

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ............................................................................... 9

ANSWERS TO ETHICAL DILEMMA Who Should Bear the Loss?

1.

From a legal standpoint, who must bear the risk of loss for the computer? From an ethical standpoint, who should bear the loss?

2. What social responsibility did Stratton violate in setting up the computer delivery scheme?

Did it have a legitimate reason for implementing the plan?

3. Do cost savings ever give a business the right to violate a social or ethical responsibility?

4. Are there any similarities between Stratton’s actions in this case and a company’s decision to close one of its plants?

Answer: 1. Since there were no special terms accompanying the sale and delivery of the computer, the risk of loss passed when the computer had been delivered to Johnson.

Delivery could only have taken place when the computer was taken out of Stratton’s control. As Johnson was acting as Stratton’s agent, the risk of loss must be assumed

by Stratton. While there might be some question as to whether Stratton was truly a merchant in this case, even if it was not, tender of delivery would be necessary to transfer risk of loss, and this was not present. If Johnson was acting as an agent, he must act in good faith. But he had no control over the fire and whether he was using the computer or not makes no difference. Stratton bears the loss.

Ethically, Johnson was acting as an agent for Stratton. Stratton would have accepted the benefits of the sale and the savings of delivery costs and should therefore accept the loss. Johnson acted in good faith for the benefit of Stratton, and Stratton therefore should accept the ethical responsibility.

2. Stratton specifically attempted to avoid paying a sales tax when one was actually due.

Each merchant has the responsibility to pay their fair share for being a member of society. This includes collecting and remitting a fair sales tax. By changing the locus of the sale, they might have been able to technically avoid paying a tax, but this also helped them to avoid fulfilling a very important social responsibility.

The only legitimate reason behind Stratton’s actions involved keeping the price of the computers down. Yet ethically, one should not weigh social values on a cost-benefit

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 21: Transfer of Title and Risk of Loss

scale. Economic theory does not often work in an ethical setting. According to Bernard Reilly in a soon to be published text on ethics, “Internal efficiency becomes the categorical imperative of behavior for executive management.” He says business, in the traditional sense, feels no responsibility to society. And this is what is taught in many business programs today. Thus, although it had a reason, Stratton’s action was not ethically legitimate.

3. As noted in question #3, ethics is not weighed on a cost-benefit scale. Economics, however, does exactly that. There is almost never an ethical reason to violate a social or ethical responsibility due to cost savings. Certainly, one did not exist in this case.

The stewardship function of management involves having management make the most of the assets entrusted to them by the stockholders. While this might mean that you should, economically, avoid the sales tax, this cannot be considered ethical.

4. When a company closes one of its plants, it does so because of economic reasons. The action often puts people of a particular area out of work. And this can violate a very important social responsibility to the people of that area even though it might save costs. In the present case, violating a social responsibility has a beneficial economic effect and thus the two situations seem similar.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Stein, a mechanic, and Beal, a life insurance agent, entered into a written contract for the sale of Stein’s tractor to Beal for $6,800 cash. It was agreed that Stein would tune the motor on the tractor. Stein fulfilled this obligation and on the night of July 1 telephoned Beal that the tractor was ready to be picked up on Beal’s making payment. Beal responded, “I’ll be there in the morning with the money.” On the next morning, however, Beal was approached by an insurance prospect and decided to get the tractor at a later date. On the night of July 2, the tractor was destroyed by fire of unknown origin. Neither Stein nor Beal had any fire insurance. Who must bear the loss? Discuss.

Answer: Beal must bear the loss. Since Stein was not a "merchant" within the meaning of Section 2-104, UCC, the risk of loss passes upon tender of delivery. Section 2509(3). Therefore, since Stein has held "conforming goods at the buyer's disposition" and has given Stein "notification reasonably necessary to enable him to take delivery" (Section 2-503(1)), Stein has made a proper tender and the loss falls on Beal.

2. Regan received a letter from Chase, the material portion of which stated, “Chase hereby places an order with you for fifty cases of Red Top Tomatoes. Ship them C.O.D.” As soon as he received the letter, Regan shipped the tomatoes to Chase. While en route, the railroad car carrying the tomatoes was wrecked. When Chase refused to pay for the tomatoes, Regan started an action to recover the purchase price. Chase defended on the ground that because the shipment was C.O.D., neither title to the tomatoes nor risk of loss passed until their delivery to Chase. Who has title? Who has the risk of loss? Explain.

Answer: Chase has title to the tomatoes, and must bear the loss. Where goods are shipped by common carrier C.O.D., title and risk of loss pass to the buyer, unless otherwise agreed, at the time and place of delivery to the carrier. The Code regards a C.O.D. contract as a "shipment" contract.

3. On May 10, the Adair Company, acting through one Brown, entered into a contract with Clark for the installation of a milking machine at Clark's farm. Following the enumeration of the articles to be furnished, together with the price of each article, the written contract

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 21: Transfer of Title and Risk of Loss

provided: “This outfit is subject to thirty days' free trial and is to be installed about June 1.” Within thirty days after installation the entire outfit, except for a double utility unit, was destroyed by fire through no fault of Clark. The Adair Company sued Clark to recover the value of the articles destroyed. Explain who bears the risk of loss.

Answer: This problem presents a question whether the transaction is a "sale on approval", or a "sale or return." Section 2-316 (1) of the UCC provides: "Unless otherwise agreed, if delivered goods may be returned by the buyer even though they conform to the contract, the transaction is (a) a “sale on approval” if the goods are delivered primarily for use."

As the milking machine was primarily for the use of the buyer, Clark, the transaction is therefore a sale on approval. Neither title nor risk of loss passed to Clark upon delivery and installation of the machine. The seller, Adair Company, bears the risk of loss until the buyer manifests his approval of the goods. The machine, excepting the double utility unit, was destroyed through no fault of Clark and before Clark had signified his approval or acceptance to the Adair Company. If the goods had been delivered to the buyer primarily for the purpose of resale, under Section 2-316(b) of the UCC, the transaction would be a "sale or return." In such case, title and risk of loss would be transferred to Clark with the privilege of divesting himself thereof within the stated period of 30 days free trial. Decision in favor of Clark.

4. Brown contracted to buy sixty cases of Lovely Brand canned corn from Smith, a Toledo seller, at a contract price of $1,260. Based on the contract, Smith selected and set aside sixty cases of Lovely Brand canned corn and tagged them “For Brown.” The contract required Smith to ship the corn to Brown via T Railroad, F.O.B. Toledo. Before Smith delivered the corn to the railroad, the sixty cases were stolen from Smith’s warehouse. a. Who is liable for the loss of the sixty cases of corn, Brown or Smith? b. Suppose Smith had delivered the corn to the railroad in Toledo. After the corn was loaded on a freight car but before the train left the yard, the car was broken open and its contents, including the corn, were stolen. Who is liable for the loss, Brown or Smith? Explain. c. Would your answer in Question 4(b) be the same if this contract were F.O.B. Brown’s warehouse, and all other facts remained the same? Why or why not?

Answer: (a) Smith, the seller, has the risk of loss. Although the goods have become identified to the contract as existing goods as to which the contract refers and Brown has a special property in them under Section 2-501 of the UCC, this does not cause title or risk of loss to pass to the buyer. Where the contract requires the seller to ship the goods by carrier, and not to deliver them at a particular destination, risk of loss passes to the buyer when the goods are duly delivered to the carrier. UCC Section 2-509 (a). (b) Brown, the buyer, bears the risk of loss. The contract was F.O.B. Toledo, where the goods were duly delivered to the carrier. UCC Section 2-509 (1)(a). (c) No, under the F.O.B. Brown’s Warehouse term, Smith would bear the risk of loss until the goods were duly delivered to their destination.

5. Farber owned a quantity of corn that was stored in a corncrib located on Farber’s farm.

On March 12, Farber wrote a letter to Barber stating that he would sell to Barber all of the corn in this crib, which he estimated at between nine hundred and one thousand bushels, for $3.60 per bushel. Barber received this letter on March 13, and on the same day immediately wrote and mailed a letter to Farber stating that he would buy the corn. The

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 21: Transfer of Title and Risk of Loss

corncrib and contents were accidentally destroyed by a fire that broke out about 3 A.M. on March 14. a. What are the rights and liabilities of the parties? b. What difference, if any, in result if Farber were a merchant?

Answer: (a) The risk of loss falls on Farber. Barber is not liable for the price of the corn. Barber does not have any rights against Farber for breach of the contract as Farber's duty of performance was excused by the accidental destruction of the subject matter. (b) In this case, the result is the same whether or not Farber is a merchant, because there was neither tender nor delivery of the corn to Barber. If Farber were a merchant, risk of loss would pass to Barber upon delivery and actual receipt of the corn by Barber. If Farber were not a merchant, risk of loss would pass to Barber upon tender of the corn by Farber to Barber. UCC Section 2-509 (3).

6. Franco, a New York dealer, purchased twenty-five barrels of specially graded and packed apples from a producer at Hood River, Oregon, under a contract that specified an agreed price on delivery at Franco’s place of business in New York. The apples were shipped to Franco from Oregon but, through no fault of Franco, were totally destroyed before reaching New York. Does any liability rest on Franco? Explain.

Answer: No. The contract between Franco and the seller required the seller to deliver the good at a particular destination—destination contract. Section 2-509 (1)(b) provides that risk of loss would not pass to the buyer until the goods were duly tendered to the buyer at destination (New York) while in possession of the carrier.

7. Smith was approached by a man who introduced himself as Brown of Brown & Co. Smith, who did not know Brown, asked Dun & Bradstreet for a credit report on Brown. He thereupon sold Brown some expensive gems and billed Brown & Co. “Brown” turned out to be a clever jewel thief, who later sold the gems to Brown & Co. for valuable consideration.

Brown & Co. was unaware of “Brown’s” transaction with Smith. Can Smith successfully sue Brown & Co. for either the return of the gems or the price as billed to Brown & Co.?

Why or why not?

Answer: No, because Brown & Co. was a good faith purchaser for value. ”Smith intended to pass title to the gems to the man physically before him, the jewel thief and impostor impersonating Brown. The transaction between Smith and the impostor resulted in the latter acquiring voidable title to the gems. Section 2-403 (1)(a) provides: “a person with voidable title has power to transfer a good title to a good faith purchaser for value. When goods have been delivered under a transaction of purchase the purchaser has such power even though (a) the transferor was deceived as to the identity of the purchaser.” Under these facts, Brown & Co. is a good faith purchaser for value.

8. Charlotte, the owner of a new Cadillac automobile, agreed to loan the car to Ellen for the month of February while she (Charlotte) went to Florida for a winter vacation. It was understood that Ellen, who was a small-town Cadillac dealer, would merely place Charlotte’s car in her showroom for exhibition and sales promotion purposes. While Charlotte was away, Ellen sold the car to Bob. When Charlotte returned from Florida, she sued to recover the car from Bob. Who has title to the automobile? Explain.

Answer: Judgment in favor of Bob. Charlotte, the owner of the Cadillac, voluntarily placed the automobile in a dangerous bailment situation when she entrusted it to Ellen, a Cadillac dealer, for display in Ellen's showroom. The buyer in the ordinary

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 21: Transfer of Title and Risk of Loss

course of business (Robert) is therefore protected. Section 2-403 (2) of the UCC provides: “Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business.”

9. Steven offered to sell his used automobile to Benito for $7,600 cash. Benito agreed to buy the car, gave Steven a check for $7,600, and drove away in the car. The next day, Benito sold the car for $8,000 to José, a good faith purchaser. The bank returned Benito’s $7,600 check to Steven because of insufficient funds in Benito’s account. Steven brings an action against José to recover the automobile. What is the judgment? Explain.

Answer: Judgment for José. Benito acquired voidable title to the automobile when he purchased it with a check drawn on an account with insufficient funds. This empowered him to transfer good title to José since José was a good faith purchaser for value. Section 2-403 (1)(b) and (c) of the UCC provides: "A person with voidable title has power to transfer a good title to a good faith purchaser for value.” When goods have been delivered under a transaction of purchase, the purchaser had such power even to José.

10. Justin told Jennifer he wished to buy Jennifer’s collection of antique watches. He told Jennifer he wanted to take the watches to his partner for evaluation. Justin then left with the watches and never returned. Justin sold the watches in another state to Thomas and gave him a bill of sale. Can Jennifer recover the watches from Thomas? Explain.

Answer: Judgment for Thomas; he has title to the watches. Because Jennifer authorized Justin to take the watches to show his partner, Justin acquired voidable title which empowered him to transfer good title to Thomas, a good faith purchaser for value. Section 2-403 (1)(d) provides that a person has such power even though that person procured delivery “through fraud punishable as larcenous under the criminal law.”

11. On February 7, Pillsbury purchased eight thousand bushels of wheat from Landis. The wheat was being stored at the Greensville Grain Company. Pillsbury also intended to store the wheat with Greensville. On February 10, the wheat was destroyed. Landis demands payment for the wheat from Pillsbury. Who prevails? Who has title? Who has the risk of loss? Explain.

Answer: Pillsbury prevails. When goods are held by a bailee the risk of loss occurs: (a) if a negotiable document of title is involved, upon the buyer's receipt of the document, (b) if a non-negotiable document of title is used by the bailee as a receipt for storage of the seller's goods, when the document is tendered to the buyer, unless the buyer seasonably objects, or (c) if no documents of title are employed, upon either (1) the seller's tender to the buyer of written directions to the bailee to deliver the goods to the buyer, unless the buyer reasonably objects or (2) the bailee's acknowledgment of the buyer's right to possession of the goods. UCC Section 2-509 (2). The facts do not indicate that any of these conditions occurred, therefore, risk of loss falls on Landis.

Title would be with Pillsbury. In this case delivery was made without moving the goods and title will pass (1) on delivery of a document of title where the contract calls for delivery of such document, or (2) at the time and place of contracting where the goods at that time have been identified and no documents are to be delivered. UCC Section 2-401 (3). Where the goods are not identified at the time of contracting, title passes when the goods are identified. The grain was identified in this situation even though it could not be actually separated from that grain belonging to other farmers. No specific

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 21: Transfer of Title and Risk of Loss

mention was made as to any documentation that needs to be delivered, so the title passes at the time and place of contracting.

12. Johnson, who owns a hardware store, was indebted to Hutchinson, one of his suppliers.

Johnson sold his business to Lockhart, one of Johnson’s previous competitors. Lockhart combined the inventory from Johnson’s store with his own and moved the combined inventory to a new, larger store. Hutchinson claims that Lockhart must pay Johnson’s debt because the sale of the business had been made without complying with the requirements of the bulk sales law. Discuss whether Lockhart is obligated to pay Hutchinson’s debt to Johnson?

Answer: Judgment for Hutchinson—Lockhart must pay the debt. This is a bulk transfer covered by Article 6 of the UCC since it could be described as “any transfer in bulk and not in the ordinary course of the transferor's business of a major part of the materials, supplies, merchandise, or other inventory.” UCC Section 6-102. Such transfers must be preceded by certain requirements which include preparation of list of existing creditors by the transferor, a complete listing of property to be transferred, preservation of the creditor list by the transferee for six months, and notice given by the transferee to the creditors at least ten days before the transferee takes possession of the goods or makes payment for them. See UCC Sections 6-104 (1), 6105.

13. A seller had manufactured forty thousand pounds of plastic resin pellets especially for a buyer, who agreed to accept them at the rate of one thousand pounds per day upon his issuance of shipping instructions. Despite numerous requests by the seller, the buyer issued no such instructions. On August 18, the seller, after warehousing the goods for forty days, demanded by letter that the buyer issue instructions. The buyer agreed to issue them beginning August 20, but never did. On September 22, a fire destroyed the seller’s plant containing the goods, which were not covered by insurance. Explain who bears the risk of loss.

Answer: Judgment for Seller—the buyer bears the risk of loss. Where conforming goods have been identified to a contract which the buyer breaches before risk of loss has passed to him, the seller may treat the risk of loss as resting on the buyer “for a commercially reasonable time” to the extent of any deficiency in the seller's effective insurance coverage.

14. McCoy, an Oklahoma cattle dealer, orally agreed with Chandler, a Texas cattle broker, to ship cattle to a New Mexico feedlot for delivery to Chandler. The agreement was for six lots of cattle valued at $119,000. After McCoy delivered the cattle, he presented invoices to Chandler that described the cattle and set forth the sales price. McCoy then demanded payment, which Chandler refused. Unknown to McCoy, Chandler had obtained a loan from First National Bank and had pledged the subject cattle as collateral. The bank had no knowledge of any interest that McCoy may have had in the cattle. McCoy sued to recover the cattle. The bank counterclaimed that it had a perfected security interest in the cattle that was superior to any interest of McCoy’s. Who has title to the cattle? Explain.

Answer: Judgment for the bank—the bank has a superior interest in the cattle. Title to goods passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, unless otherwise explicitly agreed. Here, once McCoy delivered the cattle to Chandler, Chandler had the power to create a security interest in a third party such as the bank. This interest attached even though Chandler was found to have committed a fraud against McCoy and thus had only a voidable title to the cattle. The UCC provides that “a person with

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 21: Transfer of Title and Risk of Loss

voidable title has the power to transfer a good title to a good faith purchaser for value.

When goods have been delivered under a transaction of purchase, the purchaser has such power even though... (d) the delivery was procured through fraud punishable as larcenous under the criminal law.” One of the basic policies of the UCC is to protect good faith purchasers for value, in this case the bank, from “hidden” interest in goods.

Any unperfected security interest that McCoy might have had in the cattle would have been hidden from the bank. McCoy could, and should, have protected himself by perfecting his own security interest in the cattle.

15. Home Indemnity, an insurance company, paid one of its insureds after the theft of his car.

The car reappeared in another state and was sold to Michael Schrier for $8,300 by a used car dealer. The dealer promised to give Mr. Schrier a certificate of title. One month later, the car was seized by the police on behalf of Home Indemnity. Explain who is entitled to possession of the car.

Answer: Judgment for Home Indemnity; home Indemnity is entitled to possession. The possessor of stolen goods, regardless of her knowledge of their origins, cannot convey good title. The subsequent sale of the goods, even to a bona fide purchaser for value, does not divest the original owner of title. Even a good faith purchaser cannot receive better title than the seller has. Schrier v. Home Indemnity, Co., 273 A. 2d 248 (D.C. App. 1971).

16. Fred Lane, who sells boats, motors, and trailers, sold a boat, motor, and trailer to John Willis in exchange for a check for $6,285. The check was not honored when Lane attempted to use the funds. Willis subsequently left the boat, motor, and trailer with John Garrett, who sold the items to Jimmy Honeycutt for $2,500. Considering the boat’s quality, Honeycutt was surprised at how inexpensive it was. He did not know where Garrett got the boat, but he had dealt with Garrett before and described him as a “sly businessman.”

Garrett did not sell boats; normally, he sold fishing tackle and provisions. Honeycutt also received a forged certificate for the boat, on which he had observed Garrett forge the purported owner’s signature. Can Lane compel Honeycutt to return the boat, motor, and trailer? Explain.

Answer: Yes, Lane can regain possession. Judgment for Lane. The court found that Honeycutt was not a good faith purchaser under Section 2-403 of the UCC, which provides: A person with voidable title has power to transfer a good title to a good faith purchaser for value. When goods have been delivered in a transaction of purchase the purchaser has such power even though: (a) the transferor was deceived as to the identity of the purchaser, or (b) the delivery was in exchange for a check which was later dishonored, or (c) it was agreed that the transaction was to be a “cash sale”, or (d) the delivery was procured through fraud punishable as larcenous under the criminal law.

Good title can only be transferred to a “good faith purchaser for value”, however. The court found that given the circumstances associated with the sale, Honeycutt did not purchase the boat, motor, and trailer in good faith. Lane v. Honeycutt, 14 N.C. App. 436, 188 S.E. 2d 604 (1972).

17. Mike Moses purchased a mobile home, including installation, from Gary Newman. Newman delivered the home to Moses’s lot. Upon inspection of the home, Moses’s fiancée found a broken window and water pipe. Moses also had not received keys to the front door. Before

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 21: Transfer of Title and Risk of Loss

Newman corrected these problems, a windstorm destroyed the home. Explain who bears the risk for the loss of the home.

Answer: Judgment for Moses; Newman bears the loss. “Where a tender or delivery of goods so fails to conform to the contract as to give a right of rejection the risk of the loss remains on the seller until cure or acceptance.” UCC 2-510(1). The right of rejection exists if the goods “fail in any respect to conform to the contract.” UCC 2601. Because the loss occurred before the installation was complete and the goods did not conform to the contract, Newman (the seller) could not shift the risk of loss to Moses (the buyer). Moses v. Newman, 658 S.W. 2d 119.

18. James Norwood bought one hundred ninety heifers in Valentine, Nebraska and then delivered them to Kevin Asbury in Missouri to care for them. Norwood and Asbury were merchants with regard to cattle. While in Asbury's care, one hundred fifty of the heifers were delivered to Max Hargrove. Hargrove in turn sold the heifers to B & W, Inc. Then B & W sold one hundred fifteen of the heifers to Steve Maulsby, who in turn sold the heifers to Kenneth Nordhues. Explain what Nordhues would have to prove to establish good title to the heifers.

Answer: To establish good title in the cattle, Nordhues would have to prove that Hargrove was a buyer in the ordinary course of business. This case problem is based on Nordhues v. Maulsby, 19 Neb. App. 620, 815 N.W. 2d 175 (2012).

It is undisputed that Norwood and Asbury were merchants with regard to cattle. Under Missouri law, by entrusting the heifers to Asbury, Norwood gave Asbury the power to transfer all of Norwood's rights in the heifers to a buyer in the ordinary course of business. See Mo. Ann. Stat. § 400.2-403(2) (any entrusting of possession of goods to merchant who deals in goods of that kind gives him power to transfer all rights of entruster to buyer in ordinary course of business).

Therefore, we now turn to whether Hargrove was a buyer in the ordinary course of business. Missouri defines a “buyer in the ordinary course of business” as a person that buys goods in good faith and without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind. A person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller's own usual or customary practices.

Mo. Ann. Stat. § 400.1-201(9) (West Cum. Supp. 2012). Incidentally, we note that Nebraska law is in accord. See Neb. UCC § 1-201(9) (Cum. Supp. 2010). “Good faith” in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. Mo. Ann. Stat. § 400.2-103(1)(b) (West Cum. Supp. 2012). Accord Neb. UCC § 2-103(1)(b) (Cum. Supp. 2010). “[A] bona fide purchaser [is] one who pays a valuable consideration, has no notice of outstanding rights of others and who acts in good faith.” J.C. Equipment, Inc. v. Sky Aviation, Inc., 498 S.W. 2d 73, 76 (Mo.App.1973). “The necessary notice referred to may be imparted to a prospective purchaser by actual or constructive notice of facts which would place a reasonably prudent person upon inquiry as to the title he is about to purchase.” Id. See, also, Mo. Ann. Stat. § 400.1-201(25) (person has “notice” of fact when person has actual knowledge of it or from all facts and circumstances known to him or her at time in question he or she has reason to know that it exists).

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We find no error in the district court’s conclusion that Hargrove was a buyer in the ordinary course of business and a good faith purchaser. Thus, the Asbury/Hargrove transaction resulted in Hargrove’s receiving Norwood's rights—the rights of an owner— to the heifers. And as owner, Hargrove would have good title to the heifers. See Mo. Ann. Stat. § 400.2-403(2). All parties agree that if Hargrove had good title, then all subsequent purchasers, including Nordhues, also had good title.

19. Jordan Panel Systems, Inc., ordered custom-made windows from Windows, Inc. The purchase contract provided that the windows were to be shipped properly packaged for motor freight transit and “delivered to New York City.” Windows constructed the windows according to Jordan’s specifications and arranged to have them shipped to Jordan by a common carrier, Consolidated Freightways Corp. Windows delivered them to Consolidated intact and properly packaged. During the course of shipment, the goods sustained extensive damage. Much of the glass was broken, and many of the window frames were gouged and twisted. Jordan’s president signed a delivery receipt noting that approximately two-thirds of the shipment was damaged due to “load shift.” Jordan made a claim with Consolidated for damages it had sustained and also ordered a new shipment from Windows, which was delivered without incident. Jordan did not pay for either shipment of windows, and Windows brought suit. Jordan cross-claimed for incidental and consequential damages resulting from the damaged shipment. Decision? Explain.

Answer: Judgment for Windows. Unless specifically designated as a destination contract, a sales contract that involves shipment by a carrier is a shipment contract.

Upon Windows’ proper delivery to the carrier, Jordan assumed the risk of loss and cannot recover incidental or consequential damages from the seller caused by the carrier’s negligence. This problem is based on Windows, Inc. v. Jordan Panel Systems Corp., 177 F. 3d 114 (1999). Jordan seeks to recover incidental and consequential damages pursuant to Uniform Commercial Code Section 2-715. Under that provision, Jordan is entitled to recover incidental and consequential damages if those damages “result[ed] from the seller’s breach.” A destination contract is covered by Section 2503(3); it arises where “the seller is required to deliver at a particular destination.” In contrast, a shipment contract arises where “the seller is required … to send the goods to the buyer and the contract does not require him to deliver them at a particular destination.” Section 2-504. Under a shipment contract, the seller must “put the goods in the possession of such a carrier and make such a contract for their transportation as may be reasonable having regard to the nature of the goods and other circumstances of the case.” Section 2-504(a). Unless the parties “expressly specify” that the contract requires the seller to deliver to a particular destination, the contract is generally considered to be a shipment contract. Jordan’s confirmation of its purchase order, by letter to Windows dated September 22, 1993, provided, “All windows to be shipped properly crated/packaged/boxed suitable for cross country motor freight transit and delivered to New York City.” This is a shipment contract rather than a destination contract. Thus, under the terms of its contract, Windows satisfied its obligations to Jordan when it put the goods, properly packaged, into the possession of the carrier for shipment. Upon Windows’ proper delivery to the carrier, Jordan assumed the risk of loss and cannot recover incidental or consequential damages from the seller caused by the carrier’s negligence.

ANSWERS TO “TAKING SIDES” PROBLEMS Harrison, a men’s clothing retailer located in Westport, Connecticut, ordered merchandise from Ninth Street East, Ltd., a Los Angeles–based clothing manufacturer. Ninth Street

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delivered the merchandise to Denver-Chicago Trucking Company (Denver) in Los Angeles and then sent four invoices to Harrison that bore the notation “F.O.B. Los Angeles.” Denver subsequently transferred the merchandise to a connecting carrier, Old Colony Transportation Company, for final delivery to Harrison’s Westport store. When Old Colony tried to deliver the merchandise, Harrison’s wife asked the truck driver to deliver the boxes inside the store, but the driver refused. The dispute remained unresolved, and the truck departed with Old Colony still in possession of the goods. By letter, Harrison then notified Ninth Street of the nondelivery, but Ninth Street was unable to locate the shipment. Ninth Street then sought to recover the contract purchase price from Harrison. Harrison refused, contending that risk of loss remained with Ninth Street because of its refusal to deliver the merchandise to Harrison’s place of business. a. What are the arguments that the risk of loss remained with Ninth Street? b. What are the arguments that the risk of loss passed to Harrison? c. What is the appropriate outcome?

Answer: (a) Harrison made a reasonable request to the carrier—Old Colony Transportation— to deliver the merchandise into the store. Old Colony departed with the goods, and they were lost or destroyed at no fault of Harrison. (b) Under an F.O.B. place of shipment contract, the risk of loss passes to buyer at the point that the goods are transferred to the carrier—Old Colony Transportation. Colony properly and reasonably made tender to Harrison who wanted Colony to deliver the goods into the store which they were not obligated to do. (c) Judgment for Ninth Street. The agreement provided for F.O.B. shipment, and thus risk of loss passed to Harrison after Ninth Street placed the goods in possession of the carrier Denver, made a reasonable contract for their transportation, and notified Harrison of the shipment. Harrison, therefore, is liable for the entire purchase price of the merchandise. Ninth Street Ease, Limited v. Harrison, 5 Conn.

Cir. 597, 259 A. 2d 772 (1968).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 22: Product Liability: Warranties and Strict Liability

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 22: Product Liability: Warranties and Strict Liability

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ............................................................................. 16

ANSWERS TO ETHICAL DILEMMA When Should a Company Order a Product Recall?

1.

What are the social and ethical issues Winkler must consider in choosing its course of action? Should the fact that none of the incidents had been fatal affect the company’s decision? What should Winkler do?

2. Would the first option be good for business? Who eventually bears the cost of the lawsuits or recalls? Who should bear the cost?

3. What actions should be taken by the baby’s parents? Do they have any social responsibility in this case to seek publicity sufficient to warn others?

Answer: 1. The social, policy and ethical issues for Winkler are clear. Acting ethically is doing right for the right reason. And in this case doing what is right involves protecting the lives of all potential consumers. It should make no difference that no one died. By recalling the product, or at least making the public aware of the potential problem, Winkler would serve society by acting as a protector, and would serve business by maintaining or restoring confidence in the trade.

2. Doing nothing might help, initially, to avoid any serious negative publicity. But as information about the scare leaked to the public, some negative backlash should be anticipated with a potential undermining of confidence and a possible drop in sales. It should be noted that in the Gerber baby food glass scares of 1984 and 1986, business dropped after the recall in the 1984 episode. Newsweek of March 17, 1986, reported that Gerber balked at a recall in the 1986 episode because of the lack of evidence of causation and because of the fact that no deaths or serious illnesses had been traced to the scare. And by 1987, stock prices had rebounded quite well. It would seem then that the first option would be good for business. But this was due, in part, to a media campaign that quashed rumors and explained the do-nothing approach. Dishonesty might be less costly, at first, but it usually catches up to you. Elizabeth Greenwood and Archie Carroll in “The Anatomy of Social Response: The Rely, Firestone 500, and Pinto Cases,” Business Horizons, Sept.-Oct. 1981, state that “profitability and growth go hand in hand with fair treatment ...of consumers ...”. Initially the product sales might drop off but, as with the Tylenol case, if the product has an established reputation, the sales level will bounce back. Clark Johnson, in a December 1988 article in © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Management Accounting, “A Matter of Trust,” states that by agreeing to voluntarily take action with a cost of over $240 million, the place of trust held by Tylenol translated into the regaining of market share both in 1982 and 1985. So even though David Vogel in “Ethics and Profits Don’t Always Go Hand in Hand,” Los Angeles Times, December 28, 1988, says that ethical actions are not always profitable ones, some markets disagree.

If lawsuits occur or recalls are issued, it is the consumer who will eventually bear the cost. In fact, in the Ford Pinto case, not only did consumers absorb the cost after the fact, but also the Pinto price itself included a portion of the cost of potential lawsuits.

In a Business Horizons article of Mar.-Apr. 1990, “The Corporate Apology,” Art Wolfe as guest editor notes that Ford decided to accept the lower cost alternative of paying for burn deaths, rather than redesign the car. While the cost should fall on the manufacturer and/or the retailer based on the product liability theories mentioned above, it is the consumer who ultimately absorbs extra costs.

3. The baby’s parents should, in addition to seeking compensation for the damages, do their best to bring the problem to the attention of the public. By settling and agreeing to keep quiet they acted as unethical as Winkler, but with, probably, a weaker excuse.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

At the start of the social season, Aunt Lavinia purchased a hula skirt in Sadie’s dress shop.

The salesperson told her, “This superior garment will do things for a person.” Aunt Lavinia’s houseguest, her niece, Florabelle, asked and obtained her aunt’s permission to wear the skirt to a masquerade ball. In the midst of the festivity, where there was much dancing, drinking, and smoking, the long skirt brushed against a glimmering cigarette butt.

Unknown to Aunt Lavinia and Florabelle, its wearer, the garment was made of a fine unwoven fiber that is highly flammable. It burst into flames, and Florabelle suffered severe burns. Aunt Lavinia notified Sadie of the accident and of Florabelle’s intention to recover from Sadie. Can Florabelle recover damages from Sadie, the proprietor of the dress shop, and Exotic Clothes, Inc., the manufacturer from which Sadie purchased the skirt? Explain.

Answer: Florabelle can recover from Sadie and from Exotic Clothes. Lack of horizontal privity is no defense as to Sadie because Florabelle is a statutory third-party beneficiary under Section 2-318 of the UCC. Moreover, vertical privity is no defense for the manufacturer because by the great weight of authority this type of defense is no longer recognized. Moreover, lack of privity is not a defense to a cause of action based upon strict liability in tort. More specifically: Express warranties of seller: The statement of a salesperson that a product is wonderful or that it will enhance a person’s appearance is seller’s talk and mere “puffing” without legal significance. However, in this case it is questionable whether the saleslady’s statement that the garment is “superior” is merely sales talk or constituted an express warranty. Most likely, a court would hold this statement not to be an express warranty under Section 2-313 of the Code.

Implied warranty of merchantability: A merchant seller impliedly warrants that the goods he sells are reasonably fit for their ordinary purpose. UCC Section 2-314. Here, a dress which bursts into flames upon contact with a lighted cigarette is not of merchantable quality.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 22: Product Liability: Warranties and Strict Liability

Strict liability in tort: An item of clothing which is highly flammable is a defective product which is unreasonably dangerous to the user or consumer.

Accordingly, Florabelle will prevail under an implied warranty of merchantability theory and a strict liability in tort theory.

2. The Talent Company, manufacturer of a widely advertised and expensive perfume, sold a quantity of this product to Young, a retail druggist. Dorothy and Bird visited the store of Young, and Dorothy, desiring to make a gift to Bird, purchased a bottle of this perfume from Young, asking for it by its trade name. Young wrapped up the bottle and handed it directly to Bird. The perfume contained a foreign chemical that upon the first use of the perfume by Bird severely burned her face and caused a permanent facial disfigurement.

What are the rights of Bird, if any, against Dorothy, Young, and the Talent Company?

Discuss.

Answer: Bird has no right of action against Dorothy because the perfume was a gift from Dorothy to Bird. However, Bird has a right of action against both Young and Talent Co. under both strict liability in tort and implied warranty of merchantability.

Bird is the direct third party beneficiary of the implied warranty of merchantability.

Privity is not an obstacle to the strict liability action and should not be a problem to the warranty action since most states have abrogated this doctrine; nevertheless, the instructor may wish to discuss both horizontal and vertical privity and the application of Section 2-318.

3. John Doe purchased a bottle of “Bleach-All,” a well-known brand, from Roe’s combination service station and grocery store. When John used the “Bleach-All,” his clothes severely deteriorated due to an error in mixing the chemicals during the detergent’s manufacture.

John brings an action against Roe to recover damages. Explain whether John will be successful in his lawsuit.

Answer: Judgment for John Doe. Roe is a “merchant” within the meaning of the UCC since he is a “person who deals in goods of the kind.” Section 2-104. Unless excluded or modified, which it is not in this case, a merchant seller impliedly warrants that the goods which he sells are merchantable. Section 2-314. John Doe would also prevail under a strict liability in tort cause of action since Roe is a merchant who sold a defective product that was unreasonably dangerous. It might further be noted that Roe would have a cause of action based upon both warranty and strict liability theory against the manufacturer of the bleach as well as any seller in his chain of title.

4. A route salesperson for Ideal Milk Company delivered a half-gallon glass jug of milk to Allen’s home. The next day, when Allen grasped the milk container by its neck to take it out of his refrigerator, it shattered in his hand and caused serious injury. Allen paid Ideal on a monthly basis for the regular delivery of milk. Ideal’s milk bottles each contained the legend “Property of Ideal—to be returned,” and the route salesman would pick up the empty bottles when he delivered milk. Can Allen recover damages from Ideal Milk Company? Why or why not?

Answer: Yes, Allen may recover damages. When Allen purchased the half-gallon of milk from defendant Ideal Milk Co., the glass jug container was inherently necessary both in the delivery of the milk and the possession of it prior to use by the buyer. With respect to the container, the transaction is a bailment essentially tied into the sale of the milk. The buyer had the right to use the container along with its original contents although under a duty to return the container when empty. The implied warranty of merchantability and strict tort liability therefore attached both to the container and its

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contents. Ideal may have an action based on design defect against the manufacturer of the bottle, if it is shown that squeezing caused the bottle to explode.

5. While Butler and his wife, Wanda, were browsing through Sloan’s used car lot, Butler told Sloan that he was looking for a safe but cheap family car. Sloan said, “That old Cadillac hearse ain’t hurt at all, and I’ll sell it to you for $5,950.” Butler said, “I’ll have to take your word for it because I don’t know a thing about cars.” Butler asked Sloan whether he would guarantee the car, and Sloan replied, “I don’t guarantee used cars.” Then Sloan added, “But I have checked that Caddy over, and it will run another 10,000 miles without needing any repairs.” Butler replied, “It has to because I won’t have an extra dime for any repairs.”

Butler made a down payment of $800 and signed a printed form contract, furnished by Sloan, that contained a provision: “Seller does not warrant the condition or performance of any used automobile.”

As Butler drove the car out of Sloan’s lot, the left rear wheel fell off and Butler lost control of the vehicle. It veered over an embankment, causing serious injuries to Wanda.

Explain what Sloan’s liability is to Butler and Wanda.

Answer: Butler may recover under a breach of the implied warranty of merchantability and under a strict liability in tort cause of action and possibly for a breach of an express warranty.

Warranties An express warranty need not be in writing. An affirmation or promise is sufficient. In this particular case it is debatable whether Sloan’s statement concerning the condition of the car–”it will run another 10,000 miles without needing any repairs”–constitutes an express warranty.

An implied warranty of merchantability arises where the seller is a merchant, unless it is disclaimed or modified. There is an implied warranty that the goods are fit for ordinary purposes, here to drive the automobile. The fact that the car is used does not destroy the implied warranty of “merchantability” but merely mandates that consideration be taken of the price, age, and condition of the good.

Warranties, as limited by the Magnuson-Moss Act (which is not applicable to this case since no written warranty was provided) may generally be excluded or modified. A disclaimer of merchantability must mention the word “merchantability” and must be conspicuous if in writing. A disclaimer of an express warranty must be clear, specific and definite. In the case at hand the warranty of “merchantability” was not effectively disclaimed since the disclaimer did not mention “merchantability.” Moreover, the disclaimer would probably not negate the express warranty, if indeed one was given, since it did not specifically disclaim such warranty.

Wanda will also be able to collect from Sloan under a breach of the implied warranty of merchantability since privity of contract will not be a valid defense.

Strict Liability in Tort Strict liability in tort applies to this transaction since a merchant seller sold a defective product unreasonably dangerous to user or consumer. Strict liability in tort applies to new and used goods and is generally not subject to disclaimer, exclusion or modification. Moreover, privity is not a limitation upon the cause of action.

6. John purchased for cash a Revenge automobile manufactured by Japanese Motors, Ltd., from an authorized franchised dealer in the United States. The dealer told John that the car had a “twenty-four month 24,000-mile warranty.” Two days after John accepted

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delivery of the car, he received an eighty-page manual in fine print that stated, among other things, on page 72: The warranties herein are expressly in lieu of any other express or implied warranty, including any implied warranty of merchantability or fitness, and of any other obligation on the part of the company or the selling dealer.

Japanese Motors, Ltd., and the selling dealer warrant to the owner each part of this vehicle to be free under use and service from defects in material and workmanship for a period of twenty-four months from the date of original retail delivery of first use, or until it has been driven for 24,000 miles, whichever first occurs.

Within nine months after the purchase, John was forced to return the car for repairs to the dealer on thirty different occasions; and the car has been in the dealer’s custody for more than seventy days during these nine months. The dealer has been forced to make major repairs to the engine, transmission, and steering assembly. The car is now in the custody of the dealer for further major repairs, and John has demanded that it keep the car and refund his entire purchase price. The dealer has refused on the ground that it has not breached its contract and is willing to continue repairing the car during the remainder of the “twenty-four/twenty-four” period. What are the rights and liabilities of the dealer and John? Explain.

Answer: The dealer did not properly disclaim the implied warranty of merchantability, and he has breached this warranty. The dealer’s continued willingness to “cure” the numerous defects in the Revenge automobile have not been accomplished within a reasonable time thereby giving John the right to revoke his acceptance of the car and entitling him to recover his purchase price.

Section 2-316(2), UCC, provides that in order to exclude or modify the implied warranty of merchantability the language of the disclaimer must mention the word “merchantability” and if in writing the writing must be conspicuous. The manufacturer and dealer used appropriate language to disclaim the warranty of merchantability: however, the exclusionary language was of the same size type as the other language in the document and it was contained in an 80-page fine-print manual. The disclaimer language therefore did not comply with the mandate of the Code that it be conspicuous and would not be effective against John. More importantly, the Magnuson-Moss Federal Warranty Act provides that a seller granting a written warranty on consumer goods cannot disclaim any implied warranty; therefore, this disclaimer contained in a document providing express written warranties is ineffective against all implied warranties.

NOTE: Most jurisdictions would hold that strict liability does not apply for two possible reasons: (1) the damage suffered, i.e., economic loss, is not within the coverage of 402A and/or (2) the product is not unreasonably dangerous.

7. Fred Lyon of New York, while on vacation in California, rented a new model Home Run automobile from Hart’s Drive-A-Car. The car was manufactured by the Ange Motor Company and was purchased by Hart’s from Jammer, Inc., an automobile importer. Lyon was driving the car on a street in San Jose when, due to a defect in the steering mechanism, it suddenly became impossible to steer. The speed of the car at the time was thirty miles per hour, but before Lyon could bring it to a stop, the car jumped a low curb and struck Peter Wolf, who was standing on the sidewalk, breaking both of his legs and causing other injuries. Explain what rights Wolf has against (a) Hart’s Drive-A-Car, (b) Ange Motor Company, (c) Jammer, Inc., and (d) Lyon.

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Answer: Wolf would be able to prevail under a strict liability cause of action against Harts, Ange Motor Company, and Jammer, Inc., but not against Lyon. Ange Motor Co., the manufacturer, however, should bear the ultimate responsibility due to the defective parts.

The fact that Wolf was an innocent by-stander is not significant in that strict liability in tort does not recognize the lack of privity as a defense. In addition, Section 402A has been applied to sellers and non-sellers, such as bailors and lessors, of personal property.

A cause of action premised upon a breach of the implied warranty of merchantability would present the problems of privity and non-seller of goods. Comment 2 to Section 2-313 invites utilization of warranty theory to bailments for hire and most courts have so ruled.

8. The plaintiff brings this cause of action against a manufacturer for the loss of his leg below the hip. The leg was lost when caught in the gears of a screw auger machine sold and installed by the defendant. Shortly before the accident, the plaintiff’s co-employees had removed a covering panel from the machine by use of sledgehammers and crowbars in order to do repair work. When finished with their repairs, they replaced the panel with a single piece of cardboard instead of restoring the equipment to its original condition. The plaintiff stepped on the cardboard in the course of his work and fell, catching his leg in the moving parts. Explain what causes of action the plaintiff may have against the defendant and what defenses the defendant could raise.

Answer: In this case the court held that the machine was so well built that it contained a design defect because it was extremely difficult to disassemble and should have been equipped with an automatic safety interlock device to prevent its operation when it was disassembled.

What of possible defenses? (1) Subsequent alteration: this was held to be inapplicable in that the disassembly was foreseeable and the manufacturer should have acted to eliminate the problem. (2) Misuse/Abuse of the product: this was done by fellow workers and not the plaintiff. Moreover, such misuse was reasonably foreseeable. (3) Voluntary assumption of the risk: this is only applicable if the plaintiff knew of the risk.

(4) Contributory negligence: this is not a valid defense under Section 402A. But comparative negligence may be raised.

If the instructor wishes he can discuss a significant public policy question underlying this case: the effect of worker's compensation laws on the number of Section 402A suits. In most instances, workers who are injured on the job are prohibited from suing their employer and thus frequently look for other potential defendants. In this case one would look to (a) the co-workers, who are probably judgment proof and (b) the manufacturer with the deeper pocket.

9. The plaintiff, while driving a pickup manufactured by the defendant, was struck in the rear by another motor vehicle. Upon impact, the plaintiff’s head was jarred backward against the rear window of the cab, causing the plaintiff serious injury. The pickup was not equipped with a headrest, and none was required at the time. Should the plaintiff prevail on a cause of action based upon strict liability in tort? Why or why not?

Answer: The facts as presented are premised upon those found in Buccery v. General Motors Corp., 60 Cal. App. 3d 533, 132 Cal. Rptr. 605 (1976). The court held that the vehicle was defectively designed in that a headrest should have been installed for safety purposes, even though they were not required by state or federal regulations at

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the time the truck was manufactured. Headrests were required for new automobiles at the time of the purchase. In most states compliance with government or industry-wide standards does not provide a safe-harbor, but is merely a factor to be considered.

If the instructor wishes, she can add the fact that the plaintiff recognized the danger caused by the lack of a headrest and sought, without success, to purchase one.

Should this prevent the plaintiff from recovering due to voluntary assumption of risk?

The court held that no, the plaintiff knew of the danger but was not cognizant of the magnitude of that harm. To assume a risk, one must know of its potential harm as well as the magnitude of harm.

10. The plaintiff, while dining at the defendant’s restaurant, ordered a chicken pot pie. While she was eating, she swallowed a sliver of chicken bone, which became lodged in her throat, causing her serious injury. The plaintiff brings a cause of action. Should she prevail? Why or why not?

Answer: There are two different tests which jurisdictions apply to this type of fact situation, i.e., is the product unreasonably dangerous. The majority rule is the reasonable expectations test, which asks, “Would the ordinary consumer expect they might find chicken bones in a chicken pot pie?” Under this test, the defendant may or may not prevail, depending on the perspective of the court.

The minority and old rule is the natural versus foreign test: if an element is natural to an ingredient in the final product, it is natural to the final product. Hence, since chicken bones are natural to chicken, which is natural to chicken pot pie, chicken bones are natural to chicken pot pie. Under this latter test, the defendant would prevail.

11. Salem Supply Co. sells new and used gardening equipment. Ben Buyer purchased a slightly used riding lawn mower for $1,500. The price was considerably less than that of comparable used mowers. The sale was clearly indicated to be “as is.” Two weeks after Ben purchased the mower, the police arrived at his house with Owen Owner, the true owner of the lawn mower, which was stolen from his yard, and reclaimed the mower.

What recourse, if any, does Ben have? Explain.

Answer: Ben can sue Salem Supply Co. for breach of warranty of title. Under the UCC Warranty of Title found in 2-312, the seller is obligated to convey the right to ownership without any lien. Because the goods were stolen, Salem Supply Co. had a void title and could convey no interest to Ben even though Ben is a good faith buyer in the ordinary course of business from a merchant. This is not an entrustment to a merchant, because the true owner did not authorize an entrustment of the mower to Salem. The fact that the sale is “as is” means that the warranty of merchantability may have been waived, but it does not negate the warranty of title, because there is nothing in the circumstances of the sale to suggest to Ben that Salem’s title is a colorable one. Ben is entitled to the return of the $1500 he paid for the mower.

12. Seigel, a seventy-three-year-old man, was injured at one of Giant Food’s retail food stores when a bottle of Coca-Cola exploded as he was placing a six-pack of Coke into his shopping cart. The explosion caused him to lose his balance and fall, with injuries resulting. Has Giant breached its implied warranty of merchantability to Seigel? Why or why not?

Answer: Yes, decision for Seigel. The few reported decisions are in conflict as to whether a sale or contract is made before closing at the check-out counter. The Maryland case of Sheeskin v. Giant Foods, Inc., 20 Md. App. 611, 318 A. 2d 874 (1974),

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cites three pre-Code cases which hold that in such cases no sale or contract is made.

Most cases, including Sheeskin, decided under the Code reach the opposite conclusion.

In Sheeskin the court unequivocally holds that the moment the customer picks up the goods with the intent to buy them, an executory bilateral contract of sale by offer and acceptance is entered into between the retailer and the customer, and from that moment forward the implied warranties of the Code apply. Remember, Giant may in turn bring suit for strict liability in tort against Coca-Cola.

13. Guarino and two others (plaintiffs) died of gas asphyxiation and five others were injured when they entered a sewer tunnel without masks to answer the cries for help of their crew leader, Rooney. Rooney had left the sewer shaft and entered the tunnel to fix a water leakage problem. Having corrected the problem, Rooney was returning to the shaft when he apparently was overcome by gas because of a defect in his oxygen mask, which was manufactured by Mine Safety Appliance Company (defendant). The plaintiffs’ estates brought this action against the defendant for breach of warranty, and the defendant raised the defense of the plaintiffs’ voluntary assumption of the risk. Explain who will prevail.

Answer: Decision for the plaintiffs. If a seller of goods through its negligence or breach of warranty places another person in a position of imminent peril, that seller may be held liable for any damages sustained by a rescuer in his attempt to aid the imperiled victim under the “danger invites rescue” doctrine. Here, Mine Safety Appliance Company, through its breach of warranty on the oxygen mask, placed Rooney in a position of imminent peril in the tunnel. The company, then, is liable for damages suffered by Rooney’s attempted rescuers and cannot successfully plead the defense of voluntary assumption of risk.

14. Green Seed Company packaged, labeled, and marketed a quality tomato seed known as “Green’s Pink Shipper” for commercial sale. Brown Seed Store, a retailer, purchased the seed from Green Seed and then sold it to Guy Jones, an individual engaged in the business of growing tomato seedlings for sale to commercial tomato growers. Williams purchased the seedlings from Jones and then transplanted and raised them in accordance with accepted farming methods. The plants, however, produced not the promised “Pink Shipper” tomatoes but an inferior variety that spoiled in the field. Williams then brought an action against Green Seed for $90,000, claiming that his crop damage had been caused

by Green Seed’s breach of an express warranty. Green Seed argued in defense that its warranty did not extend to remote purchasers and that the company did not receive notice of the claimed breach of warranty. Who will prevail? Why? Answer: Decision for Williams. The Code and the restatement broaden the traditional common law concept of vertical privity with respect to breach of warranty actions. A seller of tomato seed might reasonably expect a commercial grower of tomatoes to use or be affected by the seeds distributed and sold on the market by the seller. The Green Seed Company is an integral part of the distributive chain for production purposes. When a seller of tomato seed warrants it to be of particular fitness and variety, the warranty extends in the distributive chain to a purchaser of tomato plants which are grown from the seed for commercial purposes. L.A. Green Seed Co. of Arkansas v. Williams, 438 S.W. 2d 717 (Ark. 1969).

15. Mobley purchased from Century Dodge a car described in the contract as new. The contract also contained a disclaimer of all warranties, express or implied. Subsequently, Mobley discovered that the car had, in fact, been involved in an accident. He then sued Century Dodge to recover damages, claiming the dealer had breached its express warranty

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 22: Product Liability: Warranties and Strict Liability

that the car was new. Century Dodge argues that it had adequately disclaimed all warranties. Decision? Explain.

Answer: Judgment for Mobley. According to the UCC, words or conduct creating an express warranty and words or conduct negating or limiting warranties are to be construed as consistent whenever reasonable. Century Dodge’s description of the car as new gave rise to an express warranty. It is unreasonable to allow an express warranty to be negated by a general disclaimer because the two provisions are not consistent. Since the car is not new, Century Dodge is liable for its breach of an express warranty. Century Dodge, Inc. v. Mobley, 272 S.E. 2d 502 (Ga. 1980).

16. O’Neil purchased a used diesel tractor-trailer combination from International Harvester.

O’Neil claimed that International Harvester’s salesman had told him that the truck had recently been overhauled and that it would be suitable for hauling logs in the mountains.

The written installment contract signed by the parties provided that the truck was sold “AS IS WITHOUT WARRANTY OF ANY CHARACTER express or implied.” O’Neil admitted that he had read the disclaimer clause but claimed that he understood it to mean that the tractor-trailer would be in the condition that International Harvester’s salesman had promised.

O’Neil paid the $1,700 down payment, but he failed to make any of the monthly payments.

He claimed that he refused to pay because his employee had many problems with the truck when he took it to the mountains. Delays resulting from those problems, O’Neil argued, had caused him to lose his permit to cut firewood and, therefore, the accompanying business. An International Harvester representative agreed to pay for onehalf of the cost of certain repairs, but the several attempts made to fix the truck were unsuccessful. O’Neil then tried to return the truck and to rescind the sale, but International Harvester refused to cooperate. Decision?

Answer: The implied warranty of fitness for a particular purpose and the implied warranty of merchantability can be disclaimed by an “as is” clause. O’Neil’s admission that he read the disclaimer in the contract was sufficient to disclaim the implied warranty of fitness for a particular purpose and the implied warranty of merchantability. The express warranty made by the International Harvester representative (even though it was prior to the written contract) and their willingness to pay for a portion of the repairs tends to show that an express warranty was given.

However, a material issue of fact remains as to the actual final agreement between the parties, and a trial on the issue of the express warranty is appropriate. O’Neil v.

International Harvester Co., 575 P. 2d 862 (Co. 1978).

17. Mrs. Embs went into Stamper’s Cash Market to buy soft drinks for her children. She had removed five bottles from an upright soft drink cooler, placed them in a carton, and turned to move away from the display when a bottle of 7Up in a carton at her feet exploded, cutting her leg. Apparently, several other bottles had exploded that same week.

Stamper’s Cash Market received its entire stock of 7Up from Arnold Lee Vice, the area distributor. Vice in turn received his entire stock of 7Up from Pepsi-Cola Bottling Co. Can Mrs. Embs recover damages from (a) Stamper, (b) Vice, or (c) Pepsi-Cola Bottling? Why or why not?

Answer: Yes, on all three. The doctrine of strict liability in tort extends not only to actual purchasers and users but also to bystanders whose injury from a defective product is reasonably foreseeable. Moreover, as a matter of public policy, the retailer and the distributor as well as the bottler are liable for injuries resulting from defective products. These members of the marketing chain are best able to bear the loss and

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 22: Product Liability: Warranties and Strict Liability

can distribute the risk among themselves by means of insurance and reimbursement agreements. In the present case, the explosion of the bottle in the course of normal handling permitted the inference of a defect, particularly where there was evidence of similar explosions earlier in the week. Thus, Embs can recover under strict liability in tort in that the defendants sold a defective product that is unreasonably dangerous to the user or consumer. Embs v. Pepsi-Cola Bottling Co. of Lexington, Kentucky, Inc., 528 S.W. 2d 703 (1975).

18. Catania wished to paint the exterior of his house. He went to Brown, a local paint store owner, and asked him to recommend a paint for the job. Catania told Brown that the exterior walls were stucco and in a chalky, powdery condition. Brown suggested Pierce’s shingle and shake paint. Brown then instructed Catania how to mix the paint and how to use a wire brush to prepare the surface. Five months later, the paint began to peel, flake, and blister. Catania brings an action against Brown. Decision? Explain.

Answer: Judgment for Catania. There is an implied warranty of fitness covering the sale of the paint. Here, (1) the seller had reason to know the buyer’s particular needs and purpose, and (2) knew that the buyer was relying on the seller’s superior skill and judgment to select suitable goods. Catania v. Brown, 4 Conn. Cir. 344, 231 A. 2d 668 (1967).

19. Robinson, a truck driver for a moving company, decided to buy a used truck from the company. Branch, the owner, told Robinson that the truck was being repaired and that Robinson should wait and inspect the truck before signing the contract. Robinson, who had driven the truck before, felt that inspection was unnecessary. Again, Branch suggested Robinson wait to inspect the truck, and again Robinson declined. Branch then told Robinson he was buying the truck “as is.” Robinson then signed the contract. After the truck broke down four times, Robinson sued. Discuss what defenses can Branch raise.

Explain which party will be successful.

Answer: No, Robinson will not prevail. Branch can use the defense of waiver of implied warranties. Exclusion of implied warranties in this case was effectuated both orally (“as is” statement) and by course of performance. The UCC allows the exclusion or modification of implied warranties by course of performance, as well as course of dealing and trade usage. There is no question in this case that the seller disclaimed, and the buyer waived, any implied warranties. Robinson v. Branch Moving & Storage Company, Inc., 28 N.C. App. 244, 221 S.E. 2d 81 (1976).

20. Perfect Products manufactures balloons, which are then bought and resold by wholesale novelty distributors. Mego Corp. manufactures a doll called “Bubble Yum Baby.” A balloon is inserted in the doll’s mouth with a mouthpiece, and the doll’s arm is pumped to inflate the balloon, simulating the blowing of a bubble. Mego Corp. used Perfect Products balloons in the dolls, bought through independent distributors. The plaintiff’s infant daughter died after swallowing a balloon removed from the doll. Is Perfect Products liable to plaintiff under a theory of strict liability? Explain.

Answer: No. Judgment for Perfect Products. A cause of action in strict products liability arises when a manufacturer places on the market a product which has a defect that causes injury. Inadequate and dangerous products, regardless of warnings, will be held to be defective. Balloons, however, are not inherently dangerous, and Perfect Products has no duty to warn since the intended or foreseeable use of their products is not hazardous. Ingesting a balloon is not an intended use, and to the extent it is a foreseeable one, it is a misuse of the product from which the child’s guardian must protect. Note that Perfect Products had no knowledge of the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 22: Product Liability: Warranties and Strict Liability

subsequent use of their product by Mego Corp. Any unforeseen modification of the product after it leaves the manufacturer’s hands is not its responsibility. Landrine v.

Mego Corporation, 94 A.D. 2d 759, 464 N.Y.S. 2d 516 (A.D. 1 Dept. 1983).

21. Patient was injured when the footrest of an adjustable X-ray table collapsed, causing Patient to fall to the floor. G.E. manufactured the X-ray table and the footrest. At trial, evidence was introduced that G.E. had manufactured for several years another footrest model complete with safety latches. However, there was no evidence that the footrest involved was manufactured defectively. The action is based on a theory of strict liability.

Who wins? Why? Answer: Judgment for Patient. The failure of the manufacturer G.E. to equip the footrest with a safety device may constitute a design defect. The safety latches were already within the state of the art, since G.E. had been including them on footrests for several years. A jury could reasonably find the absence of the safety latches to be a design defect which in turn was the proximate cause of Patient’s injury. Ontai v. Straub Clinic and Hospital, Inc., 659 P. 2d 734 (Hawaii 1983).

22. Vlases, a coal miner who had always raised small flocks of chickens, spent two years building a new two-story chicken coop large enough to house 4,000 chickens. After its completion, he purchased two thousand two hundred one-day-old chicks from Montgomery Ward for the purpose of producing eggs for sale. He had selected them from Ward’s catalog, which stated that these chicks, hybrid Leghorns, were noted for their excellent egg production. Vlases had equipped the coop with brand-new machinery and had taken further hygiene precautions for the chicks’ health. Almost one month later, Vlases noticed that their feathers were beginning to fall off. A veterinarian’s examination revealed signs of drug intoxication and hemorrhagic disease in a few of the chicks. Eight months later, it was determined that the chicks were suffering from visceral and avian leukosis, or bird cancer, which reduced their egg-bearing capacity to zero. Avian leukosis may be transmitted either genetically or by unsanitary conditions. Subsequently, the disease infected the entire flock. Vlases then brought suit against Montgomery Ward for its breach of the implied warranties of merchantability and of fitness for a particular purpose. Ward claimed that there was no way to detect the disease in the one-day-old chicks, nor was there medication available to prevent this disease from occurring. Is Montgomery Ward liable under a warranty and/or strict liability cause of action? Explain.

Answer: Yes, Montgomery Ward is liable. The implied warranty of merchantability and the implied warranty of fitness for a particular purpose are designed to protect the buyer from bearing the loss when the goods do not conform to normal commercial standards or meet the buyer's particular purpose. The seller is therefore liable for the breach of these warranties even if he is unable to discover the defect in the goods or cure the damage if it could be ascertained. Under both warranties, however, the goods must be defective at the time of delivery to hold the seller liable.

Here, the avian leukosis definitely rendered the chicks commercially inferior and unmerchantable. They also were unfit for the purpose of laying eggs, for which Vlases had purchased them, relying on Ward’s catalogue advertisement. Vlases had taken the necessary hygienic precautions in the handling, care, and housing of the chicks. There is a strong inference, then, that the chicks had contracted the disease genetically rather than because of unsanitary conditions. Therefore, they were of inferior quality at the time of the delivery, although the disease was not discovered until eight months later. Despite its inability to detect or prevent the leukosis in the one-day-old chicks, Ward is liable for the breach of both warranties.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 22: Product Liability: Warranties and Strict Liability

23. Heckman, an employee of Clark Equipment Company, severely injured his left hand when he caught it in a power press that he was operating at work. The press was manufactured

by Federal Press Company and sold to Clark eight years earlier. It could be operated either by hand controls that required the use of both hands away from the point of operation or by an optional foot pedal. When the foot pedal was used without a guard, nothing remained to keep the operator’s hands from the point of operation. Federal Press did not provide safety appliances unless the customer requested them, but when it delivered the press to Clark with the optional pedal, it suggested that Clark install a guard. The press had a similar warning embossed on it. Clark did, in fact, purchase a guard for $100, but it was not mounted on the machine at the time of the injury; nor was it believed to be an effective safety device.

Heckman argued that a different type of guard, if installed, would have made the press safe in 95 percent of its customary uses. Federal, in turn, argued that the furnishing of guards was not customary in the industry, that the machine’s many uses made it impracticable to design and install any one guard as standard equipment, that Clark’s failure to obey Federal’s warning was a superseding cause of the injury, and that state regulations placed responsibility for the safe operation of presses on employers and employees. Decision? Explain.

Answer: Judgment for Heckman. A failure to provide proper safety devices constituted a design defect that subjected Federal to liability. The question whether Federal’s guardless press created an unreasonable risk of harm to the user was a question for the jury to decide after considering such factors as: (1) the feasibility of incorporating safety features during manufacture; (2) the likelihood that users would not secure adequate protective devices; (3) whether the machine was of standard make or custom built; (4) the relative expertise of the manufacturer and the customer with regard to the product; (5) the extent of risk to the user; and (6) the seriousness of the injury that could be anticipated. The jury concluded that the press, considering these factors, was defective and unreasonably dangerous. Heckman v. Federal Press Co. 587 F. 2d 612 (1978).

24. For sixteen years, the late Mrs. Dorothy Mae Palmer was married to Mr. Schultz, an insulator who worked with asbestos products. Mrs. Palmer was not exposed to asbestos dust in a factory setting; rather, she was exposed when Mr. Schultz brought his work clothes home to be washed. Mrs. Palmer died of mesothelioma. This product liability suit was brought by Mrs. Palmer’s daughters to recover for the alleged wrongful death of their mother. The daughters claim that Mrs. Palmer’s mesothelioma was the result of exposure to asbestos-containing products manufactured by Owens-Corning. The daughters claim that the asbestos products were defective and unreasonably dangerous and that OwensCorning was negligent in failing to warn of the dangers associated with their products.

Explain whether the plaintiffs should prevail?

Answer: Under Oklahoma law, a manufacturer may have a duty to warn consumers of potential hazards which occur from the use of its products. A failure to warn may result in a product being defective and unreasonably dangerous. This duty to warn, however, extends only to the ordinary consumer and user of the product (defined as “one who would be foreseeably expected to purchase the product”). According to these facts, Owens-Corning did not have the obligation to warn Mrs. Palmer because she was not the ordinary consumer of the asbestos-containing products.

Additionally, at the time the asbestos products in question were sold, Owens-Corning had no knowledge of its dangers. In fact, the prevailing scientific opinion of the time was that the type of asbestos involved in this case did NOT cause mesothelioma. The

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 22: Product Liability: Warranties and Strict Liability

Oklahoma Supreme Court had earlier ruled that “the manufacturer of a product has a duty to warn the consumer of potential dangers which may occur from the use of the product when it is known or should be known that the hazards exist.” Rohrbaugh v.

Owens-Corning Fiberglass Corp., 965 F. 2d 844.

25. A gasoline-powered lawn mower, which had been used earlier to cut grass, was left unattended next to a water heater which had been manufactured by Sears. Expert testimony was presented to demonstrate that vapors from the mower’s gas tank accumulated under the water heater and resulted in an explosion. Three-year-old Shawn Toups was injured as a result. Evidence was also presented negating any claim that Shawn had been handling the gasoline can located nearby or the lawn mower. He was not burned on the soles of his feet or the palms of his hands. Is Sears liable to the Toups in strict product liability? Explain.

Answer: Sears is liable. Judgment for Shawn Toups. In a strict liability case, the plaintiff must prove that the harm resulted from the condition of the product, in that the condition made the product unreasonably dangerous to normal use, and the condition existed at the time the product left the manufacturer’s control. It is not necessary to prove negligence. Sears did not include in its users’ manuals a warning as to this explosion danger, and this evidence should have been made known at trial.

Toups v. Sears, Roebuck and Co., 507 So. 2d 809 (La. 1987).

26. For more than forty years, Rose Cipollone smoked between one and two packs of cigarettes a day. Upon her death from lung cancer, Rose’s husband, Antonio Cipollone, filed suit against Liggett Group, Inc., Lorillard, Inc., and Philip Morris, Inc., three of the leading firms in the tobacco industry, for the wrongful death of his wife. Many theories of liability and defenses were asserted in this decidedly complex and protracted litigation.

One theory of liability claimed by Mr. Cipollone was breach of express warranty. It is uncontested that all three manufacturers ran multimedia ad campaigns that contained affirmations, promises, or innuendos that smoking cigarettes was safe. For example, ads for Chesterfield cigarettes boasted that a medical specialist could find no adverse health effects in subjects after six months of smoking. Chesterfields were also advertised as being manufactured with “electronic miracle” technology that made them “better and safer for you.” Another ad stated that Chesterfield ingredients were tested and approved by scientists from leading universities. Another brand, L&M, publicly touted the “miracle tip” filter, claiming it was “just what the doctor ordered."

At trial, the defendant tobacco companies were not permitted to try to prove that Mrs. Cipollone disbelieved or placed no reliance on the advertisements and their safety assurances. Did the defendants breach an express warranty to the plaintiff? Explain.

Answer: Remand for a new trial on the issue of whether Mrs. Cipollone had read or heard the advertisements and, if so, whether she believed them. The court also ruled that the Federal Cigarette Labeling Act preempted claims arising from smoking after January 1, 1966, based upon the adequacy of warnings. The central concern in a breach of express warranty case is the nature of the reliance interest required by UCC According to this section, any affirmation or promise, any description, or any sample or model must be made part of the basis of the bargain in order to create an express warranty. On one hand, the tobacco companies contend that Mr. Cipollone must prove that Mrs. Cipollone actually relied on the advertisements and was induced to buy the cigarettes because of the advertisements. On the other extreme, the trial court seemed to feel that any affirmations made in any advertisements become a basis of the bargain between Mrs. Cipollone and the tobacco companies, regardless of whether

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 22: Product Liability: Warranties and Strict Liability

Mrs. Cipollone actually knew of the ad. The court noted that the district court’s interpretation of this requirement would be met even if Mrs. Cipollone had not read or heard the ads. Rather, the court noted that a plaintiff satisfies the “basis of the bargain” requirement, establishing breach of express warranty by proving that he or she read, heard, saw, or knew of ads containing affirmation of fact or promise. Once the buyer has become aware of such affirmations or promises, those statements are presumed to be part of the basis of the bargain unless the seller, by clear affirmative proof, shows that the buyer knew that the affirmation or promise was untrue.

[Author’s note: This case was appealed on the issue of federal preemption of common law claims arising after January 1, 1966, and was reversed in part and affirmed in part by the U.S. Supreme Court, Docket No. 112 S-Ct. 2608 (1992).]

27. Trans-Aire International, Inc. (TAI), converts ordinary automotive vans into recreational vehicles. TAI had been installing carpet and ceiling fabrics in the converted vans with an adhesive made by the 3M Company. Unfortunately, during the hot summer months, the 3M adhesive would often fail to hold the carpet and fabrics in place.

TAI contacted Northern Adhesive Company (Northern), seeking a “suitable” product to replace the 3M adhesive. Northern sent samples of several adhesives, commenting that hopefully one or more “might be applicable.” Northern also informed TAI that one of the samples, Adhesive 7448, was a “match” for the 3M adhesive. After testing all the samples under cool plant conditions, TAI’s chief engineer determined that Adhesive 7448 was better than the 3M adhesive. When TAI’s president asked if the new adhesive should be tested under summerlike conditions, TAI’s chief engineer responded that it was unnecessary to do so. The president then asked if Adhesive 7448 came with any warranties. A Northern representative stated that there were no warranties, except that the orders shipped would be identical to the sample.

After converting more than five hundred vans using Adhesive 7448, TAI became aware that high summer temperatures were causing the new adhesive to fail. Explain whether TAI should prevail against Northern in a suit claiming (a) breach of an implied warranty of fitness for a particular purpose, (b) breach of an implied warranty of merchantability, and (c) breach of express warranty.

Answer: Judgment for Northern. The UCC provides that “when the buyer before entering into a contract has examined the goods or the sample or model as fully as he desired or has refused to examine the goods there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to him.”

The facts clearly show that TAI refused to do any further testing of Adhesive 7448 to determine the effect of summerlike heat upon the adhesive. Had they done so, TAI would have discovered that Adhesive 7448 fared no better than the 3M adhesive they had been using. Moreover, Northern did not breach an implied warranty of fitness for a particular purpose, since TAI did not rely on Northern’s skill or judgment in selecting Adhesive 7448. Northern, furthermore, did not breach any express warranties, for Northern made no affirmations or promises when it supplied TAI with samples. At most, Northern claimed that Adhesive 7448 was a “match” for the 3M adhesive, which in fact turned out to be true.

28. The plaintiff’s children purchased an Aero Cycle exercise bike for their mother to use in a weight loss program. The Aero Cycle bike was manufactured by DP and purchased from Walmart. The second time the plaintiff, Judy Dunne, used the bike (the first time she had used it, she used it only for a few seconds), she pedaled for three or four rotations. The rear support strut failed, and the bike collapsed under plaintiff. At the time of the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 22: Product Liability: Warranties and Strict Liability

accident, plaintiff weighed between 450 and 500 pounds. She fell off the bike backwards, struck her head on a nearby metal file cabinet, and was knocked unconscious. When plaintiff regained consciousness, her mouth was bleeding and her neck, left shoulder, arm, leg, knee, and ankle were injured. Plaintiff was diagnosed as having a cervical strain and multiple contusions. Plaintiff filed suit against Walmart and DP. Explain whether plaintiff should prevail.

Answer: A manufacturer is not responsible for accounting for every conceivable foreseeable use of a product but is liable for damage caused by a use or handling of a product that the product’s manufacturer should reasonably expect of an ordinary person in the same or similar circumstances.

The trial court concluded that “the use of this exercise bike by a woman of 500 pounds was not reasonably anticipated. DP manufactured the Aero Cycle to withstand use by adults weighing up to 250 pounds, as this encompasses greater than 98.5 percent of the United States adult population. Further, DP adheres to the American Society for Testing and Materials (ASTM) standards. However, DP is not automatically absolved of liability because it complied with the ASTM standards. The ASTM standards are not determinative of liability.”

More importantly, the trial court committed legal error in their reasons for judgment.

Instead of considering whether plaintiff was engaged in a “reasonably anticipated use,” the trial court considered whether plaintiff was a “reasonably anticipated user.” There was no misuse of the product by plaintiff in this case. In fact, the record demonstrates that plaintiff used the product in a manner wholly consistent with its intended use.

The Aero Cycle exercise bike was designed and marketed by DP primarily for use by overweight individuals. Plaintiff, an overweight person, was the type of consumer targeted by DP. Additionally, plaintiff had no reason to know that the Aero Cycle would not sustain her weight as she previously had used a similar exercise bike for several years without incident. The mere fact that plaintiff was considerably overweight does not place her in a category of persons for whom DP has no responsibility.

The next issue is whether DP was required to place a maximum weight limit warning on the Aero Cycle. The cover of the owner’s manual contains other safety information and warnings, and it was entirely feasible to have included a statement or warning that the product should not be used by persons weighing over 250 pounds. In light of DP’s admission that the Aero Cycle was only intended to have a limited use, we find that plaintiff proved that DP failed to exercise reasonable care by failing to place a limited use warning on the Aero Cycle.

Walmart is also liable as a merchant seller of the defective product.

29. Raymond and Sandra Duford purchased a woodburning stove from Sears. The stove was manufactured by Preway, Inc. At trial, it was shown that Raymond had inadvertently installed the section of the chimney pipe that went through the roof upside down; and all parties agreed that such improper installation caused a fire that had destroyed the Dufords’ house.

At trial, the Dufords alleged, and Preway admitted, that there were no markings on the pipe indicating “which end was up.” An expert for the Dufords then testified that the simple precaution of an embossed marking would have been satisfactory. Later, a witness for Preway pointed out that the actual pipe in question had been marked with embossed letters. The pipe in fact had tiny letters spelling “UP” with two arrows pointed in the proper direction. Since no one on either side had noticed the letters except the one witness, the Dufords then changed their claim to that of inadequacy of the marking. The

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 22: Product Liability: Warranties and Strict Liability

trial court however issued a directed verdict for Preway and Sears, and the Dufords appealed. Who will prevail? Why? Answer: Opinion vacated and case remanded for a new trial. Products liability actions can be brought if goods are defectively manufactured or defectively designed. In a defective design case, the plaintiff must show that the design itself rendered the product “unreasonably dangerous” to consumers. An absent or inadequate warning also constitutes a design defect. To determine what is unreasonably dangerous, a court must examine the social utility of a product. Courts should also consider whether the risk of danger could be reduced or eliminated without significant impact on product effectiveness or manufacturing cost. Failure to take such feasible steps supports a finding that a product design is defective.

Since a jury could have found that the chimney pipe in question was defective, the trial court’s order for a directed verdict was improper. For the same reason, a jury could have found that the pipe was not fit for the ordinary purposes for which such goods are used and thus found Sears in breach of the implied warranty of merchantability.

ANSWERS TO “TAKING SIDES” PROBLEMS Brian Felley purchased a used Ford Taurus from Thomas and Cheryl Singleton for $8,800. The car had 126,000 miles on it. After test driving the car, Felley discussed the condition of the car with Thomas Singleton, who informed Felley that the only thing known to be wrong with the car was that it had a noise in the right rear and that a grommet (a connector having to do with a strut) was bad or missing. Thomas told Felley that otherwise the car was in good condition. Nevertheless, Felley soon began experiencing problems with the car. On the second day that he owned the car, Felley noticed a problem with the clutch. Over the next few days, the clutch problem worsened and Felley was unable to shift the gears. Felley presented an invoice to Thomas showing that he paid $942.76 for the removal and repair of the car’s clutch. In addition, the car developed serious brake problems within the first month that Felley owned it. Felley now contends that the Singletons breached their express warranty. a. What arguments would support Felley’s contention? b. What arguments would support the claim by the Singletons that they had not given an express warranty? c. What is the appropriate outcome? Explain.

Answer: (a) A substantial amount of money was paid for the car, and this is one of the factor[s] which would cause the buyer to reasonably rely on affirmations that the automobile was in good mechanical shape. It makes little sense to pay thousands of dollars, and then expect to immediately sink substantial money into repair. In this case immediate problems were experienced with the brakes and clutch. These were not minor problems, but affected the very drivability of the car, and were directly related to the mechanical condition.

Section 2–313 of the UCC governs the formation of express warranties by affirmation in the context of a sale of goods such as a used car. Section 2–313 provides, in relevant part: “(1) Express warranties by the seller are created as follows:

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 22: Product Liability: Warranties and Strict Liability

i. Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.

(2) It is not necessary to the creation of an express warranty that the seller use formal words such as ‘warrant’ or ‘guarantee’ or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.”

In the context of a used car sale, representations by the seller such as the car is “in good mechanical condition” are presumed to be affirmations of fact that become part of the basis of the bargain.

In this case, it is undisputed that plaintiff asked defendants about the car’s mechanical condition and that defendants responded that the car was in good mechanical condition. The defendants’ representations are presumed to be affirmations of fact that became a part of the basis of the bargain.

Because they are presumed to be part of the basis of the bargain, such representations constitute express warranties. (b) The Singletons are not experts in car maintenance. There is no evidence that Mr. Singleton’s statement was not true. Just because he does not know of a defect does not mean he was misrepresenting the truth. Defects in cars are sometimes difficult to discover if you are not trained. Felley had ample opportunity to inspect the car and presumably could have had an expert to inspect it as well. (c) The Singletons are liable. The statements made by the Singletons are considered an express warranty.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 23: Sales Remedies

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 23: Sales Remedies

TABLE OF CONTENTS Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems ..............................................................................13

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Mae contracted to sellone thousand bushels of wheat to Lloyd at $10.00 per bushel. Just before Mae was to deliver the wheat, Lloyd notified her that he would not receive or accept the wheat. Mae sold the wheat for $9.60 per bushel, the market price, and later sued Lloyd for the difference of $400. Lloyd claims he was not notified by Mae of the resale and hence is not liable. Is Lloyd correct? Why or why not?

Answer: No, Lloyd is not correct. Decision for Mae. Under Section 2-708 of the UCC, upon the buyer’s repudiation of the contract, the seller is entitled to recover the difference between the market price of the goods at the time and place for tender and the contract price of the goods. This section does not require notice to the buyer. Mae would have to prove that $9.60 was the market price. If she provides satisfactory proof of this, Lloyd would owe her $400 plus any incidental damages she reasonably sustained.

2. On December 15, Judy wrote a letter to David stating that she would sell to David all of the mine-run coal that David might need to buy during the next calendar year for use at David’s factory, delivered at the factory at a price of $50.00 per ton. David immediately replied by letter to Judy stating that he accepted the offer, that he would purchase all of his mine-run coal from Judy, and that he would need two hundred tons of coal during the first week in January. During the months of January, February, and March, Judy delivered to David a total of seven hundred tons of coal, for which David made payment to Judy at the rate of $50.00 per ton. On April 10, David ordered two hundred tons of mine-run coal from Judy, who replied to David on April 11 that she could not supply David with any more coal except at a price of $58.00 per ton delivered. David thereafter purchased elsewhere at the market price, namely $58.00 per ton, all of his factory’s requirements of mine-run coal for the remainder of the year, amounting to a total of two thousand tons of coal. Can David now recover damages from Judy at the rate of $8.00 per ton for the coal thus purchased, amounting to $16,000? Why or why not?

3. Answer: Yes. Decision for David. Judy has breached her valid requirements contract with David and David is entitled to protect himself by obtaining cover, i.e., the buyer may be in good faith and without unreasonable delay purchase goods in substitution for those due from the seller. David can recover from Judy the difference between the cost of cover and the contract price, plus any incidental and consequential damages less expenses saved.

UCC, Section 2-712.On January 10, Betty, of Emanon, Missouri, visited the showrooms of

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 23: Sales Remedies

the Forte Piano Company in St. Louis and selected a piano. A sales memorandum of the transaction signed by Betty and the salesman of the Forte Piano Company read as follows: “Sold to Betty one new Andover piano, factory number 46832, price $3,300, to be shipped to the buyer at Emanon, Missouri, freight prepaid, before February 1. Prior to shipment, seller will stain the case a darker color in accordance with buyer’s directions and will make the tone more brilliant.” On January 15, Betty repudiated the contract by letter to the Forte Piano Company. The company subsequently stained the case, made the tone more brilliant, and offered to ship the piano to Betty on January 26. Betty persisted in her refusal to accept the piano. The Forte Piano Company sued Betty to recover the contract price. To what remedy, if any, is Forte entitled? Explain.

Answer: In Forte’s attempt to recover the contract price, judgment would be in favor of Betty, the buyer. This is a contract to sell specific goods whereby the seller is obligated to stain the piano and make the tone more brilliant in order to put the goods in a deliverable condition. Betty gave notice of cancellation before any work had been done on the piano. Under Section 2-401 and Section 2-509 of the UCC, neither title nor risk of loss passed to the buyer, and the seller is not entitled to recover the contract price but only damages for breach of contract as provided in Section 2-708 of the UCC Under this section, upon the buyer’s repudiation of the contract, the seller is entitled to recover the difference between the market price of the goods at the time and place for tender and the contract price of the goods. This section does not require notice to the buyer.

4. Sims contracted in writing to sell Blake one hundred electric motors at a price of $100 each, freight prepaid to Blake’s warehouse. By the contract of sale, Sims expressly warranted that each motor would develop twenty-five brake horsepower. The contract provided that the motors would be delivered in lots of twenty-five per week beginning January 2 and that Blake should pay for each lot of twenty-five motors as delivered, but that Blake was to have right of inspection on delivery. Immediately on delivery of the first lot of twenty-five motors on January 2, Blake forwarded Sims a check for $2,500, but on testing each of the twenty-five motors, Blake determined that none of them would develop more than fifteen brake horsepower. Discuss all of the remedies under the Uniform Commercial Code available to Blake.

Answer: The remedies available to Blake, the buyer, under the UCC are: (1) To accept and keep the 25 motors for which he has paid and to recover damages from the seller as provided in Section 2-714.

(2) To reject the goods as provided in Section 2-602 and thereafter hold them for the seller’s instructions or resell them for the seller’s account under Section 2-603.

(3) To recover from the seller the price paid for the 25 motors rejected and to have a security interest in the rejected goods as provided in Section 2-711.

(4) To refuse to accept any further shipment of motors under the contract and to recover damages for nondelivery or repudiation under Section 2-713.

(5) To effect “cover” by making in good faith and without reasonable delay a contract to purchase goods in substitution for those due from seller.

(6) To recover incidental and consequential damages from the seller as provided in Section 2-715.

(7) To obtain adequate assurance of performance by the seller under Section 2-609.

(8) To revoke this acceptance of the 25 motors and retain his rights against the seller under Section 2-608.

(9) To treat the seller’s breach of warranty as an anticipatory repudiation and have the rights as provided in Section 2-610.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 23: Sales Remedies

(10) To suspend any further performance of the contract on his part under Section 6610(c).

(11) To rescind the contract by reason of the seller’s breach and retain all claims for damages against the seller under Section 2-720.

(12) To treat the seller’s breach of an installment contract by delivery of 25 defective motors of the first installment as a breach of the entire contract as provided in Section 2-612.

5. Henry and Mary entered into a written contract whereby Henry agreed to sell and Mary agreed to buy a certain automobile for $8,500. Henry drove the car to Mary’s residence and properly parked it on the street in front of Mary’s house, where he tendered it to Mary and requested payment of the price. Mary refused to take the car or pay the price. Henry informed Mary that he would hold her to the contract; but before Henry had time to enter the car and drive it away, a fire truck, answering a fire alarm and traveling at a high speed, crashed into the car and demolished it. Henry brings an action against Mary to recover the price of the car. Who is entitled to judgment? Would there be any difference in result if Henry were a dealer in automobiles? Explain.

Answer: If Henry were a dealer in automobiles, judgment for Mary. If Henry was not a dealer in automobiles, and not otherwise a merchant in goods of that kind, judgment for Henry.

Since this is an action by the seller to recover the price, it is governed by section 2709(1)(a) of the UCC which provides: (1) When the buyer fails to pay the price as it becomes due, the seller may recover together with any incidental damage under the next section the price.

(a) of goods accepted or of conforming goods lost or damages within a

commercially reasonable time after risk of their loss has passed to the buyer.

Section 2-509(3) provides in this type of case: “the risk of loss passes to the buyer on his receipt of the goods if the seller is a merchant; otherwise, the risk passes to the buyer on tender of delivery.” Thus, if the seller were a merchant, the buyer must have actually received the goods for risk of loss to pass to him. If the seller is not a merchant, a tender of delivery, as in this case, would be sufficient to transfer the risk of loss to Mary.

6. Jane sells and delivers to Gerald on June 1 certain goods and receives from Gerald at the time of delivery Gerald’s check in the amount of $9,000 for the goods. The following day, Gerald is petitioned into bankruptcy; and Gerald’s bank dishonors the check. On June 5, Jane serves notice on Gerald and the trustee in bankruptcy that she reclaims the goods.

The trustee is in possession of the goods and refuses to deliver them to Jane. What are the rights of the parties?

Answer: Jane’s right to reclaim the goods as against the trustee in bankruptcy is governed by Section 2-702(2) of the UCC and Section 546(c) of the Bankruptcy Act. Under the Code, a seller who discovers that the buyer has received goods on credit while insolvent may reclaim the goods upon demand made within ten days after receipt by the buyer of the goods. The Bankruptcy Act recognizes this right if the sale is in the ordinary course of the seller’s business and if the reclamation demand is in writing.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 23: Sales Remedies

7. The ABC Company, located in Chicago, contracted to sell a carload of television sets to Dodd in St. Louis, Missouri, on sixty days’ credit. ABC Company shipped the carload to Dodd. On arrival of the car at St. Louis, Dodd paid the freight charges and reshipped the car to Hines of Little Rock, Arkansas, to whom he had previously contracted to sell the television sets. While the car was in transit to Little Rock, Dodd went bankrupt. ABC Company was informed of this at once and immediately telephoned XYZ Railroad Company to withhold delivery of the television sets. Explain what the XYZ Railroad Company should do.

Answer: The XYZ Railroad Co. should not redeliver the television sets to ABC Co. whose right of stoppage in transit is terminated upon buyer Dodd’s reconsignment of the car at St. Louis. Title to the goods would depend upon the terms of the contract between Dodd and Hines. If it were a destination contract, title would remain in Dodd while the goods were moving between St. Louis and Little Rock, and the Railroad Co. would be obliged to deliver them to Dodd’s trustee in bankruptcy. If it were a shipment contract, title would pass to Hines upon reconsignment at St. Louis, and the Railroad would be obligated to deliver the goods to the consignee Hines.

8. Robert in Chicago entered into a contract to sell certain machines to Terry in New York.

The machines were to be manufactured by Robert and shipped F.O.B. Chicago not later than March 25. On March 24, when Robert was about to ship the machines, he received a letter from Terry wrongfully repudiating the contract. The machines cannot readily be resold for a reasonable price because they are a special kind used only in Terry’s manufacturing processes. Robert sues Terry to recover the agreed price of the machines.

Discuss the rights of the parties.

Answer: Robert is entitled to recover the price of the merchandise from Terry. Section 2-709 UCC provides: “(1) When the buyer fails to pay the price as it becomes due, the seller may recover, together with any incidental damages * * * the price * * *; (b) of goods identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing.”

9. Calvin purchased a log home construction kit, manufactured by Boone Homes, Inc., from an authorized Boone dealer. The sales contract stated that Boone would repair or replace defective materials and that this was the exclusive remedy available against Boone. The dealer assembled the house, which was defective in a number of respects. The knotholes in the logs caused the walls and ceiling to leak. A support beam was too small and therefore cracked, causing the floor to crack also. These defects could not be completely cured by repair. Should Calvin prevail in a lawsuit against Boone for breach of warranty to recover damages for the loss in value? Explain.

Answer: Yes, Calvin should prevail. The repair or replacement clause as a limitation of remedy was a failure in this case. Many of the house’s deficiencies simply could not be repaired. As a result, the remedy clause failed as to its essential purpose, and Calvin is entitled to any of the buyer remedies provided by the Code, i.e., consequential damages. Hartzell v. Justice Co., Inc., 693 F. 2d 770 (8th Cir. 1982).

10. Margaret contracted to buy a particular model Rolls-Royce from Paragon Motors, Inc. Only one hundred of these models are built each year. She paid a $30,000 deposit on the car but Paragon sold the car to Gluck. What remedy, if any, does Margaret have against Paragon?

Answer: Margaret’s remedy depends upon the availability in the market of a comparable car. Under 2-716 of the Code, “Specific performance may be decreed

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 23: Sales Remedies

where the goods are unique or in other proper circumstances.” Because there were one hundred of this model of car manufactured, the goods are not strictly speaking “unique.” Margaret may be able to demonstrate that this is a proper circumstance if she can show that cover is not readily available. On the other hand, if cover is readily available, a court would only allow her money damages, which would be calculated based upon the difference between the cost of cover and the contract price, plus incidental and consequential damages, less expenses saved. If Margaret does not cover, she could seek damages measured by the difference between the market price at the time when the buyer learned of the breach and the contract price, plus incidental and consequential damages, but less expenses saved. This remedy is an alternative to cover and the buyer could not recover any consequential damages that could have been avoided by cover.

11. Technical Textile agreed by written contract to manufacture and sell 20,000 pounds of yarn to Jagger Brothers at a price of $2.15 per pound. After Technical had manufactured, delivered, and been paid for 3,723 pounds of yarn, Jagger Brothers by letter informed Technical that it was repudiating the contract and that it would refuse any further yarn deliveries. The remaining 16,277 pounds were never manufactured. Technical sued Jagger Brothers for breach of contract. To what damages, if any, is Technical entitled? Explain.

Answer: Technical is entitled to $4,069.25 in damages, an amount equal to 16,277 times $0.25, which is the difference between the contract price ($2.15) and the market price ($1.90) of the yarn on the repudiation date. Is this the appropriate method to calculate damages in this case? In general, the measure of damages for repudiation of the contract by the buyer is the difference between the market price at the time and place of tender and the unpaid contract price. The intent of this remedy is to put the seller in as good a position as he would have been had the buyer performed. If the anticipatory repudiation comes to trial before the time for performance, however, the relevant market price for computing damages is that prevailing at the time that the buyer learned of the repudiation. Therefore, Technical’s award of damages is based on the difference between the contract price and the market price on the date of repudiation. Jagger Brothers, Inc. v. Technical Textile Co., 202 Pa. Super. 639, 198 A. 2d 888 (1964).

12. Sherman Burrus, a job printer, purchased a printing press from the Itek Corporation for a price of $7,006.08. Before making the purchase, Burrus was assured by an Itek salesperson, Mr. Nessel, that the press was appropriate for the type of printing Burrus was doing. Burrus encountered problems in operating the press almost continuously from the time he received it. Burrus, his employees, and Itek representatives spent many hours in an unsuccessful attempt to get the press to operate properly. Burrus requested that the press be replaced, but Itek refused. Burrus then brought an action against Itek for (a) damages for breach of the implied warranty of merchantability and (b) consequential damages for losses resulting from the press’s defective operation. Burrus was able to prove that the actual value of the press was $1,167 and, because of the defective press, that his output decreased and he sustained a great loss of paper. Itek contends that consequential damages are not recoverable in this case since Burrus elected to keep the press and continued to use it. How much should Burrus recover in damages for breach of warranty? Is he entitled to consequential damages? Why or why not?

Answer: Judgment for Burrus affirmed. The measure of damages for breach of warranty is “the difference between the value of the goods accepted and the value they would have had if they had been as warranted.” The press’s warranted value was $7,006.08, the cost of the press to Burrus. The actual value of the press, according to testimony, was one-sixth of this amount or $1,167, resulting in a measure of damages

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 23: Sales Remedies

of $5,839.08. Itek argues that Burrus cannot recover consequential damages because he decided to keep the press and continued to use it; however, Burrus was forced to continue to use the press in an effort to maintain his business, since Itek refused to provide a replacement machine. Therefore, Burrus may also recover consequential damages resulting from Itek’s breach. He successfully established that the problems with the press reduced his volume of output and resulted in lost profits. Burrus personally spent one thousand hours trying to get the machine to work properly.

Although the press should have generated at least $15 per hour, a third of the one thousand hours spent operating the press was wasted and unproductive. Therefore, the figure for consequential damages at which the trial court arrived is well supported by the evidence. Burrus v. Itek Corp., 46 Ill. App. 3d 350, 360 N.E. 2d 1168 (1977).

13. A farmer made a contract in April to sell a grain dealer forty thousand bushels of corn to be delivered in October. On June 3, the farmer unequivocally informed the grain dealer that he was not going to plant any corn, that he would not fulfill the contract, and that if the buyer had commitments to resell the corn he should make other arrangements. The grain dealer waited in vain until October for performance of the repudiated contract. Then he bought corn at a greatly increased price on the market in order to fulfill commitments to his purchasers. To what damages, if any, is the grain dealer entitled? Explain.

Answer: This was an anticipatory repudiation of the contract. Under Section 2-610(a) the aggrieved party may await performance for a commercially reasonable time, or under 2-610(b) resort to any remedy for breach. The court held that a commercially reasonable time expired on June 3, as the buyer had no reasonable expectation of performance by the seller, and “cover” was available. The buyer was therefore denied under Section 2-715(2) the consequential damages that he could have prevented by cover, and was allowed to recover from the seller only the difference between the contract price and the June 3 futures market price for corn to be delivered for October. This was substantially less than the actual loss sustained by the grain dealer who in vain had awaited performance of the repudiated contract until October and then had to buy corn at a greatly increased price on the market in order to fulfill commitments to his purchasers. Oloffson v. Coomer, 11 Ill. App. 3d 918, 296 N.E. 2d 871 (1973).

14. Through information provided by S-2 Yachts, Inc., the plaintiff, Barr, located a yacht to his liking at the Crow’s Nest marina and yacht sales company. When Barr asked the price, he was told that, although the yacht normally sold for $102,000, Crow’s Nest was willing to sell this particular one for only $80,000 to make room for a new model from the manufacturer, S-2 Yachts, Inc. Barr was assured that the yacht in question came with full manufacturer’s warranties. Barr asked if the yacht was new and if anything was wrong with it. Crow’s Nest told him that nothing was wrong with the yacht and that there were only twenty hours of use on the engines.

Once the yacht had been delivered and Barr had taken it for a test run, he noticed several problems associated with saltwater damage, such as rusted screws, a rusted stove, and faulty electrical wiring. Barr was assured that Crow’s Nest would pay for these repairs.

However, as was later discovered, the yacht was in such a damaged condition that Barr experienced great personal hazard the two times that he used the boat. Examination by a marine expert revealed clearly that the boat had been sunk in salt water prior to Barr’s purchase. The engines were severely damaged, and there was significant structural and equipment damage as well. According to the expert, not only was the yacht not new, but it was worth at most only a half of the new value of $102,000. Explain what Barr should be able to recover from S-2 Yachts and Crow’s Nest.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 23: Sales Remedies

Answer: Judgment for Barr. When a merchant sells goods sold in the ordinary course of the merchant’s business, the goods carry an implied warranty of merchantability that they are fit for the ordinary purposes for which they are used. Moreover, if a buyer orders and purchases an item by specific sample or serial number, there is an implied warranty that it is new. Furthermore, the fact that Barr observed some minor defects in the yacht during a trial run (rust on the screws) did not waive the implied warranty.

The Code provides that “the measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted,” unless special circumstances establish a different amount. Thus, Barr was entitled to recover from the defendants an amount representing the difference between the value of the yacht if it had been as warranted and its actual value at the time of sale, plus the amount spent on repairs. Barr v. S-2 Yachts, Inc., 7 UCC Rep. Serv. 2d 1431 (1988).

15. Lee Oldsmobile sells Rolls-Royce automobiles. Mrs. Kaiden sent Lee a $25,000 deposit on a used Rolls-Royce with a purchase price of $155,500. Although Lee informed Mrs. Kaiden that the car would be delivered in November, the order form did not indicate the delivery date and contained a disclaimer for delay or failure to deliver due to circumstances beyond the dealer’s control. On November 21, Mrs. Kaiden purchased another car from another dealer and canceled her car from Lee. When Lee attempted to deliver a RollsRoyce to Mrs. Kaiden on November 29, Mrs. Kaiden refused to accept delivery. Lee later sold the car for $ 150,495.00. Mrs. Kaiden sued Lee for her $25,000 deposit plus interest.

Lee counterclaims, based on the terms of the contract, for liquidated damages of $25,000 (the amount of the deposit) as a result of Mrs. Kaiden’s breach of contract. Explain what the rights of the parties are.

Answer: Judgment for Lee but only for actual damages. The UCC 2-718(1) provides that in the event of a breach of contract, [damages] for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of other-wise obtaining adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.

Lee was limited to the actual loss which resulted from resale of the car at less than the contract price with Mrs. Kaiden. Lee Oldsmobile, Inc. v. Kaiden, 32 Md. App. 556, 363 A. 2d 270 (1976).

16. Servebest contracted to sell Emessee two hundred thousand pounds of 50 percent lean beef trimmings for $105,000. Upon a substantial fall in the market price, Emessee refused to pay the contract price and informed Servebest that the contract was canceled.

Servebest sues Emessee for breach of contract including (a) damages for the difference between the contract price and the resale price of the trimmings and (b) incidental damages. Discuss what the outcome of the suit should be.

Answer: Judgment for Servebest for the difference between the contract price and the resale price of the trimmings, incidental damages and the interest on those amounts.

Upon breach of a contract by the buyer, the seller is entitled to cancel the contract and seek damages equal to the difference between the resale of the goods and the market price, or the contract price of the goods together with any incidental damages.

UCC 2-706(1). As long as the resale of the goods is commercially reasonable in terms of the method, manner, time, place, and conditions of sale, the seller may seek the difference between the resale value and the contract price. UCC 2-706(2). The seller also may recover incidental damages that result from the buyer’s breach. UCC 2-706.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 23: Sales Remedies

Servebest Foods, Inc. v. Emessee Industries, Inc., 82 Ill. App. 3d 662, 403 N.E. 2d 1 (1980).

17. Mrs. French was the highest bidder on eight antique guns at an auction held by Sotheby & Company. Mrs. French made a down payment on the guns but subsequently refused to accept the guns and refused to pay the remaining balance of $24,886.27 owed on them. Is Sotheby’s entitled to collect the price of the guns from Mrs. French? Why or why not?

Answer: Judgment for Mrs. French. When French wrongfully rejected the guns, Sotheby & Co. had the option of recovering damages for nonacceptance or, in a proper case, maintaining an action for the price. Sotheby & Co. elected to pursue the latter alternative. An action for the price, however, is available only when the goods were accepted, were lost after risk of loss passed to the buyer, or the seller was unable to resell them at a reasonable price. Here, however, Sotheby & Co. failed to show any of these alternatives and thus could not maintain an action for the price. Rather, its available remedy was limited to recovering damages for nonacceptance. French v.

Sotheby & Co., 470 P. 2d 318 (Okla. 1970).

18. Teledyne Industries, Inc., entered into a contract with Teradyne, Inc., to purchase a T-347A transistor test system for the list and fair market price of $98,400 less a discount of $984. After the system was packed for shipment, Teledyne canceled the order, offering to purchase a Field Effects Transistor System for $65,000. Teradyne refused the offer and sold the T-347A to another purchaser pursuant to an order that was on hand prior to the cancellation. Can Teradyne recover from Teledyne for lost profits resulting from the breach of contract? Explain.

Answer: Judgment for Teradyne permitting recovery of lost profits. The Code permits an aggrieved seller to recover the difference between the unpaid contract price and the market price. Under this rule, Teradyne would recover nothing because the market price exceeded the contract price. But, the Code also states that this rule does not apply if it is inadequate to put the seller in as good a position as performance would have done. In such an instance, the measure of damages is the expected profit on the broken contract. Here, Teradyne would have made the sale to the resale purchaser even if Teledyne had not breached its contract. Teradyne is a “lost volume seller” and thus entitled to recover from Teledyne its expected profit (including reasonable overhead) on the broken contract despite the resale.

The formula for determining lost profit is the contract price minus the direct costs of producing and selling the goods, provided that all variable expenses are identified.

Here, Teradyne paid wages (including fringe benefits equal to 12 percent of wages) to its testers, shippers, installers, and other employees who directly handled the T-347A. These costs are not considered part of Teradyne’s overhead. Rather, they are “direct costs” and therefore should be deducted from the contract price to determine Teradyne’s recovery of lost profit. Teradyne, Inc. v. Teledyne Industries, Inc. US Court of Appeals, First Circuit, 1982, 676 F. 2d 865.

19. Wilson Trading Corp. agreed to sell David Ferguson a specified quantity of yarn for use in making sweaters. The written contract provided that notice of defects, to be effective, had to be received by Wilson before knitting or within ten days of receipt of the yarn. When the knitted sweaters were washed, the color of the yarn “shaded” (i.e., variations in color from piece to piece appeared). David Ferguson immediately notified Wilson of the problem and refused to pay for the yarn, claiming that the defect made the sweaters unmarketable. Wilson brought suit against Ferguson for the contract price. Explain what the result should be.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 23: Sales Remedies

Answer: Judgment for Ferguson. Ordinarily, a buyer who accepts goods has a reasonable time after he discovers or should have discovered a breach to notify the seller of the breach. At the same time, however, parties can within limits modify or exclude warranties and fashion their own remedies for the breach of those warranties.

Nevertheless, if the remedies available are limited in an unconscionable manner, the limiting terms are subject to replacement by the general remedial provisions of the UCC Since the notice provision in effect precluded buyers from giving notice of latent defects, the provision failed in its essential purpose and left David Ferguson without a remedy. To that extent, the contract provision was displaced by the rule that Ferguson had a reasonable time to notify Wilson of the defect. Wilson Trading Corp. v. David Ferguson, Ltd. 20. Bishop Logging Company is a large, family-owned logging contractor formed in the low country of South Carolina. Bishop Logging has traditionally harvested pine timber.

However, Bishop Logging began investigating the feasibility of a fully mechanized hardwood swamp logging operation when its main customer, Stone Container Corporation, decided to expand hardwood production. In anticipating an increased demand for hardwood in conjunction with the operation of a new paper machine, Stone Container requested that Bishop Logging harvest and supply hardwood for processing at its mill. In South Carolina, most suitable hardwood is located deep in the swamplands. Because of the high accident risk in the swamp, Bishop Logging did not want to harvest hardwood by the conventional method of manual felling of trees. Because Bishop Logging had already been successful in its totally mechanized pine logging operation, it began a search for improved methods of hardwood swamp logging centered on mechanizing the process to reduce labor, minimize personal injury and insurance costs, and improve efficiency and productivity.

Bishop Logging ultimately purchased several pieces of John Deere equipment to make up the system. The gross sales price of the machinery was $608,899. All the equipment came with a written John Deere “New Equipment Warranty,” whereby John Deere agreed only to repair or replace the equipment during the warranty period and did not warrant the suitability of the equipment. In the “New Equipment Warranty,” John Deere expressly provided the following: (a) John Deere’s promise to repair or replace parts that were defective in material or workmanship; (b) a disclaimer of any express warranties or implied warranties of merchantability or fitness for a particular purpose; (c) an exclusion of all incidental or consequential damages; and (d) no authority for the dealer to make any representations, promises, modifications, or limitations of John Deere’s written warranty.

Hoping to sell more equipment if the Bishop Logging system was successful, however, John Deere agreed to assume part of the risk of the new enterprise by extending its standard equipment warranties notwithstanding the unusual use and modifications to the equipment.

Soon after being placed in operation in the swamp, the machinery began to experience numerous mechanical problems. John Deere made more than $110,000 in warranty repairs on the equipment. However, Bishop Logging contended the swamp logging system failed to operate as represented by John Deere, and as a result, it suffered a substantial financial loss. To what remedies, if any, is Bishop entitled? Explain.

Answer: The evidence was clearly sufficient for the jury to determine that John Deere did not effectively perform its obligation to repair the equipment since the attempted repairs never cured the defects in the equipment, and as a result, Bishop Logging was deprived of the substantial value of the equipment it contracted for.

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John Deere’s agent knew the equipment would be used in the swamp application and knew that regular, certain repair was promised and expected in order that all of the equipment could be used for its purpose. In negotiating the sale, John Deere’s agent assured Bishop Logging that “those units would function properly in [the swamp] environment,” and that he would have “at [his] beck and call…factory support to make sure that the equipment functioned properly.” The parties obviously agreed to exclude consequential damages in the event that John Deere performed its obligation to repair or replace defects. However, Bishop Logging could reasonably have expected to recover consequential damages when, as here, the defects were never adequately corrected and the limited remedy proved ineffectual.

Profits lost as a result of the breach are recoverable under this section as consequential damages. According to Bishop Logging’s expert witness, the total financial loss to Bishop Logging was either $540,921 or $723,323 for the three-year estimated life of the equipment. The difference depended upon the price Bishop Logging received per cord of wood logged by it. The one-million-dollar actual damage award recovered by Bishop Logging, however, apparently included impermissible, noneconomic damages. To that extent, the actual damage award is reduced to the maximum total of economic damages claimed by Bishop Logging, $723,323. Bishop Logging Company v. John Deere Industrial Equipment Co., 317 S.C. 520, 455 S.E. 2d 183 (1995).

21. The plaintiff contracted with the defendant to deliver liquid nitrogen to the defendant’s oil refinery production facility located in Belle Chase, Louisiana. The defendant uses liquid nitrogen to ensure the safe operation of its plant. The contract was a “requirement” contract—deliveries were based on how much liquid nitrogen the defendant had in its tanks. As a result, the plaintiff typically made deliveries seven days a week, and sometimes several times a day.

The defendant claims that the plaintiff repeatedly failed to deliver the liquid nitrogen on time, thereby dropping the liquid nitrogen to dangerously low levels and compromising the safety of the plant and its personnel. The contract provided that if the plaintiff failed to deliver the liquid nitrogen as required, the defendant’s sole remedy would be to purchase the product from another supplier and charge the plaintiff for the additional expenses incurred. The defendant did not exercise this right because it claims it was unable to purchase nitrogen from other suppliers. However, on the only occasion the defendant actually tried to purchase nitrogen from another supplier, it was successful. The plaintiff sued the defendant for breach of contract, and the defendant counterclaimed. What are the rights and remedies of the parties? Explain.

Answer: The defendant is entitled to recover damages under the terms of the exclusive remedy specified in the contract.

The trial judge relied on the exclusive remedy language of the contract, limiting defendant’s rights in the event of plaintiff’s breach. The court concluded that defendant did not have the right to terminate the contract and granted plaintiff’s motion for partial summary judgment on the issue of liability. After trial before a jury on the issue of damages, plaintiff was awarded a judgment in the amount of $1.2 million. Defendant appealed.

When deciding whether an exclusive remedy has failed in its essential purpose, a court must examine “the facts and circumstances surrounding the contract, the nature of the basic obligations of the party, the nature of the goods involved, the uniqueness or experimental nature of the items, the general availability of the items, and the good

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faith and reasonableness of the provision.” Whether an exclusive remedy fails in its essential purpose is a question of fact.

Here, the defendant’s exclusive remedy for the unexcused failure on the part of plaintiff to deliver product to defendant was defendant’s right to recover from plaintiff the difference between defendant’s cost to purchase nitrogen from another supplier and the price defendant would have paid plaintiff for the nitrogen under the terms of the contract. Defendant did not exercise this right because it claims it was unable to purchase nitrogen from other suppliers; therefore, defendant argues, the remedy failed in its essential purpose and may not be enforced.

The evidence does not, however, support defendant’s argument. Earle testified that at the time he decided to terminate the contract with plaintiff he was not even aware of the exclusive remedy provision of the contract. Moreover, on the only occasion defendant actually tried to purchase nitrogen from another supplier, it was successful.

The defendant did not give the exclusive remedy an opportunity to work before terminating the contract. It made no attempt to purchase liquid nitrogen from other suppliers when plaintiff was delinquent in its deliveries. Instead, Earle canceled the contract despite the contract’s exclusive remedy, which did not include termination.

Both plaintiff and defendant are sophisticated business entities, freely entering into a contract which limited defendant’s remedies. There is no reason why the parties should not be held to the terms of their bargain. This problem is based on Boc Group, Inc. v. Chevron Chemical Company, LLC, Superior Court of New Jersey, Appellate Division (2003), 359 N.J. Super. 135, 819 A. 2d 431, http://lawlibrary.rutgers.edu/courts/appellate/a0338-01.opn.html.

22. Appalachian is a coal hauling company in southern West Virginia. Appalachian purchased four new Mack trucks for off-road coal hauling. Appalachian purchased three of the trucks for $165,000 each and the fourth for $175,000. The trucks were sold to Appalachian by Worldwide, a franchised retail dealer for Mack. The express warranty made with regard to Appalachian’s purchase of the four trucks validly disclaimed implied warranties and limited the express warranty to repairing or replacing defective parts. According to Appalachian, each of the four trucks failed to properly function due to a multitude of problems which began immediately after the purchase. The trucks continually broke down, resulting in repeated instances of driving or towing the trucks back for repairs. The problems included not running, hard starting, transmission problems, overheating, leaking water pump, hoods falling off, and cabs falling apart. Although Worldwide never declined to try to repair the trucks, the repairs were never successful and replacement vehicles were never provided. Appalachian brought an action for revocation of acceptance of the four trucks, a refund of the purchase price, incidental damages, and consequential damages. Decision? Explain.

Answer: Although the implied warranties were validly disclaimed, there are genuine issues of material fact concerning whether the sellers satisfied their obligations under the trucks’ express warranty and whether the express warranty failed of its essential purpose. Appalachian is entitled, on remand, to pursue the various remedies and damages provided in Article 2 of the UCC. Appalachian Leasing, Inc. v. Mack Trucks, Inc., 765 S.E. 2d 223 (W. Va., 2014).

The Official Comment to W. Va. Code, 46-2-313 [1963], on the creation of express warranties, confirms the fundamental views that “the whole purpose of the law of warranty is to determine what it is that the seller has in essence agreed to sell” and that “the probability is small that a real price is intended to be exchanged for a

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pseudo-obligation.” Here, Appalachian did not purchase the four trucks knowing them to be defective and hoping that the trucks would be repaired at a later time. The trucks purchased were new, 2008 Mack trucks, Model GU-713, customized for off-road coal hauling purposes.

If the trucks were inherently defective and unusable because of a manufacturing defect and incapable of being repaired, then Appalachian was deprived of the basis of its bargain. The circuit court did not address the quality and satisfactoriness of the repairs or the replacement parts. As summarized by J. S. Herbrand, Annotation, Construction and Effect of New Motor Vehicle Warranty Limiting Manufacturer’s Liability to Repair or Replacement of Defective Parts, 2 A.L.R. 4th 576, 581 (1980): It is generally held that where a motor vehicle warranty limits the buyer’s remedies to repair or replacement of defective parts, the refusal or unsuccessful attempt by a manufacturer or seller to repair or replace defective parts constitutes a breach of warranty for which the buyer may recover any damages allowable by law.

In that regard, circumstances can exist where a limited remedy, such as an express warranty limited to repairing or replacing defective parts, may fail of its essential purpose of providing the buyer with a usable product. As W. Va. Code, 46-2-719(2) [1963], provides: “Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this article.” In Kraft v. Staten Island Boat Sales, Inc., 715 F. Supp. 2d 464, 475 (S.D.N.Y. 2010), for example, the District Court stated: Under UCC Section 2-719, a sales contract may limit the remedies available under express warranties to repair or replacement. See N.Y. UCC § 2-719. “The UCC permits this limitation so long as the remedy does not fail of its essential purpose, such as through the inability of the warrantor to repair defects.” Demorato v. Carver Boat Corp., 304 Fed. Appx. 100, 102 (3d Cir. 2008) (applying New York law).

Moreover, we note the following language found in Givan v. Mack Truck, Inc., 569 S.W. 2d 243 (Mo. Ct. App. 1978): “[T]he fact that the manufacturer in good faith attempts to repair the defect whenever requested to do so is not a fulfillment of the warranty; he must demonstrate that the defect is permanently remedied as promised in the express warranty.” 569 S.W. 2d at 247.

Accordingly, this Court holds that, under W. Va. Code, 46-2-719(2) [1963], of the West Virginia UCC, where an express warranty limits the buyer’s remedies to repair or replacement of parts found to be defective, the refusal or inability of the seller to remedy the defect is a failure of the essential purpose of the express warranty, and the buyer may pursue remedies and damages as provided in Article 2 of the West Virginia UCC. In this action, genuine issues of material fact remain concerning whether Mack and Worldwide satisfied their obligations under Mack’s express warranty, or whether the trucks were so defective, unusable, and incapable of being repaired that the express warranty failed of its essential purpose of providing Appalachian with four trucks suitable for off-road coal hauling purposes. Therefore, the granting of summary judgment with regard to the express warranty was an error.

23. Kenco Homes, Inc. (Kenco) buys mobile homes from the factory and sells them to the consumer. Sometimes, it contracts to sell a home that the factory has not yet built. It has a virtually unlimited supply of product. On September 27, Kenco and Dale and Debi Williams, husband and wife, signed a written contract for the Williamses to buy from Kenco a mobile

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home that had not yet been built. The price was $39,400, with $500 down. Subsequently, Dale Williams gave Kenco a $600 check so Kenco could order an appraisal of the land on which the mobile home would be located. Before Kenco could act, Williams stopped payment on the check and repudiated the transaction. His reason was that he “had found a better deal elsewhere.” When Williams repudiated, Kenco had not yet ordered the mobile home from the factory. After Williams repudiated, Kenco simply did not place the order. As a result, Kenco’s only out-of-pocket expense was a minor amount of office overhead. On November 1, Kenco sued the Williamses for lost profits in the amount of $11,133. Is Kenco entitled to recover its lost profits or just the $500 deposit? Explain.

Answer: Kenco is entitled to recover its lost profit of $11,133. When the measure of damages based on the difference between the market price and the contract price does not put the seller in as good a position as performance would have done, then a nonbreaching seller is entitled to damages, which include the unrealized profit from the sale. This problem is based on the case of Kenco Homes, Inc. v. Williams, 94 Wn. App. 219, 972 P. 2d 125 (1999).

Under the UCC, a nonbreaching seller may recover “damages for nonacceptance” from a breaching buyer. These damages may be calculated in one of two ways. First, the seller may receive the difference between the market price (upon resale of the goods) and the unpaid contract price together with any incidental damages, but less expenses saved in consequence of the buyer’s breach. If this first method of determining damages does not put the seller in as good a position as performance would have done, then the second method of determining damages is used.

In this second method, the seller can receive any profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with incidental damages, plus allowance for costs reasonably incurred, minus any payments or proceeds of resale.

In general, the adequacy of damages under the first method depends on whether the nonbreaching seller has a readily available market on which he or she can resell the goods that the breaching buyer should have taken. The seller cannot readily resell goods in certain situations, such as (1) when the seller does not yet possess the goods, but was planning to obtain them, (2) when the goods are of a specialized nature for which there is not a ready market, and (3) when the market conditions are such that a ready buyer is not available without displacing another sale. (This is known as “lost volume.”)

In this case, Kenco did not order the breached goods before Williams repudiated. After Williams repudiated, Kenco was not required to order the breached goods from the factory. It rightfully elected not to do so, and it could not resell the breached goods on the open market. Thus, the measure of damages under the first method is inadequate to put Kenco in as good a position as Williams’s performance would have done.

Therefore, Kenco is entitled to its lost profit of $11,133.

ANSWERS TO “TAKING SIDES” PROBLEMS Daniel Martin and John Duke contracted with J & S Distributors, Inc., to purchase a KIS Magnum Speed printer for $17,000. The parties agreed that Martin and Duke would send onehalf of the money as a deposit and would pay the balance upon delivery. They also agreed to the following provision: In the event of nonpayment of the balance of the purchase price reflected herein on due

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date and in the manner recorded or on such extended date which may be caused by late delivery on the part of [the seller], the Customer shall be liable for: (1) immediate payment of the full balance recorded herein; and (2) payment of interest at the rate of 12 percent per annum calculated on the balance due, when due, together with any attorney’s fees, collection charges and other necessary expenses incurred by [the seller].

When the machine arrived five days late, Martin and Duke refused to accept it, stating that the company had purchased a substitute machine elsewhere. Martin and Duke requested the return of its deposit, but J & S refused. Martin and Duke sued J & S for the return of its deposit. J & S counterclaimed for full performance of the contract seeking an order that Martin and Duke accept delivery of the KIS machine and pay the entire balance of the contract. a. What arguments would support the claim by Martin and Duke for the return of the deposit? b. What arguments would support the claim by J & S for full performance of the contract? c. Who should prevail? Explain.

Answer: (a) Martin and Duke could argue that even if their rejection of the machine was wrongful they were only obligated to pay damages under Uniform Commercial Code (UCC) §2-708, which are limited to lost profits. Martin and Duke could also argue that the contract provision is an unconscionable liquidated damages clause. (b) J & S could argue that their remedy for breach by the buyer is governed by the contractual provision instead of what the UCC provides. J & S could argue that the provision is conscionable since it is only enforcing the promise the buyers made in their contract. (c) J & S will prevail. Martin v. Sheffer, 102 N.C. App. 802, 403 S.E. 2d 555 (1991),

http://scholar.google.com/scholar_case?case=3707898217986887729&q=403+S.E.2d+555+ &hl=en&as_sdt=2,34.

Martin and Duke argue that seller’s damages are controlled by UCC §2-708 and are limited to lost profits. However, §1-102 clearly allows parties to vary the provisions of the Code by agreement, except that the obligations of good faith, diligence, reasonableness and care prescribed by the Code may not be disclaimed. Also, §2719(1)(a) provides that a contract for the sale of goods “may provide for remedies in addition to or in substitution for those provided in this article and may limit or alter the measure of damages recoverable under this article.” A contractual provision expanding seller’s damages upon breach of the buyer will therefore be upheld where the contractual provision is reasonable and in good faith. Martin and Duke do not argue that they were fraudulently induced into signing the contract, that the clause authorizing specific enforcement is ambiguous or a mistake, or that the seller breached the contract by failing to deliver at the time promised.

Martin and Duke argue that the contract provision is an “unconscionable and oppressive” liquidated damages clause. However, a contract clause authorizing specific performance is different from a liquidated damages provision. Even if this were not the case, enforcement of the price the plaintiff freely agreed to pay for the machine cannot be considered unreasonable or a penalty. Furthermore, to find unconscionability, there must be an absence of meaningful choice on the part of one of the parties together with contract terms, which are unreasonably favorable to the other. As a merchant, Martin and Duke are presumed to be familiar with the terms and practices of contracts for the purchase of the tools of their trade. It is rare that a limitation of remedy will be held unconscionable in a commercial setting, since the relationship between parties is usually not so one-sided as to force an unconscionable limitation on a party.

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The contractual clause authorizing specific performance does not undermine the essential purpose of the contract. Therefore, the clause is enforceable.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 24: Form and Content

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 24: Form and Content

TABLE OF CONTENTS Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems ............................................................................... 9

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

State whether the following provisions impair or preclude negotiability, the instrument in each instance being otherwise in proper form. Answer each statement with either “Negotiable” or “Nonnegotiable” and explain why. a. A note for $2,000 payable in twenty monthly installments of $100 each that provides the following: “In case of death of maker, all payments not due at date of death are canceled.” b. A note stating, “This note is secured by a mortgage on personal property located at 351 Maple Street, Smithton, Illinois.” c. A certificate of deposit reciting, “June 6, 2024, John Jones has deposited in the Citizens Bank of Emanon, Illinois, Two Thousand Dollars, to the credit of himself, payable upon the return of this instrument properly indorsed, with interest at the rate of 3 percent per annum from date of issue upon ninety days’ written notice. (Signed) Jill Crystal, President, Citizens Bank of Emanon.” d. An instrument reciting, “IOU, Mark Noble, $1,000.00.” e. A note stating, “In accordance with our contract of December 13, 2023, I promise to pay to the order of Sam Stone $100 on March 13, 2024.” f. A draft drawn by Brown on the Acme Publishing Company for $500, payable to the order of the Sixth National Bank of Erehwon, directing the bank to “Charge this draft to my royalty account.” g. A note executed by Pierre Janvier, a resident of Chicago, for $2,000, payable in Swiss francs. h. An undated note for $1,000 payable “six months after date.” i. A note for $500 payable to the order of Ray Rodes six months after the death of Albert Olds. j. A note of $500 payable to the assigns of Levi Lee. k. A check made payable “to Ketisha Johnson.”

Answer: (a) Nonnegotiable. Payment is contingent upon the maker continuing to live during the 20 months during which the installments are payable. The contingency is always present during the 20 months that a lesser amount would be payable in the event of the death of the maker. UCC, Section 3-104(a). (b) Negotiable. A promise or order otherwise unconditional is not made conditional by the fact that the instrument states that it is secured, whether by mortgage,

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reservation of title, or otherwise. Such a recitation normally is included only for the purpose of making a record or giving information, and is not intended to condition payment in any way. UCC Section 3-106, Comment i. (c) Nonnegotiable. An instrument not payable to order is not made so payable by such words as “payable upon return of this instrument properly indorsed." (d) Nonnegotiable. An “I.O.U.” is not a promise but a mere acknowledgment of indebtedness. A promise is not implied from the fact that the existence of the debt is admitted. (e) Negotiable. A promise or order otherwise unconditional is not made conditional by the fact that the instrument states its consideration, whether performed or promised, or the transaction which gave rise to the instrument, or that the promise or order is made or the instrument matures in accordance with or “as per” such transaction. (f) Negotiable. Section 3-106(b)(ii) of the UCC provides: “A promise or order is not made conditional…because payment is limited to resort to a particular fund or source.” (g) Negotiable. One of the requirements of negotiability is payment of a fixed amount of money. UCC Section 1-201(24) defines “money” in terms of “a medium of exchange authorized or adopted by a domestic or foreign government as part of its currency.” The test of “money” is thus one of governmental sanction, whether the government be foreign or domestic. Accordingly, an instrument payable in Swiss francs would be payable in money, even though the instrument were executed in the United States by persons having no connection with Switzerland. (h) Nonnegotiable. It is not payable at a definite time since the time of payment cannot be determined from its face. It is, however, by Section 3-115 of the UCC, an incomplete instrument. UCC Section 3-115 provides upon completion it may be enforced as a negotiable instrument. (i) Nonnegotiable. An instrument that by its terms is otherwise payable only upon an act or event uncertain as to time of occurrence is not payable at a definite time. (j) Nonnegotiable. Revised Article 3 does not provide that “assigns” is the equivalent of “order of.” UCC §3-109(b). (k) Negotiable. Despite the fact that the check fails to provide the words of negotiability, it is still a negotiable instrument. UCC Section 3-104(c).

2. State whether the following provisions in a note impair or preclude negotiability, the instrument in each instance being otherwise in proper form. Answer each statement with “Negotiable” or “Nonnegotiable” and explain why. a. A note signed by Henry Brown in the trade name of the Quality Store. b. A note for $850, payable to the order of TV Products Company, “If, but only if, the color television set for which this note is given proves entirely satisfactory to me.” c. A note executed by Adams, Burton, and Cady Company, a partnership, for $1,000, payable to the order of Davis, payable only out of the assets of the partnership. d. A note promising to pay $500 to the order of Leigh and to deliver ten tons of coal to Leigh. e. A note for $10,000 executed by Eaton payable to the order of the First National Bank of Emanon, in which Eaton promises to give additional collateral if the bank deems itself insecure and demands additional security. f. A note reading, “I promise to pay to the order of Richard Roe $2,000 on January 31, 2024, but it is agreed that if the crop of Blackacre falls below ten bushels per acre for the 2023 season, this note shall be extended indefinitely.”

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g. A note payable to the order of Ray Rogers fifty years from date but providing that payment shall be accelerated by the death of Silas Hughes to a point of time four months after his death. h. A note for $4,000 calling for payments of installments of $250 each and stating, “In the event any installment hereof is not paid when due, this note shall immediately become due at the holder’s option.” i. An instrument dated September 17, 2024, in the handwriting of John Henry Brown, which reads in full: “Sixty days after date, I, John Henry Brown, promise to pay to the order of William Jones $500.” j. A note reciting, “I promise to pay Ray Reed $100 on December 24, 2024.”

Answer: (a) Negotiable. A negotiable instrument must be signed by the maker or drawer. UCC Section 3-401 provides: “A signature may be made…by use of any name, including a trade or assumed name…by a person with present intention to authenticate a writing.” A signature may be made in any name, including any trade or assumed name, however false and fictitious, which is adopted for the purpose. (b) Nonnegotiable. The maker of the note has expressly conditioned his promise to pay by the recital; he does not absolutely promise to pay. Section 3-104 of the UCC provides that any writing to be a negotiable instrument within Article 3 must contain an unconditional promise or order to pay a fixed amount of money. (c) Negotiable. Revised Article 3 eliminates the particular fund doctrine. (d) Non-negotiable. Section 3-104 of the UCC provides that any writing to be a negotiable instrument within Article 3 must contain an unconditioned promise or order to pay a fixed amount of money and no other undertaking or instruction … to do any act in addition to the payment of money. (e) Negotiable. Section 3-104(a)(3) of the UCC provides that the negotiability of an instrument is not affected by a promise or power to maintain or protect collateral or to give additional collateral. This clause does not render paper non-negotiable under the UCC as it merely aids in the collection of the debt. (f) Nonnegotiable. Section 3-108(b) of the UCC dealing with and broadly validating the negotiability of extension clauses provides: An instrument is payable at a definite time if by its terms it is payable at a definite time subject to extension at the option of the holder, or to extension to a further definite time at the option of the maker or acceptor or after a specified act or event. Here the extension is for an indefinite period; the promise is illusory, and there is no certainty of payment. (g) Negotiable. It is still possible to have a negotiable post-obituary note. An instrument is payable at a definite time if by its terms it is payable at a definite time subject to any acceleration. This is intended to mean that the instrument is not affected by any acceleration clause, whether acceleration be at the option of the maker or the holder, or automatic upon the occurrence of some event, and whether it be conditional or unrestricted. (h) Negotiable. Acceleration does not affect the negotiability of an instrument, so long as the instrument is payable at a fixed time. The acceleration may even be contingent upon some event, such as nonpayment. (i) Negotiable. There is no requirement in the UCC that a note be signed at the end of the instrument. The signature of the maker may appear in the body of the instrument. (j) Nonnegotiable. The words of negotiability are lacking. Section 3-104(a) of the UCC provides that a writing to be a negotiable instrument must be payable to order or to bearer or to their equivalent.

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3. On March 10, Tolliver Tolles, also known as Thomas Towle, delivered to Alonzo Craig and Abigail Craig the following instrument, written by him in pencil: For value received, I, Thomas Towle, promise to pay to the order of Alonzo Craig or Abigail Craig One Thousand Seventy-Five Dollars ($1,075.00) six months after my mother, Alma Tolles, dies with interest at the rate of 6 percent from date to maturity and after maturity at the rate of 63/4 percent. I hereby waive the benefit of all laws exempting real or personal property from levy or sale.

Is this Instrument negotiable? Explain.

Answer: Nonnegotiable. (See f, below). (a) The fact that Tolles also uses an assumed name is immaterial. Section 3-401(b) of the UCC provides: A signature is made by use of any name, including any trade or assumed name. (b) The fact that the note is written in pencil does not destroy negotiability. The UCC prescribes that the instrument must be in writing, but it does not state that it must be written with pen and ink. (c) The maker may sign a note at the beginning rather than at the end without impairing negotiability. (d) Words control figures except that if the words are ambiguous, then figures control.

Section 3-114, UCC. Therefore, the note is for $1,075.00. (e) An increased rate of interest after maturity, in case of default, does not impair negotiability. (f) An undated instrument payable a specific number of days, months, or years after the death of an individual is not payable at a definite time, since the time of payment cannot be determined from its face. This provision destroys the otherwise negotiable character of the instrument because the time of payment cannot be determined from the face of the instrument. (g) The fact that the note recites “For value received” is immaterial. (h) The provision waiving the benefit of all laws exempting real or personal property from levy or sale is contrary to public policy and, hence, inoperative. The provision is superfluous and neither adds to nor detracts from negotiability. UCC Section 3104(a)(3).

4. Henry Hughes, who operates a department store, executed the following instrument: $2,600 Chicago, March 5, 2023 On July 1, 2023, I promise to pay Daniel Dalziel, or order, the sum of Twenty-Six Hundred Dollars for the privilege of one framed advertising sign, size 24  36 inches, at one end of each of two hundred sixty buses of the New Omnibus Company for a term of three months from May 15, 2023.

Henry Hughes

Is this instrument negotiable? Explain Answer: Negotiable. The mere fact that the consideration for which a promissory note is given is recited in it, although it may appear thereby that it was given for or in consideration of an executory contract, or promise on the part of the payee, will not destroy the negotiability of the note, unless it appears through the recital that it qualifies the promise to pay, and renders it conditional or uncertain, either as to the time of payment or the sum to be paid. A written promise to pay a certain sum of © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 24: Form and Content

money at a certain day, for consideration thereafter to be rendered, is a valid promissory note.

This rule adopts the general commercial understanding that such language is intended as a mere recital of the origin of the instrument and a reference to the transaction for information but is not meant to condition payment according to the terms of any other agreement.

5. Pablo agreed to lend Marco $500. Thereupon Marco made and delivered his note for $500 payable to Pablo or order “ten days after my marriage.” Shortly thereafter Marco was married. Is the instrument negotiable? Explain.

Answer: The note is not negotiable since Marco’s marriage is not certain to happen.

UCC Section 3-108(b).

6. For the balance due on the purchase of a tractor Henry Brown executed and delivered to Jane Jones his promissory note containing the following language: January 1, 2023, I promise to pay to the order of Jane Jones the sum of $7,000 to be paid only out of my checking account at the XYZ National Bank of Pinckard, Illinois, in two installments of $3,500 each, payable on May 1, 2020, and on July 1, 2023, provided that if I fail to pay the first installment on the due date, the entire sum shall become immediately due.

(Signed) Henry Brown Is the note negotiable? Explain.

Answer: Negotiable. Revised Article 3 eliminates the particular fund doctrine.

Two other points should be discussed: (a) The omission of “for value received” does not affect the negotiability of the note. (b) The note is payable at a definite time subject to acceleration and is therefore payable at a definite time.

7. Sam Sharpe executed and delivered to Don Dole the following instrument: Knoxville, Tennessee May 29, 2024 Thirty days after date I promise to pay Don Dole or order Five Thousand Dollars. The holder of this instrument shall have the election to require the assignment and delivery to him of my 100 shares of Brookside Iron Works Corporation stock in lieu of the payment of Five Thousand Dollars in money.

(Signed) Sam Sharpe

Is this instrument negotiable? Explain.

Answer: The instrument is not negotiable. An option to require something to be done in lieu of payment of money destroys the negotiability of an instrument because it is not desirable in commercial settings.

8. Explain whether the following instrument is negotiable.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 24: Form and Content

March 1, 2024 One month from date, I, James Jimson, hereby promise to pay Edmund Edwards: Six Thousand, Seven Hundred Fifty ($6,750.00) Dollars, plus 8 ¾ percent interest. Payment for cutting machines to be delivered on March 15, 2024.

James Jimson Answer: Negotiable. The instrument provides a promise to pay a fixed amount in money. The requirement that payment be of a “fixed amount” only applies to the principal. Moreover, an instrument payable with a stated rate of interest is an obligation for a fixed amount.

9. The following instrument was given to Matthew Andrea: Chapel Hill, N.C. April 15, 2024 Ninety days after date pay to the order of Matthew Andrea, seven hundred and fifty dollars ($750). Value received and charge the trade account of Olympia Sales Corp., N.Y. Olympia Sales Corp.

To:

Citibank

by /s/ Carl Starr

UN Plaza

President

New York, N.Y. Explain what type of instrument this is whether it is negotiable.

Answer: The instrument is a negotiable time draft. The drawer is Olympia, the drawee is Citibank, and the payee is Matthew Andrea. It is payable to the order of Matthew Andrea, has a time certain for payment of a fixed amount, and the fact that it is charged to a particular account is acceptable (it can be noted that the particular fund doctrine has been eliminated).

10. Broadway Management Corporation obtained a judgment against Briggs. The note on which the judgment was based reads in part: “Ninety Days after date, I, we, or either of us, promise to pay to the order of Three Thousand Four Hundred Ninety Eight and 45/100— Dollars.” (The underlined words and symbols were typed in; the remainder was printed.)

There are no blanks on the face of the instrument, any unused space having been filled in with hyphens. The note contains clauses permitting acceleration in the event the holder deems itself insecure and authorizes judgment “if this note is not paid at any stated or accelerated maturity.” Explain whether the note is negotiable order paper.

Answer: Judgment for Briggs—this is not negotiable order paper. Under the UCC, an instrument is defined as bearer paper if, by its terms, (1) it is payable to the bearer, or to the order of the bearer, (2) it does not designate a specific payee, or (3) it is payable to “cash,” or to the order of “cash.” (Revised Article 3, UCC Section 3-109 (c) essentially provides the same.) However, a negotiable instrument made payable “to the order of ____________ “ is not bearer paper, but an incomplete order instrument, unenforceable until a payee's name is inserted. Here, neither the acceleration clause nor the confession of judgment clause destroys the negotiability of the note. Because the wording of the negotiable instrument implied that the payee's name was to be

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 24: Form and Content

inserted between the promise and the amount, the note is order paper, not bearer paper. Thus, since the holder could not be determined from the face of the instrument, Broadway could not exercise the right of a holder to invoke the confession of judgment. Broadway Management Corp. v. Briggs, 30 Ill. App. 3d 403, 332 N.E. 2d 131 (1975).

11. Sandra and Thomas McGuire entered into a purchase-and-sale agreement for “Becca’s Boutique” with Pascal and Rebecca Tursi. The agreement provided that the McGuires would buy the store for $75,000, with a down payment of $10,000 and the balance of $65,000 to be paid at closing on October 5, 2022. The settlement clause stated that the sale was contingent upon the McGuires obtaining a Small Business Administration loan of $65,000. On September 4, 2022, Mrs. McGuire signed a promissory note in which the McGuires promised to pay to the order of the Tursis and the Green Mountain Inn the sum of $65,000. The note specified that interest payments of $541.66 would become due and payable on the fifth days of October, November, and December 2022. The entire balance of the note, with interest, would become due and payable at the option of the holder if any installment of interest was not paid according to that schedule.

The Tursis had for several months been negotiating with Parker Perry for the purchase of the Green Mountain Inn in Stowe, Vermont. On September 7, 2022, the Tursis delivered to Perry a $65,000 promissory note payable to the order of Green Mountain Inn, Inc. This note was secured by transfer to the Green Mountain Inn of the McGuires’ note to the Tursis.

Subsequently, Mrs. McGuire learned that her Small Business Administration loan had been disapproved. On December 5, 2022, the Tursis defaulted on their promissory note to the Green Mountain Inn. On June 11, 2023, PP, Inc., formerly Green Mountain Inn, Inc., brought an action against the McGuires to recover on the note held as security for the Tursis’ promissory note. Discuss whether the instrument is negotiable.

Answer: This Promissory note is not a negotiable instrument within UCC Article 3. The note is not payable on demand or at a definite time because it does not provide for repayment of principal at a specified time. The acceleration clause provided that the amount was payable upon the maker's default which was also an indefinite time.

Despite the fact that this is not a negotiable instrument, Perry still can claim rights as a contract assignee (he will have the same rights as his assignor). PP, Inc. v. McGuire, 509 F. Supp 1079 (D.C. N.J. 1981).

12. On September 2, 2021, Levine executed a mortgage bond under which she promised to pay the Mykoffs a preexisting obligation of $54,000. On October 14, 2024, the Mykoffs transferred the mortgage to Bankers Trust Co., indorsing the instrument with the words “Pay to the Order of Bankers Trust Company Without Recourse.” The Lincoln First Bank, N.A., brought this action asserting that the Mykoffs’ mortgage is a nonnegotiable instrument because it is not payable to order or bearer; thus, it is subject to Lincoln’s defense that the mortgage was not supported by consideration because an antecedent debt is not consideration. Is the instrument payable to order or bearer? Discuss.

Answer: The instrument is not payable to order or bearer. Antecedent debt is sufficient consideration to support a negotiable instrument, but not a nonnegotiable one. Under the UCC, a writing, to be negotiable, must “be payable to order or to bearer.” Since the mortgage did not contain such language, it was not a negotiable instrument. The Mykoffs’ indorsement could not change the instrument to a negotiable one. Therefore, the mortgage bond is nonnegotiable and unenforceable because it lacks legal consideration. Bankers Trusts’ claim is unsecured in that, as assignee, Bankers Trust is subject to the defense of lack of consideration (its position can be no better than that of its assignor, the Mykoffs). In Re Levine, 23 B.R. 410 (N.Y. 1982).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 24: Form and Content

13. Horne executed a $100,000 note in favor of R. C. Clark. On the back of the instrument was a restriction stating that the note could not be transferred, pledged, or otherwise assigned without Horne’s written consent. As part of the same transaction between Horne and Clark, Horne gave Clark a separate letter authorizing Clark to pledge the note as collateral for a loan of $50,000 that Clark intended to secure from First State Bank. Clark did secure the loan and pledged the note, which was accompanied by Horne’s letter authorizing Clark to use the note as collateral. First State contacted Horne and verified the agreement between Horne and Clark as to using the note as collateral. Clark defaulted on the loan.

When First Bank later attempted to collect on the note, Horne refused to pay, arguing that the note was not negotiable as it could not be transferred without obtaining Horne’s written consent. This suit was instituted. Is the instrument negotiable? Explain.

Answer: Judgment for First State Bank, even though the note in question is not a negotiable instrument. In order for a note to be classified as a negotiable instrument, one must be able to ascertain from the instrument itself and without reference to other documents that the instrument (1) be in writing; (2) is signed by the maker or drawer; (3) contains a promise or order to pay; (4) be unconditional; (5) be for a sum certain in money [Revised Article 3: fixed amount]; (6) contains no other promise by the maker or drawer except as authorized by law; (7) is payable on demand or at a definite time; and (8) is payable to order or bearer. The note executed by Horne failed to meet the requirements of negotiability because the promise to pay was not payable to order or bearer. Rather, a transfer of the note was conditioned on the holder's obtaining Horne's written consent. This limitation, although it appeared only on the back of the instrument, was part of the instrument and destroyed its negotiability.

Furthermore, that flaw could not be overcome by the accompanying letter from Horne to Clark. In order to facilitate the transfer of notes, the party receiving the note must be able to determine its validity and negotiability from the face of the note. Thus, the note was assigned to First State Bank and is governed by the law of assignments. First State Bank at Gallup v. Clark, 570 P. 2d 1144 (N.M. 1977).

14. The Society National Bank (Society) agreed in a promissory note to lend U.S.A. Diversified Products, Inc. (USAD) up to $2 million in the form of an operating line of credit upon which USAD could make draws of varying amounts. The outstanding balance was to be paid on April 30 of the following year. USAD defaulted on the line of credit, and Society filed a complaint against USAD. Is the promissory note negotiable?

Answer: The line of credit is not a negotiable instrument. This problem is based on the case Yin v. Society National Bank Indiana, Court of Appeals of Indiana, 1996, 665 N.E. 2d 58, http://scholar.google.com/scholar_case?case=10434850995862158719&q=665+N.E.2d+5 8+&hl=en&as_sdt=2,22.

The agreement in this case is a line of credit upon which USAD could make draws of varying amounts. Indeed, the face of the note contains a notation regarding “draws.”

Although USAD did make various draws upon the line of credit, it was under no obligation to make any draws whatsoever. In fact, if USAD had never drawn upon the line of credit, it would have owed nothing when the agreement matured. The principal would have been zero. This is noteworthy because it illustrates an important feature of the line of credit: to ascertain the principal owed, one must look beyond the agreement itself. Because of the potentially variable principal which results from such an arrangement, the line of credit contains no sum certain or fixed amount. Lacking an unconditional promise to pay a sum certain (fixed amount), the line of credit falls outside the definition of a negotiable instrument.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 24: Form and Content

ANSWERS TO “TAKING SIDES” PROBLEMS Holly Hill Acres, Ltd., executed and delivered a promissory note and a purchase money mortgage to Rogers and Blythe. The note provided that it was secured by a mortgage on certain real estate and that the terms of that mortgage “are by this reference made a part hereof.” Rogers and Blythe then assigned the note to Charter Bank, and the bank sought to foreclose on the note and mortgage. Holly Hill Acres refused to pay, claiming that the note was not negotiable and therefore subject to the defense that Holly Hill Acres had been defrauded by Rogers and Blythe. a. Present the position that the note is a negotiable instrument. b. What is the position that the note is nonnegotiable? c. Is the note negotiable or nonnegotiable? Explain.

Answer: (a) Many notes state that they are secured by a mortgage and this is an important part of commercial real estate law. There is nothing in such a provision that destroys the negotiability of a note. (b) The provision that the note is secured by a mortgage does not destroy the negotiability of an instrument. However, the provision that the terms of the mortgage are made part of this note does destroy the negotiability of the note.

Such a provision makes one go beyond the four corners of the instrument to determine its terms, and this is not permissible for negotiability. (c) Judgment for Holly Hill. A note that states that it is subject to or governed by any other agreement does not contain an unconditional promise to pay, and therefore, it is not a negotiable instrument. Here, the note executed by Holly Hill Acres provided that it was secured by a mortgage on real estate. This is a common commercial practice, and such a reference does not in itself destroy the negotiability of the note. In addition, however, the note states that the terms of the mortgage are by reference made a part of the note. This condition on the promise to pay renders the note nonnegotiable because it depends on terms not appearing on the face of the instrument. And since the note, therefore, is nonnegotiable, Charter Bank, as the assignee of a mortgage securing a nonnegotiable note, must take subject to all defenses, including that of fraud, available against Rogers and Blythe. Holly Hill Acres, Ltd v. Charter Bank of Gainesville, 314 So. 2d 209 (1975).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 25: Transfer and Holder in Due Course

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 25: Transfer and Holder in Due Course

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ............................................................................. 14

ANSWERS TO ETHICAL DILEMMA What Responsibility Does a Holder Have in Negotiating Commercial Paper?

1.

Would it be ethical for Marcus and David to accept the note and negotiate it to Wire Ways, Inc.? Why? 2. What ethical responsibilities does one have to review the business reputations of prospective clients or customers and to refuse to do business with disreputable persons?

3. What risks did Moore & Arnold, Inc., assume in accepting the business? Was the risk limited to the failure to obtain payment?

4. Could Marcus and David have structured the business transaction in any way to insulate Moore & Arnold, Inc., from the risks it assumed?

Answer: 1. The use of three trading names, the gambling problems of John Barnes, and the pending litigation create significant doubt about the note. Under these circumstances it may be unethical to negotiate the note to anyone. Remember, however, that there is a social policy in protecting negotiability, and the holder in due course concept is critical to this end. If business reputation is too broadly interpreted as a factor which gives a party “notice,” the holder in due course doctrine could be undermined considerably.

2. Most agree that one does have an ethical responsibility to review the business reputation of prospective clients or customers and to gain knowledge about them.

Professions such as law or accounting have specific codes of ethics on such matters.

Subcontractors such as Moore & Arnold have special concerns since their work involves business construction and affects public safety.

3. Moore & Arnold assumed a number of risks. If Barnes & Sons does not complete its contract or is negligent, Moore & Arnold could be named in litigation. By associating with Barnes & Sons, Moore & Arnold could tarnish its own reputation. Further, by accepting the job, without payment in cash as a part of work is completed, or payment with a guarantee, Moore & Arnold have the risk of nonpayment.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 25: Transfer and Holder in Due Course

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Roy Rand executed and delivered the following note to Sue Sims: “Chicago, Illinois, June 1, 2024; I promise to pay to Sue Sims or bearer, on or before July 1, 2024, the sum of $7,000.

This note is given in consideration of Sims’s transferring to the undersigned title to her 2016 Buick automobile. (signed) Roy Rand.” Rand and Sims agreed that delivery of the car be deferred to July 1, 2024. On June 15, Sims sold and delivered the note, without indorsement, to Karl Kaye for $6,200. What rights, if any, has Kaye acquired? Explain.

Answer: Kaye has become a holder of the note. The note is negotiable in form. The fact that Sims had not indorsed the note does not preclude Kaye’s becoming a holder.

The note was bearer paper because it was payable to a specified person or bearer.

Sect. 3-109. Since it was payable to bearer, transfer by delivery is a negotiation and the transferee becomes a holder. Sect. 3-201.

The recital that it is given in consideration of Sims transferring title of his automobile to Rand does not impair negotiability. A promise or order otherwise unconditional is not made conditional by the fact that the instrument states its consideration, whether performed or promised, or the transaction that gave rise to the instrument.

2. Lavinia Lane received a check from Wilmore Enterprises, Inc., drawn on the Citizens Bank of Erehwon, in the sum of $10,000. Mrs. Lane indorsed the check “Mrs. Lavinia Lane for deposit only, Account of Lavinia Lane” and placed it in a “Bank by Mail” envelope addressed to the First National Bank of Emanon, where she maintained a checking account. She then placed the envelope over a tier of mailboxes in her apartment building along with other letters to be picked up by the postal carrier the next day.

Flora Fain stole the check, went to the Bank of Omaha, where Mrs. Lane was unknown, represented herself to be Lavinia Lane, and cashed the check. Has Bank of Omaha taken the check by negotiation? Why or why not?

Answer: No. Lavinia Lane’s indorsement is a restrictive indorsement. Section 3-206 permits further negotiation, but the transferee must comply with the restriction.

Section 3-206 provides: A depository bank must insure that the restrictive indorsement is honored.

Here, application of the law to the facts discloses that the Bank of Omaha converted the check in controversy. The check was stolen; it had not become bearer paper; title remained in Lavinia Lane, subject to only that which might legally be done under the indorsement, namely, collection of the proceeds and turning them over to the true owner.

The bank cashed the check for an impostor using the name of Lavinia Lane. Thus, the Bank of Omaha did not pay consistently with the restrictive indorsement and therefore did not become a holder.

3. For each of the following indorsements indicate (a) the type of indorsement and whether the indorsement is (b) blank or special, (c) restrictive or nonrestrictive, and (d) qualified or unqualified: a. b. c. d. e.

“Pay to Monsein without recourse.”

“Pay to Allinore for collection.”

“I hereby assign all my rights, title, and interest in this note to Fullilove in full.”

“Pay to the Southern Trust Company.”

“Pay to the order of the Farmers Bank of Nicholasville for deposit only.”

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 25: Transfer and Holder in Due Course

Answer: (a) Special, nonrestrictive, and qualified. The fact that words of negotiability are not used in the indorsement is immaterial. The UCC requires that such words be used in the body of the instrument for it to be negotiable. There is no requirement that a special indorsement state that it is payable to the order of a named indorsee; qualified indorsement indicates that the indorser is not a guarantor of payment in the event the person primarily liable does not pay. (b) Special, restrictive, and unqualified. (c) Special, nonrestrictive, and unqualified. The indorsement is presumed to be unqualified, unless there are words which express a different intention. The words used indicate a clear expression of assignment and transfer. (d) Special, nonrestrictive, and unqualified. (e) Special, restrictive, and unqualified.

4. Explain whether each of the following transactions results in a valid negotiation: a. Arnold gives a negotiable check payable to bearer to Betsy without indorsing it. b. Golden indorses a negotiable, promissory note payable to the order of Golden, “Pay to Chambers and Rambis, (signed) Golden.” c. Porter lost a negotiable check payable to his order. Kersey found it and indorsed the back of the check as follows: “Pay to Drexler, (signed) Kersey.” d. Thomas indorsed a negotiable promissory note payable to the order of Thomas, “(signed) Thomas,” and delivered it to Sally. Sally then wrote above Thomas’s signature, “Pay to Sally.” e. Margarita issued to Poncho a negotiable promissory note payable to the order of Poncho. Poncho indorsed the note “Pay to Randy only, (signed) Poncho” and sold it to Randy. Randy then sold the note to Stephanie after indorsing it “Pay to Stephanie, (signed) Randy.”

Answer: (a) Valid negotiation. An instrument payable to bearer is negotiated by delivery. §3201(a), 1-201(20), 3-205(5). (b) Valid negotiation. An instrument may be negotiated to more than one transferee as long as all transferees are co-owners of the entire instrument. (c) Not a valid negotiation. The instrument was payable to the order of Porter and may be negotiated by delivery and Porter’s indorsement. (d) Valid negotiation. Thomas’ indorsement in blank and delivery to Sally was a valid negotiation of an order instrument. UCC Section 3-202(1). Sally, the holder, may convert a blank indorsement into a special indorsement by writing over Thomas’ signature any contract consistent with the character of Thomas’ indorsement. UCC §3-204. (e) Valid negotiation. Stephanie acquires all the rights of a holder. Poncho’s indorsement purported to prohibit further transfer, but UCC section 3-206(a) gives such an indorsement the same effect as an unrestricted indorsement. Accordingly, the negotiation to Stephanie is entirely valid and Stephanie becomes a holder.

5. Alpha issues a negotiable check to Beta payable to the order of Beta in payment of an obligation Alpha owed Beta. Beta delivers the check to Gamma without indorsing it in exchange for one hundred shares of General Motors stock owned by Gamma. How has Beta transferred the check? What rights, if any, does Gamma have against Beta? Explain.

Answer: Beta transferred the instrument by assignment; but Gamma has the specifically enforceable right to have the unqualified indorsement of Beta because the transfer was for value. UCC §3-203(c).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 25: Transfer and Holder in Due Course

6. Simon Sharpe executed and delivered to Ben Bates a negotiable promissory note payable to the order of Ben Bates for $500. Bates indorsed the note, “Pay to Carl Cady upon his satisfactorily repairing the roof of my house, (signed) Ben Bates,” and delivered it to Cady as a down payment on the contract price of the roofing job. Cady then indorsed the note and sold it to Timothy Tate for $450. What rights, if any, does Tate acquire in the promissory note?

Answer: Tate acquires full rights in the note whether or not Cady satisfactorily repairs Bates' roof. Revised Article 3 makes conditional indorsements ineffective, allowing the indorsee the full right to enforce the instrument.

7. Debbie Dean issued a check to Betty Brown payable to the order of Cathy Cain and Betty Brown. Betty indorsed the check, “Payable to Elizabeth East, (signed) Betty Brown.” What rights, if any, does Elizabeth acquire in the check? Explain.

Answer: None. An instrument payable to two or more persons together must be indorsed by both of them. The purported transfer is ineffective.

8. Marcus issues a negotiable promissory note payable to the order of Parish for $3,000.

Parish raises the amount to $13,000 and negotiates it to Hilda for $12,000. a. If Hilda is a holder in due course, how much can she recover from Marcus? How much from Parish? If Marcus’s negligence substantially contributed to the making of the alteration, how much can Hilda recover from Marcus and Parish, respectively? b. If Hilda is not a holder in due course, how much can she recover from Marcus? How much from Parish? If Marcus’s negligence substantially contributed to the making of the alteration, how much can Hilda recover from Marcus and Parish, respectively?

Answer: (a) Since a payee is a holder (Section 1-201(20)), his fraudulent and material alteration discharges any party whose obligation is thereby changed. Section 3-407(b).

However, a subsequent holder in due course may enforce the instrument according to its original tenor. Section 3-407(c). Therefore, Hilda can recover $3,000 from Marcus. Parish is liable to Hilda for the full $13,000. Sections 3-416, 3-415.

However, if Marcus‘s negligence substantially contributed to the alteration, Hilda could recover the full $13,000 from either Marcus or Parish. Section 3-406. (b) If Hilda is not a holder in due course, then the material and fraudulent alteration discharges Marcus’s liability with respect to Hilda. Section 3-407(b). Therefore, Hilda can recover nothing from Marcus. Hilda can recover the full $13,000 from Parish.

Marcus’s negligence has no effect upon his discharge with respect to a holder who is not a holder in due course. Sections 3-406, 3-407. Therefore, Hilda would recover nothing from Marcus and $13,000 from Parish.

9. On December 2, 2023, Miles executed and delivered to Proctor a negotiable promissory note for $1,000, payable to Proctor or order due March 2, 2024, with interest at 14 percent from maturity, in partial payment of a printing press. On January 3, 2024, Proctor, in need of ready cash, indorsed and sold the note to Hughes for $800. Hughes paid $600 in cash to Proctor on January 3 and agreed to pay the balance of $200 one week later, namely, on January 10. On January 6, Hughes learned that Miles claimed a breach of warranty by Proctor and, for this reason, intended to refuse to pay the note when it matured. On January 10, Hughes paid Proctor $200, in conformity with their agreement of January 3.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 25: Transfer and Holder in Due Course

Following Miles’s refusal to pay the note on March 2, 2024, Hughes sues Miles for $1,000.

Is Hughes a holder in due course? If so, for what amount? Explain.

Answer: Decision for Hughes. Section 3-303 of the UCC provides: An instrument is issued or transferred for value to the extent that the agreed promise has been performed. Hughes paid $200 of the consideration agreed to be paid after being placed upon notice of a personal defense, namely, breach of contract, available to Miles.

Where a person pays any part of the consideration agreed to be paid after notice of infirmity in the instrument or defect in the title of the person negotiating it before he has paid the agreed amount, he is a holder in due course only to the extent of the amount previously paid by him. Six hundred dollars was paid by Hughes before he received notice and he is, accordingly, a holder in due course to the extent of $600 plus his pro rata share of discount (600/800) x 200, or $150, for a total of $750.

Sections 3-303, 3-302(d).

10. Thornton fraudulently represented to Daye that he would obtain for her a new car to be used in Daye’s business for $17,800 from Pennek Motor Company. Daye thereupon executed her personal check for $17,800 payable to the order of Pennek Motor Company and delivered the check to Thornton, who immediately delivered it to the motor company in payment of his own prior indebtedness. The motor company had no knowledge of the representations made by Thornton to Daye. Pennek Motor Company now brings an action on the check that was not paid against Daye, who defends on the ground of failure of consideration. Is Pennek subject to this defense? Explain.

Answer: Decision for Pennek Motor Company. Section 3-302(comment 4) of the UCC provides that a payee may be a holder in due course. The check was complete when Pennek Motor Company received it from Thornton, and there was nothing in the character of the instrument to charge it with knowledge of any infirmity or put it on inquiry. Pennek Motor Company became the holder of the check in good faith, for value, without notice of any infirmity, and without reason to question its authenticity.

The check in its hands was not subject to the defense of failure of consideration (a personal defense) interposed by Daye.

It should be noted that the FTC rule limiting holder in due course rights is not applicable to this situation: (a) payment by check and not on credit and (b) a business, not consumer, transaction.

11. Adams, who reads with difficulty, arranged to borrow $2,000 from Bell. Bell prepared a note, which Adams read laboriously. As Adams was about to sign it, Bell diverted Adams’s attention and substituted the following paper, which was identical to the note Adams had read except that the amounts were different: On June 1, 2024, I promise to pay Ben Bell or order Twelve Thousand Dollars with interest from date at 8 percent. This note is secured by certificate No. 13 for 100 shares of stock of Brookside Mills, Inc. Adams did not detect the substitution, signed as maker, handed the note and stock certificate to Bell, and received from Bell $2,000. Bell indorsed and sold the paper to Fore, a holder in due course, who paid him $11,000. Fore presented the note at maturity to Adams, who refused to pay. What are Fore’s rights, if any, against Adams?

Answer: Although the note is negotiable (the fact that it appears to be undated does not affect its negotiable character), Fore can only recover from Bell and not from Adams. Fraud in the execution is a real defense. Section 3-305 (a)(1)(iii). Fore, a holder in due course, took subject to the real defense.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 25: Transfer and Holder in Due Course

There are two types of fraud. Fraud in the inducement occurs when the maker, knowing the contents of the paper, is persuaded or induced to sign it by false representations of another. Fraud in the execution occurs where the maker, due to some trick or deception by another, and without negligence on his part, signs a paper, which is a different document from the one that he reasonably believed he was signing. Fraud in the inducement is a personal defense, good only against a holder.

The point on which most cases distinguishing the two types of fraud turn is whether the issuer was negligent in not knowing the nature of the paper he signed. This is a question of fact. It is generally held that if the issuer, though literate, is prevented by a trick of the promisee from reading the instrument and learning its nature—always assuming no negligence by the issuer—there is fraud in the execution. In the problem presented, the maker read with difficulty; he read the paper placed before him and ascertained its contents to be what he intended; by trick of the promisee, he was thrown off guard and another paper substituted for the one he had just read. Under these circumstances, there was no negligence by the maker and the fraud was fraud in the execution. Accordingly, even though the note is negotiable in form and Fore is a holder in due course, he cannot recover on this note from the maker, Adams.

12. On January 2, 2024, seventeen-year-old Martin paid $2,000 for a used motorboat to use in his fishing business, after Dealer’s fraudulent misrepresentation of the condition of the boat. Martin signed an installment contract for $1,500 and gave Dealer the following instrument as down payment: Dated: ______ 2024 I promise to pay to the order of Dealer, six months after date, the sum of $500 without interest. This is given as a down payment on an installment contract for a motorboat. (signed) Martin Dealer, on July 1, sold his business to Henry and included this note in the transaction.

Dealer indorsed the note in blank and handed it to Henry, who left the note in his office safe. On July 10, Sharpie, an employee of Henry, without authority, stole the note and sold it to Bert for $300, indorsing the note “Sharpie.” At the time, in Bert’s presence, Sharpie filled in the date on the note as February 2, 2024. Bert demanded payment from Martin, who refused to pay. Explain what Bert’s rights are against Martin.

Answer: Ordinarily, the failure to date an instrument does not impair its negotiability except where the due date is made by reference to the date of the instrument, such as “six months after date.” Since the time of payment cannot be determined on the face of the instrument, it would not be negotiable unless it was subsequently completed by dating it.

Sharpie can complete the blank by filling in the date and thus make it negotiable. An incomplete instrument is not negotiable until completed, but when it is completed in accordance with authority given, it is effective as completed. Section 3-115, UCC In this case, however, while there was authority to complete the instrument on the date it was issued, Sharpie made an unauthorized completion which would amount to an alteration. Section 3-115, UCC. Nevertheless, Section 3-407 provides that a subsequent holder in due course may in all cases enforce the instrument as completed.

Accordingly, since Bert is a holder in due course, the unauthorized completion by Sharpie could not be a defense so far as Martin is concerned. The fact that Bert purchased from a thief does not affect his rights. Bert has given value and while he

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 25: Transfer and Holder in Due Course

observed the completion of the instrument, notice that an incomplete instrument has been completed is not notice of a possible defense.

Minority. Section 3-305 provides that a holder in due course does not take the instrument free of the defense of infancy to the extent that it is a defense to a simple contract. Thus, the question would be determined by reference to the particular state law relating to the right of a minor generally to rescind this type of purchase contract.

In addition, it must be determined whether the boat was a necessary.

Fraud. Martin’s defense of fraud in the inducement is not available against a holder in due course.

13. McLaughlin borrowed $10,000 from Adler, who, apprehensive about McLaughlin’s ability to pay, demanded security. McLaughlin indorsed and delivered to Adler a negotiable promissory note executed by Topping for $12,000 payable to McLaughlin’s order in twelve equal monthly installments. The note did not contain an acceleration clause, but it recited that the consideration for the note was McLaughlin’s promise to paint and shingle Topping’s barn. At the time McLaughlin transferred the note to Adler, the first installment was overdue and unpaid. Adler was unaware that the installment had not been paid.

Topping did not pay any of the installments on the note. When the last installment became due, Adler presented the note to Topping for payment. Topping refused upon the ground that McLaughlin had not painted or shingled her barn. Explain what Adler’s rights are, if any, against Topping on the note.

Answer: Judgment for Adler against Topping for $10,000. When Adler obtained the negotiable promissory note as security for repayment of his $10,000 loan to McLaughlin, he became a holder in due course of this note. The note is recited to be a negotiable promissory note, and the fact that it made reference to the consideration for the note does not make the promise conditional so as to impair the negotiability of the note.

To become a holder in due course of the note, it was necessary that the note be indorsed and delivered to Adler, as it was, and that Adler take it for value, in good faith, without notice that it was overdue or had been dishonored or of any defense against or claim to it on the part of any person and without reason to question its authenticity. Taking the note for security for the antecedent obligation of McLaughlin was “value,” and therefore Adler took the note for value. Adler had no knowledge that the note was overdue or dishonored and became a holder in due course of the note.

Topping has a good defense to payment of the note insofar as McLaughlin is concerned. McLaughlin had not performed the work required of him, nor furnished the consideration for the note and Topping does not have to pay it to him. However, Topping is responsible to Adler for payment of the note, despite her personal defense against McLaughlin. A holder in due course of a note takes it free from all defenses of any party to the instrument with whom the holder has not dealt, except for real defenses; none of which are applicable here.

However, the amount that Adler may recover on the note is not the full amount of the note, but only the amount that McLaughlin owes him and that is secured by the indorsement of the note. If Topping had no defense against McLaughlin on the note, then Adler could collect the entire amount of the note and would be obligated to hold any balance in excess of his claim against McLaughlin for the benefit of McLaughlin.

But if the maker of the note has a good defense against the payee, as here, then the holder in due course of the note, as security for an obligation due him, can only recover on the note to the extent of the debt for which it was given as security. Thus,

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 25: Transfer and Holder in Due Course

Adler’s claim against Topping on the note is limited to the $10,000 owing by McLaughlin to Adler plus interest thereon.

14. Adams, by fraudulent representations, induced Barton to purchase one hundred shares of the capital stock of the Evermore Oil Company. The shares were worthless. Barton executed and delivered to Adams a negotiable promissory note for $5,000, dated May 5, in full payment for the shares, due six months after date. On May 20, Adams indorsed and sold the note to Cooper for $4,800. On October 21, Barton, having learned that Cooper now held the note, notified Cooper of the fraud and stated he would not pay the note. On December 1, Cooper negotiated the note to Davis who, while not a party, had full knowledge of the fraud perpetrated on Barton. Upon refusal of Barton to pay the note, Davis sues Barton for $5,000. Is Davis a holder in due course or, if not, does he have the rights of a holder in due course? Explain.

Answer: Decision for Davis. Cooper took the note in good faith, without notice, for value and without reason to question its authenticity and hence became a holder in due course. Davis, a transferee from a holder in due course, enjoys the rights of a holder in due course under the shelter theory, UCC Section 3-203 (b), and as such cuts off all personal defenses. Barton’s defense of fraud in the inducement is a personal defense and accordingly is ineffective against Davis.

15. Donna gives Peter a check for $3,000 in return for a computer. The check is dated December 2. Peter transfers the check for value to Howard on December 14, and Howard deposits it in his bank on December 20. In the meantime, Donna has discovered that the computer is not what was promised and has stopped payment on the check. If Peter and Howard disappear, may the bank recover from Donna notwithstanding her defense of failure of consideration? What will be the bank’s cause of action?

Answer: The bank will argue that it is a holder in due course by virtue of having taken the check for value without notice of claims or defenses against it. Donna’s claim would appear to be a personal defense (i.e., warranty or merchantability) and the bank would not be subject to it.

16. The drawer, Commercial Credit Corporation (Corporation), issued two checks payable to Rauch Motor Company. Rauch indorsed the checks in blank, deposited them to its account in University National Bank, and received a corresponding amount of money. The Bank stamped “pay any bank” on the checks and initiated collection. However, the checks were dishonored and returned to the Bank with the notation “payment stopped.” Rauch, through subsequent deposits, repaid the bank. Later, to compromise a lawsuit, the Bank executed a special two-page indorsement of the two checks to Lamson. Lamson then sued the Corporation for the face value of the checks, plus interest. The Corporation contends that Lamson was not a holder of the checks because the indorsement was not in conformity with the Uniform Commercial Code in that it was stapled to the checks. Is Lamson a holder? Why or why not?

Answer: Yes, Lamson is a holder and would prevail. Because the Bank indorsed the checks to Lamson by name, thus qualifying as a special indorsement, the restrictive indorsement of “Pay any Bank” no longer prevented Lamson from becoming a holder.

The problem was whether the special indorsement was correctly and properly affixed to the checks under Section 3-202(2) which provides that “(a)n indorsement must be written...on behalf of the holder and on the instrument or on a paper so firmly affixed thereto as to become a part thereof.” [Revised 3-204(a) provides: “For determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument.”]

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 25: Transfer and Holder in Due Course

Since it was physically impossible to place all of the language on the two small checks, the indorsement had to be affixed to the checks in some way. Such a paper is called an allonge. The Court agreed that paper clipping is not sufficient but held that stapling the allonge to the checks was a permanent attachment to the checks so that it becomes “a part thereof.” (Under Revised Article 3, it would be adequate.)

Section 1-201(20) defines a holder as a person who possesses an instrument indorsed to him. The Bank’s special indorsement, stapled to the checks, made Lamson a holder.

As a holder, Lamson was entitled to payment unless the Corporation establishes a defense. Lamson v. Commercial Credit Corp., 531 P. 2d 966 (Co. 1975). [Note: Decision would change under Revised Article 3, Section 3-204(a).]

17. While assistant treasurer of Travco Corporation, Frank Mitchell caused two checks, each payable to a fictitious company, to be drawn on Travco’s account with Brown City Savings Bank. In each case, Mitchell indorsed the check in his own name and then cashed it at Citizens Federal Savings & Loan Association of Port Huron. Both checks were cleared through normal banking channels and charged against Travco’s account with Brown City.

Travco subsequently discovered the embezzlement, and after Citizens denied its demand for reimbursement, Travco brought a suit against Citizens. Is the indorsement effective?

Explain.

Answer: No, the indorsement is not effective against Travco. An endorsement by any person in the name of a named payee is effective if an agent or employee of the maker or drawer has supplied him with the name of the payee intending the latter to have no such interest. Here, however, although Mitchell was an employee of the drawer, Travco, and had supplied the drawer with the names of the fictitious payees, neither check was indorsed in the name of the named payee. Instead, Mitchell indorsed them in his own name, and as a consequence, the indorsements were not effective against Travco, and Citizens is therefore liable. Travco Corporation v. Citizens Federal Savings and Loan Association of Port Huron, 42 Mich. App. 291, 201 N.W. 2d 675 (1972).

18. Eldon’s Super Fresh Stores, Inc., is a corporation engaged in the retail grocery business.

William Drexler was the attorney for and the corporate secretary of Eldon’s and was also the personal attorney of Eldon Prinzing, the corporation’s president and sole shareholder.

From January 2023 through January 2024, Drexler maintained an active stock trading account in his name with Merrill Lynch. Eldon’s had no such account. On August 12, 2019, Drexler purchased one hundred shares of Clark Oil & Refining Company stock through his Merrill Lynch stockbroker. He paid for the stock with a check drawn by Eldon’s, made payable to Merrill Lynch and signed by Prinzing. On August 15, 2023, Merrill Lynch accepted the check as payment for Drexler’s stock purchase. There was no communication between Eldon’s and Merrill Lynch until November 2024, fifteen months after the issuance of the check. At that time, Eldon’s asked Merrill Lynch about the whereabouts of the stock certificate and asserted a claim to its ownership. Does Merrill Lynch qualify as a holder in due course? Why or why not?

Answer: Yes, judgment for Merrill Lynch. A payee may be a holder in due course if it can be shown that it took the instrument for value, in good faith, without reason to question its authenticity and without notice that the instrument was overdue or had been dishonored or of any defense against or claim to it on the part of any person. At issue here is whether Merrill Lynch took the instrument without notice of a defense to it by Eldon’s. Merrill Lynch did not have actual knowledge of the claim, nor did it have “inferable knowledge” from the fact that Drexler settled his account with a check drawn by Eldon’s. The bank check was delivered to Merrill Lynch by Eldon’s agent, Drexler, with the consent and knowledge of Eldon’s president; it contained no

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 25: Transfer and Holder in Due Course

restrictions or designations as to its use; and Eldon’s had no trading account with Merrill Lynch; therefore, Merrill Lynch took the check without notice of Eldon’s claims and became a holder in due course of the check free from Eldon’s claim of wrongful delivery. Eldon’s Super Fresh Stores, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 296 Minn. 130, 207 N.W. 2d 282 (1973).

19. Walter Duester purchased a John Deere combine from St. Paul Equipment. John Deere Co. was the lender and secured party under the agreement. The combine was pledged as collateral. Duester defaulted on his debt, and the manager of St. Paul, Hansen, was instructed to repossess the combine. Hansen went to Duester’s farm to accomplish this.

Duester told him that he had received some payments for custom combining and would immediately purchase a cashier’s check to pay the John Deere debt. Hansen followed Duester to the defendant, Boelus State Bank. Hansen remained outside, and Duester returned in a few minutes with a cashier’s check in the amount of the balance of his indebtedness payable to John Deere. The check had been signed by an authorized bank employee. When John Deere, however, presented the check to the bank for payment shortly thereafter, the bank refused to pay, claiming that Duester acquired the cashier’s check by theft. Is John Deere subject to this defense? Why or why not?

Answer: No, judgment for John Deere affirmed. Theft of an instrument constitutes a personal defense. The UCC provides that a holder in due course takes an instrument free of the personal defense of theft of the instrument. The court concluded that John Deere was indeed a holder in due course since it had given value in the form of taking an instrument in payment of an antecedent debt and that it had acted in good faith and without notice that was any claim or defense applicable to the instrument.

Although the Bank subsequently informed John Deere of the theft, the court stated that subsequent knowledge of a defense or claim does not impair holder in due course status.

In addition, the payee of a negotiable instrument may be a holder in due course provided he meets the requirements. In obtaining the check drawn on the defendant bank, John Deere did not deal with the bank, and took the instrument for value, in good faith, and without notice.

20. Stephens delivered one hundred eighty-four bushels of corn to Aubrey, for which he was to receive $478.23. Aubrey issued a check with $478.23 typewritten in numbers, and on the line customarily used to express the amount in words appeared “$100478 and 23 cts” imprinted in red with a check-writing machine. Before Stephens cashed the check, someone crudely typed “100” in front of the typewritten $478.23. When Stephens presented this check to the State Bank of Salem, Anderson, the manager, questioned Stephens. Anderson knew that Stephens had just declared bankruptcy and was not accustomed to making such large deposits. Stephens told Anderson he had bought and sold a large quantity of corn at a great profit. Anderson accepted the explanation and applied the monies to nine promissory notes, an installment payment, and accrued interest owed by Stephens. Stephens also received $2,000 in cash, with the balance deposited in his checking account.

Later that day, Anderson reexamined the check and discovered the suspicious appearance of the typewriting. He then contacted Aubrey, who said a check in that amount was suspicious, whereupon Anderson froze the transaction. When Aubrey stopped payment on the check, the bank sustained a $28,193.91 loss because Stephens could not be located.

The bank then sued Aubrey for the loss. Explain who should bear the loss.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 25: Transfer and Holder in Due Course

Answer: Judgment for State Bank of Salem affirmed. Under the UCC, value is given for an instrument when the instrument is taken in payment for an antecedent debt.

Moreover, when credit is drawn upon, value is given to that extent. Value is also given to the extent that the funds represented by the check are applied to an overdrawn account. Here, the bank’s application of funds made available by the Aubrey check to Stephens’ indebtedness and the surrender of the notes constituted taking the instrument for value.

Furthermore, the bank took the check without notice of Aubrey’s defense. In case of ambiguity, typewritten terms control printed terms and words control figures. The court determined that the impressions made by the check imprinter were not “printed” terms but should be considered “words,” since they were on the line typically used for expressing the amount in words, not figures. Moreover, Aubrey did not prove that Anderson violated customary banking standards by not comparing the two amounts. Consequently, Anderson’s reliance upon the amount expressed by the check imprinter was reasonable. In addition, the typed figure “100” was not such visible evidence of an alteration of the check as to put the bank on notice of Aubrey’s defense.

Finally, the circumstances surrounding such a transaction may be so irregular as to put a reasonably prudent banker on notice of a defense or claim. Anderson’s knowledge of Stephens’ questionable general financial position, by itself, however, is insufficient to defeat the bank’s holder in due course status. Thus, the bank can enforce the check against Aubrey to the extent it gave value for it. St. Paul Fire & Marine Ins. Co. v. State Bank of Salem, 412 N.E. 2d 103.

21. L&M Home Health Corporation (L&M) had a checking account with Wells Fargo Bank. L&M engaged Gentner and Company, Inc. (Gentner), to provide consulting services, and paid Gentner for services rendered with a check drawn on its Wells Fargo account in the amount of $60,000, dated September 23, 2023. Eleven days later, on October 4, 2023, L&M orally instructed Wells Fargo to stop payment on the check. Eleven days after that, on October 15, 2023, Gentner presented the L&M check to Wells Fargo for payment. On the same date the teller issued a cashier’s check, payable to Gentner, in the amount of $60,000. On November 5, 2023, Wells Fargo placed a “stop payment order” on the cashier’s check. On January 15, 2024, Gentner deposited the cashier’s check at another bank, but it was not honored and was returned stamped “Payment Stopped.” Gentner sues Wells Fargo for wrongful dishonor of the cashier’s check. Is Gentner a holder in due course of the check? Discuss.

Answer: The trial court ruled in favor of Gentner, finding that Gentner was a holder in due course of the cashier’s check. To be a holder in due course, one must take the instrument “for value, in good faith, without notice that the instrument is overdue, has been dishonored, contains an unauthorized signature or has been altered, and without notice of any claim to the instrument” (and now, under the revised article, without reason to question its authenticity.)

The reason achieving the status of a holder in due course is important is that the only defenses available against a holder in due course are real defenses that include “infancy” of the obligor, “duress,” lack of legal capacity, illegality of the transaction, fraud, and discharge of the obligor by bankruptcy. When the instrument is not in the hands of a holder in due course, the obligor can raise many other defenses (personal or contractual defenses).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 25: Transfer and Holder in Due Course

Wells Fargo contends that the holder-in-due-course doctrine does not apply because the cashier’s check was purchased by Gentner for payment to itself rather than by another party for payment to Gentner. Logically, one would think that must be so and that Gentner’s status as the payee of the cashier’s check would preclude it from claiming holder-in-due-course status. However, “[t]he payee of an instrument can be a holder in due course” even though “use of the holder-in-due-course doctrine by the payee of an instrument is not the normal situation,” and only “in a small percentage of cases” would it be “appropriate to allow the payee of an instrument to assert rights as a holder in due course.”

The situation of a bank accepting a customer’s check and giving the payee a cashier’s check in return appears to fall within that small percentage of cases which presents an opportunity for the payee to establish holder-in-due-course status. Gentner, the payee of the cashier’s check, was acting in complete good faith and had no knowledge of any potential defenses held by Wells Fargo as drawer of the instrument.

Specifically, it did not know, and had no reason to know, that the L&M check it submitted to Wells Fargo was subject to a stop notice and was, from Wells Fargo’s perspective, worthless since the funds could not be recovered from the customer’s account. Gentner and Company, Inc. v. Wells Fargo Bank, 90 Cal. Rptr. 2d 904.

22. Stanley A. Erb became a vice president of the Shearson Lehman Brothers, Inc. branch office in Provo, Utah. That year, Erb was contacted by McKay Matthews, the controller for the Orem, Utah-based WordPerfect Corporation and its sister corporation, Utah Softcopy.

At Matthews’s request, Erb established and managed three separate investment accounts at Shearson. The accounts were for the benefit of the WordPerfect and Utah Softcopy corporations, and one account was for the WordPerfect principals, Allen Ashton, Bruce Bastian, and Willard Peterson. In March of that year, Erb personally accepted from Matthews a check drawn by Utah Softcopy for $460,150.23 and payable to the order of “ABP Investments.” At that time, there was no ABP investment account at Shearson, although the WordPerfect principals maintained accounts elsewhere in that name. Erb accepted the check, but rather than deposit it in one of the three authorized accounts, Erb opened a new account at Shearson in the name of “ABP Investments,” apparently by forging the signature of Bruce Bastian on the new account documents. Over the next eleven months, Erb induced Shearson to draft thirty-seven checks on the ABP Investment account, payable to ABP Investments, by submitting falsified payment requests to Shearson’s cashier. The checks were mailed to an Orem post office box unknown to WordPerfect and its principals. Erb would obtain the checks and indorse them in the name of ABP Investments. He took the checks to Wasatch Bank for deposit into his personal account. Wasatch accepted the deposits and later allowed Erb to withdraw $504,295.30, the entire amount, from the account. Shearson discovered Erb’s activities after Erb had left Shearson after two years. Shearson brought a suit against Wasatch Bank. Discuss who should prevail.

Answer: Judgment for Wasatch. The “fictitious payee” defense as articulated in section 3-405(1)(c) of the UCC operates under the facts of the present case to shield the collecting bank, Wasatch, from liability resulting from Erb’s misconduct while in Shearson’s employ. Erb deliberately induced the issuance of checks by Shearson. The payee named on those checks was never intended by Erb to take an interest in the checks. In such circumstances the mandate of the Code is clear—the drawer shall bear the loss resulting from the misdeeds of its employee. Wasatch’s conduct in the relevant transactions raises serious questions about whether the bank discharged its duty to act in a commercially reasonable manner. Nevertheless, no fact has been

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 25: Transfer and Holder in Due Course

alleged which would support the inference that Wasatch acted in bad faith so as to preclude the operation of the fictitious payee defense.

23. Turman executed a deed of trust note for $107,500 payable to Ward’s Home Improvement, Inc. (Ward’s). The note was in consideration of a contract for Ward’s to build a house on Turman’s property. On the same day, Ward’s executed an assignment of the note to Robert Pomerantz for which Pomerantz paid Ward’s $95,000. Although the document uses the word “assignment,” no notation or indorsement was made on the note itself. Is Pomerantz a holder? Is Pomerantz a holder in due course? Explain.

Answer: Judgment reversed and remanded. Pomerantz is not a holder in due course. “[I]f an instrument is payable to an identified person, negotiation requires its indorsement by the holder.” UCC § 3-201. An assignment is not an indorsement, UCC § 3-204(a), and consequently, the transaction between Ward and Pomerantz was not a negotiation and Pomerantz is not a holder.

An assignment vests in the transferee any rights of the transferor to enforce the contract. The rights of the transferee are derivative of the transferor’s. Consequently, the assignee of a negotiable instrument is subject to defenses which the maker could assert against the assignor. One such defense is failure of consideration. If an instrument is issued for a promise, the issuer has a defense to the extent performance of the promise is due and the promise has not been performed. Since Pomerantz is not a holder in due course, he is subject to this defense as if it were asserted against Ward.

24. Certain partners of the Finley Kumble law firm signed promissory notes that secured loans made to the law firm by the National Bank of Washington (NBW). When Finley Kumble subsequently declared bankruptcy and defaulted on the loans, NBW filed suit to collect on the notes. Then NBW itself became insolvent, and the Federal Deposit Insurance Corporation (FDIC) was appointed as receiver for NBW. The FDIC brought suit against the partners who had signed the note. Section 1823(e) of the Federal Deposit Insurance Act places the FDIC in the position of a holder in due course and thus bars all personal defenses against the FDIC claims. Twenty of the Finley partners claimed that they had signed the notes under the threat that their wages and standing in the firm would decrease if they refused to sign. Such a threat constituted economic duress, which, they contended, is not a personal defense but a real defense. Discuss who should prevail.

Answer: Judgment for FDIC First, s 3-305(2)(b) provides that holders in due course take free of all defenses except for “(b) such other incapacity, or duress, or illegality of the transaction, as renders the obligation of the party a nullity.” The words “such” and “as” indicate that the section is not stating that any type of duress renders an obligation to be a nullity. Rather, it suggests that only those types of duress that are so severe as to render it a nullity stand as exceptions to the rule that holders in due course take free of defenses.

Of course, the question left open is what type of duress is severe enough to render it a nullity. Neither UCC s 3-305(2)(b) nor the Official Comment attempt to establish a rule governing which types of duress render a transaction void as opposed to merely voidable. Instead, Official Comment 6 declares that “[a]ll such matters are therefore left to the local law.”

Duress takes two forms. In one, a person physically compels conduct that appears to be a manifestation of assent by a party who has no intention of engaging in that conduct. The result of this type of duress is that the conduct is not effective to create a contract (s 174). In the other, a person makes an improper threat that induces a

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 25: Transfer and Holder in Due Course

party who has no reasonable alternative to manifesting his assent. The result of this type of duress is that the contract that is created is voidable by the victim.

ANSWERS TO “TAKING SIDES” PROBLEMS Wilson was employed as the office manager of Palmer & Ray Dental Supply of Abilene, Inc. Soon after an auditor discovered a discrepancy in the company’s inventory, Wilson confessed to cashing thirty-five checks that she was supposed to deposit on behalf of the company.

Palmer & Ray Dental Supply used a rubber stamp to indorse checks. The stamp listed the company’s name and address but did not read “for deposit only.” The company’s president, James Ray, authorized Wilson to indorse checks with this stamp. Wilson cashed all of the checks at First National Bank. a. What are the arguments that First National Bank is liable to Palmer & Ray Dental Supply for converting the company’s funds by giving Wilson cash instead of depositing the checks into the company’s bank account? b. What are the arguments that First National Bank is not liable to Palmer & Ray Dental Supply? c. Explain who should prevail.

Answer: (a) Palmer & Ray Dental Supply would argue that the indorsements were unauthorized. (b) First National Bank would argue that the indorsements were authorized. (c) First National Bank should prevail. Palmer & Ray Dental Supply of Abilene, Inc. v.

First National Bank, Court of Civil Appeals of Texas (1972), 477 S.W. 2d 954. A blank indorsement is one that specifies no particular indorsee and that may consist of a mere signature. A restrictive indorsement, on the other hand, includes one that uses the words “for deposit.” The rubber stamp used by Wilson to indorse the checks on the company’s behalf was a blank indorsement, because it stated only the company’s name and address. Moreover, Wilson indorsed the checks under the actual implied or apparent authority granted by Ray, the company president.

Accordingly, when First National Bank delivered cash to Wilson instead of depositing the proceeds from the checks into the company’s account, the bank acted in conformity with the indorsement.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 26: Liability of Parties

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 26: Liability of Parties

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems .............................................................................. 11

ANSWERS TO ETHICAL DILEMMA Who Gets to Pass the Buck on a Forged Indorsement?

1.

How could the bank have prevented this problem? Is a clerk responsible for knowing exactly who is cashing a check and who gave value for it? What steps, if any, could Rita Bosworth have taken to verify the check’s indorsements?

2. Did Tom West have a responsibility to ensure that his friend’s check was legitimate?

Should he have inquired about the indorsement?

3. What issues relating to the transfer of a negotiable instrument are involved here? What liability does the bank face? What liability does Tom West face? What warranties apply to each party?

Answer: 1. Banks should obtain the indorsement of all presenters and should obtain valid identification from all such individuals. Moreover, if the presenter is not a customer, but is with a customer, the bank should have its customer indorse the instrument.

2. When one indorses or transfers an instrument for value, they incur liability and should be careful. Yes, West had, at least ethically, a responsibility to ensure that the check was legitimate.

3. This question is a general one to focus the students’ attention on overall legal liability.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

November 15, 2023 The undersigned promises to pay to the order of John Doe, Nine Hundred Dollars with interest from date of note. Payment to be made in five monthly installments of One Hundred Eighty Dollars, plus accrued interest beginning on December 1, 2023. In the event of default in the payment of any installment or interest on installment date, the holder of this instrument may declare the entire obligation due and owing and proceed forthwith to collect the balance due on this instrument.

(Signed) Acton, agent

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 26: Liability of Parties

On December 18, 2023, no payment having been made on the note, Doe indorsed and delivered the instrument to Todd to secure a preexisting debt in the amount of $800.

On January 18, 2024, Todd brought an action against Acton and Phi Corporation, Acton’s principal, to collect the full amount of the instrument with interest. Acton defended on the basis that he signed the instrument in a representative capacity and that Doe had failed to deliver the consideration for which the instrument had been issued. Phi Corporation defended on the basis that it did not sign the instrument and that its name does not appear on the instrument.

For what amount, if any, are Acton and Phi Corporation liable? Explain.

Answer: Liability of Acton: The instrument is, by its terms, payable to the order of a designated party. Words of negotiability are present. The instrument in question satisfies the requirements of a negotiable instrument. While the amount written in figures and in writing differ, the words control figures except when the words are ambiguous in which case figures control. The instrument in question is clearly for a fixed amount in that the words control the figures, and interest will be at the legal rate from date of the instrument.

An instrument is payable at a definite time if by its terms it is payable at a definite time subject to any acceleration. This is an installment note with a specified maturity date for each installment. The fact that the instrument contains an acceleration clause does not affect its negotiability.

No person is liable on an instrument unless his signature appears thereon. UCC Section 3-401(a). A signature may be made by an agent or other representative and his authority to make it may be established as in other cases of representation. No particular form of appointment is necessary to establish such authority. However, UCC Section 3-402(b)(2) provides: if (i) the form of the signature does not show unambiguously that the signature is made in a representative capacity or (ii) the represented person is not identified in the instrument, the representative is liable to a holder in due course that took the instrument without notice “of the representative capacity.” With respect to any other person, the representative is liable on the instrument unless the representative proves that the original parties did not intend the representative to be liable on the instrument.”

Todd gave value for the instrument. UCC Section 3-303 states that a holder takes the instrument for value to the extent that he acquires a security interest or lien on the instrument or when he takes the instrument as security for an antecedent claim against any person whether or not the claim is due. Even though Todd has given value to the extent of his lien, he cannot qualify if he is charged with notice that the instrument is overdue in part at the time he purchased the instrument because he knew or should have known of the fact that the first installment was past due. A purchaser has notice that the instrument is overdue if he has reason to know that any part of the principal amount is overdue at the time he acquired the instrument.

Todd qualifies as a holder of the instrument but not as a holder in due course. Todd’s action on the instrument is subjective to any defense which would be available to the maker of a nonnegotiable contract. The defense of failure of consideration is, therefore, available against Todd.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 26: Liability of Parties

Assuming the agent Acton had the authority to sign the instrument, and did sign in a representative capacity, he failed to identify his principal. Therefore, he is personally liable on the instrument unless he can show that Doe did not intend for him to be liable. This is Acton’s instrument, but as previously mentioned he has a valid defense.

Liability of Phi Corporation. Section 3-401 of the UCC states that no person is liable on an instrument unless his signature appears thereon. An undisclosed principal cannot be held liable on the negotiable instrument even though he may have liability on the underlying debt. The corporation is in no way liable on the instrument whether or not Acton was authorized to act for the corporation. The Phi Corporation cannot be held liable on the instrument because its name nowhere appears on the instrument.

2. While employed as a night watchman at the place of business of A. B. Cate Trucking Company, Fred Fain observed that the office safe had been left unlocked. It contained fifty payroll checks, which were ready for distribution to employees two days later. The checks had all been signed by the sole proprietor, Cate. Fain removed five of these checks and two blank checks that were also in the safe. Fain forged the indorsements of the payees on the five payroll checks and cashed them at local supermarkets. He then filled out one of the blank checks, making himself payee, and forged Cate’s signature as drawer.

After cashing that check at a supermarket, Fain departed by airplane to Jamaica. The supermarkets in good faith promptly presented the six checks for payment to the drawee bank, the Bank of Emanon, which paid each one. Shortly thereafter, Cate learned about the missing payroll checks and forgeries and demanded that the Bank of Emanon credit his account with the amount of the six checks.

Explain whether the Bank must comply with Cate’s demand. Discuss what the Bank’s rights are, if any, against the supermarkets.

Answer: The Bank of Emanon must comply with Cate’s demands unless it can prove that Cate was negligent. The office safe being left unlocked may possibly be construed as negligence.

The Bank of Emanon is entitled to recover from the supermarkets its loss on the 5 payroll checks with the forged indorsements. Because the payees’ indorsements were forged, the supermarket breached the presenter’s warranty to the bank that it was “entitled to enforce” the checks. UCC Section 3-417(a). The instrument was paid, thus there is no breach of indorser’s liability.

The bank may not, however, recover from the supermarket on the check on which Fain forged Cate’s name as drawer. The supermarket will prevail because presenters’ warranties do not cover a guarantee of a forged maker or drawer’s signature. This part of the question involves the principle of Price v. Neale which held that as between a drawee (the bank here) and some party who paid value in good faith for an instrument containing a forged drawer’s signature, the drawee should bear the loss. The principle of this classic case is codified in UCC Section 3-418.

3. A negotiable promissory note executed and delivered by B to C passed in due course to and was indorsed in blank by C, D, E, and F. G, the present holder, strikes out D’s indorsement. What is the liability of D on her indorsement?

Answer: G, the holder of the instrument, may discharge the liability of any party on it by canceling it in any manner apparent on the face of the instrument. UCC Section 3604(a) provides the following example of cancellation: by intentional “cancellation or striking out of the party’s signature.” Therefore, G has discharged D’s liability.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 26: Liability of Parties

4. On June 15, 2016, Joanne, for consideration, executed a negotiable promissory note for $10,000, payable to Robert on or before June 15, 2024. Joanne subsequently suffered financial reverses. In January 2024, Robert, on two occasions, told Joanne that he knew she was having a difficult time, that he, Robert, did not need the money, and that the debt should be considered completely canceled with no other act or payment being required.

These conversations were witnessed by three persons, including Larry. On March 15, 2024, Robert changed his mind and indorsed the note for value to Larry. The note was not paid

by June 15, 2024, and Larry sued Joanne for the amount of the note. Joanne defended on the ground that Robert had canceled the debt and renounced all rights against Joanne and that Larry had notice of this fact. Has the debt been properly canceled? Explain.

Answer: Judgment for Larry. Although the law provides that the holder of a note may discharge any party without consideration, this must be done by destruction of the note, some apparent cancellation on the face of the note, by renunciation of rights by a writing signed and delivered, or by surrender of the note to the party to be discharged. None of these requirements were met in this instance. Section 3-604, UCC. A discharge or renunciation is not effective against a holder in due course unless he has notice thereof. Section 3-601(b). UCC Robert was not bound by his ineffective renunciation, and therefore Larry’s knowledge of the oral conversation does not prevent him being a holder in due course as he has no notice of a valid renunciation.

5. Tate and Fitch were longtime friends. Tate was a man of considerable means; Fitch had encountered financial difficulties. To bolster his failing business, Fitch desired to borrow $60,000 from Farmers Bank of Erehwon. To accomplish this, he persuaded Tate to aid him in the making of a promissory note by which it would appear that Tate had the responsibility of maker, but with Fitch’s agreeing to pay the instrument when due.

Accordingly, they executed the following instrument: December 1, 2023 Thirty days after date and for value received, I promise to pay to the order of Frank Fitch the sum of $60,000. /s/ Timothy Tate On the back of the note, Fitch indorsed, “Pay to the order of Farmers Bank of Erehwon /s/ Frank Fitch” and delivered it to the bank in exchange for $60,000. a. When the note was not paid at maturity, may the bank, without first demanding payment by Fitch, recover in an action on the note against Tate? Why or why not? b. If Tate voluntarily pays the note to the bank, may he then recover on the note against Fitch, who appears as an indorser? Why or why not?

Answer: The Bank may proceed against Tate as the maker of the note because he signed the note as the maker and as such is primarily liable. UCC Section 3-412.

Tate cannot defend on the ground that the Bank has not first demanded payment by Fitch. Since the maker’s liability is primary, a note holder may go directly against the maker of a promissory note without demanding payment of intermediate indorsers.

UCC Section 3-412. Tate may not defend on the ground that Fitch agreed to be primarily liable.

Between Tate and Fitch, Tate was an accommodation party, even though he signed the note as maker. UCC Section 3-419(a). Tate may recover on the note against Fitch after paying the note. UCC Section 3-419(e) provides: “An accommodation party who pays

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 26: Liability of Parties

the instrument is entitled to reimbursement from the accommodated party and is entitled to enforce the instrument against the accommodated party.”

6. Alpha orally appointed Omega as his agent to find and purchase for him a 1930 Dodge automobile in good condition, and Omega located such a car. Its owner, Roe, agreed to sell and deliver the car on January 10, 2024, for $9,000. To evidence the purchase price, Omega mailed to Roe the following instrument: December 1, 2023 We promise to pay to the order of bearer Nine Thousand Dollars with interest from date of this instrument on or before January 10, 2024. This note is given in consideration of John Roe transferring title to and possession of his 1930 Dodge automobile.

(Signed) Omega, agent Smith stole the note from Roe’s mailbox, indorsed Roe’s name on the note, and promptly discounted it with Sunset Bank for $8,700. Not having received the note, Roe sold the car to a third party. On January 10, 2024, the bank, having discovered all the facts, demanded payment of the note from Alpha and Omega. Both refused payment. a. What are Sunset Bank’s rights with regard to Alpha and Omega? b. What are Sunset Bank’s rights with regard to Roe and Smith?

Answer: The instrument is payable in a fixed amount, in money, even though no precise interest rate is specified as the legal rate of interest is implied in cases where the obligation calls for interest and no rate has been specified. More importantly, under Revised Article 3, the fixed amount rule applies only to the principal. The instrument is bearer paper because it so provides and does not name a payee.

It is payable on or before January 10, 2024. This satisfies the requirement of Article 3 as to a definite time.

Here the instrument was signed by Omega and will be considered and treated as his note. Since there can be no undisclosed principal on a negotiable instrument, this must be the instrument of Omega.

The fact that the instrument showed on its face the consideration for which it was executed in no way affects the negotiable character of the instrument.

Although Roe’s indorsement was forged and is wholly inoperative as Roe’s indorsement, it was not necessary for the negotiation of the instrument as a thief may deliver bearer paper and such delivery constitutes a negotiation of the instrument.

UCC Section 3-403(a).

Bank’s rights against Alpha. Section 3-401 of the UCC states that no person is liable on an instrument unless his signature appears thereon. An undisclosed principal cannot be held liable on the negotiable instrument even though he may have liability on the underlying debt. Alpha is in no way liable on the instrument whether or not Omega was authorized to act for Alpha.

Bank’s rights against Omega. The bank, being a holder in due course of the instrument, even though it took the note at a slight discount, may recover the principal and interest from Omega. Any defense which Omega may assert is only a personal defense and is not available against a holder in due course. Omega’s defense would be failure of consideration which is not available for use against a subsequent holder in due course.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 26: Liability of Parties

Since the agent did not disclose the identity of his principal on the instrument, but only his representative capacity, he cannot escape liability or show that another is liable because we are no longer dealing between immediate parties to the transaction.

Omega is liable on the instrument.

Bank’s rights with regard to Roe. The bank has no claim against Roe. A forged signature is totally inoperative as the signature of the person whose name is forged. UCC Section 3-403.

Bank’s rights against Smith. The bank, being a holder in due course, does have a right to proceed against Smith either for breach of warranty under Section 3-416, UCC, or his liability as an endorser, as the unauthorized signature of Smith is treated as his signature for the purpose of fixing liability. Obviously, Smith did not have good title to the instrument as he had stolen it. Therefore, he is liable for breach of warranty to his transferee, the bank.

7. In payment of the purchase price of a used motorboat that had been fraudulently misrepresented, Young signed and delivered to Armstrong his negotiable note in the amount of $2,000 due October 1, with Selby as an accommodation co-maker. Young intended to use the boat for his fishing business. Armstrong indorsed the note in blank preparatory to discounting it. Tillman stole the note from Armstrong and delivered it to McGowan on July 1 in payment of a past-due debt in the amount of $600 that he owed to McGowan, with McGowan making up the difference by giving Tillman his check for $800 and an oral promise to pay Tillman an additional $600 on October 1.

When McGowan demanded payment of the note on December 1, both Young and Selby refused to pay the note because the note had not been presented for payment on its due date and because Armstrong had fraudulently misrepresented the motorboat for which the note had been executed.

What are McGowan’s rights, if any, against Young, Selby, Tillman, and Armstrong?

Answer: When Armstrong indorsed the note with his blank indorsement, he converted what was otherwise order paper into bearer paper. McGowan gave value for the note to the extent ($600) that it canceled an antecedent claim (Section 3-303, UCC), and to the extent of the amount of the negotiable check, that is $800, that he gave Tillman in partial payment of the note. McGowan’s oral promise to pay an additional $600, not being negotiable, does not constitute value under UCC Section 3-303.

McGowan qualifies as a holder in due course to the extent of $1,400, the amount of the value with which he actually parted, and is a holder to the balance of the instrument.

McGowan’s rights against Young. Young, the maker of the note, is primarily liable for payment of the note. The maker of the note engages that he will pay the note according to the tenor of the instrument at the time of his engagement. Young, as maker of the note, is a primary party. He has no right to insist, as a condition to liability, that the holder present the note to him for payment on its maturity date.

Young’s personal defense of fraud in the inducement may not be used against a holder in due course of a negotiable instrument. It may be successfully asserted against one to the extent the party is only a holder of the note. As McGowan is a holder in due course to the amount of $1,400, he may recover this amount from Young. Young’s defense of fraud in the inducement may be asserted against McGowan to the extent of $600.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 26: Liability of Parties

McGowan’s rights against Selby. Selby is an accommodation maker of the note. When Selby signed the note as a co-maker, he was lending his credit to Young. UCC Section 3-419. An accommodation party is liable in the capacity in which he placed his signature on the instrument, that is as a maker, or as an indorser if he indorsed the instrument. Selby may not successfully defend on the basis that the instrument had not been presented for payment on its maturity date. McGowan is a holder in due course to the extent of $1,400 and only as a holder in the amount of $600. Since the same consideration which supported Young’s obligation on the instrument supports Selby’s obligation, Selby may use the personal defense of fraud in the inducement or failure of consideration as a defense to the same extent that Young can assert it.

McGowan may only recover $1,400 from Selby.

McGowan’s rights against Tillman. Tillman (the thief) did not indorse the note when he delivered it to McGowan. One who negotiates bearer paper by delivery alone has no secondary liability. Only an indorser adds his credit to the instrument when he negotiates the instrument.

UCC Section 3-416 provides that any person who transfers an instrument and receives consideration warrants he is entitled to enforce the instrument and the transfer is otherwise rightful. Tillman did not acquire title to the note by his theft. Therefore, he breached the warranty that he is entitled to enforce the instrument when he delivered the instrument to McGowan for value. A warranty is breached as soon as it is made or not at all. Tillman is liable to McGowan on the theory of breach of warranty.

McGowan’s rights against Armstrong. (1) indorser’s liability—no because there is no proper presentment and hence there is a discharge; if there was proper presentment and notice, Armstrong would be liable; (2) Transfer Warranty—this warranty was not given because consideration was not given.

8. On July 1, Anderson sold D’Aveni, a jeweler, a necklace containing imitation gems, which Anderson fraudulently represented to be diamonds. In payment for the necklace, D’Aveni executed and delivered to Anderson her promissory note for $25,000 dated July 1 and payable on December 1 to Anderson’s order with interest at 12 percent per annum. The note was thereafter successively indorsed in blank and delivered by Anderson to Bylinski,

by Bylinski to Conrad, and by Conrad to Shearson, who became a holder in due course on August 10.

On November 1, D’Aveni discovered Anderson’s fraud and immediately notified Anderson, Bylinski, Conrad, and Shearson that she would not pay the note when it became due.

Bylinski, a friend of Shearson, requested that Shearson release him from liability on the note, and Shearson, as a favor to Bylinski and for no other consideration, struck out Bylinski’s indorsement.

On November 15, Shearson, who was solvent and had no creditors, indorsed the note to the order of Frederick, his father, and delivered it to Frederick as a gift. At the same time, Shearson told Frederick of D’Aveni’s statement that D’Aveni would not pay the note when it became due. Frederick presented the note to D’Aveni for payment on December 1, but D’Aveni refused to pay. Thereafter, Frederick gave due notice of dishonor to Anderson, Bylinski, and Conrad. What are Frederick’s rights, if any, against Anderson, Bylinski, Conrad, and D’Aveni on the note?

Answer: Frederick may recover from D’Aveni, Conrad, or Anderson. As a holder in due course, Shearson could have recovered against Anderson, Bylinski, Conrad, and D’Aveni. Anderson’s fraud would not have been a defense to D’Aveni against Shearson.

It was fraud in the inducement, a personal defense, rather than fraud in the execution.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 26: Liability of Parties

By striking Bylinski’s indorsement, Shearson discharged Bylinski. Consideration was not required. The holder may effect discharge in any manner apparent on the face of the instrument or the endorsement. See UCC Section 3-604. Bylinski’s discharge was obvious upon examination of the note. Frederick is bound by Shearson’s cancellation.

Discharging Bylinski without Conrad’s consent under prior Article 3 acted also as a discharge of subsequent indorsers, who relied on Bylinski’s signature and whose right of recourse against Bylinski has been destroyed. UCC Section 3-606. Revised Article 3, UCC Section 3-605(b), does not follow this rule and thus Conrad’s liability would not be discharged.

As a transferee from Shearson, however, Frederick has rights as a holder in due course. Under the shelter doctrine, a donee acquires a donor’s rights unless the transferee was a party to the fraud affecting the note. UCC Section 3-203(b). Frederick may recover on the note from D’Aveni, Anderson, or Conrad. Their liability is not joint but several.

The problem does not seek an answer to whether Frederick could recover from Shearson. Shearson would not be liable to Frederick on a warranty because Shearson did not receive consideration from Frederick. However, Shearson would be liable for payment of the note on his indorsement. UCC Section 3-415.

9. Jack stole a check made out to the order of Bertha. Jack forged Bertha’s name on the back and made the instrument payable to himself. Jack then transferred the check to Sun for cash by signing his name on the back of the check in Sun’s presence. Sun was unaware of any of the facts surrounding the theft or forged indorsement and presented the check for payment. Central County Bank, the drawee bank, paid it. Who will bear the loss? Explain.

Answer: Jack will ultimately bear the risk of loss if he can be found and is solvent. If not, Sun will bear the risk. Sun will have a cause of action for breach of transferor’s warranty for the forged indorsement against Jack. By forging the indorsement Jack breached the transferor’s warranty of entitled to enforce and authentic and authorized signatures. In addition, the forged indorsement destroys all future parties of the right of being a holder—to be a holder you must possess an instrument with all necessary indorsements.

Further, when Sun presented the instrument for payment to Central County Bank, they presented the Bank with presenter’s warranty. The warranty on presentation includes the warranty that all indorsements are genuine; this warranty was breached by Sun. Thus, Central County Bank has a successful cause of action against Sun. 10. R & A Concrete Contractors, Inc., executed a promissory note that identifies both R & A Concrete and Grover Roberts as its makers. On the reverse side of the note, the following appears: “X John Ament Sec. & Treas.” National Bank of Georgia, the payee, now sues both R & A Concrete and Ament on the note. What rights does National Bank have against R & A and Ament?

Answer: Judgment for National Bank of Georgia against Ament and R & A. Even though an instrument may name the person represented, the one who signs in a representative capacity may still be personally liable, if, by his manner of signing in a representative capacity, he does not clearly indicate that he is signing in a representative capacity. The complete correct name of the corporate defendant maker was not utilized here. Ament indorsed the note on its reverse side, rather than on the line for the maker on the face, but he or someone else may have considered there to

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 26: Liability of Parties

be insufficient space in which to indorse on the face of the note. National Bank of Georgia v. Ament, 27 Ga. App. 838, 195 S.E. 2d 202 (1973). Grover Roberts would also be liable on the instrument as a maker.

NOTE—Revised article 3 rules about an agent signing in a representative manner does not apply here because the instrument was not a check.

11. On August 10, 2021, Theta Electronic Laboratories, Inc. executed a promissory note to George and Marguerite Thomson. Six other individuals, Gerald Exten, Emil O’Neil, James Hane, and their wives also indorsed the note. The Thomsons then transferred the note to Hane on November 26, 2023. Although a default occurred at this time, it was not until April 2024 that Hane gave notice of the dishonor and made a demand for payment on the Extens as indorsers. Are the Extens liable under their indorser’s liability? Explain.

Answer: Judgment for the Extens. Unless an indorsement otherwise specifies (as by words such as “without recourse”), every indorser agrees that upon presentment, dishonor, and any necessary notice of dishonor he will pay the instrument according to its terms at the time of his indorsement to the holder or to any subsequent indorser who pays it. Generally, presentment for payment and notice of any dishonor are necessary to charge any indorser, and unless either is waived or excused, an unreasonable delay will discharge the indorser.

Here, Hane waited for an unreasonable period of eighteen months until he gave notice of the dishonor and presented the note to the Extens for payment. This was far beyond the requirement that notice of dishonor be given by persons other than banks before midnight of the third business day after dishonor or receipt of notice of dishonor. Hane v. Exten, 255 Md. 668, 259A. 2d 290 (1969). The O’Neils were never given notice of the default and are thus not liable.

12. Attorney Eliot Disner tendered a check for $100,100 to Sidney and Lynne Cohen. In drawing the check, Disner was serving as an intermediary for his clients, Irvin and Dorothea Kipnes, who owed the money to the Cohens as part of a settlement agreement. The Kipneses had given Disner checks totaling $100,100, which he had deposited into his professional corporation’s client trust account. After confirming with the Kipneses’ bank that their account held sufficient funds, Disner wrote and delivered a trust account check for $100,100 to the Cohens’ attorney, with this note: “Please find $100,100 in settlement (partial) of Cohen v. Kipnes, et al[.] Per our agreement, delivery to you constitutes timely delivery to your clients.” Also typed on the check was a notation identifying the underlying lawsuit. Without Disner’s knowledge, the Kipneses stopped payment on their checks, leaving insufficient funds in the trust account to cover the check to the Cohens. The trust account check therefore was not paid due to insufficient funds; the Kipneses declared bankruptcy; and the Cohens served Disner and his professional corporation with demand for payment. The Cohens sought the amount written on the check plus a $500 statutory penalty. Explain who should prevail and why.

Answer: Decision for Disner. The trial court entered summary judgment for Disner, reasoning he is not liable on the check because he was a mere conduit or agent for transferring money from the Kipneses to the Cohens. The Cohens appealed from the judgment. California Civil Code § 1719, subdivision (a) provides in part that any person who draws a check that is dishonored due to insufficient funds shall be liable to the payee for the amount owing upon the check and treble damages of at least $100, not to exceed $500.The Cohens do not appeal that Disner was a mere conduit or agent for transferring funds. They contend his representative status and motivations for

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 26: Liability of Parties

transferring the funds are irrelevant. According to the Cohens, § 1719 imposes strict liability against the [drawer] of a check drawn on an account lacking sufficient funds.

Their contention of strict liability is based on legislative omission. While the UCC permits the drawer of a dishonored check to prove that he signed in a representative capacity and that the holder in due course took the check with notice of the representative’s lack of liability (UCC, § 3–402, subd. (b)(2), sometimes hereinafter referred to as the “representative capacity” defense), § 1719 does not mention this defense.

Nothing in § 1719 affirmatively supports the Cohens’ contention that the “representative capacity” and other UCC defenses were written out of § 1719. On the contrary, the express language of subdivision (a) compels us to the opposite conclusion. By acknowledging there must be an enforceable obligation to pay, § 1719 echoes the UCC, which precludes recovery where the payee has no “right to enforce the obligation of a party to pay an instrument.” (UCC, § 3–305, subd. (a).) If the drawer has no enforceable obligation to pay a dishonored check, there is no amount “owing upon that check” under the plain language of § 1719.

The court rejected the Cohens’ assertion in their reply brief that the “representative capacity” defense is inapplicable here because the conditions of UCC § 3 402, subdivision (c) have not been met. That subdivision provides: “If a representative signs the name of the representative as drawer of a check without indication of the representative status and the check is payable from an account of the representative person who is identified on the check, the signer is not liable on the check if the signature is an authorized signature of the represented person.”

According to the official code comment on that subdivision: “Subdivision (c) is directed at the check cases. It states that if the check identifies the represented person, the agent who signs on the signature line does not have to indicate agency status. Virtually all checks used today are in personalized form, which identify the person on whose account the check is drawn. In this case, nobody is deceived into thinking that the person signing the check is meant to be liable.

The Cohens’ assertion is that because UCC § 3 402, subdivision (b)(2)’s “representative capacity” defense is “subject to” subdivision (c), Disner may not be relieved of liability unless he fulfills the requirements of the subdivision (c) defense. subdivisions (b)(2) and (c)should not be read in that restrictive manner. Any finding of liability under UCC § 3 402, subdivision (b)(2) is subject to subdivision (c)’s additional exception that the representative is not liable if he signed his name on a personalized check identifying the account of the represented person. Subdivision (c) expands rather than contracts the representative’s defenses. § 1719, by its clear and unambiguous language, permits the drawer of a dishonored check to prove he has no enforceable obligation to pay the check. Cohen v. Disner, California Court of Appeal, 1995, 36 Cal. App. 4th 855, 42 Cal. Rptr. 2d 782, 27 UCC Rep. Serv. 2d 540, http://scholar.google.com/scholar_case?case=11503422137111626726&hl=en&as_sdt=2&a s_vis=1&oi=scholarr 13. Vincent Medina signed a check in the amount of $34,348 written on the account of First Delta Financial, a family corporation owned and controlled by Medina. His corporate title did not appear before his signature. He issued the check to James G. Wyche. The check was dishonored for insufficient funds. First Delta Financial is in bankruptcy. Wyche contends that Medina is personally liable because he signed the check without indicating

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 26: Liability of Parties

his corporate capacity below his signature. Medina argues that he is not personally liable on account of having signed the check. Explain who should prevail.

Answer: Medina is not personally liable on account of having signed the check. Medina v. Wyche, 796 So. 2d 622 (Florida District Court of Appeals, 3rd Dist., 2001).

Medina is not personally liable for the corporate check, which was written on September 9, 1998. The UCC provides, in part: 673.4021. Signature by representative ....

(3) If a representative signs the name of the representative as drawer of a check without indication of the representative status and the check is payable from an account of the represented person who is identified on the check, the signer is not liable on the check if the signature is an authorized signature of the represented person. § 673.4021(3), Fla. Stat. (1997).

The official comment makes clear that the revision is intended to address the situation now before us: 3. Subsection [3] is directed at the check cases. It states that if the check identifies the represented person the agent who signs on the signature line does not have to indicate agency status. Virtually all checks used today are in personalized form which identify the person on whose account the check is drawn. In this case, nobody is deceived into thinking that the person signing the check is meant to be liable. This subsection is meant to overrule cases decided under former Article 3 such as Griffin v. Ellinger, 538 S.W. 2d 97 (Texas 1976).

Thus, the UCC “puts the Code’s legal stamp of approval on the obvious intent of the transaction—that the company’s check binds only the company, even if an agent signs in her own name.”

ANSWERS TO “TAKING SIDES” PROBLEMS Saul sold goods to Bruce, warranting that the goods were of a specified quality. The goods were not of the quality warranted, however, and Saul knew this at the time of the sale. Bruce drew and delivered a check payable to Saul and drawn on Third National Bank in the amount of the purchase price. Bruce subsequently discovered the goods were faulty and stopped payment on the check. Third National refused to pay Saul on the check. a. What are the arguments that Saul can recover (1) from Bruce and (2) from Third National? b. What are the arguments that (1) Bruce should prevail? and (2) Third National should prevail? c. Who should prevail? Why? Answer: (a) A check should be honored and then any defenses from the underlying transaction should be resolved in separate litigation. (b) Bruce received defective goods, and any defense from the underlying transaction should be valid against Saul. As a drawee, Third National has no liability on the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 26: Liability of Parties

instrument until it accepts it. Since Third National did not accept the check, it is not liable to Saul, the payee. (c) Saul cannot recover from Bruce; Saul cannot recover from Third National. Although Bruce as the drawer of an unaccepted draft is obligated to pay the instrument upon its dishonor according to its terms at the time it was issued, Bruce will prevail because Saul committed a fraud in the underlying contract by misrepresenting the quality of the goods. A party to the underlying transaction is subject to defenses arising therefrom. Since the drawee, Third National never accepted the check, it is not liable to the payee, Saul.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 27: Bank Deposits, Collections, and Funds Transfers

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 27: Bank Deposits, Collections, and Funds Transfers

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ..............................................................................13

ANSWERS TO ETHICAL DILEMMA Can Embezzlement Ever Be a Loan?

1.

Were Susan’s actions unethical or illegal? Explain. Would Susan’s using the money for essential items, such as food or medicine, change your answer?

2. What should Susan have done?

3. What responsibility does the First Sandy Hill Bank have to its customers? In general, are banking procedures and standards established for the benefit of the bank or for that of the public?

4. If the bank teller had any idea that Susan had done something wrong, does the fact that he may have followed banking rules relieve him of any ethical responsibility?

Answer: 1. Susan’s actions were both unethical and illegal. Susan has taken funds that do not belong to her, and her act is, therefore, illegal and unethical. Specifically, as to the ethics of the situation, Susan has used her position of trust in an inappropriate manner. Even though she intended to, and eventually did, return the money, she has acted completely against any ethical or moral standards.

2. Student responses will vary. The instructor should encourage students to explain and justify answers.

3. As noted above, the First Sandy Hill Bank must inspect the check for changes, alterations, or unusual circumstances. As none were found they appropriately cashed the check. While it is true that banking procedures and standards serve as a protection for the bank, they also serve a very important social responsibility. They allow the public to have confidence in the banking system and promote the use of this system.

With the lack of confidence, commercial transactions as we know them today would be obsolete.

4. While recalling the answer to question #3 above, it should be noted that banking rules and regulations were not meant to provide a screen behind which the bank or its employees can hide. This same theory holds true for regulations in every industry. As an example, builders should not ethically allow sub-par construction to exist simply because they followed inspection regulations to the letter. What happens if there are no regulations to address a particular issue? Glenn Rifkin notes in an October 14, 1981,

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 27: Bank Deposits, Collections, and Funds Transfers

article in Computer World, “Are Corporate Codes Enough? Maybe Not,” that Information Systems professionals often find codes of conduct lacking in professional detail. Some firms do not even have a code. In fact, a May 1990 article in Across The Board, “Why A Corporate Code May Not Protect You,” Harvey Pitt and Karl Groskaufmanis, states that codes may not even provide legal protection. Compliance programs are helpful but not enough.

Michael Hyman, Robert Skipper, and Richard Tansey in “Ethical Codes Are Not Enough,” Business Horizons, March/April 1990, state that rules won’t aid in ethical behavior if profit can be earned by doing otherwise. They propose a checklist of questions to help people think through various situations. People must look inside to be ethical, not just hide behind rules.

In this case, if the bank teller had any idea that Susan had done something wrong, failing to act on this notion should not be protected by simply following banking regulations. The teller might be acting legally but definitely not ethically.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

On November 9, Jane Jones writes a check for $500 payable to Ralph Rodgers in payment for goods to be received later in the month. Before the close of business on November 9, Jane notifies the bank by telephone to stop payment on the check. On December 19, Ralph gives the check to Bill Briggs for value and without notice. On December 20, Bill deposits the check in his account at Bank A. On December 21, Bank A sends the check to its correspondent, Bank B. On December 22, Bank B presents the check through the clearinghouse to Bank C. On December 23, Bank C presents the check to Bank P, the payor bank. On December 28, the payor bank makes payment of the check final. Is Jane Jones’ stop payment order effective against the payor bank? Explain.

Answer: Decision for Bank P, the payor bank. Section 4-403(b) of the UCC provides that an oral stop payment order is binding upon the bank only for 14 days unless confirmed in writing within that period. There was no confirmatory writing by Jones.

2. Howard Harrison, a longtime customer of Western Bank, operates a small department store, Harrison’s Store. Because his store has few experienced employees, Harrison frequently travels throughout the United States on buying trips, although he also runs the financial operations of the business. On one of his buying trips, Harrison purchased two hundred sport shirts from Well-Made Shirt Company and paid for the transaction with a check on his store account with Western Bank in the amount of $3,000. Adams, an employee of Well-Made who deposits its checks in Security Bank, sloppily raised the amount of the check to $30,000 and indorsed the check, “Pay to the order of Adams from Pension Plan Benefits, Well-Made Shirt Company by Adams.” He cashed the check and cannot be found. Western Bank processed the check, paid it, and sent it to Harrison’s Store with the monthly statement. After briefly examining the statement, Harrison left on another buying trip for three weeks. a. Assuming the bank acted in good faith and the alteration was not discovered and reported to the bank until an audit was conducted thirteen months after Harrison’s Store had received the statement , explain who must bear the loss on the raised check. b. Assume that Harrison, who was unable to examine his statement promptly because of his buying trips, left instructions with the bank to carefully examine and to notify him of any item over $5,000 to be charged to his account; assume further that the bank

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nevertheless paid the item in his absence. Who bears the loss if the alteration is discovered one month after the statement was received by Harrison’s Store? If the alteration is discovered thirteen months later? Explain.

Answer: (a) Harrison’s Store must bear the loss. Section 4-406(f) of the UCC provides: “Without regard to care or lack of care of either the customer or the bank a customer who does not within one year after the statement or items are made available to the customer (subsection (a)) discover and report the customer’s unauthorized signature on or alteration on the item is precluded from asserting against the bank the unauthorized signature***or alteration.” (b) Security Bank must bear the loss. Section 4-406(e) of the UCC provides: if the “customer proves that the bank failed to exercise ordinary care…and that the failure substantially contributed to the loss, the loss is allocated” on a comparative negligence basis. Here, Security Bank did not follow Harrison’s explicit instruction and hence did not exercise ordinary care when it paid the item without contacting Harrison. The jury will have to allocate the loss based on comparative negligence.

Security Bank would also be liable if the alteration was discovered thirteen months later because it failed to exercise ordinary care pursuant to Harrison’s instructions.

3. Tom Jones owed Bank of Cleveland $10,000 on a note due November 17, with 1 percent interest due the bank for each day delinquent in payment. Jones issued a $10,000 check to Bank of Cleveland and deposited it in the night vault the evening of November 17.

Several days later, he received a letter saying he owed one day’s interest on the payment because of a one-day delinquency in payment. Jones refused because he said he had put the payment in the vault on November 17. Who is correct? Why? Answer: The Bank of Cleveland is correct. Assuming that the interest rate is within the state’s legal limits, Jones will have to pay the one per cent per day or one day’s delinquent payment. The bank may use November 18 as the day of receipt, pursuant to Section 4-108(a) “For the purpose of allowing time to process items, prove balance and make the necessary entries on its books to determine its position for the day, a bank may fix an afternoon hour of two p.m. or later as a cutoff hour for the handling of money and items and the making of entries on its books. (2) An item or deposit of money received on any day after a cutoff hour so fixed or after the close of the banking day must be treated as being received at the opening of the next banking day.”

4. Assume that Davis draws a check on Dallas Bank, payable to the order of Perkins; that Perkins indorses it to Cooper; that Cooper deposits it to her account in Houston Bank; that Houston Bank presents it to Dallas Bank, the drawee; and that Dallas Bank dishonors it because of insufficient funds. Houston Bank receives notification of the dishonor on Monday but, because of an interruption of communication facilities, fails to notify Cooper until Wednesday. Explain the result.

Answer: Houston Bank is a collecting bank. As such it has a duty to act timely. A collecting bank acts timely in any event if it takes proper action before its “midnight deadline” following receipt of the item, notice or payment. If the bank adheres to this standard, the timeliness of its action cannot be challenged. Although a reasonably longer time may be timely, the bank bears the burden of proof in such cases. Section 4-202 (b). The midnight deadline means midnight of the next banking day following the banking day on which the bank receives the item or notice. Section 4-104(a)(10). Thus, Houston Bank has until midnight of the day after receipt of notification of dishonor or midnight on Tuesday to act under the midnight deadline. Houston bank fails to notify

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 27: Bank Deposits, Collections, and Funds Transfers

Cooper until Wednesday. Thus, Houston bears the burden of proving that its failure to act until Wednesday was not in violation of its duty to act timely.

5. Jones, a food wholesaler whose company has an account with City Bank in New York City, is traveling in California on business. He finds a particularly attractive offer and decides to buy a carload of oranges for delivery in New York. He gives Saltin, the seller, his company’s check for $25,000 to pay for the purchase. Saltin deposits the check, with others he received that day, with his bank, the Carrboro Bank. Carrboro Bank sends the check to Downs Bank in Los Angeles, which in turn deposits it with the Los Angeles Federal Reserve Bank (L.A. Fed). The L.A. Fed sends the check, with others, to the New York Federal Reserve Bank (N.Y. Fed), which forwards the check to City Bank, Jones’s bank, for collection. a. Is City Bank a depositary bank? A collecting bank? A payor bank? b. Is Carrboro Bank a depositary bank? A collecting bank? c. Is the N.Y. Fed. an intermediary bank? d. Is Downs Bank a collecting bank?

Answer: (a) City Bank is not a depositary bank. Section 4-105(2). City Bank is not a collecting bank. Section 4-105(5). City Bank is a payor bank. Section 4-105(3). (b) Carrboro Bank is a depositary bank. Section 4-105(2) Carrboro Bank is a collecting bank. Section 4-105(5). (c) The N.Y. Fed is an intermediary bank. Section 4-105(4). (d) Downs Bank is a collecting bank. Section 4-105(5).

6. On April 1, Moore gave Pipkin a check properly drawn by Moore on Zebra Bank for $5,000 in payment of a painting to be framed and delivered the next day. Pipkin immediately indorsed the check and gave it to Yeager Bank as payment in full of his indebtedness to the bank on a note he previously had signed. Yeager Bank canceled the note and returned it to Pipkin.

On April 2, upon learning that the painting had been destroyed in a fire at Pipkin’s studio, Moore promptly went to Zebra Bank, signed a printed form of stop payment order, and gave it to the cashier. Zebra Bank refused payment on the check upon proper presentment by Yeager Bank. a. What are the rights of Yeager Bank against Zebra Bank? b. What are the rights of Yeager Bank against Moore? c. Assuming that Zebra Bank inadvertently paid the amount of the check to Yeager Bank and debited Moore’s account, what are the rights of Moore against Zebra Bank?

Answer: (a) Yaeger Bank cannot recover anything from Zebra Bank. In the absence of certification, a drawee bank is not liable to the holder of a check for failure to honor it, despite the fact that the action of the bank in refusing to pay the check was unjustified and that the holder sustained a loss as a result thereof. This is because the holder of a check is a stranger to the bank with whom the bank has no direct contractual relationship. Furthermore, the holder of a check ordinarily has no right to enforce the duty that the bank owes to its depositor on any theory that the check operated as an assignment of the depositor’s rights. (b) Yaeger Bank can recover $5,000 from Moore. Yeager Bank is a holder in due course as it gave value in good faith, without reason to question its authenticity, and without notice that the instrument was overdue or had been dishonored or of any defenses against it. Taking for value includes taking the check in payment of an

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 27: Bank Deposits, Collections, and Funds Transfers

antecedent claim. Section 3-303. The failure of the payee to carry out the contract is not a defense to a holder in due course. Section 3-305.

The drawer of a check, like an indorser, makes a contract to pay any holder who takes it up. Normally, the liability of the drawer of a check is similar to that of an indorser. The drawer engages that upon dishonor of the check and any necessary notice of dishonor will pay the amount of the check to the holder or to any indorser who takes it up. Section 3-413(2). (c) Moore cannot recover anything from Zebra Bank if, by inadvertence, Zebra Bank paid the check contrary to Moore’s stop payment order. The failure of the drawee bank to honor a timely stop payment order is a breach of its contract of deposit.

Section 4-403 requires that the stop payment order be received at such time and in such manner as to afford the bank a reasonable opportunity to act on it prior to any other action with respect to the check. The position taken by this section is that stopping payment is a service which depositors expect and are entitled to receive from banks notwithstanding its difficulty, inconvenience, and expense. The inevitable occasional losses through failure to stop should be borne by the banks as a cost of the business of banking. Since the stop payment order was timely received, Zebra Bank breached its contract of deposit by failure to honor it.

However, a depositor cannot compel the drawee bank to restore a deposit to t account unless he can establish not only that the payment was improper, but also that he sustained a loss by reason of the improper payment. Section 4-403(c) places the burden upon the customer to establish the amount of the loss and Section 4-407 provides for the drawee bank’s right to subrogation on improper payment.

To summarize, the stop payment order is binding on Zebra Bank. When Zebra Bank pays a check over such a stop order it is prima facie liable, but the burden of establishing the fact and amount of loss from such payment is on Moore. Moreover, Zebra Bank’s defense in the problem is that Moore suffered no loss because he would have been liable to a holder in due course (Yaeger Bank) in any event. Payment can be stopped, but if it is, Moore is liable and the sound rule is that Zebra Bank is subrogated to the rights of Yaeger Bank. Section 4-403, Comment 1. Since Yaeger Bank is a holder in due course, Moore is unable to sustain a loss and cannot recover anything from Zebra Bank.

7. As payment in advance for services to be performed, Acton signed and delivered the following instrument: December 1, 2023 LAST NATIONAL BANK MONEYVILLE, STATE X Pay to the order of Olaf Owen $10,500.00 Ten Thousand Five Hundred Dollars For services to be performed by Olaf Owen starting on December 6, 2023. (signed) Arthur Acton Owen requested and received Last National Bank’s certification of the check even though Acton had only $9,000 on deposit. Owen indorsed the check in blank and delivered it to Dan Doty in payment of a preexisting debt.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 27: Bank Deposits, Collections, and Funds Transfers

When Owen failed to appear for work, Acton issued a written stop payment order ordering the bank not to pay the check. Doty presented the check to Last National Bank for payment. The bank refused payment.

What are the bank’s rights and liabilities relating to the transactions described?

Answer: The instrument is negotiable. The fact that there is a statement on the check of the consideration for which it was issued does not affect its negotiable character.

The fact that the consideration for which the check was given is executory in nature, that it is for work to be performed in the future, does not make the order conditional.

Although a bank is under no duty to certify a check, if it does certify a check this amounts to an acceptance of the instrument by the drawee bank. Section 3-409(d) states that certification of a check is acceptance. The drawer and all prior indorsers are discharged. Sections 3-414 (c), 3-415 (d). Section 3-401 (a) states that acceptance is the drawee’s signed engagement to honor the draft as presented. It must be written on the draft.

When the drawee bank certified the check, this amounted to an acceptance which resulted in the drawee-acceptor becoming primarily liable for the payment on the instrument. The acceptor has contractually obligated itself to pay the $10,500 irrespective of the drawer’s account. The fact that the drawer had only $9,000 on deposit does not affect the liability of the acceptor to third parties.

There is no right to stop payment after certification of a check or other acceptance of a draft.

The check payable to the order of Owen was order paper. When Owen indorsed a check in blank and delivered it to Doty such acts constituted a negotiation of the instrument. When Doty presented the check to the bank for payment, he fulfilled the requirements of a holder in due course. Doty gave value for the instrument in accordance with the provisions of Section 3-303 which states that a holder takes the instrument for value when he takes it in payment of an antecedent claim against any person whether or not the claim is due.

The fact that Doty knew the instrument had been given for executory consideration does not put him on notice of any defense or right of others in the instrument.

Neither Doty nor Owen breached any warranty to the drawee bank. The acceptance by the bank by way of certification was final and not subject to rescission under Section 3-418. The acceptor may not rescind the acceptance on the theory of mutual mistake of fact in leading to the acceptance.

A bank that pays an overdraft or becomes obligated to pay an overdraft by an acceptance or certification has the legal right to look to the drawer for reimbursement.

A payment on an overdraft or the acceptance of an overdraft results into a loan so far as the relationship between the bank and drawer are concerned. The bank has the right to debit the drawer’s account to the extent of the balance in his account ($9,000) and to proceed by way of the creditor against the drawer for the balance of $1,500. If the bank has in fact paid the $1,500, the bank is entitled to interest at the legal rate on this amount until the drawer pays the bank $1,500.

8. Jones drew a check for $1,000 on The First Bank and mailed it to the payee, Thrift, Inc. Caldwell stole the check from Thrift, Inc.; chemically erased the name of the payee; and inserted the name of Henderson as payee. Caldwell also increased the amount of the check to $10,000 and, by using the name of Henderson, negotiated the check to Willis.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 27: Bank Deposits, Collections, and Funds Transfers

Willis then took the check to The First Bank, obtained its certification on the check, and negotiated the check to Griffin, who deposited the check in The Second National Bank for collection. The Second National forwarded the check to the Detroit Trust Company for collection from The First Bank, which honored the check. Griffin exhausted her account in The Second National Bank, and the account was closed. Shortly thereafter, The First Bank learned that it had paid an altered check. What are the rights of each of the parties?

Explain.

Answer: Jones may compel the First Bank to re-credit his account for the entire amount of the certified check, or, in alternative, Thrift Inc. may recover the original amount of the check from the payor-bank in an action for conversion, and Jones may then compel the payor-bank to recredit his account for the difference between the original amount of the check and the altered amount. The payor-bank may not maintain an action for breach of warranty against Griffin, the Second National Bank, and the Detroit Trust Company. However, the payor-bank has a valid cause of action against Willis and Caldwell for breach of warranty of entitlement to enforce and that the check was altered.

First, it is the general rule that the payor bank may charge against the account of its depositor only those items which are properly payable, i.e., the payor bank must comply with Jones’ command to pay Thrift Inc., and any payment to Henderson is not consistent with this command and renders the payor-bank liable for breach of contract. Section 4-401, UCC. If the real payee, Thrift Inc., had altered the check by increasing the amount and had then indorsed to Griffin, Griffin as a holder in due course, would be entitled to keep the original amount of the check and the First Bank would have correctly paid the original amount. Section 4-401(d)(1).

Jones may sue only the payor-bank and may not sue the depository and other collecting banks.

Second, the payee who received the check and had a property right in it may sue the payor-bank on a conversion cause of action because it paid on a forged indorsement of the payee. Although it is true that no one signed the name of the payee as in the typical forgery case, the unauthorized erasure of the payee's name and the substitution of another name as a payee constitutes a forgery. The payee may sue the payor bank because it paid on a forged indorsement of the payee, and the measure of recovery against the payor banks is the original amount of the check. Section 3-420.

Section 3-420(c) also provides that the true owner of the check may sue the depository or collecting bank for conversion when it makes collection of a check bearing a forged indorsement. However, the depository bank is liable for only the amount of any proceeds of the check that it still has in its possession. Under the facts, Griffin withdrew all of the funds from his account, and it was closed; hence, the Second National Bank would not be liable to Thrift, Inc. Finally, under the UCC, a party receiving payment on an accepted draft does not warrant that it is without alteration. In addition, the UCC also provides that the acceptor engages that he will pay the instrument according to its tenor at the time of his engagement and that the acceptor admits as against all subsequent parties the existence of the payee and his then capacity to indorse.

Thus, we have the following result: The First Bank certified the check when it was presented by Willis. This certification constituted a promise that the bank would pay the amount then appearing on the check and that Henderson existed and had capacity to indorse. Griffin took the check after it was certified and consequently when he

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 27: Bank Deposits, Collections, and Funds Transfers

presented it for payment through the depository bank, he made no warranties regarding alterations to the payor-bank.

The UCC provides that each collecting bank (here the Second National Bank and the Detroit Trust Company) warrants to the payor-bank that it has the right to enforce the item, and this could appear to make both of them liable because of the forged indorsement. However, this general rule is subservient to the rule that when a check has been altered and then certified, the certifying bank becomes bound according to the tenor of its acceptance. Further, when the collecting banks are operating in good faith and they have taken the check after the acceptance, they do not warrant to the payor-bank that the check has not been altered. Article 4 places the collecting banks in the same position as an individual holder who has taken the check after certification, and as a result, neither bank would be liable to the First Bank.

Assuming that the payor-bank is unable to recover the proceeds of the certified check from Griffin and the banks, it may recover the proceeds on a breach of warranty theory from Willis and from Caldwell, assuming that Caldwell is solvent and can be found.

Caldwell will be liable to the First Bank and to Willis if he is forced to pay the payorbank. Caldwell, even though he used a fictitious name, is liable because the UCC provides that the signature may be made by use of any name. Accordingly, Caldwell is liable under the assumed name of Henderson. Caldwell’s liability is predicated on the theory of breach of warranty. Under UCC, Caldwell warrants to the payor-bank that he was entitled to enforce the check and, of course, he did not. He also warrants that the check has not been altered, and since he altered the check, he has breached this warranty to the payor-bank.

Similarly, Caldwell is deemed by the UCC to have warranted to Willis that he (Caldwell) had good title to the check, that all signatures are genuine and that it had not been altered. Since all three warranties were breached, Caldwell is liable to Willis.

9. On July 21, Boehmer, a customer of Birmingham Trust, secured a loan from that bank for the principal sum of $5,500 in order to purchase a boat allegedly being built for him by A. C. Manufacturing Company, Inc. After Boehmer signed a promissory note, Birmingham Trust issued a cashier’s check to Boehmer and A. C. Manufacturing Company as payees. The check was given to Boehmer, who then forged A. C. Manufacturing Company’s indorsement and deposited the check in his own account at Central Bank. Central Bank credited Boehmer’s account and then placed the legend “P.I.G.,” meaning “Prior Indorsements Guaranteed,” on the check. The check was presented to and paid by Birmingham Trust on July 22. When the loan became delinquent in March of the following year, Birmingham Trust contacted A. C. Manufacturing Company to learn the location of the boat. They were informed that it had never been purchased, and they soon after learned that Boehmer had died on January 24 of that year. Can Birmingham Trust obtain reimbursement from Central Bank under Central’s warranty of prior indorsements? Explain.

Answer: Decision for Birmingham Trust based upon breach of the guarantee of prior indorsements. If Central Bank had not guaranteed the indorsements with the “PIG” stamp, however, it would probably not be liable under the presenting bank’s warranties, because a presenting bank only warrants on presentment that (1) it has good title or is authorized to obtain payment; (2) it has no knowledge that the signature of the maker or drawer is unauthorized; and (3) that the item has not been materially altered. These warranties are not as extensive as the transferor’s warranties. Birmingham Bank has no knowledge that the signature of A.C.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 27: Bank Deposits, Collections, and Funds Transfers

Manufacturing is unauthorized and thus would not be in breach of the warranties on presentment were it not for the “PIG” stamp it placed on the instrument. Unlike the presenter, the transferor warrants that all signatures are genuine and authorized. If the transfer warranties applied, the warranty would have been breached even without the “PIG” stamp. Birmingham Trust Nat'l Bank v. Central Bank & Trust Co., 44 Ala. App. 630, 275 So. 2d 148 (1973). [Revised warranties are covered in Sections 4-207 and 4208.]

10. Jason, who has extremely poor vision, went to an automated teller machine (ATM) to withdraw $200 on February 1. Joshua saw that Jason was having great difficulty reading the computer screen and offered to help. Joshua obtained Jason’s personal identification number and secretly exchanged one of his old credit cards for Jason’s ATM card. Between February 1 and February 15, Joshua withdrew $1,600 from Jason’s account. On February 15, Jason discovered that his ATM card was missing and immediately notified his bank. The bank closed Jason’s ATM account on February 16, by which time Joshua had withdrawn another $150. What is Jason’s liability, if any, for the unauthorized use of his account?

Answer: Jason’s liability is only $50. The EFTA provides that a consumer's liability for an unauthorized electronic funds transfer is limited to a maximum of $50 if the consumer notifies the bank within two days after he learns of the loss or theft. In this case, Jason informed the bank the day that he discovered the card was missing.

11. Advanced Alloys, Inc., issued a check in the amount of $2,500 to Sergeant Steel Corporation. The check was presented for payment fourteen months later to the Chase Manhattan Bank, which made payment on the check and charged Advanced Alloys’s account. Can Advanced Alloys recover the payment made on the check? Why or why not?

Answer: No, Advanced Alloys cannot recover from Chase Manhattan. A bank is under no obligation to a customer having a checking account to pay a check, other than a certified check, which is presented more than six months after its date, but it may charge its customer's account for a payment made thereafter in good faith. Good faith is defined as honesty in fact in the conduct or transaction concerned. Chase Manhattan acted in good faith when it paid the check presented fourteen months after its issuance without inquiry of the depositor Advanced Alloys because it did not actually know that Advanced Alloys did not want the check paid. Advanced Alloys, Inc. v. Sergeant Steel Corp., 72 Misc. 2d 614, 340 N.Y.S. 2d 266 (1973).

12. Laboratory Management deposited into its account at Pulaski Bank a check issued by Fairway Farms in the amount of $150,000. The date of deposit was February 5. Pulaski, the depositary bank, initiated the collection process immediately by forwarding the check to Worthen Bank on the sixth. Worthen sent the check on for collection to M Bank Dallas, and M Bank Dallas, still on February 6, delivered the check to M Bank Fort Worth. That same day, M Bank Fort Worth delivered the check to the Fort Worth Clearinghouse.

Because TAB/West Side, the drawee/payor bank, was not a clearinghouse member, it had to rely on TAB/Fort Worth for further transmittal of the check. TASI, a processing center used by both TAB/Fort Worth and TAB/West Side, received the check on the sixth and processed it as a reject item because of insufficient funds. On the seventh, TAB/West Side determined to return the check unpaid. TASI gave M Bank Dallas telephone notice of the return on February 7, but physically misrouted the check. Because of this, M Bank Dallas did not physically receive the check until February 19. However, M Bank notified Worthen by telephone on the fifteenth of the dishonor and return of the check. Worthen received the check on the twenty-first and notified Pulaski by telephone on the twenty-second.

Pulaski actually received the check from Worthen on the twenty-third. On February 22 and 23, Laboratory Management’s checking account with Pulaski was $46,000. Pulaski did not

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 27: Bank Deposits, Collections, and Funds Transfers

freeze the account because it considered the return to be too late. The Laboratory Management account was finally frozen on April 30, when it had a balance of $1,400.

Pulaski brings this suit against TAB/Fort Worth, Tab/Dallas, and TASI, alleging their notice of dishonor was not timely relayed to Pulaski. Explain whether Pulaski is correct in its assertion.

Answer: Decision for Pulaski Bank & Trust. A payor bank’s liability is for the full amount of a check, whereas the collecting bank’s liability is for the full amount minus the loss that would not have occurred if the collecting bank had used ordinary care.

TAB Ft. Worth was acting as TAB West Side’s transferor bank, and not its agent. TASI, acting as an agent for both TAB Ft. Worth and TAB West Side, made the appropriate ledger entries between West Side and Ft. Worth, reversing the transaction before midnight on February 7. TAB West Side had timely given notice of dishonor to its transferor/collecting bank prior to its midnight deadline. Pulaski Bank & Trust v. Texas American Bank, 759 S.W. 2d 723 (Tex. App. 1988).

13. On November 22, a $25,000 check drawn on the First National Bank of Nevada was deposited with Lincoln First Bank-Central. Lincoln forwarded the check to Nevada via Hartford National Bank and Trust Company and Wells Fargo Bank. Nevada received the check on Friday, December 10, and discovered that it was drawn on insufficient funds.

That same day, Nevada informed Wells Fargo by telephone that the check had been dishonored. On Monday, December 13, Nevada mailed the check to Wells Fargo, which received it on Friday, December 17. Upon receiving the check, Wells Fargo promptly wired notice of the dishonor to Hartford and mailed the check to Hartford. Hartford received the check on December 21 and mailed it to Lincoln, which received it on December 27. Lincoln refused to accept the check, claiming that the notice of dishonor had arrived too late.

Wells Fargo, which eventually ended up with the check and the $25,000 loss, brought an action to reverse the $25,000 credit it had given to Hartford in the course of handling the check. Decision?

Answer: Summary judgment for Hartford. Wells Fargo failed to give Hartford timely notice of Nevada’s dishonor of the check and therefore may not recover from Hartford.

A bank is generally required to provide proper notice before the “midnight deadline,” or midnight of the next banking day following the banking day on which it receives notice.

Wells Fargo did not give notice to Hartford before the December 13 midnight deadline after receiving notice of Nevada’s dishonor by telephone on December 10. Wells Fargo, however, did give notice before the appropriate midnight deadline after receiving written notice from Nevada on December 17. Federal Reserve Operating Circular No. 6, which governed this transaction, required payor banks, such as Nevada, to wire notice when they dishonor items in excess of $1,000, where “wire” expressly includes “telephonic” notices. Therefore, Nevada’s notice by telephone to Wells Fargo was proper notice of dishonor and obligated Wells Fargo to give notice to Hartford before the midnight deadline on December 13.

14. On Tuesday, June 11, Siniscalchi issued a $200 check on the drawee, Valley Bank. On Saturday morning, June 15, the check was cashed. This transaction, as well as others taking place on that Saturday morning, was not recorded or processed through the bank’s bookkeeping system until Monday, June 17. On that date, Siniscalchi arrived at the bank at 9:00 a.m. and asked to place a stop payment order on the check. A bank employee checked the bank records, which at that time indicated the instrument had not cleared the bank. At 9:45 a.m., she gave him a printed notice confirming his request to stop payment. May Siniscalchi recover the $200 paid on the check? Explain.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 27: Bank Deposits, Collections, and Funds Transfers

Answer: No, Siniscalchi may not recover on the check; judgment for Valley Bank. A customer has a right to stop payment on a check, but the stop payment order must be received at such time and in such manner as to afford the bank a reasonable opportunity to act on the stop payment. Here, the check was cashed before the stop payment order was issued, and hence the stop payment order did not effectively bind Valley Bank.

15. Tally held a savings account with American Security Bank. On seven occasions, Tally’s personal secretary, who received his bank statements and had custody of his passbook, forged Tally’s name on withdrawal slips that she then presented to the bank. The secretary obtained $52,825 in this manner. Three years after the secretary’s last fraudulent withdrawal, she confessed to Tally, who promptly notified the bank of the issue. Can Tally recover the funds from American Security Bank? Explain.

Answer: Partial summary judgment for American Security Bank granted. The UCC imposes a duty upon a bank customer to inspect promptly statements and items either sent to the customer or reasonably made available to him. A customer must report any unauthorized signature on an item within one year from the time the item is made available. Tally first notified the bank of the irregularities some three years after his secretary’s last withdrawal. Tally claims, however, that the one-year time limit only holds when the periodic account statement is accompanied by the items supporting it.

In this case, the savings withdrawal slips were retained on file by the bank. They were, however, effectively made available to Tally when the statement was sent. Tally should have reviewed the statement and reported any problems to the bank. Since he did not do so within the specified one-year time period, he cannot recover for the allegedly forged withdrawal orders paid by the bank.

16. Morvarid Kashanchi and her sister, Firoyeh Paydar, held a savings account with Texas Commerce Medical Bank. An unauthorized withdrawal of $4,900 from the account was allegedly made by means of a telephone conversation between some other unidentified individual and a bank employee. Paydar learned of the transfer of funds when she received her bank statement and notified the bank that the withdrawal was unauthorized. The bank, however, declined to recredit the account for the $4,900 transfer. Kashanchi brought an action against the bank, claiming that the bank had violated the Electronic Funds Transfer Act (EFTA). The bank defended by arguing that the Act did not apply. Does the EFTA govern the transaction? Explain.

Answer: The act defines an “electronic funds transfer” to include “transfers initiated by telephone,” with the exception of “any transfer of funds which is initiated by a telephone conversation between a consumer and an officer or employee of a financial institution which is not pursuant to a prearranged plan and under which periodic or recurring transfers are not contemplated…” The unauthorized withdrawal of $4,900 from the Kashanchi account falls under this exception and is therefore not covered by the act. Although the act does not explicitly address informal personal phone transfers, the lack of such discussion suggests an intent not to include these under the act’s protection. Moreover, the act was passed to fill gaps in existing legislation in the consumer protection area. For example, a consumer previously might have had no action against a financial institution if an individual had made an unauthorized withdrawal from the consumer’s account at an automatic teller machine. In such instances, the bank has no way of knowing that the transfer is unauthorized. The act was passed to protect consumers in these cases. Kashanchi, however, may have a negligence or breach of contract action against the Texas bank, for the bank employee made no attempt to obtain a positive identification of the phone caller who requested the unauthorized withdrawal.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 27: Bank Deposits, Collections, and Funds Transfers

17. During a period of almost two years, Great Lakes Higher Education Corp. (Great Lakes), a not-for-profit student loan servicer, issued 224 student loan checks totaling $273,152.88.

The checks were drawn against Great Lakes’s account at First Wisconsin National Bank of Milwaukee (First Wisconsin). Each of the 224 checks was presented to Austin Bank of Chicago (Austin) without indorsement of the named payee. Austin Bank accepted each check for purposes of collection and without delay forwarded each check to First Wisconsin for that purpose. First Wisconsin paid Austin Bank the face amount of each check even though the indorsement signature of the payee was not on any of the checks.

Has Austin Bank breached its warranty to First Wisconsin and Great Lakes due to the absence of proper indorsements? Explain.

Answer: Negligence claims and breach of warranty to a third party are dismissed with prejudice. [Author’s Note: This case applies Revised Article 3 and 4.] Plaintiffs have claimed negligence in the presentment of checks as a theory of recovery. Presentment under the UCC means “a demand made by or on behalf of a person entitled to enforce an instrument…” UCC Section 3-501. Under UCC Section 4-202, a collecting bank such as Austin is required to use ordinary care in the presentment of checks or the sending of checks for presentment. Comment Two to this section indicates that where the collecting bank is itself presenting the check for payment, it must use ordinary care with respect to the time and manner of the presentment. However, where the collecting bank is merely sending the check for presentment, it must exercise ordinary care in the routing of the check and the selection of intermediary banks. In this case, Austin was merely sending the checks for presentment. Therefore, since Austin used ordinary care with respect to routing and choosing intermediaries, it is not liable under Section 4-202.

Great Lakes also alleges that it is the third party beneficiary of a transfer warranty owed by Austin to First Wisconsin under UCC Section 4-207. Section 4-207 provides, in relevant part, “a customer or collecting bank…warrants to the transferee and to any subsequent collecting bank that…all signatures on the item are authentic and authorized.” However, the majority of courts do not allow a drawer to maintain an action under Section 4-207 as a third party beneficiary. Comment 2 to UCC Section 3417, the minority position that a drawer may maintain such an action is specifically rejected. Therefore, Great Lakes’s claim that it is entitled to relief as a third party beneficiary of Austin’s Section 4-207 warranty to First Wisconsin is dismissed.

18. Bank customer Aliaga Medical Center (Aliaga) opened a checking account with Harris Bank.

Aliaga issued a $50,000 check, which bore the notation “void after 90 days.” More than 90 days after the check was issued, Harris honored the check. Aliaga now seeks reimbursement from Harris, claiming that the notation served as a stop payment order after the 90 days. Who will prevail? Why? Answer: Aliaga Medical Center, S.C. v. Harris Bank N.A., 2014 WL 4415328, 84 UCC Rep. Serv. 2d 579 (Ill. App. 1 Dist., 2014).

Harris had the right to pay the check despite the “void after 90 days” language because Aliaga failed to properly stop payment of the check. Under the parties’ agreement, if Aliaga did not want Harris Bank to pay a check it had written, then Aliaga had to comply with certain requirements.

Moreover, under the parties’ agreement, Harris Bank specifically “reserve[d] the right to pay *** a stale check.” This is also the law under the UCC. Aliaga’s contention that this provision is inapplicable because the check “was not *** stale *** [but instead]

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 27: Bank Deposits, Collections, and Funds Transfers

was void is without merit. The bank still has the right in its discretion to pay a stale check unless a stop payment order was properly filed.

19. Ron Honeycutt was the president, treasurer, and sole stockholder of Sheldon, Inc. (Sheldon’s Lounge), a bar located in Baltimore City. Christine Honeycutt was, at one time, Ron Honeycutt’s wife and held the position of vice president and secretary of Sheldon.

Ron Honeycutt and Christine Honeycutt opened a business checking account with Maryland National Bank in the name of Sheldon’s Lounge. At that time, Ron Honeycutt and Christine Honeycutt executed a signature card for the account, on which they checked off the box requiring only one signature to transact any business. Ron Honeycutt and Christine Honeycutt were the authorized signatories on the account.

Five days after Ron Honeycutt died, Christine Honeycutt withdrew funds in the amount of $13,066.48 from Sheldon’s account. At the time of withdrawal, an employee of the bank retrieved and reviewed the signature card on file with the bank to verify Christine Honeycutt’s authority to direct and conduct transactions on Sheldon’s account. The bank did not inquire as to Christine Honeycutt’s status with respect to Sheldon, nor did it inquire of anyone at Sheldon as to her status. At the time, the bank was unaware that Ron Honeycutt had died. A month later, Sheldon commenced an action against Christine Honeycutt and the bank, asserting claims for conversion, breach of contract, and negligence for permitting the allegedly unauthorized withdrawal. Explain whether the bank is liable.

Answer: The bank is not liable. Honeycutt v. Honeycutt, Court of Special Appeals of Maryland, 2002, 150 Md. App. 604; 822 A. 2d 551; cert. denied, 376 Md. 544, 831 A. 2d 4 (2003).

“A bank and its customers enjoy a debtor/creditor relationship in which the rights and liabilities of each are contractual.” [Citations.] “Implicit in the contract [between the bank and customer] is the duty of the bank to use ordinary care in disbursing the depositor’s funds.” [Citations.] *** A signature card may constitute a contract between a bank and its customer.

[Citation.] (“The signature card constituted the contract between the parties and, subject to the statutory schemes, regulates their rights and duties.” [Citations.]*** *** The plain language of the signature card established that both Ron and Christine Honeycutt were authorized signatories able to transact business on Sheldon’s account.

Moreover, the signature card expressly and unambiguously provided that the Bank is authorized to recognize and rely upon either of Ron or Christine Honeycutt’s signatures on checks, drafts and orders for the payment of money, the withdrawal of funds, or the transaction of any business to Sheldon’s account.

When Christine Honeycutt withdrew funds from Sheldon’s account, the Bank did not breach any standard of care owed to appellants. The Bank exercised reasonable care when it inspected the signature card on file for Sheldon’s account and verified that Christine Honeycutt was an authorized signatory on the account.

ANSWERS TO “TAKING SIDES” PROBLEMS Mary Mansi claims that eighteen checks on her account contain forgeries but were nevertheless paid by her bank, Sterling National Bank. The checks bore signatures that, according to the Mansi’s handwriting expert, were apparently “written by another person who attempted to

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 27: Bank Deposits, Collections, and Funds Transfers

simulate her signature” and thus were not considered obvious forgeries. Sterling National Bank acknowledged that it did honor those eighteen checks, but nine of them were returned to the plaintiff more than one year prior to this action. In addition, Mansi had received bank statements and failed to examine them. a. What are the arguments that the bank is liable to Mansi for wrongfully paying the checks? b. What are the arguments that the bank is not liable to Mansi for paying the checks? c. Who should prevail? Why? Answer: (a) The bank paid the checks even though Mansi never ordered the bank to pay these instruments. The signatures were forgeries, and the bank should not have paid these forged checks. (b) It is the customer’s duty to exercise due care in reviewing checks and bank statements that have been returned to her. Mansi did not do this and therefore cannot recover from the bank for their payment. (c) Summary judgment granted in favor of Sterling National Bank. Mansi did not report the fraud with respect to nine of the checks until more than a year after the checks were made available to her and thus she was barred from recovering on these items. On the remaining nine checks, she was also barred by her failure (1) to exercise reasonable care in examining her bank statements and (2) to submit any evidence that the bank failed to exercise ordinary care in paying the items. Mansi v. Gaines Supreme Court, Appellate Division, Second Department 1995, 216 A.D. 2d 536, 628 N.Y.S. 2D 804.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 28: Relationship of Principal and Agent

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 28: Relationship of Principal and Agent

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ............................................................................. 14

ANSWERS TO ETHICAL DILEMMA Is Medicaid Designed to Protect Inheritances?

1.

Is it ethical for Steven to execute the power of attorney in an effort to enable his mother to qualify for Medicaid?

2. Should Medicaid be available only to those with low income and few assets? Could a national health care plan provide a solution?

3. What role, if any, should private insurance play in providing a safety net against the catastrophic costs of nursing home care?

4. What questions of family ethics does a plan such as Steven’s raise?

Answer: 1. To the extent that Medicare is a social program aimed to aid the truly impoverished, it may be argued that it is unethical and abusive to shelter the assets of middle-class and wealthy families. On the other hand, middle- and upper middle-class families who have shouldered a substantial tax burden throughout their lives may feel cheated and unfairly burdened by a system that would totally rob the family of hard-earned savings.

2. The abuses raise the question of whether a broad-based health program should replace the existing system. The obvious questions concern how such a plan should be funded, the manner in which society should impose the relative burdens for the payment of such a plan, etc.

3. New York State has instituted an innovative plan designed to encourage the purchase of nursing-home insurance. Under the plan, if nursing home insurance is purchased, the individuals would be exempt from onerous Medicare limits on personal wealth.

Connecticut and Indiana have instituted similar programs in response to the widespread practice of "spending down" to qualify for Medicare. Consumer advocates have criticized the plan for being difficult to afford. Insurance premiums would range from $1,500 to $2,000 per year for purchasers who are 65. (Freudenheim, Medicaid Plan Promotes Nursing-Home Insurance, New York Times, May 3, 1992, pg. 1) 4. Several important family issues arise when a spend-down plan is pursued. Which family member or members should control the elderly person's assets? Will the controlling parties act in a fair and responsible manner? Should the elderly person's attorney be named the power of attorney? There is clearly the potential for abuse of the elderly person, who is stripped of assets and becomes entirely dependent upon others. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 28: Relationship of Principal and Agent

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Parker, the owner of certain unimproved real estate in Chicago, employed Adams, a real estate agent, to sell the property for a price of $250,000 or more and agreed to pay Adams a commission of 6 percent for making a sale. Adams negotiated with Turner, who was interested in the property and willing to pay as much as $280,000 for it. Adams made an agreement with Turner that if Adams could obtain Parker’s signature to a contract to sell the property to Turner for $250,000, Turner would pay Adams a bonus of $10,000.

Adams prepared and Parker and Turner signed a contract for the sale of the property to Turner for $250,000. Turner refuses to pay Adams the $10,000 as promised. Parker refuses to pay Adams the 6 percent commission. In an action by Adams against Parker and Turner, explain who should prevail.

Answer: Decision against Adams on both actions. Adams owes an overriding duty of utmost loyalty and good faith to Parker, his principal. An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship. Restatement, Section 8.01. The problem presents a flagrant violation of Adams’s duty in this regard when he agreed with Turner to attempt to obtain Parker’s signature to a contract to sell the property to Turner for $250,000 when Turner was willing to pay $280,000 for it. Even though authorized to sell the property for $250,000, he was under a duty to obtain a higher price if possible or at least inform the principal of Turner’s willingness to pay a higher price. Adams’s agreement with Turner, for all practical purposes, made him the agent of Turner as well as of Parker. A disloyal agent cannot recover compensation from either party. If permitted to recover the $10,000 from Turner, he would be under the duty of a fiduciary to account for the full $10,000 to Parker. A principal is entitled to recover secret profits from a disloyal agent.

2. Perry employed Alice to sell a parcel of real estate at a fixed price without knowledge that David had previously employed Alice to purchase the same property for him. Perry gave Alice no discretion as to price or terms, and Alice entered into a contract of sale with David on the exact terms authorized by Perry. After accepting a partial payment, Perry discovered that Alice was employed by David and brought an action to rescind. David resisted on the ground that Perry had suffered no damage because Alice had been given no discretion and the sale was made on the exact basis authorized by Perry. Discuss whether Perry will prevail.

Answer: Decision in favor of Perry. Although Alice had no discretion as to price or terms with respect to the sale of Perry’s real estate, she was representing two principals; she was a dual agent. In such cases, the interests of one of the principals are likely to suffer, particularly where, as in the problem, the agent represents both the buyer and the seller. Therefore, Alice has breached her fiduciary to both Perry and David. Upon discovery of the double or dual agency either of the principals may repudiate the contract made in their behalf by the common agent. If the contract has been performed, either party may have the transaction set aside. The agent is not entitled to compensation from either party. It appears that neither Perry nor David knew of the double agency. If one of the principals did not know that Alice was also the agent of the other party to the contract, he has the absolute right to rescind the transaction upon learning the truth. It is not necessary for the principal to show any injury or intent to deceive.

3. Packer owned and operated a fruit cannery in Southton, Illinois. He stored a substantial number of finished canned goods in a warehouse in East St. Louis, Illinois, owned and

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operated by Alden, in order to have goods readily available for the St. Louis market. On March 1, he had ten thousand cans of peaches and five thousand cans of apples in storage with Alden. On the day named, he borrowed $5,000 from Alden, giving Alden his promissory note for this amount due June 1, together with a letter authorizing Alden, in the event the note was not paid at maturity, to sell any or all of his goods in storage, pay the indebtedness, and account to him for any surplus. Packer died on June 2 without having paid the note. On June 8, Alden told Taylor, a wholesale food distributor, that he had for sale, as agent of the owner, ten thousand cans of peaches and five thousand cans of apples. Taylor said he would take the peaches and would decide later about the apples.

A contract for the sale of ten thousand cans of peaches for $6,000 was thereupon signed “Alden, agent for Packer, seller; Taylor, buyer.” Both Alden and Taylor knew of the death of Packer. Delivery of the peaches and payment were made on June 10. On June 11, Alden and Taylor signed a similar contract covering the five thousand cans of apples, delivery and payment to be made June 30. On June 23, Packer’s executor, having learned of these contracts, wrote Alden and Taylor stating that Alden had no authority to make the contracts, demanding that Taylor return the peaches, and directing Alden not to deliver the apples. Discuss the correctness of the contentions of Packer’s executor.

Answer: Packer’s executor is incorrect as to the first contract for the sale of the peaches, but correct as to the second contract for the sale of the apples. A power given as security “is a power to affect the legal relations of its creator that is created in the form of a manifestation of actual authority and held for the benefit of the holder or a third person.” Restatement, Section 3.12. A power given as security creates neither a relationship of agency nor actual authority, although the power enables its holder to affect the legal relations of the creator of the power. Restatement, Section 3.12, comment b. The power arises from a manifestation of assent by its creator that the holder of the power may, for example, dispose of property or other interests of the creator. The Restatement’s definition includes, but is more extensive than, the rule in some states regarding an agency coupled with an interest, in which the holder (agent) has a security interest in the power conferred upon him by the creator (principal). For example, an agency coupled with an interest would arise where an agent has advanced funds on behalf of the principal and the agent’s power to act is given as security for the loan.

Unless otherwise agreed, a power given as security may not be revoked. In addition, the incapacity of the creator or of the holder of the power does not terminate the power. Nor will the death of the creator terminate the power, unless the duty for which the power was given terminates with the death of the creator. Restatement, Section 3.13(2). A power given as security is terminated by an event that discharges the obligation secured by it or that makes execution of the power illegal or impossible.

Restatement, Section 3.13(1). Thus, in the example above, when the creator repays the loan, the power is terminated.

Packer’s grant of authority to Alden to sell the canned goods was an agency coupled with an interest of the agent in the subject matter. Alden had an interest in the prospective proceeds of the execution of the agency in that he could pay himself therefrom the debt owed to him. He also had an interest in the subject matter of the agency, the canned goods, in that he had possession thereof. Since the interest was not only in the proceeds but also in the subject matter, he had a true “agency coupled with an interest” and it was irrevocable even by the death of the principal.

The result is different with respect to the second contract for the apples. A power given as security is terminated by an event that discharges the obligation secured by it.

Restatement, Section 3.13(1). Alden, as a result of the concluded sale of the peaches,

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 28: Relationship of Principal and Agent

had $6,000, which more than covered the indebtedness to him. He therefore had no further interest in the proceeds of the sale of the apples even though he still had possession thereof. At the time he made the contract to sell the apples, he no longer had an agency coupled with an interest, and hence, no agency because the death of the principal terminated the agency.

4. Harvey Hilgendorf was a licensed real estate broker acting as the agent of the Hagues in the sale of eighty acres of farmland. The Hagues, however, terminated Hilgendorf’s agency before the expiration of the listing contract when they encountered financial difficulties and decided to liquidate their entire holdings of land at one time. Hilgendorf brought this action for breach of the listing contract. The Hagues maintain that Hilgendorf’s duty of loyalty required him to give up the listing contract. Are the Hagues correct in their assertion? Explain.

Answer: No, the Hagues are not correct. Judgment for Hilgendorf. Since agency is a consensual relationship, a principal has the power to terminate an agency that is not coupled with an interest even though the term of the agency has not yet expired. But without a legal reason for doing so, the principal does not have the right to terminate an unexpired agency contract and may subject himself to liability for doing so.

Although an agent’s duty of loyalty does require him to place the principal’s interests first in dealing with third parties, in the contract of agency itself between the agent and the principal each is acting in his own behalf. The Hagues’ financial difficulties did not give them the legal right to terminate the agency relationship, and Hilgendorf was under no duty to relinquish his role as their agent simply because the principal encountered financial problems. Therefore, Hilgendorf may recover damages for breach of the listing contract. Hilgendorf v. Hague, 29 N.W. 2d 272 (1980) 5. Palmer made a valid contract with Ames under which Ames was to sell Palmer’s goods on commission from January 1 to June 30. Ames made satisfactory sales up to May 15 and was about to close an unusually large order when Palmer suddenly and without notice revoked Ames’s authority to sell. Can Ames continue to sell Palmer’s goods during the unexpired term of her contract? Explain.

Answer: No. A principal may revoke an agent’s authority at any time by notifying the agent. Restatement, Section 3.10. If, however, such revocation constitutes a breach of contract, the agent may recover damages from the principal. Although Palmer did not have the right to terminate the agency before June 30, he had the power. Since the authority of an agent is based upon the consent of the principal, the agency is terminated upon the withdrawal of such consent. Therefore, upon Palmer’s revocation of Ames’s authority to sell, Ames no longer had the actual authority to sell Palmer’s goods. Ames, however, may sue Palmer and recover damages for breach of the agency contract.

6. Piedmont Electric Co. gave a list of delinquent accounts to Alexander, an employee, with instructions to discontinue electric service to delinquent customers. Among those listed was Todd Hatchery, which was then in the process of hatching chickens in a large, electrically heated incubator. Todd Hatchery told Alexander that it did not consider its account delinquent, but Alexander nevertheless cut the wires leading to the hatchery.

Subsequently, Todd Hatchery recovered a judgment of $5,000 in an action brought against Alexander for the loss resulting from the interruption of the incubation process. Alexander has paid the judgment and brings a cause of action against Piedmont Electric Co. What may he recover? Explain.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 28: Relationship of Principal and Agent

Answer: Judgment for Alexander. In general, a principal has an obligation to indemnify an agent whenever the agent makes a payment or incurs an expense or other loss while acting as authorized on behalf of the principal. The contract between the principal and agent may specify the extent of this duty. In the absence of any contractual provisions a principal has a duty to reimburse the agent when the agent makes a payment within the scope of the agent’s actual authority. Restatement, Section 8.14. In collecting the accounts and discontinuing service, Alexander was acting within his actual authority. A principal is under a duty to indemnify and reimburse his agent for expenses incurred by or resulting from authorized acts of the agent if not illegal or not known by the agent to be wrongful. Accordingly, Alexander has a right of reimbursement from Piedmont Electric Co. for $5,000.

7. In October 2018, Black, the owner of the Grand Opera House, and Harvey entered into a written agreement to lease the opera house to Harvey for five years at a rental of $300,000 a year. Harvey engaged Day as manager of the theater at a salary of $1,175 per week plus 10 percent of the profits. One of Day’s duties was to determine the amounts of money taken in each night and, after deducting expenses, to divide the profits between Harvey and the manager of the particular attraction playing at the theater. In September 2023, Day went to Black and offered to rent the opera house from Black at a rental of $375,000 per year, whereupon Black entered into a lease with Day for five years at this figure. When Harvey learned of and objected to this transaction, Day offered to assign the lease to him for $600,000 per year. Harvey refused and brought an appropriate action against Day. Should Harvey recover? If so, explain on what basis and to what relief is he entitled.

Answer: Decree in favor of Harvey. An agent owes the principal a duty of loyalty, which includes an obligation not to compete. During the agency relationship, an agent must not compete with his principal or act on behalf or otherwise assist any of the principal’s competitors. Restatement, Section 8.04. An agent may not use or disclose confidential information obtained in the course of the agency for his own benefit or those of a third party. Restatement, Section 8.05(2). In this case, Day engaged in business activity with Black, and this activity would be characterized as being in conflict with the interests of Day’s principal, Harvey.

8. Timothy retains Cynthia, an attorney, to bring a lawsuit upon a valid claim against Vincent.

Recently enacted legislation has shortened the statute of limitations for this type of legal action. Cynthia fails to make herself aware of this new statute. Consequently, she files the complaint after the statute of limitations has run. As a result, the lawsuit is dismissed.

What rights, if any, does Timothy have against Cynthia?

Answer: Judgment would be for Timothy assuming that a lawyer acting reasonably would have had opportunity to discover the revised statute of limitations period.

Subject to any agreement with the principal, an agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances. Special skills or knowledge possessed by an agent are circumstances to be taken into account in determining whether the agent acted with due care and diligence. Moreover, if the agent claims to possess special skill or knowledge, the agent has a duty to act with the care, competence, and diligence normally exercised by agents with such skill or knowledge. Restatement, Section 8.08.

9. Wilson engages Ruth to sell Wilson’s antique walnut chest to Harold for $2,500. The next day, Ruth learns that Sandy is willing to pay $3,000 for Wilson’s chest. Ruth nevertheless sells the chest to Harold. Wilson then discovers these facts. Explain what Wilson’s rights are, if any, against Ruth.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 28: Relationship of Principal and Agent

Answer: An agent has a duty to use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know if: (1) the agent knows, or has reason to know, that the principal would wish to have the facts; or (2) the facts are material to the agent’s duties to the principal. Restatement, Section 8.11.

An agent who breaches this duty is subject to liability to the principal for loss caused the principal by the agent’s breach and may also be subject to termination of the agency relationship. Moreover, if the agent’s breach of this duty constitutes a breach of the contract between the agent and the principal, the agent is also liable for breach of contract. However, if Ruth has reason to believe that Wilson desired only to sell the chest to Harold at the agreed upon price, then she fulfilled the terms of the agency.

The problem may be interpreted either way.

10. Morris is a salesperson for Acme, Inc., a manufacturer of household appliances. Morris receives a commission on all sales made and no further compensation. He drives his own automobile, pays his own expenses, and calls on whom he pleases. While driving to make a call on a potential customer, Morris negligently collides with Hudson. Hudson sues Acme and Morris. Discuss who should be held liable.

Answer: A principal is liable for the torts committed by an employee within the scope of his employment but ordinarily is not liable for torts committed by an independent contractor. The critical question in this case is whether Morris is an employee of Acme or is an independent contractor. Agents who are not employees are generally referred to as independent contractors, although the Third Restatement does not use this term.

In these cases, although the principal has the right of control over the agent, the principal does not control the manner and means of the agent’s performance. Acme had no control over Morris since Morris made the decision as to which customers to see, as well as driving his own car. Therefore, Morris is most likely an independent contractor and Acme would not be liable to Hudson. Hudson would, however, be successful in a suit against Morris since persons are responsible for their own negligent conduct.

11. Sierra Pacific Industries purchased various areas of timber and six other pieces of real property, including a ten-acre parcel on which five duplexes and two single-family units were located. Sierra Pacific requested the assistance of Joseph Carter, a licensed real estate broker, in selling the non-timberland properties. It commissioned him to sell the property for an asking price of $850,000, of which Sierra Pacific would receive $800,000 and Carter would receive $50,000 as a commission. Unable to find a prospective buyer, Carter finally sold the property to his daughter and son-in-law for $850,000 and retained the $50,000 commission without informing Sierra Pacific of his relationship to the buyers.

After learning of these facts, Sierra Pacific brought an action against Carter. To what relief, if any, is Sierra Pacific entitled? Discuss.

Answer: Sierra Pacific is entitled to relief based on Carter’s breach of his fiduciary duty. An agent has a duty not to deal with the principal as or on behalf of an adverse party in a transaction connected with the agency relationship. Restatement, Section 8.03. An agent also has a duty to use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know if: (1) the agent knows, or has reason to know, that the principal would wish to have the facts; or (2) the facts are material to the agent’s duties to the principal. Restatement, Section 8.11.

An agent must refrain from dual representation in a transaction unless he obtains the consent of both principals after full disclosure. Under most circumstances, then, if the agent is related to the buyer in a way that suggests a reasonable possibility that the agent himself could be acquiring an interest in the property, the relationship is a

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 28: Relationship of Principal and Agent

material fact that must be disclosed. Therefore, Sierra Pacific may recover the $50,000 commission paid to Carter plus any actual and proximately caused loss on the price it received for the property. Sierra Pacific Industries v. Carter, 104 Cal. App. 3d 579, 163 Cal. Rptr. 764 (1980).

12. Murphy, while a guest at a motel operated by the Betsy-Len Motor Hotel Corporation, sustained injuries from a fall allegedly caused by negligence in maintaining the premises.

At that time, Betsy-Len was under a license agreement with Holiday Inns, Inc. The license contained provisions permitting Holiday Inns to regulate the architectural style of the buildings as well as the type and style of the furnishings and equipment. The contract, however, did not grant Holiday Inns the power to control the day-to-day operations of Betsy-Len’s motel, to fix customer rates, or to demand a share of the profits. Betsy-Len could hire and fire its employees, determine wages and working conditions, supervise the employee work routine, and discipline its employees. In return, Betsy-Len used the trade name “Holiday Inns” and paid a fee for use of the license and Holiday Inns’ national advertising. Murphy sued Holiday Inns, claiming Betsy-Len was its agent. Is Murphy correct? Explain.

Answer: Decision for Holiday Inns. No, Betsy-Len is not the agent of Holiday Inns. At issue is whether the terms of the license agreement satisfied the level of control necessary to establish a principal-agent relationship. In this case, the regulatory provisions included regulations on the architectural style of the buildings and the type and style of furnishings and equipment but did not give the defendant control over the day-to-day operations of Betsy-Len’s motel; therefore, this did not constitute control within the definition of agency. Murphy v. Holiday Inns, Inc., 219 S.E. 2d 874 (1975).

13. Hunter Farms contracted with Petrolia Grain & Feed Company, a Canadian company, to purchase a large supply of the farm herbicide Sencor from Petrolia for resale. Petrolia learned from the U.S. Customs Service that the import duty for the Sencor would be 5 percent but that the final rate could be determined only upon an inspection of the Sencor at the time of importation. Petrolia forwarded this information to Hunter. Meanwhile, Hunter employed F. W. Myers & Company, an import broker, to assist in moving the herbicide through customs by drafting the necessary papers. When customs later determined that certain chemicals in the herbicide, not listed on its label, would increase the customs duty from $30,000 to $128,000, Myers paid the additional amount under protest and turned to Hunter for indemnification. Explain what Myers would have to prove to recover from Hunter.

Answer: Myers must show that the customs of the industry or profession is that importers bear no special duty to advise the importer unless requested to do so. They essentially draft papers to facilitate the process. Finally, Myers needs to prove that he had no information regarding the increased duty and thus had fulfilled his duty of disclosure to Hunter.

In general, a principal has an obligation to indemnify an agent whenever the agent makes a payment or incurs an expense or other loss while acting as authorized on behalf of the principal. The contract between the principal and agent may specify the extent of this duty. In the absence of any contractual provisions, a principal has a duty to reimburse the agent when the agent makes a payment within the scope of the agent’s actual authority. Restatement, Section 8.14.

On the other hand, subject to any agreement with the principal, an agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances. Special skills or knowledge possessed by an agent are

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circumstances to be taken into account in determining whether the agent acted with due care and diligence. Moreover, if the agent claims to possess special skill or knowledge, the agent has a duty to act with the care, competence, and diligence normally exercised by agents with such skill or knowledge. Restatement, Section 8.08.

Moreover, an agent has a duty to use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know if: (1) the agent knows, or has reason to know, that the principal would wish to have the facts; or (2) the facts are material to the agent’s duties to the principal. Restatement, Section 8.11.

F. W. Myers & Company v. Hunter Farms, 319 N.W. 2d 186 (1982).

14. Tube Art was involved in moving a reader board sign to a new location. Tube Art’s service manager and another employee went to the proposed site and took photographs and measurements. Later, a Tube Art employee laid out the exact size and location for the excavation by marking a four-by-four square on the asphalt surface with yellow paint. The dimensions of the hole, including its depth of six feet, were indicated with spray paint inside the square. After the layout was painted on the asphalt, Tube Art engaged a backhoe operator, Richard F. Redford, to dig the hole. Redford began digging in the early evening hours at the location designated by Tube Art. At approximately 9:30 p.m., the bucket of Redford’s backhoe struck a small natural gas pipeline. After examining the pipe and finding no indication of a break or leak, he concluded that the line was not in use and left the site. Shortly before 2:00 a.m. on the following day, an explosion and fire occurred in the building serviced by that gas pipeline. As a result, two people in the building were killed, and most of its contents were destroyed. Massey and his associates, as tenants of the building, brought an action against Tube Art and Richard Redford for the total destruction of their property. Will the plaintiffs prevail? Explain.

Answer: Yes, Massey will prevail. A number of factors may be taken into account in determining whether one who performs services for another is an employee or an independent contractor. The crucial consideration is “the extent of control which, by the agreement, the master may exercise over the details of the work.” An employee is subject to the employer’s control or right of control regarding the employee’s physical conduct in performing the services. Independent contractors are not subject to such control or right of control. In this case, Redford was essentially self-employed, was free to work for other contractors, and chose the time of day to do the assigned work.

Tube Art, however, not only had the right to control Redford’s activities, but it did control them. Specifically, it exercised control over the most important decisions associated with the project: the size and location of the hole. Redford simply dug the hole in accordance with the placement and dimensions dictated by Tube Art. Redford was an employee of Tube Art, and Tube Art is therefore responsible for his actions.

Massey v. Tube Art Display, Inc., 15 Wn. App. 782, 551 P. 2d 1387 (1976).

15. Brian Hanson sustained a paralyzing injury while playing in a lacrosse match between Ohio State University and Ashland University. Hanson had interceded in a fight between one of his teammates and an Ashland player, William Kynast. Hanson grabbed Kynast in a bear hug, but Kynast threw Hanson off his back. Hanson’s head struck the ground, resulting in serious injuries. An ambulance was summoned, and after several delays, Hanson was transported to a local hospital where he underwent surgery. Doctors determined that Hanson suffered a compression fracture of his sixth spinal vertebrae. Hanson, now an incomplete quadriplegic, subsequently filed suit against Ashland University, maintaining that because Kynast was acting as the agent of Ashland, the university was therefore liable for Kynast’s alleged wrongful acts. Was Kynast an agent of Ashland? Why or why not?

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 28: Relationship of Principal and Agent

Answer: No. The relationship of principal and agent exists only when one party exercises the right of control over the actions of another and those actions are directed toward the attainment of an objective which the former seeks. William Kynast attended Ashland University, received no scholarship or compensation, voluntarily became a member of the university’s lacrosse team for whose games no attendance fee is charged. Kynast purchased his own equipment and received instruction from a coach while preparing and playing such games but was not otherwise controlled by the coach and participated in the game as a part of his total educational experience while attending school. Kynast and Ashland have a relationship typical of most students attending a university. A university such as Ashland offers classroom instruction in a great variety of subjects, as well as optional participation in events such as school clubs and sports. These offerings are designed to expand and enrich the overall educational experience. The student pays a fee and agrees to abide by the university’s rules. In exchange, the university provides the student with a worthwhile education.

This relationship does not constitute a principal-agent relationship. The student is a buyer of education rather than an agent. Hanson v. Kynast, 494 N.E. 2d 1091 (1986).

16. Tony Wilson was a member of Troop 392 of the Boy Scouts of America (BSA) and of the St. Louis Area Council (Council). Tony went on a trip with the troop to Fort Leonard Wood, Missouri. Five adult volunteer leaders accompanied the troop. The troop stayed in a building that had thirty-foot aluminum pipes stacked next to it. At approximately 10:00 p.m., Tony and other scouts were outside the building, and the leaders were inside. Tony and two other scouts picked up a pipe and raised it so that it came into contact with 7,200-volt power lines that ran over the building. All three scouts were electrocuted, and Tony died.

His parents brought a suit for wrongful death against the Council, claiming that the volunteer leaders were agents or servants of the Council and that it was vicariously liable for their negligence. The Council filed a motion for summary judgment, arguing as follows: the BSA chartered local councils in certain areas, and councils in turn granted charters to local sponsors such as schools, churches, or civic organizations. Local councils did not administer the scouting program for the sponsor, did not select volunteers, did not prescribe training for volunteers, and did not direct or control the activities of troops.

Troops were not required to get permission from local councils before participating in an activity. Are the troop leaders agents of the Council? Explain.

Answer: No. Under the doctrine of respondeat superior, an employer is liable for those negligent acts or omissions of his employee which are committed within the scope of his employment. Liability based on respondeat superior requires some evidence that a master-servant relationship existed between the parties. The test to determine if respondeat superior applies to a tort is whether the person sought to be charged as master had the right or power to control and direct the physical conduct of the other in the performance of the act. If there was no right to control, there is no liability; those rendering services but retaining control over their own movements are not servants. The relationship of servant and master begins only when the person charged as master has the right to direct the method by which the master’s service is performed. Whether a party is liable under the doctrine of respondeat superior depends on the facts and circumstances in evidence in each particular case, and no single test is conclusive of the issue of the party’s interest in the activity and his right of control.

In the instant action, Council neither controlled the actions of the troop leaders nor ran the program at Fort Leonard Wood. There was no vicarious liability on the part of

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Council for the leaders’ actions while on the trip to Fort Leonard Wood. The trial court did not err in granting Council’s motion for summary judgment.

17. Danny Del Pilar sustained injuries when his car collided with a delivery van painted in yellow—the widely recognized DHL color—and displaying the DHL name and logo. The truck was driven by a driver wearing a DHL uniform and laden with packages destined for DHL customers. The van was owned not by DHL, but by Johnny Boyd, a driver for Silver Ink, Inc., a local company that was responsible at the time for picking up, sorting, and delivering all DHL packages in metropolitan Jacksonville, Florida. Boyd, working for Silver Ink on the DHL contract, was shuttling DHL packages when the accident occurred. DHL, whose primary business focuses on shipping packages via air around the world, has no capability to pick up or deliver local packages in Duval County and, at the time of the accident, it relied exclusively on Silver Ink to provide such local services.

DHL’s agreement with Silver Ink essentially delegated to Silver Ink the responsibility to service DHL customers in the Jacksonville area. The contract identified Silver Ink as an “independent contractor” and provided that “the manner and means by which Contractor performs the services shall be at Contractor’s sole discretion and control and are Contractor’s sole responsibility.” The agreement also, however, recited an exhaustive and detailed list of procedures that Silver Ink employees were to follow in processing, picking up, and delivering packages, and contained a provision under which Silver Ink was required to indemnify DHL in the event Silver Ink lost or damaged packages bound for DHL’s customers. The agreement gave either party the power to terminate in the event of the other party’s breach. Silver Ink employees were contractually required to “wear a DHL uniform and properly display the DHL Marks [sic] and uniform in a clean, professional, and businesslike manner”; the contract specified the particular articles of clothing and accessories considered part of the DHL uniform, the purchase of which was funded by DHL. Silver Ink was required to submit to unannounced operational inspections and audits at DHL’s sole discretion and was required to maintain a fleet of delivery vans operated in DHL livery, designed and placed on the vehicles in strict accordance with specifications established by DHL. Silver Ink’s operational hub was co-located with DHL’s Jacksonville facility and DHL employees monitored and reviewed Silver Ink operations on a daily basis.

Danny Del Pilar sued DHL for his personal injuries arising from the auto accident. DHL argued that Silver Ink is an independent contractor for whose alleged negligence DHL is not vicariously liable. Explain whether Silver Ink is an independent contractor as a matter of law.

Answer: The trial court erred in concluding, as a matter of law, that Silver Ink was DHL’s independent contractor. The question of DHL’s control over Silver Ink operations should go to the jury. Whether a person is an employee or an independent contractor is a question of fact, not controlled by descriptive labels employed by the parties themselves. A particularly significant factor in this determination is the degree of control exercised by the employer or owner over the agent, and it is the right of control, not actual control, which determines the relationship between the parties. Del Pilar v. DHL Global Customer Solutions (USA), Inc., 993 So. 2d 142, District Court of Appeal of Florida, First District, 2008.

Generally, a principal is not vicariously liable for the negligence of its independent contractor, but the principal is liable for the negligence of its agent. Whether a person working on behalf of another is an agent or an independent contractor “is a question of fact…not controlled by descriptive labels employed by the parties themselves.” A particularly significant factor in the determination of status is “the degree of control exercised by the employer or owner over the agent. More particularly, it is the right of

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 28: Relationship of Principal and Agent

control, and not actual control, which determines the relationship between the parties.” In most cases, the terms of a contract between the parties is a pertinent index of the principal’s right of control and should factor heavily into the inquiry, “unless other provisions of the agreement, or the parties’ actual practice, demonstrate that it is not a valid indicator of status [or]…belie the creation of the status agreed to by the parties.” In that case, “the actual practice and relationship of the parties should control.”

Elements of control that tend to suggest a relationship in which the principal is vicariously liable for the agent’s negligence include, but are not limited to, (1) the principal’s right to control the agent’s use of the principal’s trademarks; (2) reservation to the principal of the unilateral right to prohibit the agent from working on behalf of competitors; (3) a requirement that the agent’s employees must undergo training before they work on the principal’s behalf; (4) a requirement that the agent perform services using only equipment selected pursuant to the principal’s specifications; (5) a requirement that the agent, when working on behalf of the principal, use a vehicle with the principal’s logo, placed according to parameters established by the principal; (6) a requirement that the agent adhere to customer-service procedures established by the principal; and (7) a requirement that the agent submit to inspections conducted at the principal’s discretion.

Here, the contract between DHL and Silver Ink certainly recites in conclusory terms the status of independent contractor. The balance of DHL’s contract with Silver Ink “leaves nothing to chance.” Somewhat inconsistently with the conclusory language purporting to confer broad discretion upon Silver Ink to fulfill its operational obligations, subsequent provisions list specific procedures and protocols that Silver Ink employees are to follow when picking up, sorting, and delivering DHL packages; everything from the process of scanning packages into DHL’s tracking system to procedures for redelivery after unsuccessful delivery attempts is set out in detail in the agreement. Shippers and recipients are “DHL customers,” and the agreement contains an indemnity provision requiring Silver Ink to indemnify DHL for damages stemming from packages lost or damaged due to Silver Ink’s negligence, suggesting that DHL intends, in the first instance, to answer directly to its customers. The contract requires Silver Ink employees to “wear a DHL uniform and properly display the DHL Marks and uniform in a clean, professional, and businesslike manner,” with further specification of the particular apparel considered part of the DHL uniform.

Silver Ink must operate delivery vehicles painted in the DHL livery and must submit to unannounced operational inspections and audits at DHL’s sole discretion. Silver Ink must pick up and deliver packages at times requested by DHL’s customers pursuant to DHL’s advertised guarantees.

18. Sheree Demming—a real estate investor in the business of acquiring properties in the Bloomington, Indiana area for remodeling, renovation, leasing, and sale—engaged Cheryl Underwood’s professional services as a realtor to buy and sell properties on multiple occasions between July 2019 and April 2024. In 2019, Demming became particularly interested in purchasing two properties owned by Marion and Frances Morris and managed by realtor Julie Costley. The properties, however, were not listed for sale. Underwood made an offer to Costley on Demming’s behalf in the fall of 2019. After the offer was rejected, Underwood approached Costley every few months to inquire whether the properties were available for purchase. However, unknown to Demming, Underwood became interested in purchasing the properties for herself after she acquired a neighboring property in May 2023. In February 2024, Demming again instructed Underwood to inquire into the availability of the properties. Accordingly, Underwood asked Costley to

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contact Mrs. Morris, whose husband had recently died. Costley agreed to contact Mrs. Morris but expressed doubt as to Mrs. Morris’ willingness to sell. The next day, Underwood told Demming that the properties were not for sale. A few days later, Costley contacted Mrs. Morris, who instructed Costley to request that anyone interested in purchasing the properties tender a written offer. When Costley informed Underwood that Mrs. Morris was willing to entertain an offer, Underwood did not relay this information to Demming.

Instead, on March 30, 2024, Underwood and a partner purchased the property. Explain what rights, if any, Demming has against Underwood.

Answer: Demming has alleged sufficient facts to go to trial to prove that (1) Underwood was acting as her agent, (2) Underwood had breached her fiduciary duty, and (3) Demming was entitled to have a constructive trust in her favor imposed on the property. This case problem is based on Demming v. Underwood, 943 N.E. 2d 878, Indiana Court of Appeals.

Because the trial court concluded that no agency relationship existed between Demming and Underwood as a matter of law, it did not reach the issue of breach. On appeal, however, the Defendants argue that even if there is a genuine issue of material fact as to whether a common law agency relationship existed, Underwood did not breach her fiduciary duty to Demming because at the time of the alleged breach, the purposes of the agency had already been satisfied. Specifically, the Defendants assert that the scope of the alleged agency was limited to the services to which Demming consented, which they claim consisted only of Underwood making isolated inquiries into whether the properties were available, and that the agency was fulfilled once Underwood accurately reported that the properties were not for sale. We disagree.

First, Demming argues that the evidence most favorable to her supports an inference that Underwood reported inaccurate or misleading information to Demming regarding the availability of the properties. Demming testified in her deposition that she told Underwood to contact Costley in February 2024 and that Underwood told her the next day that the properties were not for sale. However, Costley testified in her deposition that when she spoke to Underwood in February, she expressed doubt as to whether Mrs. Morris would be willing to sell but nevertheless agreed to contact Mrs. Morris to inquire. It was not until a few days later that Costley spoke to Mrs. Morris and learned that she was willing to entertain offers.

Thus, the evidence supports an inference that Underwood told Demming that the properties were not for sale before receiving an answer from Costley. While Underwood may have sincerely believed at that time that Mrs. Morris would not sell the properties, her representation to Demming was incomplete, and therefore misleading. Accordingly, even assuming that the agency relationship was limited to Underwood making a single inquiry regarding the properties and reporting what she learned to Demming, a genuine issue of material fact exists as to whether Underwood breached the fiduciary duty arising from that agency relationship. See Medtech Corp. v.

Ind. Ins. Co., 555 N.E. 2d 844, 850 (Ind. Ct. App.) (an agent has a duty to act in good faith and with due care), trans. denied; Egan v. Burkhart, 657 N.E. 2d 401, 404 (Ind. Ct. App.) (an agent has a duty to disclose to the principal all facts within her knowledge which she may learn within the course of the agency that are material to the purposes of the agency or which might influence the principal’s actions in relation thereto).

Even if Underwood reported accurate information to Demming, the Defendants construe the scope of the alleged agency too narrowly. It is clear that the reason Demming repeatedly instructed Underwood to contact Costley regarding the properties’ availability over a period of more than four years is that Demming desired

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to purchase the properties. Indeed, the evidence most favorable to the non-movant establishes that after Demming’s first offer to purchase was rejected, Underwood and Demming “strategized” together and determined that the best way for Demming to acquire the properties was for Underwood to approach Costley every few months on Demming’s behalf. Appellant’s App. p. 146. On several occasions, including in February 2024, Underwood contacted Costley at Demming’s express direction. And after Underwood reported to Demming that the properties were still not for sale in February 2024, Demming instructed Underwood to “stay on it” because she believed that Mrs. Morris would be willing to sell in the near future. Id. at 139. Indeed, the evidence establishes that the parties contemplated Demming’s future purchase of the properties and Underwood’s receipt of a standard seven percent commission for her services.

These facts, when taken together, support an inference that Underwood was Demming’s agent not only for the purposes of making a few, isolated contacts with Costley regarding the properties, but for the broader purpose of actually acquiring the Properties. This is not to suggest that the agency relationship between Demming and Underwood would continue indefinitely until Demming acquired the properties. See, e.g., Restatement (Third) of Agency § 3.09 cmt. d. (“If the parties do not specify a duration for the agent’s actual authority, it terminates after a reasonable period of time.”). The undisputed fact that Underwood had no authority to enter into negotiations to purchase the Properties on Demming’s behalf does not alter this conclusion. When construed in the light most favorable to Demming as the nonmovant, this evidence merely establishes that Underwood was without authority to unilaterally tender an offer to purchase without first consulting with Demming. Such a limitation on a real estate agent’s authority is not unusual. Other evidence, particularly Demming’s deposition testimony that Underwood was to be paid a standard realtor’s commission at closing, supports an inference that Demming intended to use Underwood’s services to purchase the properties once they became available. And Underwood’s continued assistance to Demming, without compensation, over the course of Demming’s four-year pursuit of the properties supports an inference that Underwood anticipated representing Demming in an eventual sale and receiving a commission for doing so.

Thus, when we consider the evidence in the light most favorable to Demming, we conclude that Underwood was acting as Demming’s agent for the purpose of purchasing the properties. Underwood clearly would have breached the fiduciary duties arising out of that relationship by purchasing the properties for herself without informing Demming that Mrs. Morris was entertaining offers. See Bopp v. Brames, 713 N.E. 2d 866, 871 (Ind. Ct. App.) (unless otherwise agreed, an agent is subject to a duty to act solely for the principal’s benefit), trans. denied; Prudential Ins. Co. of America v.

Baker, 499 N.E. 2d 1152, 1153 (Ind. Ct. App.) (an agent has a duty to refrain from interfering with the principal’s ability to accomplish the purpose of the agency), trans. denied; Potts v. Review Bd. of Ind. Emp’t Sec. Div., 475 N.E. 2d 708, 711 (Ind. Ct. App.) (an agent has a duty not to place himself in a position where his own interests are potentially antagonistic to those of his principal), trans. denied.

Construing the evidence in the light most favorable to Demming, as we must, we conclude that a genuine issue of material fact exists as to whether Underwood breached a common law fiduciary duty owed to Demming. Therefore, the trial court erred in granting summary judgment in favor of the Defendants on Demming’s claim for breach of fiduciary duty arising out of a common law agency relationship.

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With regard to Demming’s request for the imposition of a constructive trust, we note that a constructive trust may be imposed where a person holding title to property is subject to an equitable duty to convey it to another on the ground that he or she would be unjustly enriched if permitted to retain it. Morfin, 831 N.E. 2d at 801. An equitable duty to convey the property may arise if the property was acquired through a breach of fiduciary duty or constructive fraud. Id. at 801-02; Estates of Kalwitz v.

Kalwitz, 717 N.E. 2d 904, 912 (Ind. Ct. App.). As we have concluded that genuine issues of material fact preclude summary judgment on Demming’s breach of fiduciary duty and constructive fraud claims, we must likewise conclude that summary judgment was an inappropriate vehicle for the trial court to dispose of Demming’s request for the imposition of a constructive trust.

For all of these reasons, the trial court erred when it entered summary judgment in favor of the Defendants. We therefore reverse and remand for proceedings consistent with this opinion.

ANSWERS TO “TAKING SIDES” PROBLEMS Western Rivers Fly Fisher (Western) operates under license of the U.S. Forest Service as an “outfitter,” a corporation in the business of arranging fishing expeditions on the Green River in Utah. Michael D. Petragallo is licensed by the Forest Service as a guide to conduct fishing expeditions but cannot do so by himself, because the Forest Service licenses only outfitters to float patrons down the Green River. Western and several other licensed outfitters contact Petragallo to guide clients on fishing trips. Because the Forest Service licenses only outfitters to sponsor fishing expeditions, every guide must display on the boat and vehicle he uses the insignia of the outfitter sponsoring the particular trip. Petragallo may agree or refuse to take individuals Western refers to him, and Western does not restrict him from guiding expeditions for other outfitters. Western pays Petragallo a certain sum per fishing trip and does not make any deductions from his compensation. Petragallo’s responsibilities include transporting patrons to the Green River, using his own boat for fishing trips, providing food and overnight needs for patrons, assisting patrons in fly fishing, and transporting them from the river to their vehicles.

Robert McMaster contacted Western and arranged for a fishing trip for him and two others.

Jaeger was a member of McMaster’s fishing party. McMaster paid Western, which set the price for the trip, planned the itinerary for the McMaster party, rented fishing rods to them, and arranged for Petragallo to be their guide. When Petragallo met the McMaster party, he answered affirmatively when the plaintiff asked him if he worked for Western. Petragallo provided his own vehicle and boat and supplied the food, equipment, and gasoline for the trip. Both the vehicle and the boat had signs bearing Western’s identification and logo. While driving the McMaster party back to town at the conclusion of the fishing trip, Petragallo lost control of his vehicle and got into an accident, injuring Jaeger. a. What arguments could Jaeger make for claiming that Petragallo was an employee of Western? b. What arguments could Western make for claiming that Petragallo was an independent contractor? c. Which side should prevail?

Answer: (a) Jaeger argues that Petragallo was Western’s employee, and, thus, Western is liable for Petragallo’s actions. Jaeger could argue that Western has control over Petragallo through its advertising and arranging of fishing expeditions. Although

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Petragallo may refuse to guide patrons, Western apparently contacts Petragallo only after Western has planned the fishing trip, without involving him, and may provide him with a set itinerary. Also, Forest Service licensing regulations place Western in a position of having the ultimate right to control Petragallo’s work as, without solicitations from Western and other outfitters, Petragallo would be prohibited completely from conducting fishing expeditions. (b) Western contends Petragallo was never its employee and instead is an independent contractor for whose conduct Western is not liable as a matter of law. Western engages Petragallo to guide particular fishing trips, for a set sum, allowing him to conduct the trips in his own discretion. Petragallo may even choose to refuse to guide patrons Western has referred to him. Western’s actions appear to involve setting up the parameters of a fishing trip and place “only minimal restrictions or controls” upon Petragallo. Moreover, although Petragallo must operate under Western’s license, as required by the Forest Service, Western does not control the manner in which Petragallo conducts fishing trips. Apparently, once Western sets up a fishing trip and engages Petragallo as a guide, it relies upon and expects Petragallo to use his own discretion in doing everything else to ensure that patrons have an enjoyable experience, including using his own expertise, vehicle, boat, and equipment. Finally, because Forest Service licensing regulations prohibit an individual river guide from conducting tours unless sponsored by an outfitter, it may be argued that, if Petragallo is subject to any control, it is by the Forest Service, not Western. (c) The facts of this case, relative to whether Petragallo is Western’s employee or an independent contractor, do not point only to a single conclusion. In general, an employee is one who is hired and paid a salary, a wage, or at a fixed rate to perform the employer’s work as directed by the employer and who is subject to a comparatively high degree of control in performing those duties. In contrast, an independent contractor is one who is engaged to do some particular project or piece of work, usually for a set total sum, who may do the job in his own way, subject to only minimal restrictions or controls and who is responsible only for its satisfactory completion. Factors a court may consider in determining the nature of the relationship include (1) whatever agreements exist concerning the right of direction and control over the employee, whether express or implied; (2) the right to hire and fire; (3) the method of payment—whether in wages or fees, as compared with payment for a complete job or project; and (4) the furnishing of the equipment. None of these factors separately is controlling. In applying the above factors and standards, the court concluded that determining the nature of Petragallo’s relationship with Western is a factual issue inappropriate for summary judgment. Jaeger v. Western Rivers Fly Fisher, United States District Court, 1994, 855 F. Supp. 1217.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 29: Relationship with Third Parties

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 29: Relationship with Third Parties

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ............................................................................. 14

ANSWERS TO ETHICAL DILEMMA When Should an Agent’s Power to Bind His Principal Terminate?

1. Who is legally responsible for the bills? Who is ethically responsible?

2. What is the social policy behind the requirement of notice prior to termination of a principal-agent relationship?

3. Does Tim have a responsibility to the greenhouses to notify them of the source of his funds, as long as the bill is paid?

Answer: 1. As was noted above, a principal is liable for contracts made on their behalf by an agent until actual notice is given to those with whom the agent has been dealing. GHFI is therefore responsible for the bills in question. While GHFI might have some recourse against Tim, they must pay the bills.

Ethically, GHFI acted poorly. They were trying to get the best of both worlds. They wanted to keep Tim’s reputation but not Tim. And they definitely did not want to pay the bills. They wanted the advantages without what they considered to be the disadvantages. Even if this were legal, it was totally unethical. The parties that suffered were the greenhouses who were simply innocent bystanders in this case.

2. We are all potential third parties in dealings with principals and agents. If we could not be confident in our ability to enforce the contract, and know against whom it could be enforced, we would never make deals with agents. This would slow down and substantially change the face of commercial transactions, which would severely retard the economic progress of society.

3. Legally the responsibility for notice usually falls on the principal. But ethically, not only should Tim notify the greenhouses of the change, he should not have made any deals with them without their knowing. Caveat emptor has no place in these types of arrangements, nor do the effects of secret agreements between an agent and a principal. By not revealing the truth, Tim has told a constructive lie, which means he, ethically, has not even achieved the level of the moral minimum. His actions were, therefore, anti-social and lacking in moral fiber. In short, he acted unethically.

The law and social policies, as noted in a working paper on “Ethics and the Law,” 1992,

by Cermignano, help to establish a minimum conduct. But ethics goes beyond. If you

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are not achieving the moral minimum, your actions surely could not be considered ethical. And this is what we find here. Tim was unethical in its truest sense by not revealing the source of the funds or the nature of his new arrangement. He lied and this is ethically inexcusable.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Alice was Peter’s traveling salesperson and was authorized to collect accounts. Before the agreed termination of the agency, Peter wrongfully discharged Alice. Peter did not notify anyone of Alice’s termination. Alice then called on Tom, an old customer, and collected an account from Tom. She also called on Laura, a new prospect, as Peter’s agent, secured a large order, collected the price of the order, sent the order to Peter, and disappeared with the collections. Peter delivered the goods to Laura per the order. a. Explain what the result will be if Peter sues Tom for his account. b. Explain what the result will be if Peter sues Laura for the agreed price of the goods.

Answer: (a) Decision for Tom. Under the Second Restatement, Peter wrongfully terminated the agency. In such cases, the principal, in order to protect himself against possible future liability for the acts of his former agent, must give notice to third persons of the termination of the agency. Where, as here, a third person (Tom) has previously dealt on credit with Peter through his agent, Alice, Peter must give him actual notice. Since Tom did not receive notice from Peter, either oral or written, he had no reason to suspect that the agency relationship between Peter and Alice had been terminated and was justified in paying his account to Alice.

Same result would obtain under the Third Restatement. The general rule of the Third Restatement is that it is reasonable for third parties to assume that an agent’s actual authority continues, unless and until a third party has notice of circumstances that make it unreasonable to continue that assumption. These circumstances include, for example, notice that the principal has revoked the agent’s actual authority, that the agent has renounced it, or that circumstances otherwise have changed such that it is no longer reasonable to believe that the principal consents to the agent’s act on the principal’s behalf. Restatement, Section 3.11, comment c. A person has notice of a fact if the person knows the fact, has reason to know the fact, has received an effective notification of the fact, or should know the fact to fulfill a duty owed to another person. Restatement, Section 1.04(4). Here there was no notice. (b) Decision in favor of Laura. Under the Second Restatement, although the authority of Alice to collect had been terminated before Alice dealt with Laura, and Laura had not been a customer of Peter prior to such termination, if Laura knew of the agency while it was in force, Alice had continuing apparent authority until Laura received constructive notice of the termination of the agency relationship. Since Peter did not publish such notice in a newspaper of general circulation in the place where the agency is conducted, Peter is bound by Alice’s acts. The same result would obtain under the Third Restatement. Here there was no notice.

If Laura had not known of the agency, then Alice was without apparent authority, but Peter’s acceptance of the order and shipment of goods was a ratification of Alice’s unauthorized act.

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2. Paula instructed Alvin, her agent, to purchase a quantity of hides. Alvin ordered the hides from Ted in his own (Alvin’s) name and delivered the hides to Paula. Ted, learning later that Paula was the principal, sends the bill to Paula, who refuses to pay Ted. Ted sues Paula and Alvin. What are Ted’s rights against Paula and Alvin?

Answer: Ted is entitled to recover the price either from Alvin or Paula, but not both of them. Upon learning of the undisclosed principal, Ted may treat Alvin as the agent and hold the principal (Paula) liable or he may disregard Paula and hold Alvin with whom he contracted liable as a principal. Ted may bring suit against Alvin and Paula, but before conclusion of the trial, he must make an election as to which one he wishes to take judgment against.

Ted is entitled to recover the price from Alvin and/or Paula. The Third Restatement and a number of states have recently rejected the election rule, holding that a third party’s rights against the principal are additional and not alternative to the third party’s rights against the agent. Section 6.09 provides, “When an agent has made a contract with a third party on behalf of a principal, unless the contract provides otherwise, the liability, if any, of the principal or the agent to the third party is not discharged if the third party obtains a judgment against the other.” However, the liability, if any, of the principal or the agent to the third party is discharged to the extent a judgment against the other is satisfied.

3. Stan sold goods to Bill in good faith, believing him to be a principal. Bill in fact was acting as agent for Nancy and within the scope of his authority. The goods were charged to Bill, and, on his refusal to pay, Stan sued Bill for the purchase price. While this action was pending, Stan learned of Bill’s relationship with Nancy. Nevertheless, thirty days after learning of that relationship, Stan obtained judgment against Bill and had an execution issued that was never satisfied. Three months after the judgment was made, Stan sued Nancy for the purchase price of the goods. Is Nancy liable? Explain.

Answer: No, Nancy is not liable to Stan, but is liable to Bill for reimbursement if Bill pays any or all of the judgment. If Stan had obtained his judgment against Bill before he learned that Nancy was an undisclosed principal clearly, he could proceed against Nancy upon learning of the relationship. Although his action against Bill was instituted before he learned of Nancy, he did not take judgment against Bill until thirty days after he learned of Nancy’s relationship with Bill. Under the circumstances, Stan is not entitled to collect from Nancy. Restatement, Agency, Second, Section 210 states: “An undisclosed principal is discharged from liability upon a contract if, with knowledge of the identity of the principal, the other party recovers judgment against the agent who made the contract, for breach of the contract.”

The Third Restatement and a number of states have recently rejected the election rule, holding that a third party’s rights against the principal are additional and not alternative to the third party’s rights against the agent. Section 6.09 provides, “When an agent has made a contract with a third party on behalf of a principal, unless the contract provides otherwise, the liability, if any, of the principal or the agent to the third party is not discharged if the third party obtains a judgment against the other.”

However, the liability, if any, of the principal or the agent to the third party is discharged to the extent a judgment against the other is satisfied.

4. Green Grocery Company employed Jones as its manager and gave her authority to purchase supplies and goods for resale. Jones had conducted business for several years with Brown Distributing Company, although her purchases had been limited to groceries.

Jones contacted Brown and had it deliver a television set to her house. She told Brown

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that the set was to be used in promotional advertising to increase Green’s business. The advertising did not develop, and Jones disappeared from the area, taking the television set with her. Brown now seeks to recover the purchase price of the set from Green. Will Brown prevail? Explain.

Answer: No, Green will prevail. Generally, an agent has implied authority to make reasonable and necessary purchases for his principal, who is bound by the act of the agent within the scope of apparent authority. Payment of bills for merchandise sold to an agent by his principal is sufficient to establish apparent authority, especially where this practice is continued over a period of time and the principal is estopped to deny the agent’s authority. It is a generally recognized rule of law that an agent has implied or apparent authority to purchase those items required in the prosecution of the business he represents.

The burden is upon the plaintiff, Brown Company, to prove the authority of the agent, Jones, and that she had authority to make the specific purchase in question. The authority to buy one type of goods is insufficient to establish authorization to buy an entirely different type. While a general agent has authority to bind the principal as to matters within the proper scope of the business, the authority is limited to acts customary and usual in the business involved. Here the purchase was different from prior dealings. The set was delivered to the home of the agent and Brown Company is charged with the duty of determining actual authority.

The question of acceptance of benefits or ratification is not involved here.

5. Stone was the agent authorized to sell stock of the Turner Company at $10 per share and was authorized in case of sale to fill in the blanks in the certificates with the name of the purchaser, the number of shares, and the date of sale. He sold one hundred shares to Barrie, and without the knowledge or consent of the company and without reporting to the company, he indorsed the back of the certificate as follows: “It is hereby agreed that Turner Company shall, at the end of three years after the date, repurchase the stock at $13 per share on thirty days’ notice. Turner Company,

by Stone.”

After three years, demand was made on Turner Company to repurchase. The company refused the demand and repudiated the agreement on the ground that the agent had no authority to make the agreement for repurchase. Is Turner Company liable to Barrie?

Explain.

Answer: No, Turner Company is not liable. The agent was employed to sell shares of stock. He had no express authority to repurchase stock. There is no implied authority since an agreement by a corporation to repurchase its stock is not usual or customary and is contrary to the purpose for which the stock is sold, namely, to raise capital.

There is no basis whatever for any apparent authority. The act of Stone was completely unauthorized.

6. Helper, a delivery boy for Gunn, delivered two heavy packages of groceries to Reed’s porch. As instructed by Gunn, Helper rang the bell to let Reed know the groceries had arrived. Mrs. Reed came to the door and asked Helper if he would deliver the groceries into the kitchen because the bags were heavy. Helper did so, and on leaving he observed Mrs. Reed having difficulty in moving a cabinet in the dining room. He undertook to assist her, but being more interested in watching Mrs. Reed than in noting the course of the cabinet, he failed to observe a small, valuable antique table, which he smashed into with

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the cabinet and destroyed. Does Reed have a cause of action against Gunn for the value of the destroyed antique? Why or why not?

Answer: No. Gunn is liable for the negligent acts of his employee committed within the scope or course of his employment but is not liable for acts of an employee or agent that are unrelated to performance of the duties he was employed to perform. The duties of the delivery boy included only delivering groceries to the front porch and ringing the bell and not only did not entail carrying the goods inside but certainly did not entail his aiding the customer in a chore such as this. His act was voluntary and merely an act of courtesy, and having so volunteered, the act became a joint enterprise of Mrs. Reed and Helper for the accomplishment of special business of Mrs. Reed, which was not the business of Gunn.

7. Driver picked up Friend to accompany him on an out-of-town delivery for his employer, Speedy Service. A “No Riders” sign was prominently displayed on the windshield of the truck, and Driver violated specific instructions of his employer by permitting an unauthorized person to ride in the vehicle. While discussing a planned fishing trip with Friend, Driver ran a red light and collided with an automobile driven by Motorist. Both Friend and Motorist were injured. Is Speedy Service liable to either Friend or Motorist for the injuries they sustained? Explain.

Answer: Speedy Service is liable to Motorist but is not liable to Friend.

Driver was making a delivery within the course of his employment and his negligent act of running the red light will make his employer responsible for the injuries sustained

by Motorist. The mere fact that the driver had an unauthorized passenger does not of itself render the servant outside the scope of his employment insofar as Motorist is concerned. Driver violated the employer’s rule as to unauthorized passengers, but he had not abandoned the business of Speedy Service as he was making a delivery for his employer. If Driver had abandoned the business of his employer and embarked upon an adventure for himself, such as taking a trip to the lake where Friend and Driver planned to fish, then such conduct would be outside the scope of his employment and in that event Speedy Service would not be liable to Motorist. Such is not the case here as Driver was on his employer’s business at the time of the collision.

Speedy Service is not liable to Driver’s unauthorized invitee who was injured by the negligence of Driver. Driver’s invitation of Friend was outside the scope or course of his employment. Driver had no apparent authority to invite Friend to take a ride as he was specifically instructed not to do so and the “No Riders” sign demonstrated his lack of authority. Friend was accompanying Driver for personal reasons unrelated to the employment of Driver by Speedy Service.

8. Cook’s Department Store advertises that it maintains a barber shop in its store and that the shop is managed by Hunter, a Cook’s employee. Actually, Hunter is not an employee of the store but merely rents space in the store. While shaving Jordan in the barbershop, Hunter negligently puts a deep gash, requiring ten stitches, into one of Jordan’s ears.

Should Jordan be entitled to collect damages from Cook’s Department Store? Why or why not?

Answer: Yes. By advertising that it maintained a barbershop in its store in charge of Hunter, Cook’s Department Store has caused third persons reasonably to believe that Hunter is its employee. The store is therefore estopped from asserting the fact that Hunter is not its employee because to allow it to do so would be unfair and unjust to persons who, in good faith and in reliance upon the advertisements, engaged Hunter’s

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 29: Relationship with Third Parties

services in the mistaken belief that he was an employee of the store. This problem presents a case of agency by estoppel or apparent authority.

9. The following contract was executed on August 22: Ray agrees to sell, and Shaw, the representative of Todd and acting on his behalf, agrees to buy 10,000 pounds of 0.32  1 5/8 stainless steel strip type 410. (signed) Ray (signed) Shaw On August 26 Ray informs Shaw and Todd that the contract was in reality signed by him as agent for Upson. What are the rights of Ray, Shaw, Todd, and Upson in the event of a breach of the contract? Explain.

Answer: Ray, Todd, and Upson are bound by the contract, but Shaw is not. (a) Ray, although an agent for Upson, is bound because of his failure to reveal the agency. The agent is personally liable upon a contract she enters into with a third person on behalf of an undisclosed principal. Restatement, Section 6.03(2). Since he appears in the written contract as a principal, he cannot show that he intended to sign the contract merely as an agent. (b) Since Shaw signed the contract only as the agent for Todd, Shaw is not bound by the contract, but Todd is bound. When an agent acting with actual or apparent authority makes a contract with a third party on behalf of a disclosed principal, the agent is not a party to the contract unless she and the third party agree otherwise.

Restatement, Section 6.01(2). (c) Upson is bound by the contract as an undisclosed principal. An undisclosed principal and the third party are parties to the contract if the agent acts within her actual authority in making the contract on the principal’s behalf unless (a) the terms of the contract exclude the principal or (b) his existence is fraudulently concealed. Restatement, Sections 6.03 and 6.11(4).

10. Harris, owner of certain land known as Red Bank, mailed a letter to Byron, a real estate broker in City X, stating, “I have been thinking of selling Red Bank. I have never met you, but a friend has advised me that you are an industrious and honest real estate broker. I therefore employ you to find a purchaser for Red Bank at a price of $350,000.” Ten days after receiving the letter, Byron mailed the following reply to Harris: “Acting pursuant to your recent letter requesting me to find a purchaser for Red Bank, this is to advise that I have sold the property to Sims for $350,000. I enclose your copy of the contract of sale signed by Sims. Your name was signed to the contract by me as your agent.” Is Harris obligated to convey Red Bank to Sims? Explain.

Answer: No. There is no actual authority. Byron was not authorized by the letter to Harris to effect a sale of Red Bank. He was merely authorized to find a buyer. The problem is silent regarding the existence of a custom in the real estate business that the broker has the authority to effect a sale. The duty rested upon Sims to ascertain precisely Byron’s authority unless there is a custom in the real estate brokerage business in the community where the transaction occurred that the real estate broker had the authority to make a sale.

11. While crossing a public highway in the city, Joel was struck by a horse-drawn cart driven

by Morison’s agent. The agent was traveling between Burton Crescent Mews and Finchley on his employer’s business and was not supposed to go into the city. Apparently, the © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 29: Relationship with Third Parties

agent was on a detour to visit a friend when the accident occurred. Joel brought this action against Morison for the injuries he sustained as a result of the agent’s negligence.

Morison argues that he is not liable for his agent’s negligence because the agent had strayed from his assigned path. Who is correct? Why? Answer: Joel is correct. Under the doctrine of respondeat superior, the principal is liable for his agent’s negligence only if the agent was acting in the course of his employment at the time of the accident. On the other hand, the principal is not liable if the accident occurred while the agent was out on a frolic of his own and not on his master’s business. In this case, however, the agent was driving on Morison’s business but had gone out of his way against his master’s implied command in order to visit a friend. Joel v. Morison, 6 Carrington & Payne Reports, 501 Court of Exchequer, 1833) (England).

12. Serges is the owner of a retail meat marketing business. Without authority his managing agent borrowed $3,500 from David, on Serges’s behalf for use in Serges’s business. Serges paid $200 on the alleged loan and on several other occasions told David that the full balance owed would eventually be paid. He then disclaimed liability on the debt, asserting that he had not authorized his agent to enter into the loan agreement. Should David succeed in an action to collect on the loan? Explain.

Answer: Yes, judgment for David. Serge’s partial payment and his promise to pay off the loan constituted a ratification of his agent’s action. Ratification is the principal’s affirmance of a prior act by the agent that would not otherwise have been binding on the principal. Its effect is to bind the principal as if the agent’s act had been authorized. David v. Serges, 373 Mich. 442, 129 N.W. 2d 882 (1964).

13. Sherwood negligently ran into the rear of Austen’s car, which was stopped at a stoplight.

As a result, Austen received bodily injuries and her car was damaged. Sherwood, arts editor for the Mississippi Press Register, was en route from a concert he had covered for the newspaper. When the accident occurred, he was on his way to spend the night at a friend’s house. Austen sued Sherwood and—under the doctrine of respondeat superior— Sherwood’s employer, the Mississippi Press Register. Who is liable? Explain.

Answer: Sherwood is liable, but the Mississippi Press Register is not. Under the doctrine of respondeat superior, the negligent acts of an employee on his way to and from work are not generally imputed to his employer. The determination of liability depends upon whether the employee’s conduct is more closely related to his employment duties or to purely personal considerations separate from the employer’s interests.

Here, Sherwood was on his way from work to visit a friend. This excursion in no way benefited his employer, nor was it related to his employment duties. It did not occur within the course and scope of Sherwood’s employment. Therefore, his employer, the Mississippi Press Register, is not liable. Austen v. Sherwood, 425 So. 2d 818 (Louis.

1983).

14. Aretta J. Parkinson owned a two-hundred-acre farm in a state that requires written authority for an agent to sell land. Prior to her death on December 23, Parkinson deeded a one-eighth undivided interest in the farm to each of her eight children as tenants in common. On January 15 of the following year, one of the daughters, Roma Funk, approached Barbara Bradshaw about selling the Parkinson farm to the Bradshaws. They orally agreed to a selling price of $800,000. After this meeting, Funk contacted Bryant Hansen, a real estate broker, to assist her in completing the transaction. Hansen prepared an earnest money agreement that was signed by the Bradshaws but by none of the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 29: Relationship with Third Parties

Parkinson children. Hansen also prepared warranty deeds, which were signed by three of the children. Several of the children subsequently refused to convey their interests in the farm to the Bradshaws. Explain whether the Bradshaws can get specific performance of the oral contract of sale, based on the defendants’ ratification of the oral contract by their knowledge of and failure to repudiate it.

Answer: No, implied ratification is not allowed in this case. Ratification of an agent’s unauthorized conduct may be express or implied. It is imperative, though, that the principal have full knowledge of all material facts since the ratification cannot subsequently be revoked. If formalities are required for the authorization of an act, the same formalities apply to a ratification of that act. Restatement, Section 4.01, comment e. Since the law requires that Funk’s authority must have been given in writing, the ratification must also have been in writing. Therefore, implied ratification is not allowed in this case. Bradshaw v. McBride, 649 P. 2d 74 (Utah 1982).

15. Chris Zulliger was a chef at the Plaza Restaurant in the Snowbird Ski Resort in Utah. The restaurant is located at the base of a mountain. As a chef for the Plaza, Zulliger was instructed by his supervisor and the restaurant manager to make periodic trips to inspect the Mid-Gad Restaurant, which was located halfway up the mountain. Because skiing helped its employees to get to work, Snowbird preferred that its employees know how to ski and gave them ski passes as part of their compensation. One day prior to beginning work at the Plaza, Zulliger went skiing. The restaurant manager asked Zulliger to stop at the Mid-Gad before beginning work that day, and Zulliger stopped at the Mid-Gad during his first run and inspected the kitchen. He then skied four runs before heading down the mountain to begin work. On the last run, Zulliger decided to take a route often taken by Snowbird employees. About midway down, Zulliger decided to jump off a crest on the side of an intermediate run. Because of the drop, a skier above the crest cannot see if there are skiers below, and Zulliger ran into Margaret Clover, who was below the crest. The jump was well known to Snowbird; the resort’s ski patrol often instructed people not to jump, and there was a sign instructing skiers to take it slow at that point. Clover sued Zulliger and, under the doctrine of respondeat superior, Snowbird, claiming that Zulliger had been acting within the scope of his employment. Who is liable? Explain.

Answer: Zulliger is liable. In addition, Snowbird may be held liable if Zulliger was acting within the course of employment. Under the circumstances of the instant case, it is entirely possible for a jury to reasonably believe that at the time of the accident, Zulliger had resumed his employment and that Zulliger’s deviation was not substantial enough to constitute a total abandonment of employment. First, a jury could reasonably believe that by beginning his return to the base of the mountain to begin his duties as a chef and to report to Mandler concerning his observations at the MidGad, Zulliger had resumed his employment. If the employee has resumed the duties of employment, the employee is then “about the employer’s business” and the employee’s actions will be “motivated, at least in part, by the purpose of serving the employer’s interest.” The fact that due to Zulliger’s deviation, the accident occurred at a spot above the Mid-Gad does not disturb this analysis. In situations where accidents have occurred substantially within the normal spatial boundaries of employment, we have held that employees may be within the scope of employment if, after a personal detour, they return to their duties and an accident occurs. Clover v. Snowbird Ski Resort, 808 P. 2d 1037 (1991).

16. Van D. Costas, Inc. (Costas) entered into a contract to remodel the entrance of the Magic Moment Restaurant owned by Seascape Restaurants, Inc. Rosenberg, part owner and president of Seascape, signed the contract on a line under which was typed “Jeff Rosenberg, The Magic Moment.” When a dispute arose over the performance and payment

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 29: Relationship with Third Parties

of the contract, Costas brought suit against Rosenberg for breach of contract. Rosenberg contended that he had no personal liability for the contract and that only Seascape, the owner of the restaurant, was liable. Costas claimed that Rosenberg signed for an undisclosed principal and, therefore, was individually liable. Explain whether Rosenberg is liable on the contract.

Answer: Yes, Rosenberg is individually liable. To avoid personal liability, an agent must disclose both that he is acting as an agent and the identity of his principal. If the contracting party knows the identity of the principal for whom the agent is acting, the principal is considered disclosed. It is not the contracting party’s duty to seek out the identity of the principal.

Here, nothing indicates that Costas had ever heard of Seascape at the time the contract was signed. Moreover, use of a trade name (here, Magic Moment) is not sufficient disclosure of the identity of the principal. Rosenberg knew that Seascape was the owner, and he could have avoided personal liability by properly disclosing the identity of his principal. Since he did not, Rosenberg is personally liable. Van D. Costas, Inc. v. Rosenberg, 432 So. 2d 656 (1983).

17. Virginia and her husband Ronnie Hulbert were involved in an accident in Mobile County when their automobile collided with another automobile driven by Dr. Murray’s nanny. The nanny’s regular duties of employment included housekeeping, supervising the children, and taking the children places that they needed to go. At the time of the collision, the nanny was driving her own car and was following Dr. Murray and her family to Florida from Louisiana to accompany Dr. Murray’s family on their vacation. One of Dr. Murray’s daughters was in the automobile driven by the nanny. Virginia Hulbert sued Dr. Murray under the doctrine of respondeat superior, alleging that the nanny was acting within the scope of her employment when the automobile accident occurred. Should she be able to recover from Dr. Murray? Explain.

Answer: Yes. To recover from a tortfeasor’s employer on the theory of respondeat superior, the plaintiff must show by substantial evidence that the employee’s act was within the scope or course of the employee’s employment. An act is within an employee’s scope of employment if the act is done as part of the duties the employee was hired to perform or if the act confers a benefit on his employer. Dr. Murray and the nanny assert that the nanny was on vacation at the time of the accident and that while on vacation she was not to perform any of the duties she had been hired to perform. Hulbert responded with four pieces of evidence. First, Hulbert proffered an affidavit from her husband in which he stated that shortly after the accident both Dr. Murray and the nanny had stated that the nanny was going to the beach with the Murray family to help Dr. Murray take care of the children—a duty the nanny was hired to perform. Second, it is undisputed that one of Dr. Murray’s daughters was a passenger in the car with the nanny at the time of the accident. Third, it is undisputed that the nanny was to receive her regular salary for the week spent at the beach.

Fourth, although the nanny was driving her own car, Dr. Murray was to pay for the lodgings, which the nanny was to share at the beach. While Dr. Murray asserts that her daughter rode with the nanny for personal reasons and that the pay received by the nanny was vacation pay, these contentions merely underscore that there is a genuine issue of material fact as to whether at the time of the accident the nanny was acting for personal motives or for employment motives. Hulbert v. State Farm Mutual Automobile Insurance Company, 723 So. 2d 22 (1998).

18. Raymond Zukaitis was a physician practicing medicine in Douglas County, Nebraska. Aetna issued a policy of professional liability insurance to Zukaitis through its agent, the Ed

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 29: Relationship with Third Parties

Larsen Insurance Agency. The policy covered the period from August 31, 2022, through August of the following year. On August 7, 2024, Dr. Zukaitis received a written notification of a claim for malpractice that had occurred on September 27, 2022. Dr. Zukaitis notified the Ed Larsen Insurance Agency immediately and forwarded the written claim to it. The claim was then mistakenly referred to St. Paul Fire and Marine Insurance Company, the company that currently insured Dr. Zukaitis. Apparently without notice to Dr. Zukaitis, the agency contract between Larsen and Aetna had been canceled on August 1, 2023, and St. Paul had replaced Aetna as the insurance carrier. However, when St. Paul discovered it was not the carrier on the date of the alleged wrongdoing, it notified Aetna and withdrew from Dr. Zukaitis’s defense. Aetna also refused to represent Dr. Zukaitis, contending that it was relieved of its obligation to Dr. Zukaitis because he had not notified Aetna immediately of the claim. Dr. Zukaitis then secured his own attorney to defend against the malpractice claim and brought an action against Aetna to recover attorneys’ fees and other expenses incurred in the defense. Should Dr. Zukaitis recover? Explain.

Answer: Yes, judgment for Dr. Zukaitis. Aetna is responsible for the defense of Dr. Zukaitis. The notice given by Dr. Zukaitis to Larsen, the agent of Aetna, constitutes notice to Aetna and obligates it to carry out the terms of its insurance contract with Dr. Zukaitis. A revocation of the agent’s authority does not become effective between the principal and third persons until they receive notice of the termination. More specifically, when an insurer terminates the agency contract, it is its duty to notify third persons, such as the insureds with whom the agent dealt, and inform them of such termination. If it does not do so and such third persons or insureds deal with the agent without notice or knowledge of the termination and in reliance on the apparently continuing authority of the agent, the insurer is bound by the acts of the former agent.

Therefore, the notice given by Zukaitis to Larsen, the agent of Aetna, obligates Aetna to carry out the terms of its insurance contract with Dr. Zukaitis and to provide for his defense against the malpractice claim. Zukaitis v. Aetna Casualty and Surety Co., 236 N.W. 2d 819.

19. Tommy Blair, Sr. was the sole owner and president of Tommy Blair, Inc., d/b/a Courtesy Autoplex. His son, Thomas Blair, Jr., was a management employee who supervised employees within the service department. On September 28, Tommie Lee Patterson entered into an agreement with Courtesy to trade his Camaro for a new GMC Jimmy. At the time of the trade, Patterson owed $12,402.82 on the Camaro. Despite this, he incorrectly informed Courtesy that he owed only $9,500 on the car. The transaction occurred at a time when Courtesy could not verify the payoff amount on the loan.

Courtesy allowed Patterson to take possession of the Jimmy but did not transfer title. An agreement was also executed providing that (a) Courtesy would credit Patterson if he had overstated his outstanding indebtedness on the Camaro and (b) Patterson would pay the difference if his figure understated that amount. The next day, Courtesy discovered the amount Patterson actually owed on the Camaro. When notified of this discrepancy, Patterson refused to pay the additional sum and refused to return the Jimmy. Courtesy subsequently tried unsuccessfully to repossess the truck on at least two occasions. On October 4, Thomas Blair, Jr., and another Courtesy employee encountered Patterson, who was driving the Jimmy, on a public road. At a stoplight, Thomas Blair, Jr., exited his car and knocked on the Jimmy’s driver-side window, demanding that Patterson get out of the vehicle. When Patterson refused, Thomas Blair, Jr., drew a pistol he was carrying and fired two shots in the front tire and two shots in the rear tire of the Jimmy. Ultimately, the disabled truck was impounded and returned to Courtesy by the police. Thomas Blair, Jr., was convicted of wanton endangerment in the first degree, a felony. Patterson sued Thomas Blair, Jr., and Courtesy claiming that Courtesy was vicariously liable for the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 29: Relationship with Third Parties

tortious acts of its employee, Thomas Blair, Jr. Explain whether Courtesy is vicariously liable.

Answer: Thomas Blair, Jr. (“Blair, Jr.”) acted within the scope of employment, thereby imposing vicarious liability on Courtesy. Patterson v. Blair, 172 S.W. 3d 361, Kentucky Supreme Court (2005).

A jury awarded Patterson damages of $42,465.18 and found that Courtesy was vicariously liable for Blair, Jr.’s conduct. A divided panel of the Court of Appeals held that Blair, Jr., was not acting within the scope of his employment and therefore concluded that Courtesy could not be held liable under respondeat superior. *** This Court granted discretionary review to consider whether the jury’s verdict, holding Courtesy vicariously liable for Blair, Jr.’s actions, should be upheld. Having determined that the jury correctly determined that Blair, Jr., was acting within the scope of employment when he assaulted Patterson, we reverse the Court of Appeals and reinstate the jury’s verdict against Courtesy.*** Stated generally, the doctrine of respondeat superior, also called vicarious liability, provides the legal rationale for holding a master responsible for a tort committed by his servant. *** Vicarious liability is a long-standing principle of Kentucky’s tort law. *** An employer’s liability is limited only to those employee actions committed in the scope of employment. The central difficulty in applying the rule of respondeat superior focuses on this concept, especially when the tort in question was intentional (as opposed to merely the result of negligence). Thus, the question inevitably arises: What does “scope of employment” mean? *** Kentucky’s approach is precisely the standard advanced by Prosser and Keeton when they explained that “in general, … the master is held liable for any intentional tort committed by the servant where its purpose, however misguided, is wholly or in part to further the master’s business.” Prosser and Keeton at 505. Thus, if the servant “acts from purely personal motives …which [are] in no way connected with the employer’s interests, he is considered in the ordinary case to have departed from his employment, and the master is not liable.” Id. at 506. This sound approach also conforms to the economic theory of vicarious liability, discussed above, because when the employee acts for solely personal reasons, the employer’s ability to prevent the tort is limited. See Landes and Posner at 208-09.

In fact, Kentucky’s emphasis on employee motive has been embraced in the Tentative Draft of the Third Restatement of Agency. The Tentative Draft rejects formulations based on assessments of foreseeability and instead states that an “employee’s act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer.”

Restatement (Third) of Agency § 7.07 (Tentative Draft No. 5, 2004). In explaining this change from the Second Restatement of Agency, the commentators state that “[a]lthough formulations that focus on an employee’s intention may be difficult to apply in some cases, formulations based on assessments of ’forseeability’ are potentially confusing and may generate outcomes that are less predictable than intent-based formulations.” Id. § 7.07 cmt. b. *** Thus, one who is sent to collect a bill does not normally make the employer responsible if he seizes money from the debtor, since this would be an unusual and unexpectable proceeding of a bill collector. On the other hand, one who is sent to

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 29: Relationship with Third Parties

recapture property is likely to come into contact with a possessor unwilling to surrender it, and persons sent to recapture goods are frequently the kind who would be not unlikely to attempt force.

Restatement (Second) of Agency § 245 cmt. a (1958). *** Instead, the Court noted that there were divergent views on the issue among the states, and focused on another factor that survives today under all theories of determining respondeat superior liability, namely the effect of the criminal nature of the employee’s activity. The Bingham Court cited the Second Restatement of Agency for the proposition that whether the servant engaged in “a crime, especially if the crime is of some magnitude,” should be considered in determining whether or not the act is within the scope of employment. Id. at 428 (quoting Restatement (Second) of Agency § 231(a)).

The consideration of whether the conduct was criminal conduct also survives under the Tentative Draft of the Third Restatement of Agency. The Draft states: In determining whether an employee’s tortious conduct is within the scope of employment, the nature of the tort is relevant, as is whether the conduct also constitutes a criminal act. An employee’s intentionally criminal conduct may indicate a departure from conduct within the scope of employment, not a single escalation.

Restatement (Third) of Agency § 7.07 cmt. c (Tentative Draft No. 5, 2004). Prosser and Keeton also note that “[w]here the conduct of the servant is unprovoked, highly unusual, and quite outrageous, there has been something of a tendency to find that this in itself is sufficient to indicate that the motive was a purely personal one, but it seems clear that this cannot hold true in all cases.” Prosser and Keeton at 506 (footnotes omitted). *** Tommy Blair, Sr. (“Blair, Sr.”) was the sole owner and president of Courtesy. He had been in the automobile business for 35 years and had operated Courtesy for 22 years.

His son, Blair, Jr., had worked for Courtesy for 22 years and was at the time of the incident the service manager for Courtesy. Blair, Jr., with his father’s permission, represented himself as Vice President of Courtesy. Blair, Jr., was a management employee and supervised employees within the service department.

In explaining his decision to find Patterson on October 4th, 1995, Blair, Jr., testified that the purpose of his confrontation with Patterson was to retrieve “our property” and repossess the vehicle for Courtesy. Chris Wathen accompanied Blair, Jr., to confront Patterson. Blair, Jr., also testified that he carried a gun with him anytime he was outside the office and that he made no attempt to hide the gun.

When Blair, Jr., went to repossess the truck, Blair, Sr., knew that: (i) his son was looking for the truck; (ii) Patterson would not voluntarily relinquish the truck; and (iii) Patterson had threatened other Courtesy employees during a failed attempt to repossess the truck. Blair, Sr., testified that Courtesy did not ordinarily finance vehicle loans, but he also testified that Courtesy sometimes had to repossess vehicles, noting only that it was a “rare occurrence.” In fact, Blair, Jr., testified that another long-time employee, Mr. Dee, had handled repossessions for Courtesy up until the time of his death in June 1995, just a few months before the incident in this case. Thus, the record demonstrates that a reasonable juror could have concluded that Courtesy had previously repossessed cars. Furthermore, Blair, Sr.’s wealth of experience in the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 29: Relationship with Third Parties

automobile business certainly made him aware of what can occur during automobile repossession.

Clearly, in confronting Patterson and shooting out the truck’s tires, Blair, Jr., was acting to further the business interests of Courtesy. At the very least, his conduct was at least incidental to the conduct that was authorized by Courtesy. Here, just as in Frederick, Blair, Jr., was acting to protect his employer’s property. In fact, Blair, Jr.’s testimony explicitly confirmed this motive. And perhaps most importantly, there is no evidence that he sought to serve any personal purpose by his actions. Quite simply, he engaged in the act to further his employer’s business interests. This is clearly distinguishable from the acts of the employees in Wood and Osborne. And finally, although the act was criminal, it was not so outrageous to indicate that the motive was a personal one. Therefore, the jury’s finding that Blair, Jr., acted within the scope of employment, thereby imposing vicarious liability on Courtesy, is supported by the evidence and the law of this Commonwealth.

20. Frederick “Rick” Worrell conducted business as WRL Advertising. However, WRL Advertising was not a legal entity in its own right but rather a trade name for Wingfield, Bennett & Baer, LLC, which is owned and operated by Worrell. Martha J. Musil, an employee of WRL Advertising, placed advertising orders with the Plain Dealer Publishing Company at the direction of her employer. Musil communicated to the Plain Dealer that she was working on behalf of WRL Advertising. WRL did not pay for all of the advertising, and the Plain Dealer sued Worrell and Musil. Shortly after the case was brought, Worrell filed for bankruptcy. Explain whether Musil is personally liable on the contracts.

Answer: Musil is not personally liable because she disclosed the name and identity of her principal and thus was not acting on behalf of a nonexistent or fictitious principal.

Plain Dealer Publishing Co. v. Worrell, 178 Ohio App. 3d 485, 898 N.E. 2d 1009, Court of Appeals of Ohio, Ninth District, Summit County (2008).

The parties do not contest the fact that Musil communicated to the Plain Dealer that she was working on behalf of a principal. In Ohio, an agent is liable to a third party when she contracts in the name of a nonexistent or fictitious principal or assumes to act as an agent for a principal who has no legal status or existence. But Musil was not acting on behalf of a fictitious entity or an entity that does not exist in Ohio, but rather she acted for WRL Advertising, which was a fictitious name for Wingfield, Bennett, & Baer, L.L.C. “A corporation may use a name other than its corporate name in the conduct of its business.” In this case, the parties do not dispute that Wingfield, Bennett & Baer L.L.C. was registered with the Secretary of State. Therefore, Wingfield, Bennett & Baer is not a fictitious or nonexistent principal for agency law purposes. Furthermore, WRL Advertising was a fictitious name for Wingfield, Bennett & Baer and Musil was acting on behalf of Wingfield, Bennett & Baer, which was in turn using a fictitious name.

An agent will “avoid personal liability for debts of the corporation only if he complies with the rules which apply in all agency relationships—he must so conduct himself in dealing on behalf of the corporation with third persons that those persons are aware that he is an agent of the corporation and it is the corporation (principal) with which they are dealing, not the agent individually.” In this case, Musil disclosed that she was acting on behalf of a principal, and therefore, the Plain Dealer knew that it was not dealing with Musil individually. The Plain Dealer knew it was dealing with an entity, but that entity was using the fictitious name WRL Advertising. The use of a name other than Wingfield, Bennett & Baer in the conduct of business does not render Musil liable as an agent of a nonexistent or fictitious principal.

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ANSWERS TO “TAKING SIDES” PROBLEMS Sonenberg Company managed Westchester Manor Apartments through its on-site property manager, Judith. Manor Associates Limited Partnership, whose general partner is Westchester Manor, Ltd., owned the complex. The entry sign to the property did not reveal the owner’s name but did disclose that Sonenberg managed the property. Judith contacted Redi-Floors and requested a proposal for installing carpet in several of the units. In preparing the proposal, Redi-Floors confirmed that Sonenberg was the managing company and that Judith was its on-site property manager. Sonenberg did not inform Redi-Floors of the owner’s identity. Judith and her assistant orally ordered the carpet, and Redi-Floors installed the carpet. Redi-Floors sent invoices to the complex and received checks from “Westchester Manor Apartments.” Believing that Sonenberg owned the complex, Redi-Floors did not learn of the true owner’s identity until after the work had been completed when a dispute arose concerning the payment of some of its invoices. a. What arguments would support Redi-Floors in recovering on the outstanding invoices from both Sonenberg and Manor Associates? b. What arguments would limit Redi-Floors to recovering on the outstanding invoices from either Sonenberg or Manor Associates? c. Explain what the outcome would be under (1) the Second Restatement and (2) the Third Restatement.

Answer: (a) Redi-Floors could argue that Sonenberg never disclosed the name of Manor Associates Limited Partnership to Redi-Floors. Accordingly, Sonenberg acted for an undisclosed principal and upon discovery the identity of the principal Redi-Floors is entitled to a judgment against both the agent and the principal. The principal and agent each consented to create his own obligation. The two causes of action are not inconsistent, since the agent is liable because she made the contract, while the principal is liable because he caused it to be made. The undisclosed principal is made liable originally upon the transaction because he initiated it, because he profits by it, and because it is his business, conducted under his control. Thus, he should be liable and should be discharged only if the debt is paid. (b) Sonenberg and Manor Associates could argue that even if Manor Associates were an undisclosed principal, Redi-Floors may recover from either Sonenberg or Manor Associates but not from both. (c) An agent who makes a contract without identifying his principal becomes personally liable on the contract. If the agent wishes to avoid personal liability, “the duty is on him to disclose his agency, and not on the party with whom he deals to discover it.”

The agent’s disclosure of a trade name and the plaintiff’s awareness of that name are not necessarily sufficient so as to protect the agent from liability.

Under the Second Restatement and the rule in Georgia (where this case took place), Redi-Floors may recover from either Sonenberg or Manor Associates, but not both.

With respect to an undisclosed principal, if the buyer is in fact merely an agent and acts with the authority of an undisclosed principal, either he or such principal may be held liable at the election of the opposite party; but the contractual liability of such agent and principal is not joint, and, after an election to proceed against one, the other cannot be held regardless of whether the judgment is ever satisfied. So, Redi-Floors must make an election as to which defendant it will proceed against, as they can obtain a judgment against only one of the defendants. Redi-Floors, Inc. v. Sonenberg

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Co., Court of Appeals of Georgia, 2002, 254 Ga. App. 615, 563 S.E. 2d 505; certiorari denied.

The Third Restatement and a number of states have recently rejected the election rule described above in favor of a “satisfaction rule” holding that a third party’s rights against the principal are additional and not alternative to the third party’s rights against the agent. Under this approach Redi-Floors could recover on the outstanding invoices from both Sonenberg and Manor Associates. The Third Restatement provides, “When an agent has made a contract with a third party on behalf of a principal, unless the contract provides otherwise, the liability, if any, of the principal or the agent to the third party is not discharged if the third party obtains a judgment against the other.”

However, the liability, if any, of the principal or the agent to the third party is discharged to the extent a judgment against the other is satisfied. Thus, a creditor who contracts with an agent for an undisclosed principal may proceed to judgment against both agent and undisclosed principal but is limited to one satisfaction.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 30: Formation and Internal Relations of General Partnerships

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 30: Formation and Internal Relations of General Partnerships

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems ............................................................................. 10

ANSWERS TO ETHICAL DILEMMA When Is an Opportunity a Partnership Opportunity?

1.

Does Ted have an ethical responsibility to inform Karla of the opportunity to renew the lease?

2. Does it matter that the renewal offer for the long-term lease was initially raised in a dinner conversation between Ted and James?

3. Should Ted be free to sever relations with Karla with regard to the property? Consider that Ted has managed the property and no longer needs Karla’s capital. What competing social values does his dilemma involve?

Answer: (1) To the extent that the opportunity for the renewal arose as an incident to the joint enterprise between Ted and Karla, it may be argued that Ted has an ethical responsibility to inform Karla of the opportunity.

(2) If the offer was extended exclusively to Ted, it is easier for Ted to justify sole acceptance. Nevertheless, there remains a duty of loyalty to Karla, without whom Ted would not have received the opportunity. Further inquiry into the facts and circumstances may clarify the issues. Since it was not clear whether James made the offer to Ted alone, or to the partnership of Ted and Karla, the best and most fair next step would be for Ted to ask James if he intended to include Karla in the offer.

(3) Since this partnership between Ted and Karla had a specific purpose for a specific time which is coming to a close, either one could justifiably sever the relationship.

There is a social interest in freedom of business conduct and the termination of business. This freedom must be balanced, however, against the duty of loyalty to one’s partners.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Lynn and Jack jointly own shares of stock of a corporation, have a joint bank account, and have purchased and own as tenants in common a piece of real estate. They share equally the dividends paid on the stock, the interest on the bank account, and the rent from the © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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real estate. Without Lynn’s knowledge, Jack makes a trip to inspect the real estate and on his way runs over Samuel. Samuel sues Lynn and Jack for his personal injuries, joining Lynn as defendant on the theory that Lynn was Jack’s partner. Is Lynn a partner of Jack?

Explain.

Answer: Lynn is not liable. No partnership exists between Lynn and Jack merely by reason of their joint ownership of shares of stock of a corporation, or their joint bank account, or their passive ownership of real estate as tenants in common. If their ownership and renting of the property involved such active participation as to constitute a business, then Lynn and Jack would be considered partners. RUPA Section 202(c)(1), UPA Section 7(2). There is no association to carry on a business for profit.

2. James and Suzanne engaged in the grocery business as partners. In one year, they earned considerable money, and at the end of the year they invested a part of the profits in oil land, taking title to the land in their names as tenants in common. The investment was fortunate, for oil was discovered near the land, and its value increased many times. Is the oil land partnership property? Why or why not?

Answer: The oil land was most likely a partnership asset because it was acquired with partnership funds. RUPA Section 204(c), UPA Section 8(2). Property is presumed to be partnership property if purchased with partnership assets, even if not acquired in the name: (1) of the partnership or (2) of one or more partners with an indication in the instrument transferring title to the property: (a) of the person’s capacity as a partner or (b) of the existence of a partnership.

3. Sheila owned an old roadside building that she believed could be easily converted into an antique shop. She talked to her friend Barbara, an antique fancier, and they executed the following written agreement: a. Sheila would supply the building, all utilities, and $100,000 capital for purchasing antiques. b. Barbara would supply $30,000 for purchasing antiques, Sheila to repay her when the business terminated. c. Barbara would manage the shop, make all purchases, and receive a salary of $500 per week plus 5 percent of the gross receipts. d. Fifty percent of the net profits would go into the purchase of new stock. The balance of the net profits would go to Sheila. e. The business would operate under the name “Roadside Antiques.”

Business went poorly, and after one year a debt of $40,000 is owed to Old Fashioned, Inc., the principal supplier of antiques purchased by Barbara in the name of Roadside Antiques.

Old Fashioned sues Roadside Antiques, and Sheila and Barbara as partners. Decision?

Explain.

Answer: Old Fashioned will clearly recover from Roadside Antiques and Sheila.

Recovery from Barbara would be based upon showing that a partnership actually existed between Sheila and Barbara. RUPA Section 202(c)(2) and UPA Section 7(3) provide that the sharing of gross receipts does not of itself establish a partnership.

Barbara can point out that she participated in gross receipts regardless of profits, and she may allege that the agreement between Sheila and herself also amounts to an indemnity against losses, since Sheila’s obligation to repay her appears to be absolute.

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On the whole, Barbara appears to have the advantage on this issue. It appears that Sheila is operating as a sole proprietor. Recovery from Barbara, therefore, is not likely.

4. Clark, who owned a vacant lot, and Bird, who was engaged in building houses, entered into an oral agreement by which Bird was to erect a house on the lot. Upon the sale of the house and lot, Bird was to have his money first. Clark was then to have the agreed value of the lot, and the profits were to be equally divided. Did a partnership exist? Why or why not?

Answer: No partnership existed. The agreement is a joint venture. Clark and Bird were not “carrying on” a business but engaged in a single transaction involving contributions by each and an agreement to share profits.

5. Grant, Arthur, and David formed a partnership for the purpose of betting on boxing matches. Grant and Arthur would become friendly with various boxers and offer them bribes to lose certain bouts. David would then place large bets, using money contributed by all three, and would collect the winnings. After David had accumulated a large sum of money, Grant and Arthur demanded their share, but David refused to make any split. Can Grant and Arthur compel David to account for the profits of the partnership? Why or why not?

Answer: Grant and Arthur are not entitled to an accounting against David, as the business in which Grant, Arthur, and David engaged was illegal. The parties are left without a legal or equitable remedy and the court will leave them in the position in which they find themselves.

6. Teresa, Peter, and Walker were partners under a written agreement made in January that the partnership should continue for ten years. During the same year, Walker, being indebted to Smith, sold and conveyed his interest in the partnership to Smith. Teresa and Peter paid Smith $50,000 as Walker’s share of the profits for that year but refused Smith permission to inspect the books or to come into the managing office of the partnership.

Smith brings an action setting forth the above facts and asks for an account of partnership transactions and an order to inspect the books and to participate in the management of the partnership business. a. Does Walker’s action dissolve the partnership? b. To what is Smith entitled with respect to (1) partnership profits, (2) inspection of partnership books, (3) an account of partnership transactions, and (4) participation in the partnership management?

Answer: (a) No. Walker’s action does not dissolve the partnership. RUPA Section 503(a)(2), UPA Section 27(1). (b) (1) Smith is entitled to receive Walker’s share of the partnership profits. RUPA Section 503(b)(1), UPA Section 27(1). (2) Smith is not entitled to inspect the partnership books. RUPA Section 503(a)(3), UPA Section 27(1). (3) Smith is not entitled to an account of the partnership’s transactions. RUPA Section 503(a)(3), UPA Section 27(1). (4) Smith is not entitled to participate in the management or administration of the partnership business or affairs. RUPA Section 503(a)(3), UPA Section 27(1).

7. Horn’s Crane Service furnished supplies and services under a written contract to a partnership engaged in operating a quarry and rock-crushing business. Horn brought this action against Prior and Cook, the individual members of the partnership, to recover a personal judgment against them for the partnership’s liability under that contract. Horn

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has not sued the partnership itself, nor does he claim that the partnership property is insufficient to satisfy its debts. What result? Explain.

Answer: Judgment for Prior and Cook. A partnership is a legal entity distinct and apart from the members composing it. Therefore, in order to hold the individual partners liable, it is necessary for a creditor to show that the partnership property is insufficient to satisfy the debts of the partnership. The partnership relation is such that the separate property of a partner cannot be subjected to the payment of partnership debts until the property of the firm is exhausted. There are two reasons for this rule. First, since credit was extended to the partnership, the partnership property should be exhausted first. Second, to allow a partnership creditor to bypass the partnership’s assets and exhaust the assets of an individual member would allow the other partners to profit unjustly at his expense. Horn’s Crane Service v. Prior, 182 Neb. 94, 152 N.W. 2d 421 (1967). The outcome would be the same under the Revised Act. 8. Cutler worked as a bartender for Bowen until they orally agreed that Bowen would have the authority and responsibility for the entire active management and operation of the tavern business known as the Havana Club. Each was to receive $300 per week plus half of the net profits. The business continued under this arrangement for four years until the building was taken over by the Salt Lake City Redevelopment Agency. The agency paid $30,000 to Bowen as compensation for disruption. The business, however, was terminated after Bowen and Cutler failed to find a new, suitable location. Cutler, alleging a partnership with Bowen, then brought this action against him to recover one-half of the $30,000. Bowen contends that he is entitled to the entire $30,000 because he was the sole owner of the business and that Cutler was merely his employee. Cutler argues that although Bowen owned the physical assets of the business, she, as a partner in the business, is entitled to one-half of the compensation that was paid for the business’s goodwill and going-concern value. Who is correct? Explain.

Answer: Judgment for Cutler. The appellate court upheld the trial court’s determination that a partnership had been formed. One of the primary matters to consider in determining whether a partnership exists is the nature of the contribution each party makes to the enterprise. It need not be in the form of tangible assets or capital, but, as is frequently done, one partner may make such a contribution, and this may be balanced by the other’s performance of services and the shouldering of responsibility. On the question of whether profits shared should be regarded simply as wages, it is important to consider the degree to which a party participates in the management of the enterprise and whether the relationship is such that the party shares generally in the potential profits or advantages and thus should be held responsible for losses or liability incurred therein. Cutler v. Bowen, 543 P. 2d 1349 (Utah Supreme Court, 1975). The outcome would be the same under the Revised Act. 9. In 2014, Gauldin and Corn entered into a partnership for the purpose of raising cattle and hogs. The two men were to share equally all costs, labor, losses, and profits. The business was started on land owned initially by Corn’s parents but later acquired by Corn and his wife. No rent was ever requested or paid for use of the land. Partnership funds were used to bulldoze and clear the land, to repair and build fences, and to seed and fertilize the land. In 2018, at a cost of $2,487.50, a machine shed was built on the land. In 2020, a Cargill unit was built on the land at a cost of $8,000. When the partnership dissolved in 2024, Gauldin paid Corn $7,500 for the “removable” assets; however, the two had no agreement regarding the distribution of the barn and the Cargill unit. Is Gauldin entitled to one-half of the value of the two buildings? Explain.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 30: Formation and Internal Relations of General Partnerships

Answer: Yes, judgment for Gauldin. The well-established rule is that improvements made upon lands owned by one partner, if made with partnership funds for purposes of the partnership business, are the property of the partnership. The non-land-owning partner is then entitled to his proportionate share of the value of the improvements.

This general rule only applies, however, where there is no agreement between the partners controlling the disposition of the improvements.

Here, Gauldin and Corn had no agreement regarding the disposition of the fixed assets upon the partnership’s dissolution. The barn and Cargill unit, acquired with partnership funds for the purpose of raising cattle and hogs, are such fixed assets. Therefore, Gauldin is entitled to his proportionate share (one-half) of the value of the two buildings at the time of the partnership’s dissolution. Gauldin v. Corn, 595 S.W. 2d 329 (Mo. So. Dist. Div. 1 1980). The outcome would be the same under the Revised Act. 10. Anita and Duncan had been partners for many years in a mercantile business. Their relationship deteriorated to the point where Anita threatened to bring an action for an accounting and dissolution of the firm. Duncan then offered to buy Anita’s interest in the partnership for $250,000. Anita refused the offer and told Duncan that she would take no less than $360,000. A short time later, James approached Duncan and informed him he had inside information that a proposed street change would greatly benefit the business and that he, James, would buy the entire business for $1,000,000 or buy a one-half interest for $500,000. Duncan made a final offer of $350,000 to Anita for her interest.

Anita accepted this offer, and the transaction was completed. Duncan then sold the onehalf interest to James for $500,000. Several months later, Anita learned for the first time of the transaction between Duncan and James. What rights, if any, does Anita have against Duncan? Explain.

Answer: Anita has a right against Duncan for an accounting of the $150,000 difference in the sale price, and Anita may bring a suit in equity to impress a trust thereon. RUPA Section 404(b)(1) provides that a partner’s duty of loyalty to the partnership and the other partners includes the duty “to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity.” UPA Section 21 provides: (1) Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.

One partner will not be permitted directly or indirectly to purchase the interest of the other or reap any benefit therefrom without making a full and fair disclosure of all facts within his knowledge relative thereto. This relationship exists until a dissolution or termination of the partnership, and it is immaterial that the partners’ relationship is strained or that a suit for an accounting and dissolution is threatened. Here, Duncan did not make a full disclosure, which failure resulted in a $150,000 loss to Anita, his partner.

11. ABCD Company is a general partnership. It consists of Dianne, Greg, Knox, and Laura, whose capital contributions were as follows: Dianne, $5,000; Greg, $7,500; Knox, $10,000; and Laura, $5,000. The partnership agreement provided that the partnership would continue for three years and that no withdrawals of capital were to be made without the consent of all the partners. The agreement also provided that all advances would be entitled to interest at 10 percent per year. Six months after the partnership was formed, Dianne advanced $10,000 to the partnership. At the end of the first year, net profits

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totaled $11,000 before any moneys had been distributed to partners. Explain how the $11,000 should be allocated to Dianne, Greg, Knox, and Laura.

Answer: Dianne would receive the entire $11,000. When a partner makes an advance to the firm above and beyond her capital contribution she is entitled to repayment of this advance plus interest. RUPA Section 401(c). Comment 4 to that section states: “Although the right to indemnification is usually enforced in the settlement of accounts among partners upon dissolution and winding up of the partnership business, the right accrues when the liability is incurred and thus may be enforced during the term of the partnership in an appropriate case.”

This partner’s position is on the same footing as firm creditors and is superior to the partners’ claims for return of capital or distribution of profits. RUPA Section 404(f). In this case, the $11,000 represents the total of Dianne’s advance plus one year of interest at 10%.

UPA: The same outcome except this partner’s position as a firm creditor is subordinate to other firm creditors, but is superior to the partners’ claims for return of capital or distribution of profits. UPA Section 18(c).

12. Donald Petersen joined his father, William Petersen, in a chicken hatchery business William had previously operated as a sole proprietorship. When the partnership was formed, William contributed the assets of the proprietorship, which included cash, equipment, and inventory having a total value of $41,000. Donald contributed nothing.

They agreed to share the profits equally. For fifteen years Donald took over the operation of the hatchery with very little help from his father. When the business was terminated William contended that he was entitled to the return of his capital investment of $41,000 before Donald could recover anything. Donald asserted that he is entitled to one-half the value of the business. Explain who is correct in his contention.

Answer: Judgment for Donald. According to the Uniform Partnership Act, the right of a partner to receive back the capital he contributed is subject to a contrary agreement among the partners. Such an agreement need not be written but may be implied from the conduct of the partners.

Here, although Donald contributed no substantial capital to the business, he operated it with very little help from his father. Meanwhile, William continued to receive half of the income. The conduct of the parties makes it reasonable to infer that William put up the capital and Donald provided the labor under an agreement by which each was to own half of the business, including capital and profits. Donald’s estate is therefore entitled to half of the value of the business. Petersen v. Petersen, 284 Minn. 61, 169 N.W. 2d 228 (1969).

13. Smith, Jones, and Brown were creditors of White, who operated a grain elevator known as White’s Elevator. Heavily in debt, White was about to fail when the three creditors agreed to take title to his elevator property and pay all the debts. It was also agreed that White should continue as manager of the business at a salary of $1,500 per month and that all profits of the business were to be paid to Smith, Jones, and Brown. It was further agreed that they could dispense with White’s services at any time and that he was free to quit when he pleased. White accepted the proposition and continued to operate the business as before. The agreement worked successfully and for several years paid substantial profits, enough so that Smith, Jones, and Brown had received nearly all that they had originally advanced. Were Smith, Jones, and Brown partners? Explain.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 30: Formation and Internal Relations of General Partnerships

Answer: Yes. Smith, Jones, and Brown purchased White’s business for themselves and White thereafter had no further interest in it. Moreover, they have agreed to share all profits from the business and could discharge White at any time. Consequently, they are partners.

14. Virginia, Georgia, Carolina, and Louis were partners doing business under the trade name of Morning Glory Nursery. Virginia owned a one-third interest, and Georgia, Carolina, and Louis owned two-ninths each. The partners acquired three tracts of land for the purpose of the partnership. Two of the tracts were acquired in the names of the four partners, “trading and doing business as Morning Glory Nursery.” The third tract was acquired in the names of the individuals, the trade name not appearing in the deed. This third tract was acquired by the partnership out of partnership funds and for partnership purposes. Who owns each of the three tracts? Explain.

Answer: The partnership. (a) The first two tracts were acquired for the purpose of the partnership and title included the name of the partnership. RUPA Sections 204(a) and 204(b), UPA Section 8(3). (b) The third tract was acquired with partnership funds. Even if the instrument transferring title to one or more of the partners does not indicate their capacity as a partner or the existence of a partnership, the property nevertheless may be partnership property. Ultimately, the partners’ intention controls whether property belongs to the partnership or to one or more of the partners in their individual capacities. When the partners have failed to express their intent, property purchased with partnership funds is presumed to be partnership property, without regard to the name in which title is held. RUPA Section 204(c). The result would be the same under the UPA. Unless the contrary intention appears, property acquired with partnership funds is partnership property. UPA Section 8(2).

15. Charles and L. W. Clement were brothers who had formed a partnership that lasted forty years until Charles discovered that his brother, who kept the partnership’s books, had made several substantial personal investments with funds improperly withdrawn from the partnership. He then brought an action seeking dissolution of the partnership, appointment of a receiver, and an accounting. Should Charles succeed? Explain.

Answer: Yes. There is a fiduciary relationship between partners such that a person does not have to deal with his partner as though he were the opposite party in an arm’s length transaction. Where a partner commingles partnership funds with his own and generally deals loosely with partnership assets, he has the burden of proving that he did not breach his fiduciary duty. Here, L. W. dealt loosely with partnership funds.

At various times he made substantial investments in his own name with partnership funds. Charles is entitled to recover even if he cannot trace the money invested by his brother, dollar for dollar, from the diverted partnership funds.

16. Michael, his mother, and his four siblings orally agreed that they would all play the lottery and that if any one of them should purchase a lottery ticket which would win a substantial prize, all of them would share the money equally. Michael’s mother purchased the sole winning ticket for the $6 million lottery prize and informed the lottery commission that, per the family agreement, a six-person partnership had won the prize.

Each of the six family members took an equal one-sixth share of the lottery proceeds.

Explain whether Michael’s share of the lottery proceeds was income resulting from a partnership or a gift from Michael’s mother.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 30: Formation and Internal Relations of General Partnerships

Answer: Tests of Partnership Existence. Michael’s share of the lottery proceeds was income resulting from a partnership. This case problem is based on the case of Weinig v. Weinig, 674 N.E. 2d 991, Indiana Court of Appeals (1996).

Existence of a partnership is generally a question of fact. Soley v. VanKeppel, 656 N.E. 2d 508, 513 (Ind. Ct. App. 1995), J.M. Schultz Seed Company v. Robertson, 451 N.E. 2d 62, 64 (Ind. Ct. App. 1983), In re Zeits, 108 Ind. App. 617, 31 N.E. 2d 209, 216 (1941). *** “The requisites of a partnership are that the parties must have joined together to carry on a trade or adventure for their common benefit, each contributing property or services, and having a community of interest in the profits.” Kopka v. Yockey, 76 Ind. App. 218, 131 N.E. 828, 829 (1921). To establish a partnership relation between parties, there must be: (1) a voluntary contract of association for the purpose of sharing profits and losses which may arise from the use of capital, labor, or skill in a common enterprise; and (2) an intention on the part of the parties to form a partnership. Watson v. Watson, 231 Ind. 385, 108 N.E. 2d 893, 895 (1952); Isaacs v. Fletcher American National Bank, 103 Ind. App. 246, 198 N.E. 829, 832 (1935), reh. denied, 103 Ind. App. 246, 200 N.E. 440 (1936). Further: The first requirement for establishing a partnership, that there be a voluntary contract of association for the purpose of sharing profits which may arise from use of capital, labor, or skill in a common venture, is established by the family’s oral agreement. The six family members agreed that they would continue to play the lottery, and would evenly divide any major winnings. The agreement is a voluntary joining together to share winnings that may result from expenditures of money on lottery tickets. The agreement to share any large winnings created a community of interest in any large lottery prize among all six parties to the agreement. The trial court could reasonably conclude that the family’s oral agreement to evenly divide any major lottery winnings was a voluntary contract of association for the purpose of sharing profits arising from expenditures on lottery tickets, satisfying the first element essential to finding a partnership. *** The second element essential to establishing a partnership, that there be an intention on the part of the parties to form a partnership, was established by the parties conduct subsequent to forming the oral agreement. There was evidence from which the trial court could conclude that Michael continued to play the lottery regularly, along with the other parties to the oral agreement. After Michael’s mother discovered that she possessed the winning ticket, the family stated to the Lottery Commission and federal taxing authorities that the Lottery was won by a six person partnership. No gift tax was paid on the lottery proceeds disbursed to Michael since Michael declared the money to be earned income resulting from his one sixth interest in a partnership to play the lottery. Finally, the lottery jackpot was in fact divided equally among all six family members as contemplated by their oral agreement. The trial court could reasonably find that this subsequent conduct of the family members demonstrated an intention to pursue the common goal of winning a lottery jackpot as a partnership, satisfying the second element essential to establishing a

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 30: Formation and Internal Relations of General Partnerships

partnership relation among the family members for the purpose of winning the lottery.

The totality of facts is sufficient to support the trial courts finding that the one sixth share of lottery proceeds received by Michael was due to his participation in a family partnership to play the lottery and not as a gift from his mother. No one fact stands alone, but the agreement, considered with the subsequent conduct of the parties, shows that a partnership was intended, that the goal of the partnership was actually achieved, and that upon attainment of their goal the parties fulfilled the obligations they accepted in their oral agreement. The facts of this case reveal a wholly completed partnership.

17. Anderson and Tallstrom are partners in Rancho Murieta Investors (RMI). Anderson owns 80 percent of RMI; Tallstrom owns the other 20 percent and is the managing partner of RMI. Hellman obtained judgments against Anderson in his individual capacity for more than $440,000. After various unsuccessful attempts to enforce the judgments, Hellman obtained an “Order Charging Debtor John B. Anderson’s Partnership Interest” in RMI. Despite the charging order, Hellman has not received any monies in satisfaction of the judgments because RMI had not generated profits and was not expected to do so in the near future. Explain what Hellman’s rights are with respect to the unsatisfied charging order.

Answer: Hellman may seek a court-ordered foreclosure of Anderson’s transferable partnership interest subject to the charging order at any time. The purchaser at the foreclosure sale has the rights of a transferee.

This case problem is based on Hellman v. Anderson, 233 Cal. App. 3d 840, 284 Cal. Rptr. 830, California Court of Appeal, 3rd Appellate Dist. 1991, decided under the 1914 UPA. Section 15028 authorizes a charging order on the debtor partner’s partnership interest and further allows the trial court to “make all other orders which the circumstances of the case may require.” (§ 15028, subd. (1); see also 6 West’s U. Laws Ann. (1969) Uniform Partnership Act, § 28.) The statute clearly implies judicial authority to order foreclosure and sale of the charged interest because it further says the interest charged may be redeemed “at any time before foreclosure, or in case of a sale being directed by the court” may be purchased by nondebtor partners without causing a dissolution of the partnership. (§ 15028, subd. (2), italics added.) (3) “It is a settled axiom of statutory construction that significance should be attributed to every word and phrase of a statute, and a construction making some words surplusage should be avoided.” (People v. Woodhead (1987) 43 Cal. 3d 1002, 1010 [239 Cal. Rptr. 656, 741 P. 2d 154].) (2b) We cannot imagine why the statute would give advice about redemption prior to foreclosure and sale unless foreclosure and sale were contemplated.

Foreclosure sales of charged partnership interests are also implicitly recognized in section 15032 which deals with partnership dissolutions and makes reference to “the purchaser” of a partner’s interest under section 15028. *** As we have mentioned, the statutory authority for the sale of a partnership interest in satisfaction of a debt of an individual partner was recognized in Crocker Nat. Bank v.

Perroton, supra, 208 Cal. App. 3d 1. Courts from other jurisdictions have agreed that the charging order provision of the Uniform Partnership Act authorizes sale of a charged partnership interest. (FDIC v. Birchwood Builders (1990) 240 N.J. Super. 260

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[573 A. 2d 182]; Wills v. Wills (Mo. App. 1988) 750 S.W. 2d 567; Bohonus v. Amerco (1979) 124 Ariz. 88 [602 P. 2d 469]; Tupper v. Kroc (1972) 88 Nev. 146 [494 P. 2d 1275]; Beckley v. Speaks (1963) 39 Misc. 2d 241 [240 N.Y.S. 2d 553]; see First Nat. Bank of Denver v.

District Court (Colo. 1982) 652 P. 2d 613.) In Tupper v. Kroc, supra, the Nevada Supreme Court affirmed denial of a motion to set aside a court-ordered sale of a charged partnership interest. The Nevada statute, just as California’s, authorized the trial court to make all orders and directions as the case required, and this, said the court, included sale of the charged interest. (494 P. 2d at p. 1278.) Bohonus v. Amerco, supra, emphasized the distinction between a partnership “interest” and partnership “property,” the latter of which may not be sold. (602 P. 2d at p. 471.) *** We conclude section 15028 authorized the trial court’s order directing foreclosure and sale of the charged partnership interest. (Crocker, supra, 208 Cal. App. 3d at pp. 8-9.)

ANSWERS TO “TAKING SIDES” PROBLEMS Chaiken entered into separate but nearly identical agreements with Strazella and Spitzer to operate a barber shop. Under the terms of the “partnership” agreements, Chaiken would provide barber chairs, supplies, and licenses, while the other two would provide tools of the trade. The agreements also stated that gross returns from the partnership were to be divided on a percentage basis among the three men and that Chaiken would decide all matters of partnership policy. Finally, the agreements stated hours of work and holidays for Strazella and Spitzer and required Chaiken to hold and distribute all receipts. a. What are the arguments that Strazella and Spitzer are partners with Chaiken? b. What are the arguments that Strazella and Spitzer are employees of Chaiken? c. Explain which arguments should prevail.

Answer: (a) Arguments that Strazella and Spitzer are partners with Chaiken include (1) they had entered into a partnership agreement, (ii) they contributed their tools and labor, and (2) they shared gross returns generated by the business. (b) Arguments that Strazella and Spitzer are not partners with Chaiken but are employees of Chaiken include (1) having separate agreements with each barber, (2) sharing gross receipts rather than sharing profits, (3) lack of control by Strazella and Spitzer, and (4) Chaiken setting working hours for Strazella and Spitzer. (c) Strazella and Spitzer are employees of Chaiken. Chaiken v. Employment Security Commission, 274 A. 2d 707 (Delaware Superior Court, 1971), http://scholar.google

.com/scholar_case?case=9812582210779482634&q=274+A.2d+707&hl=en&as _sdt=2,34.

A partnership is an association of two or more persons to carry on as co-owners a business for profit. The mere existence of a writing labeled “partnership agreement” and the characterization of its signatories as “partners” does not conclusively establish the existence of a partnership. Rather, the intention of the parties, as explained by the wording of the agreement, is controlling.

Here, several aspects of the agreements between Chaiken and the two barbers, when considered as a whole, negate the finding of a partnership arrangement. First, Chaiken reserved the exclusive right to determine partnership policy. Second, distribution of assets upon dissolution of a partnership is to occur only after all partnership liabilities have been

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 30: Formation and Internal Relations of General Partnerships

satisfied. Here, however, there was no such condition placed on such distributions to Strazella and Spitzer. Third, the agreements set forth holidays and hours of work for the two barbers, subjects not commonly found in partnership agreements. Finally, and of most importance, the agreements provided for a division of gross returns, not of net profits. The intent to divide profits is an indispensable requisite of a partnership. All of these factors taken together negate a finding of partnership intent here. Rather, Strazella and Spitzer are employees of Chaiken.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 31: Operation and Dissolution of General Partnerships

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 31: Operation and Dissolution of General Partnerships

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ..............................................................................15

ANSWERS TO ETHICAL DILEMMA What Duty of Disclosure Is Owed to Incoming Partners?

1.

2.

3.

4.

5.

Should James make a point of acquainting himself with the details of the litigation? Were his preliminary statements about the lawsuits justifiable?

Is it ethical for Banks & Borre to recruit new partners and to institute a policy that encourages mergers, given the pending litigation?

If a merger takes place, could Ken, Richard, and Donald be held liable for any judgments arising from the litigation?

How might a CPA firm insulate its partners from personal liability?

What actions should Jones, Jones, and Frank take to investigate Banks & Borre before proceeding with the merger?

Answer: (1) Yes, James should acquaint himself with the litigation. He should never assume that any pending litigation is insignificant. As a managing partner he needs to have this knowledge.

(2) There is nothing to suggest that the partnership agreement was unethical. Presumably it was a voluntary agreement and did not unfairly deprive a retiring partner of compensation upon retirement. There should be no reason why the agreement should not be enforced.

(3) Partners traditionally owe a fiduciary duty to each other to act in good faith. Actions may be brought for a breach of this duty under common law principles. The concept has been codified in UPA Section 21 which makes every partner accountable as a fiduciary.

(4) Care must be taken to insulate retiring partners from liability to creditors subsequent to their withdrawal. It is advisable to enter an agreement with the creditor absolving the retiring partner from future liability. Under UPA Sec. 36(2) a partner is discharged from any existing liability upon dissolution of the partnership by an agreement to that effect between himself, the partnership creditor, and the person or partnership continuing the business. Such agreement may be inferred from the course of dealing between the creditor having knowledge of the dissolution and the person continuing the business.

(5) They should review the litigation files through the appropriate courts. They also need to take a more aggressive role in negotiating the merger agreement.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 31: Operation and Dissolution of General Partnerships

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Albert, Betty, and Carol own and operate the Roy Lumber Company. Each contributed one-third of the capital, and they share equally in the profits and losses. Their partnership agreement provides that two partners must authorize all purchases over $2,500 in advance and that only Albert is authorized to draw checks. Unknown to Albert or Carol, Betty purchases on the firm’s account a $5,500 diamond bracelet and a $5,000 forklift and orders $5,000 worth of logs, all from Doug, who operates a jewelry store and is engaged in various activities connected with the lumber business. Before Betty made these purchases, Albert told Doug that Betty is not the log buyer. Albert refuses to pay Doug for Betty’s purchases. Doug calls at the mill to collect, and Albert again refuses to pay him.

Doug calls Albert an unprintable name, and Albert then punches Doug in the nose, knocking him out. While Doug is lying unconscious on the ground, an employee of Roy Lumber Company negligently drops a log on Doug’s leg, breaking three bones. The firm and the three partners are completely solvent. What are the rights of Doug against Roy Lumber Company, Albert, Betty, and Carol? Explain.

Answer: (a) The Roy Lumber Company Partnership is not liable for the logs; Betty is personally liable for the price of the logs. No act of a partner in contravention of a restriction on authority shall bind the partnership to persons having knowledge of the restriction. RUPA Section 301(1), UPA Section 9(4). Thus, the partnership will not be bound as to the logs because Doug had knowledge of the lack of authority. Betty is liable for breach of warranty of authority. (b) The Roy Lumber Company Partnership is liable for the forklift truck. Since Doug was unaware of the $2,500 restriction upon partners’ purchases and the purchase of a forklift was within the apparent authority of Betty, the partnership is bound.

RUPA Section 301(1), UPA Section 9(1). The partners are personally and unlimitedly liable for this obligation. Under the RUPA, their liability is joint and several. RUPA Section 306(a). Under the UPA, their liability is joint. UPA Section 15(b). (c) Partnership is not liable for the diamond bracelet; Betty is personally liable for the bracelet. RUPA Section 301(2) provides: An act of a partner which is not apparently for carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership only if the act was authorized by the other partners. UPA Section 9(2) is similar: “An act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not bind the partnership unless authorized by the other partners.” (d) Partnership is liable for the injured leg; the employee is liable for the injured leg. A partnership, as are all principals, is liable under the doctrine of respondeat superior for torts committed by employees within the scope of their employment. The partners are personally and unlimitedly liable for this obligation. Under the RUPA, their liability is joint and several. RUPA Section 306(a). Under the UPA, their liability is also joint and several. UPA Section 15(a).

2. Paula, Fred, and Stephanie agree that Paula and Fred will form and conduct a partnership business and that Stephanie will become a partner in two years. Stephanie agrees to lend the firm $50,000 and take 10 percent of the profits in lieu of interest. Without Stephanie’s knowledge, Paula and Fred tell Harold that Stephanie is a partner, and Harold, relying on Stephanie’s sound financial status, gives the firm credit. The firm later becomes insolvent, and Harold seeks to hold Stephanie liable as a partner. Should Harold succeed? Explain.

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Answer: Harold should not succeed in holding Stephanie liable as a partner. The agreement to become a partner in two years did not create a present partnership.

Neither does the receipt by a creditor of a share of the profits rather than interest on the loan. RUPA Section 202(c)(3), UPA Section 7(4). Stephanie is not liable as a partner by estoppel as she had no knowledge of the representation made by Paula and Fred to Harold. RUPA Section 308(a), UPA Section 16.

3. Simmons, Hoffman, and Murray were partners doing business under the firm name of Simmons & Co. The firm borrowed money from a bank and gave the bank the firm’s note for the loan. In addition, each partner guaranteed the note individually. The firm became insolvent, and a receiver was appointed. The bank claims that it has a right to file its claim as a firm debt and that it has a right to participate in the distribution of the assets of the individual partners before partnership creditors receive any payment from such assets. a. Explain the principle involved in this case. b. Is the bank correct? Why or why not?

Answer: Under the UPA, the principle involved is that of marshaling of assets. UPA Section 40(g). The Revised Act has abolished the marshaling of assets doctrine.

Under the UPA, the bank is correct and may file its claim against and participate in the assets of the partnership and also in the separate nonpartnership assets of the estate of each individual partner, as the guaranty is the individual and separate liability of each partner. This is sometimes referred to as “doubling proofing.” Under the UPA, the bank would have a priority over partnership creditors in the assets of the individual partners. Under the Revised Act, the bank would not have a priority over partnership creditors in the assets of the individual partners.

4. Anthony and Karen were partners doing business as the Petite Garment Company. Leroy owned a dye plant that did much of the processing for the company. Anthony and Karen decided to offer Leroy an interest in their company, in consideration for which Leroy would contribute his dye plant to the partnership. Leroy accepted the offer and was duly admitted as a partner. At the time he was admitted as a partner, Leroy did not know that the partnership was on the verge of insolvency. About three months after Leroy was admitted to the partnership, a textile firm obtained a judgment against the partnership in the amount of $50,000. This debt represented an unpaid balance that had existed before Leroy was admitted as a partner.

The textile firm brought an action to subject the partnership property, including the dye plant, to the satisfaction of its judgment. The complaint also requested that, in the event the judgment was unsatisfied by sale of the partnership property, Leroy’s home be sold and the proceeds applied to the balance of the judgment. Anthony and Karen own nothing but their interest in the partnership property.

Explain what the result should be (a) with regard to the dye plant and (b) with regard to Leroy’s home Answer: (a) The dye plant may be sold. (b) Leroy’s home cannot be sold.

A person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the person’s admission as a partner.

RUPA Section 306(b). The UPA is very similar. A person admitted as a partner into an existing partnership is liable for all the obligations of the partnership arising before his admission as though he had been a partner when such obligations were incurred, except that his liability shall be satisfied only out of partnership property.

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5. Jones and Ray formed a partnership on January 1, known as JR Construction Co., to engage in the construction business, each partner owning a one-half interest. On February 10, while conducting partnership business, Jones negligently injured Ware, who brought an action against Jones, Ray, and JR Construction Co. and obtained judgment for $250,000 against them on March 1. On April 15, Muir joined the partnership by contributing $100,000 cash, and by agreement each partner was entitled to a one-third interest. In July, the partners agreed to purchase new construction equipment for the partnership, and Muir was authorized to obtain a loan from XYZ Bank in the partnership name for $200,000 to finance the purchase. On July 10, Muir signed a $200,000 note on behalf of the partnership, and the equipment was purchased. In November, the partnership was in financial difficulty, its total assets amounting to $50,000. The note was in default, with a balance of $150,000 owing to XYZ Bank. Muir has substantial resources, while Jones and Ray each individually have assets of $20,000.

What is the extent of Muir’s personal liability and the personal liability of Jones and Ray as to (a) the judgment obtained by Ware and (b) the debt owing to XYZ Bank? Explain.

Answer: (a) Muir is not personally liable for the Ware judgment. . A person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the person’s admission as a partner. RUPA Section 306(b), UPA Section 17.

Jones and Ray are jointly and severally liable for the judgment obtained by Ware since he was injured by a wrongful act of a partner acting in the ordinary course of business.

RUPA Section 306(a), UPA Sections 13 and 15. (b) Under the RUPA, Muir, Jones, and Ray are jointly and severally liable for the debt owing to XYZ Bank but not collected from partnership assets. Since Muir executed the note as an agent of the partnership, the partnership is bound for the debt as Muir had authority to do this, and the liability for this obligation would be joint and several for all partners. RUPA Section 306(a). Under the UPA the result would be the same except the liability would be joint. UPA Sections 9 and 15.

6. Lauren, Matthew, and Susan form a partnership, Lauren contributing $100,000, Matthew contributing $50,000, and Susan contributing her time and skill. Nothing is said regarding the division of profits. The firm later dissolves. No distributions to partners have been made since the partnership was formed. The partnership sells its assets for a loss of $90,000. After payment of all firm debts, $60,000 is left. Lauren claims that she is entitled to the entire $60,000. Matthew contends that the distribution should be $40,000 to Lauren and $20,000 to Matthew. Susan claims the $60,000 should be divided equally among the partners. Who is correct? Explain.

Answer: Neither Lauren, nor Matthew, nor Susan, is correct. Under the Revised Act, where the agreement is silent as to sharing profits, the partners share the profits equally. The instant agreement is silent as to both profits and losses. Hence, Lauren, Matthew, and Susan bear the $90,000 loss equally, or in the amount of $30,000 each.

This results in the partners’ accounts as follows: Lauren = $70,000, Matthew = $20,000, and Susan = ($30,000). Accordingly, Lauren will receive $70,000, Matthew will receive $20,000, and Susan must contribute $30,000.

Under the UPA, the total capital contributions are $150,000. After payment of all partnership debts, the remaining assets are $60,000. The loss is therefore $90,000.

Where the partnership agreement is silent as to bearing losses, the partners bear the loss in the same proportion as they share profits. Where the agreement is silent as to

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 31: Operation and Dissolution of General Partnerships

sharing profits, the partners share the profits equally. The instant agreement is silent as to both profits and losses. Hence, Lauren, Matthew, and Susan bear the $90,000 loss equally or in the amount of $30,000 each. Lauren is entitled to the return of her $100,000 capital contribution, less her $30,000 share of the loss, or $70,000. Matthew is entitled to the return of his $50,000 capital contribution, less his $30,000 share of the loss, or $20,000. Susan must pay her share of the loss, $30,000, which sum added to the $60,000 on hand would be paid to Lauren and Matthew in the amount above stated.

7. Adams, a consulting engineer, entered into a partnership with three others for the practice of their profession. The only written partnership agreement is a brief document specifying that Adams is entitled to 55 percent of the profits and the others to 15 percent each. The venture is a total failure. Creditors are pressing for payment, and some have filed suit. The partners cannot agree on a course of action.

Explain how many of the partners must agree to achieve each of the following objectives.: a. To add Jones, also an engineer, as a partner, Jones being willing to contribute a substantial amount of new capital. b. To sell a vacant lot held in the partnership name, which had been acquired as a future office site for the partnership. c. To move the partnership's offices to less expensive quarters. d. To demand a formal accounting. e. To dissolve the partnership. f. To agree to submit certain disputed claims to arbitration, which Adams believes will prove less expensive than litigation. g. To sell all of the partnership's personal property, Adams having what he believes to be a good offer for the property from a newly formed engineering firm. h. To alter the respective interests of the parties in the profits and losses by decreasing Adams's share to 40 percent and increasing the others' shares accordingly. i. To assign all the partnership's assets to a bank in trust for the benefit of creditors, hoping to work out satisfactory arrangements without filing for bankruptcy.

Answer: In the absence of an agreement to the contrary, all four partners stand on an equal footing in the management of the firm notwithstanding their unequal shares in the profits. RUPA Section 401(b), UPA Section 18(e). (a) The admission of a new partner requires unanimous consent of all partners. RUPA Section 401(i), UPA Section 18(g). (b) A majority of the partners may decide to sell partnership property. RUPA Section 401(j), UPA Section 18(h). (c) A majority of the partners may decide upon relocation of the offices, that being an ordinary matter connected with the partnership business. RUPA Section 401(j), UPA Section 18(h). (d) One. Under the Revised Act a partner may maintain a direct suit against the partnership or another partner for legal or equitable relief, with or without an accounting as to partnership business, to enforce the partner’s rights under the partnership agreement and the Act. Section 405(b). Under the UPA any partner may demand an accounting since the present circumstances of the business would appear to render the demand just and reasonable. UPA Section 22. (e) RUPA: Any partner may rightfully dissociate by withdrawing and thereby cause the partnership to dissolve, since the partnership agreement is not for a definite term or a particular undertaking. RUPA Sections 601, 602, and 801(1).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 31: Operation and Dissolution of General Partnerships

UPA: any partner may rightfully cause the partnership to dissolve, since the partnership agreement is not for a definite term or a particular undertaking. UPA Section 31. (f) RUPA: This probably would require a majority of the partners. Comment 4 to Section 301 states: “UPA Section 9(3) contains a list of five extraordinary acts that require unanimous consent of the partners before the partnership is bound. RUPA omits that section. That leaves it to the courts to decide the outer limits of the agency power of a partner. Most of the acts listed in UPA Section 9(3) probably remain outside the apparent authority of a partner under RUPA, such as disposing of the goodwill of the business, but elimination of a statutory rule will afford more flexibility in some situations specified in UPA Section 9(3). In particular, it seems archaic that the submission of a partnership claim to arbitration always requires unanimous consent.”

UPA: Only all partners acting together may submit a partnership claim or liability to arbitration. UPA Section 9(3). (g) If the disposition of all the personal property would make it impossible to carry on the ordinary business of the partnership, it requires unanimous action of all partners. Otherwise, a majority may act. RUPA Section 301(2), UPA Section 9. (h) Since the interests of the partners in profits and losses is fixed by the written partnership agreement, they can only be altered with the consent of all the partners. RUPA Section 401(j), UPA Section 18(h). (i) RUPA: Uncertain. See (f) above.

UPA: An assignment in trust for the benefit of creditors requires unanimous consent of the partners. UPA Section 9(3).

8. Charles and Jack orally agreed to become partners in a tool and die business. Charles, who had experience in tool and die work, was to operate the business. Jack was to take no active part but was to contribute the entire $500,000 capitalization. Charles worked ten hours a day at the plant, for which he was paid nothing. Nevertheless, despite Charles’s best efforts, the business failed. The $500,000 capital was depleted, and the partnership owed $500,000 in debts. Prior to the failure of the partnership business, Jack became personally insolvent; consequently, the creditors of the partnership collected the entire $500,000 indebtedness from Charles, who was forced to sell his home and farm to satisfy the indebtedness. Jack later regained his financial responsibility, and Charles brought an appropriate action against Jack for (a) one-half of the $500,000 he had paid to partnership creditors and (b) one-half of $80,000, the reasonable value of Charles’s services during the operation of the partnership. Who will prevail and why?

Answer: Charles cannot recover for (a) or (b). (a) Since Charles and Jack had no specific agreement regarding the division of profits and losses, profits were to be divided equally and, hence, losses were to be shared equally. Losses include “capital or otherwise” so the partnership lost $1,000,000.

Jack had already contributed his half of the loss so Charles could not force further contribution from Jack. RUPA Section 401 and Comment 3, UPA Section 18(a). (b) The RUPA provides that unless otherwise agreed a partner is not entitled to remuneration for services performed for the partnership. RUPA Section 401(h).

Since Charles and Jack had no specific agreement regarding remuneration, Charles is entitled to none. UPA Section 18(f) is similar.

9. Glenn refuses an invitation to become a partner of Dorothy and Cynthia in a retail grocery business. Nevertheless, Dorothy inserts an advertisement in the local newspaper representing Glenn as their partner. Glenn takes no steps to deny the existence of a

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 31: Operation and Dissolution of General Partnerships

partnership between them. Ron, who extended credit to the firm, seeks to hold Glenn liable as a partner. Is Glenn liable? Explain.

Answer: Glenn is not liable as a partner by estoppel because he took no part in placing the advertisement in the newspaper nor is he under a duty to have a retraction published. The comment to RUPA Section 308 states: “As under the UPA, there is no duty of denial, and thus a person held out by another as a partner is not liable unless he actually consents to the representation.” Under the UPA, a few courts, however, have held that Glenn is under a duty to have a retraction published.

10. Hanover leased a portion of his farm to Brown and Black, doing business as the Colorite Hatchery. Brown went upon the premises to remove certain chicken sheds that he and Black had placed there for hatchery purposes. Thinking that Brown intended to remove certain other sheds, which were Hanover’s property, Hanover accosted Brown, who willfully struck Hanover and knocked him down. Brown then ran to the Colorite truck, which he had previously loaded with chicken coops, and drove back to the hatchery. On the way, he picked up George, who was hitchhiking to the city to look for a job. Brown was driving at seventy miles an hour down the highway. At an open intersection with another highway, Brown in his hurry ran a stop sign, striking another vehicle. The collision caused severe injuries to George. Immediately thereafter, the partnership was dissolved, and Brown was insolvent. Hanover and George each bring separate actions against Black as copartner for the alleged tort committed by Brown against each. What should the judgments be as to each action? Discuss.

Answer: (a) Hanover may recover against Black as the assault and battery committed by Brown was in connection with a dispute which concerned property of the partnership and was, therefore, a tort committed by a partner in the course of the partnership business. (b) George may not recover against Black as the act of Brown in picking up George as a hitchhiker was not connected with the carrying on of the partnership business or for the benefit of the partnership.

11. Martin, Mark, and Marvin formed a retail clothing partnership named M Clothiers and conducted a business for many years, buying most of their clothing from Hill, a wholesaler. On January 15, Marvin retired from the business, but Martin and Mark decided to continue it. As part of the retirement agreement, Martin and Mark agreed in writing with Marvin that Marvin would not be responsible for any of the partnership debts, either past or future. On January 15 the partnership published a notice of Marvin’s retirement in a newspaper of general circulation where the partnership carried on its business.

Before January 15, Hill was a creditor of M Clothiers to the extent of $10,000, and on January 30, he extended additional credit of $5,000. Hill was not advised and did not in fact know of Marvin’s retirement and the change of the partnership. On January 30, Ray, a competitor of Hill, extended credit for the first time to M Clothiers in the amount of $3,000. Ray also was not advised and did not in fact know of Marvin’s retirement and the change of the partnership.

On February 1, Martin and Mark departed for parts unknown, leaving no partnership assets with which to pay the described debts. Explain what Marvin’s liability is, if any, (a) to Hill and (b) to Ray. Answer: Under the Revised Act: a. Marvin is liable to Hill for $15,000; b. Marvin is liable to Ray for $3,000.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 31: Operation and Dissolution of General Partnerships

A partner’s dissociation does not of itself discharge the partner’s liability for a partnership obligation incurred before dissociation. Section 703(a). An agreement as to continuing liability of a retiring partner, though binding on the parties making it, is not binding on an existing creditor unless such creditor assents to it, and Marvin, therefore, remains liable on the pre-existing $10,000 debt to Hill. For partnership obligations incurred within two years after a partner dissociates without resulting in a dissolution of the partnership business, a dissociated partner is liable for a partnership obligation if at the time of entering into the transaction the other party: (1) reasonably believed that the dissociated partner was then a partner; (2) did not have notice of the partner's dissociation; and (3) is not deemed to have had constructive notice from a filed statement of dissociation. Section 703(b). On the facts, it appears most likely that both Hill and Ray satisfy all of the conditions of Section 703(b) and could hold Marvin liable.

Under the UPA: (a) Marvin is liable to Hill for $15,000; (b) Marvin is not liable to Ray for any amount.

An agreement as to continuing liability of a retiring partner, though binding on the parties making it, is not binding on an existing creditor unless such creditor assents to it, and Marvin, therefore, remains liable on the pre-existing $10,000 debt to Hill. There is a distinction in regard to continued liability of a retiring partner to persons who had extended credit to the firm before dissolution as opposed to those who have not; as to the former, actual notice is necessary of the withdrawal or retirement of the partner and must be given in some form to such creditor unless the creditor, in fact, knows of the change. Therefore, Marvin would be liable to Hill for the $5,000 credit extended in Hill's continued dealings but before he knew of the retirement. Ray, the new creditor, having extended credit to the new partnership only after the retirement of Marvin and after the news item was published, can look only to such partnership, and therefore, Marvin is not liable to Ray. 12. Ben, Dan, and Lilli were partners sharing profits in proportions of one-fourth, one-third, and five-twelfths, respectively. Their business failed, and the firm was dissolved. At the time of dissolution, no financial adjustments between the partners were necessary with reference to their respective partners’ accounts, but the firm’s liabilities to creditors exceeded its assets by $24,000. Without contributing any amount toward the payment of the liabilities, Dan moved to a destination unknown. Ben and Lilli are financially responsible. Explain how much each must contribute to pay off any outstanding liabilities.

Answer: Ben must contribute $9,000; Lilli, $15,000.

Section 807(c) of the Revised Act provides that if a partner fails to contribute the full amount required, all of the other partners must contribute, in the proportions in which those partners share partnership losses, the additional amount necessary to satisfy the partnership obligations for which they are personally liable.

Section 40 of the Uniform Partnership Act is similar and provides, in part: If any, but not all, partners are insolvent, or not being subject to process, refuse to contribute, the other partners shall contribute their share of the liabilities and in the proportions in which they share the profits, the additional amount necessary to pay the liabilities.

The partners’ required contribution is as follows: Ben, $6,000; Dan, $8,000; and Lilli, $10,000. Since Dan failed to contribute, Ben and Lilli must contribute to Dan's

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 31: Operation and Dissolution of General Partnerships

share of the liability. As between themselves Ben and Lilli share profits in the proportion of three to five (1/4 divided by 5/12 = 3/5). Accordingly, Ben must contribute 3/8ths of the $24,000 required to pay creditors or $9,000; and Lilli must contribute 5/8ths of the $24,000, or $15,000.

13. Ames, Bell, and Cole were equal partners in the ABC Construction Company. Their written partnership agreement provided that the partnership would dissolve upon the death of any partner. Cole died on June 30, and his widow, Cora Cole, qualified as executor of his will. Ames and Bell wound up the business of the partnership and on December 31 they completed the sale of all of the partnership’s assets. After paying all partnership debts, they distributed the balance equally among themselves and Mrs. Cole as executor.

Subsequently, Mrs. Cole learned that Ames and Bell had made and withdrawn a net profit of $200,000 from July 1 to December 31. The profit was made through new contracts using the partnership name and assets. Ames and Bell had concealed such contracts and profit from Mrs. Cole, and she learned about them from other sources. Immediately after acquiring this information, Mrs. Cole made demand upon Ames and Bell for one-third of the profit of $200,000. They rejected her demand. Explain what the rights and remedies are, if any, of Cora Cole as executor.

Answer: Mrs. Cole, as executor, is entitled to one-third of the dissolution net profits.

The surviving partners have the right to continue possession of the firm’s assets and business for the purpose of winding up. The surviving partners have no right to bind the partnership by new contracts. If the new contracts are within their apparent authority, the partnership is bound. The continuing partners must account to the personal representative of the deceased partner for any profit from the new contracts.

They are liable to the partnership for any loss from the new contracts.

Mrs. Cole, as executor, is entitled to one-third of the net profits of $200,000.

14. The articles of partnership of the firm of Wilson and Company provide the following: •

William Smith to contribute $50,000; to receive interest thereon at 13 percent per annum and to devote such time as he may be able to give; to receive 30 percent of the profits.

•

John Jones to contribute $50,000; to receive interest on same at 13 percent per annum; to give all of his time to the business and to receive 30 percent of the profits.

•

Henry Wilson to contribute all of his time to the business and to receive 20 percent of the profits.

•

James Brown to contribute all of his time to the business and to receive 20 percent of the profits.

There is no provision for sharing losses. After six years of operation, the firm is dissolved and wound up. No distributions to partners have been made since the partnership was formed. The partnership assets are sold for $400,000 with a loss of $198,000. Liabilities to creditors total $420,000. Explain what the rights and liabilities of the respective parties are.

Answer: RUPA: Smith and Jones are entitled to have their partners’ accounts credited with interest of $39,000, as the partnership agreement expressly provides. Each of the partners’ accounts is charged with each partner’s share of the $198,000 loss. These

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 31: Operation and Dissolution of General Partnerships

losses are borne in the same ratio as profits are shared. Smith and Jones are each charged with 30 percent or $59,400. Wilson and Brown are each charged with $39,600, their share of the losses. The partner’s account for Smith and Jones each equals $29,600 ($50,000 plus $39,000 in interest minus his share of the loss of $59,400). The partner’s account for Wilson and Brown each equals a negative $39,600, which each must contribute to the partnership. This sum added to the $400,000 assets on hand makes a total of $479,200. The creditors’ claims of $420,000 are paid first, leaving a balance of $59,200. Of this amount, $29,600 is paid to Smith, and $29,600 is paid to Jones.

UPA: The total capital contributions are $100,000. In addition, interest of $39,000 is due to Smith and Jones each on their respective capital contributions, as the partnership agreement expressly provides. Liabilities to creditors are $420,000, assets are $400,000, and the total losses are $198,000. These losses are borne in the same ratio as profits are shared. Smith is entitled to $50,000 in capital plus $39,000 in interest minus his share of the loss (30 per cent or $59,400), which equals $29,600. On the same basis, Jones is entitled to receive $29,600. Wilson and Brown should each pay $39,600, their share of the losses, for a total of $79,200. This sum added to the $400,000 assets on hand makes a total of $479,200. The creditors’ claims of $420,000 are paid first, leaving a balance of $59,200. Of this amount, $29,600 is paid to Smith, and $29,600 is paid to Jones.

15. Adam, Stanley, and Rosalind formed a partnership in State X to distribute beer and wine.

Their agreement provided that the partnership would continue until December 31, 2025.

Which of the following events would cause the ABC partnership to dissolve? If so, when would the partnership be dissolved? a. Rosalind assigns her interest in the partnership to Mary on April 1, 2023. b. Stanley dies on June 1, 2025. c. Adam withdraws from the partnership on September 15, 2024. d. A creditor of Stanley obtains a charging order against Stanley’s interest on October 9, 2022. e. In 2023, the legislature of State X enacts a statute making the sale or distribution of alcoholic beverages illegal. f. Stanley has a formal accounting of partnership affairs on September 19, 2024.

Answer: RUPA (a) No dissociation and no dissolution. A partner can transfer her transferable interest in a partnership to another. The assignee does not become a partner. (b) Death of a partner in a term partnership will not cause dissolution of a partnership if within 90 days fewer than half of the remaining partners vote to wind up the partnership. (c) Withdrawal of a partner in a term partnership in violation of the partnership agreement will not cause dissolution of a partnership if within 90 days fewer than half of the remaining partners vote to wind up the partnership. (d) No dissociation and no dissolution. The charging order will not cause dissociation or dissolution. At the expiration of the specified term, the holder of the charging order may seek to obtain a court-ordered dissolution. (e) Dissolution in 2023. The action by the legislature making the business illegal dissolves the partnership by operation of law. (f) No dissolution. Any partner is entitled to request an accounting, and this will not cause a dissolution.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 31: Operation and Dissolution of General Partnerships

UPA (a) No dissolution. A partner can assign her interest in a partnership to another. The assignee does not become a partner. (b) Dissolution on June 1, 2025. Death of a partner causes the dissolution of a partnership by operation of law. (c) Dissolution. Because Adam has withdrawn prior to the expiration of the partnership agreement, he is liable to his partners for damages and they have the right to continue the partnership until December 31, 2025. (d) No dissolution. The charging order will not effect a dissolution. At the expiration of the specified term, the holder of the charging order may obtain a court ordered dissolution. (e) Dissolution in 2023. The action by the legislature making the business illegal dissolves the partnership by operation of law. (f) No dissolution. Any partner is entitled to request an accounting, and this will not cause a dissolution.

16. Phillips and Harris are partners in a used car business. Under their oral partnership, each has an equal voice in the conduct and management of the business. Because of their irregular business hours, the two further agreed that they could use any partnership vehicle as desired. This use includes transportation to and from work, even though the vehicles are for sale at all times. Harris conducted partnership business both at the used car lot and from his home. He was on call by Phillips or customers at his home and he went back to the lot two or three times after going home. While driving a partnership vehicle home from the used car lot, Harris negligently hit a car driven by Cook, who brought this action against Harris and Phillips individually and as copartners for his injuries. Who is liable? Explain.

Answer: Both the partnership and the individual partners are liable. The test of the liability of the partnership and of its members for the torts of any one partner is whether the wrongful act was done within what may reasonably be found to be the scope of the business of the partnership and for its benefit. Phillips v. Cook, 239 Md. 215, 210 A. 2d 743 (1965).

17. Voeller, the managing partner of the Pay-Out Drive-In Theatre, signed a contract to sell to Hodge a small parcel of land belonging to the partnership. Except for the last twenty feet, which was necessary for the theatre’s driveway, the parcel was not used in theatre operations. The agreement stated that it was between Hodge and the partnership, with Voeller signing for the partnership. Voeller claims that he told Hodge before signing that a plat plan would have to be approved by the other partners before the sale. Hodge denies this and sues for specific performance, claiming that Voeller had actual and apparent authority to bind the partnership. The partners argue that Voeller had no such authority and that Hodge knew this. Who is correct? Explain.

Answer: Judgment for the partners. Under the UPA, a partner may convey legal title to property held in the partnership name. The partnership, however, may recover the property (except from a good faith purchaser) if (1) the conveying partner did not have apparent authority, or (2) he did not have any authority and the purchaser knew this fact.

Here, although Voeller was managing partner, selling the land adjacent to the theater is not in the usual course of the business of operating a theater. Therefore, Voeller did not have apparent authority to sell the land. Furthermore, there is no evidence that Voeller had sold property before, on behalf of the partnership, nor was the partnership engaged in the business of buying and selling real estate. Thus, there was no actual

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 31: Operation and Dissolution of General Partnerships

authority to sell real property belonging to the partnership. In the absence of both apparent and actual authority, the contract is not binding on the partnership. Hodge v.

Garrett, 614 P. 2d 420 (Idaho 1980). The RUPA appears consistent with this decision.

18. L. G. and S. L. Patel, husband and wife, owned and operated the City Center Motel in Eureka. On April 16, Rajeshkumar, the son of L. G. and S. L., formed a partnership with his parents and became owner of 35 percent of the City Center Motel. The partnership agreement required that Rajeshkumar approve any sale of the motel. Record title to the motel was not changed, however, to reflect his interest. On April 21, L. G. and S. L. listed their motel for sale with a real estate broker. On May 2, P. V. and Kirit Patel made an offer on the motel, which L. G. and S. L. accepted. Neither the broker nor the purchasers knew of the son’s interest in the motel. When L. G. and S. L. notified Rajeshkumar of their plans, to their surprise, he refused to sell his 35 percent of the motel. On May 4, L. G. and S. L. notified P. V. and Kirit that they wished to withdraw their acceptance. They offered to pay $10,000 in damages and to give the purchasers a right of first refusal for five years. Rather than accept the offer, on May 29, P. V. and Kirit filed an action for specific performance and incidental damages. L. G., S. L., and Rajeshkumar responded that the contract could not lawfully be enforced. Discuss who will prevail and why.

Answer: Judgment for the partnership selling the motel. The trial court found the provisions of UPA section 9 (3)(c) to prevail over those of subdivision (3) of section 10.

To enforce the contract of sale without Rajeshkumar's approval would frustrate the purpose of subdivision (3)(c) of section 9 by making it impossible for the partnership to continue. (See UPA § 9 (3)(c).) Because the purpose of the partnership is to operate a motel, rather than to hold it for eventual sale, the better result would be to preserve the partnership and hold the contract unenforceable. Patel v. Patel, 212 Cal. App. 3d, 260 Cal. Rptr 255 (California 1989). The RUPA appears consistent with this decision.

19. Davis and Shipman founded a partnership under the name of Shipman & Davis Lumber Company. Seven years later, the partnership was dissolved by written agreement. Notice of the dissolution was published in a newspaper of general circulation in Merced County, where the business was conducted. No actual notice of dissolution was given to firms that had previously extended credit to the partnership. By the dissolution agreement, Shipman, who was to continue the business, was to pay all of the partnership’s debts. He continued the business as a sole proprietorship for a short time until he formed a successor corporation, Shipman Lumber Servaes Co. After the partnership’s dissolution, two firms that had previously done business with the partnership extended credit to Shipman for certain repair work and merchandise. The partnership also had a balance due to Valley Company for prior purchases. Five months later, two checks were drawn by Shipman Lumber Servaes Co. and accepted by Valley as partial payment on this debt. Credit Bureaus of Merced County, as assignee of these three accounts, sued the partnership as well as Shipman and Davis individually. Does the dissolution of the partnership relieve Davis of personal liability for the accounts? Explain.

Answer: Judgment for the Credit Bureaus affirmed. A retired partner may be relieved of liability for partnership debts incurred after his retirement if creditors receive appropriate notice of the partnership’s dissolution. As to the firms having prior credit dealing with the partnership, actual notice is required.

Here, all three creditors had previously extended credit to the partnership. The publication of notice of the partnership’s dissolution, by itself, is insufficient to show that these prior creditors received actual notice. Furthermore, the two checks do not, in themselves, prove that Valley Company entered into a novation to relieve Davis of liability for the account. Again, actual knowledge of the partnership’s dissolution is

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 31: Operation and Dissolution of General Partnerships

required. Therefore, Davis remains liable for these debts. Credit Bureaus of Merced County, Inc. v. Shipman, 167 Cal. App. 2d 673, 334 P. 2d 1036 (1959).

The outcome under the Revised Act is uncertain. The Revised Act has changed the UPA’s rule distinguishing between creditors who extend credit before dissociation and those who first do so after dissociation. Under the RUPA, for partnership obligations incurred within two years after a partner dissociates without resulting in a dissolution of the partnership business, a dissociated partner is liable for a partnership obligation if at the time of entering into the transaction the other party: (1) reasonably believed that the dissociated partner was then a partner; (2) did not have notice of the partner’s dissociation; and (3) is not deemed to have had constructive notice from a filed statement of dissociation. Section 703(b). It is not clear whether all these creditors have satisfied all of these requirements. Moreover, if any of the new obligations arose after two years following dissociation, there would be no liability.

20. In August, Victoria Air Conditioning, Inc. (VAC), entered into a subcontract for insulation services with Southwest Texas Mechanical Insulation Company (SWT), a partnership composed of Charlie Jupe and Tommy Nabors. In February of the following year, Jupe and Nabors dissolved the partnership, but VAC did not receive notice of the dissolution at that time. Sometime later, insulation was removed from Nabors’s premises to Jupe’s possession and Jupe continued the insulation project with VAC. From then on, Nabors had no more involvement with SWT. One month later, Nabors informed VAC’s project manager, Von Behrenfeld, that Nabors was no longer associated with SWT, had formed his own insulation company, and was interested in bidding on new jobs. Subsequently, SWT failed to perform the subcontract and Jupe could not be found. VAC brought suit for breach of contract against SWT, Jupe, and Nabors. Nabors claims that several letters and change orders introduced by both parties show that VAC knew of the dissolution and impliedly agreed to discharge Nabors from liability. These documents indicated that VAC had dealt with Jupe, but not with Nabors, after the dissolution. VAC denies that the course of dealings between VAC and Jupe was the type from which an agreement to discharge Nabors could be inferred. Who is correct? Explain.

Answer: The general rule is that the dissolution of a partnership does not of itself discharge any existing liabilities of a partner. UPA § 36(1). (RUPA § 703(a) is similar.)

However, an exception to the general rule exists when the retired partner, the person continuing the partnership’s business, and the partnership creditor agree that the retired partner will be discharged from liability. UPA § 36(2). (RUPA § 703(c) continues this rule.) Furthermore, such an agreement may be inferred from the course of dealing between the creditor having knowledge of the dissolution and the person continuing the partnership’s business. UPA § 36(2). (RUPA § 703(c) omits the language regarding inferring an agreement from the course of dealing.)

It must be determined whether the evidence is factually sufficient to show that there was an agreement between VAC, Jupe, and Nabors to discharge Nabors from liability.

First, the evidence supports that VAC knew of the dissolution of the SWT partnership.

Also, the letters and change orders subsequent to dissolution support the contention that VAC was aware of SWT’s change of address. Second, the course of dealing between Jupe and VAC after the dissolution shows that there was an implied agreement between the parties to discharge Nabors from liability. Therefore, sufficient evidence of a course of dealing exists in the record from which it could have inferred that an agreement existed between VAC, Jupe, and Nabors to discharge Nabors from

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 31: Operation and Dissolution of General Partnerships

liability. Victoria Air Conditioning, Inc. v. Southwest Texas Mechanical Insulation Co., Court of Appeals of Texas, 850 S.W. 2d 720 (1993).

21. Horizon is a large, publicly traded provider of both nursing homes and management for nursing homes. It wanted to expand into Osceola County, Florida, in 1993. Southern Oaks was already operating in Osceola County; it owned the Southern Oaks Health Care Center and had a Certificate of Need issued by the Florida Agency for Health Care Administration for a new one-hundred-and-twenty-bed facility in Kissimmee. Horizon and Southern Oaks decided to form a partnership to own the proposed Kissimmee facility, which was ultimately named Royal Oaks, and agreed that Horizon would manage both the Southern Oaks facility and the new Royal Oaks facility. To that end, Southern Oaks and Horizon entered into twenty-year partnership and management contracts. The partnership agreements provided that “irreconcilable differences” was a permissible reason for dissolving the partnership. Three years later, Southern Oaks filed suit alleging that Horizon breached its obligations under two different partnership agreements and that Horizon had breached the various management contracts. The court ordered that the partnerships be dissolved, finding that they were incapable of continuing to operate in business together.

Explain whether Southern Oaks is entitled to receive a damage award for the loss of the partnerships’ seventeen remaining years’ worth of future profits.

Answer: Southern Oaks is not entitled to future damages. A court-ordered dissolution for good cause is not wrongful and does not entitle either party to damages from the other. Horizon/CMS Healthcare Corporation v. Southern Oaks Health Care, Inc., Court of Appeal of Florida, Fifth District, 732 So. 2d 1156; review denied, 744 So. 2d 454 (1999).

First, the trial court’s finding that the parties are incapable of continuing to operate together is a finding of “irreconcilable differences,” a permissible reason for dissolving the partnerships under the express terms of the partnership agreements. One of the reasons the Revised Uniform Partnership Act (RUPA) gives for dissolution is, “It is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement.” While “reasonably practicable” is not defined in RUPA, the term is broad enough to encompass the inability of partners to continue working together, which is what the court found. Thus, dissolution was not “wrongful,” and Southern Oaks was not entitled to damages for lost future profits. Additionally, the partnership contracts also permit dissolution by “judicial decree.”

Second, even assuming the partnership was dissolved for a reason not provided for in the partnership agreements, damages were properly denied. Under RUPA, it is clear that wrongful dissociation triggers liability for lost future profits. However, RUPA does not contain a similar provision for dissolution. RUPA does not refer to the dissolutions as rightful or wrongful. Under RUPA, only when a partner dissociates and the dissociation is wrongful can the remaining partners sue for damages.

Southern Oaks’ attempt to bring the instant dissolution under the statutory provision applicable to dissociation is rejected. The trial court ordered dissolution of the partnership, not the dissociation of Horizon for wrongful conduct. There no longer appears to be “wrongful” dissolution—either dissolution is provided for by contract or statute or the dissolution was improper and the dissolution order should be reversed.

In the instant case, because the dissolution either came within the terms of the partnership agreements or judicial dissolution in which case it is not reasonably practicable to carry on the partnership business, Southern Oaks’ claim for lost future profits is without merit.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 31: Operation and Dissolution of General Partnerships

ANSWERS TO “TAKING SIDES” PROBLEMS Stroud and Freeman are general partners in Stroud’s Food Center, a grocery store. Nothing in the articles of partnership restricts the power or authority of either partner to act in respect to the ordinary business of the Food Center. In November, however, Stroud informed National Biscuit that he would not be personally responsible for any more bread sold to the partnership. Then, in the following February, at the request of Freeman, National Biscuit sold and delivered more bread to the Food Center. a. What are the arguments that Stroud is not liable to National Biscuit for the value of the bread delivered to the Food Center? b. What are the arguments that Stroud is liable to National Biscuit for the value of the bread delivered to the Food Center? c. Explain which arguments should prevail.

Answer: (a) Stroud would argue that because he had informed National Biscuit of a restriction on Freeman’s authority the contract was not binding on the partnership and thus not binding on Stroud. (b) National Biscuit would argue that each partner is an agent of the partnership for the purpose of its business. An act of a partner for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership and thus binds Stroud. (c) National Biscuit should prevail. National Biscuit v. C. N. Stroud, 249 N.C. 467, 106 S.E. 2d 692 (1959). (The Revised Uniform Partnership Act [RUPA] appears consistent with this decision.)

Freeman’s purchase bound both the partnership and his partner Stroud. Freeman is a general partner with no restrictions on his authority to act within the scope of partnership business. Under the Uniform Partnership Act (UPA), then, he had “equal rights in the management and conduct of the partnership business.” Stroud could not restrict the power and authority of Freeman to buy bread for the partnership as a going concern, for such a purchase was an “ordinary matter connected with the partnership business,” for the purpose of its business and within its scope. Such a restriction on Freeman’s powers could only be implemented by a majority of the partners, which Stroud was not. According to Crane on Partnership: In cases of an even division of the partners as to whether or not an act within the scope of the business should be done, of which disagreement a third person has knowledge, it seems that logically no restriction can be placed upon the power to act.

The partnership being a going concern, activities within the scope of the business should not be limited, save by the expressed will of the majority deciding a disputed question; half of the members are not a majority.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 32: Limited Partnerships and Limited Liability Companies

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 32: Limited Partnerships and Limited Liability Companies

TABLE OF CONTENTS Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems ............................................................................... 9

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

John Palmer and Henry Morrison formed the limited partnership of Palmer & Morrison for the management of the Huntington Hotel. The limited partnership agreement provided that Palmer would contribute $400,000 and be a general partner and that Morrison would contribute $300,000 and be a limited partner. Palmer was to manage the dining and cocktail rooms, and Morrison was to manage the rest of the hotel. Nanette, a popular French singer who knew nothing of the limited partnership affairs, appeared for four weeks in the Blue Room at the hotel and was not paid her fee of $8,000. Subsequently, the limited partnership became insolvent. Nanette sued Palmer and Morrison for $8,000. a. For how much, if anything, are Palmer and Morrison liable? Explain. b. If Palmer and Morrison had formed a limited liability limited partnership, for how much, if anything, would Palmer and Morrison be liable? Explain. c. If Palmer and Morrison had formed a limited liability company with each as a member, explain for how much, if anything, would Palmer and Morrison be liable. d. If Palmer and Morrison had formed a limited liability partnership with each as a general partner, explain for how much, if anything, would Palmer and Morrison be liable.

Answer: (a) As an actual general partner, Palmer has personal, unlimited liability for the full $8,000. The issue here is whether the limited partner Morrison is also liable as a general partner because of his involvement in the management of the hotel. In general, a limited partner cannot share in the management or control of the association; if he does so, he forfeits his limited liability. The 1985 Act has eliminated the broader liability of a limited partner whose participation is substantially the same as a general partner. Under the 1985 Act, a limited partner who participates in the control of the business only has liability to those persons who transact business with the limited partnership reasonably believing that the limited partner is a general partner. Based on the facts as stated in the problem, good arguments can be made for Morrison's liability. It would appear that Nanette dealt with the partnership under the reasonable belief that Morrison was a general rather than a limited partner. If so, Morrison has personal, unlimited liability for the full $8,000.

The RULPA provides a “safe harbor” by enumerating certain activities in which a limited partner may engage without being deemed to have taken part in the control

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 32: Limited Partnerships and Limited Liability Companies

of the business. The 1985 amendments have expanded the safe harbor list.

However, none of the enumerated activities include management of the entire business. Under the facts as stated, Morrison is supposed to manage the hotel.

This would seem to go beyond the permissible activities listed in both the RULPA and in the 1985 amendments, so Morrison is likely to be held liable as a general partner. (b) As a general partner in an LLLP, Palmer’s liability is limited to the extent provided by the LLP statute. Under a partial shield statute, Palmer would not be protected and would have personal, unlimited liability for the full $8,000. Under a full shield statute, Palmer would not have personal liability; only his capital contribution would be available. If Morrison were held liable as a general partner, then his liability presumably would be the same as Palmer’s. (c) As members of an LLC, Palmer and Morrison would have limited liability for the obligation. (d) As members of an LLP, under a partial shield statute, Palmer and Morrison would not be protected and would have personal, unlimited liability for the full $8,000.

Under a full shield statute, Palmer and Morrison would not have personal liability; only their capital contributions would be available.

2. A limited partnership was formed consisting of Webster as the general partner and Stevens and Stewart as the limited partners. The limited partnership was organized in strict compliance with the limited partnership statute. Stevens was employed by the partnership as a purchasing agent. Stewart personally guaranteed a loan made to the partnership. Both Stevens and Stewart consulted with Webster about partnership business, voted on a change in the nature of the partnership business, and disapproved an amendment to the partnership agreement proposed by Webster. The partnership experienced serious financial difficulties, and its creditors seek to hold Webster, Stevens, and Stewart personally liable for the debts of the partnership. Discuss who, if any, is personally liable.

Answer: Webster is personally liable; Stevens and Stewart are not. As a general partner Webster has unlimited, personal liability for obligations of the partnership. A limited partner has limited personal liability for obligations of the partnership unless he takes part in control. The RULPA Section 303 specifies a number of activities in which a limited partner may engage without losing limited liability: (1) being a contractor for, an agent or employee of the limited partnership or of a general partner; (2) consulting with and advising a general partner with respect to the business of the limited partnership; (3) acting as surety for the limited partnership; (4) approving or disapproving an amendment to the partnership agreement; and (5) voting on one or more of the following matters: a. the dissolution and winding up of the partnership; b. the sale, exchange, lease, mortgage, pledge, or other transfer of all or substantially all of the assets of the limited partnership other than in the ordinary course of its business; c. the occurrence of indebtedness by the limited partnership other than in the ordinary course of its business; d. a change in the nature of the business; or e. the removal of a general partner.

Thus, under the RULPA, Stevens and Stewart would not have taken part in control and therefore would retain their limited liability.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 32: Limited Partnerships and Limited Liability Companies

3. Fox, Dodge, and Gilbey agreed to become limited partners in Palatine Ventures, a limited partnership. In a signed writing each agreed to contribute $20,000. Fox’s contribution consisted entirely of cash; Dodge contributed $12,000 in cash and gave the partnership her promissory note for $8,000, and Gilbey’s contribution was his promise to perform two hundred hours of legal services for the partnership. a. Explain what liability, if any, Fox, Dodge, and Gilbey have to the partnership by way of capital contribution. b. If Palatine Ventures had been formed as a limited liability company with Fox, Dodge, and Gilbey as members, explain what liability, if any, Fox, Dodge, and Gilbey would have to the LLC by way of capital contribution.

Answer: (a) Under the RULPA, the contribution of a partner may be cash, property, or services rendered or a promissory note or other obligation to contribute cash or property or to perform services. A partner is liable to the partnership for the difference between the contribution actually made and the amount stated in the certificate as having been made. Thus, Dodge and Gilbey are liable for the remainder of the $8,000 Dodge has not yet provided and the $20,000 that Gilbey has not yet provided. If Dodge has already paid the promissory note and Gilbey has already contributed the promised two hundred hours of legal services for the partnership, then they have no further liability. Under the 1985 amendments, a promise by a limited partner to contribute to the partnership is not enforceable unless it is in a signed writing. (b) As members of an LLC, their liability for contributions would be the same as in (a).

4. Madison and Tilson agree to form a limited partnership with Madison as general partner and Tilson as the limited partner, each to contribute $12,500 as capital. No papers are ever filed, and after ten months the enterprise fails with liabilities exceeding assets by $30,000.

Creditors of the partnership seek to hold Madison and Tilson personally liable for the $30,000. Explain whether the creditors will prevail.

Answer: Madison and Tilson are jointly liable for the $30,000. Madison is liable because he was a general partner. Tilson is liable as a general partner because no limited partnership had been formed and he did not renounce his interest in the business. The RULPA clarifies an ambiguity that formerly existed in the law by requiring the equity participant to either withdraw from the business and renounce future profits or file an amendment curing the defect.

5. Kraft is a limited partner of Johnson Enterprises, a limited partnership. As provided in the limited partnership agreement, Kraft decided to leave the partnership and demanded that her capital contribution of $20,000 be returned. At this time, the partnership assets were $150,000 and liabilities to all creditors totaled $140,000. The partnership returned to Kraft her capital contribution of $20,000. a. Explain what liability, if any, Kraft has to the creditors of Johnson Enterprises. b. If Johnson Enterprises had been formed as a limited liability company, explain what liability, if any, Kraft would have to the creditors of Johnson Enterprises.

Answer: (a) Kraft is liable to the limited partnership and/or the creditors for $10,000 for six years; for one year, Kraft is potentially liable for the other $10,000 if needed. Of the $20,000 distributed, $10,000 is wrongful and $10,000 is rightful. The funds available for distribution to partners equals $10,000 ($150,000 of assets minus $140,000 of liabilities to creditors). Section 607 of the RULPA provides that a partner may not receive a distribution from a limited partnership to the extent that, after giving

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 32: Limited Partnerships and Limited Liability Companies

effect to the distribution, all liabilities of the limited partnership interests, exceed the fair value of the partnership’s assets. For one year, Kraft is potentially liable for the other $10,000 if needed, as provided by §608, which states: “If a partner has received the return of any part of his contribution without violation of the partnership agreement or this Act, for a period of one year thereafter he is liable to the limited partnership for the amount of his contribution returned, but only to the extent necessary to discharge the limited partnership’s liabilities to creditors who extended credit to the limited partnership during the period the contribution was held by the partnership.” (b) In an LLC the result would be similar. Under the great majority of LLC statutes, any member who receives a return of her contribution in violation of the LLC’s operating agreement or the limited liability company act is liable to the LLC for the amount of the contribution wrongfully returned. Under a few of the statutes, even members who receive a return of their capital contribution without violating the LLC agreement or the limited liability company act remain liable to the LLC for a specified time to the extent necessary to pay creditors.

6. Gordon is the only limited partner in Bushmill Ventures, a limited partnership whose general partners are Daniels and McKenna. Gordon contributed $10,000 for his limited partnership interest and loaned the partnership $7,500. Daniels and McKenna each contributed $5,000 by way of capital. After a year, the partnership is dissolved, at which time it owes $12,500 to its only creditor, Dickel, and has assets of $30,000. a. Explain how these assets should be distributed. b. Explain how these assets should be distributed if Bushmill Ventures had been formed as a limited liability company with Gordon, Daniels, and McKenna as members.

Answer: (a) In a limited partnership, Section 804 of RULPA provides: Dickel: $12,500 as creditor Gordon: $ 7,500 as creditor Gordon: $ 5,000 for capital contributions Daniels: $ 2,500 for capital contributions McKenna: $ 2,500 for capital contributions (b) Under typical LLC statute, the same distribution would occur unless the operating agreement provides otherwise.

Albert, Betty, and Carol own and operate the Roy Lumber Company, a limited liability partnership (LLP). Each contributed one-third of the capital, and they share equally in the profits and losses. Their LLP agreement provides that all purchases over $2,500 must be authorized in advance by two partners and that only Albert is authorized to draw checks.

Unknown to Albert or Carol, Betty purchases on the firm’s account a $5,500 diamond bracelet and a $5,000 forklift and orders $5,000 worth of logs, all from Doug, who operates a jewelry store and is engaged in various activities connected with the lumber business. Before Betty made these purchases, Albert told Doug that Betty is not the log buyer. Albert refuses to pay Doug for Betty’s purchases. Doug calls at the mill to collect, and Albert again refuses to pay him. Doug calls Albert an unprintable name, and Albert then punches Doug in the nose, knocking him out. While Doug is lying unconscious on the ground, an employee of Roy Lumber Company negligently drops a log on Doug’s leg, breaking three bones. The firm and the three partners are completely solvent. Explain what the rights of Doug are against Roy Lumber Company, Albert, Betty, and Carol.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 32: Limited Partnerships and Limited Liability Companies

Answer: This problem has the same facts as Problem 1 but here the company is an LLP. Because the partnership is not liable in parts (a) and (c), the answers remain the same. Depending upon the LLP statute, in part (b) the partners’ liability for the partnership obligation may change from that in a general partnership. In part (d), under all LLP statutes the partners’ liability for the partnership obligation will change from that in a general partnership. (a) The Roy Lumber Company Partnership is not liable for the logs; Betty is personally liable for the logs. No act of a partner in contravention of a restriction on authority shall bind the partnership to persons having knowledge of the restriction. RUPA Section 301(1), UPA Section 9(4). Thus, the partnership will not be bound as to the logs because Doug had knowledge of the lack of authority. Betty is liable for breach of warranty of authority. (b) The Roy Lumber Company Partnership is liable for the forklift truck. Since Doug was unaware of the $2,500 restriction upon partners’ purchases and the purchase of a forklift was within the apparent authority of Betty, the partnership is bound.

RUPA Section 301(1), UPA Section 9(1). As partners in an LLP, under a partial shield statute, the partners would not be protected and would have personal, unlimited liability. Under a full shield statute, the partners would not have personal liability; only their capital contributions would be available. (c) Partnership is not liable for the diamond bracelet; Betty is personally liable for the bracelet. RUPA Section 301(2) provides: An act of a partner which is not apparently for carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership only if the act was authorized by the other partners. UPA Section 9(2) is similar: “An act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not bind the partnership unless authorized by the other partners.” (d) Partnership is liable for the injured leg; the employee is liable for injured leg. A partnership, as are all principals, is liable under the doctrine of respondeat superior for torts committed by employees within the scope of their employment. As partners in an LLP, under a partial shield statute or under a full shield statute, the partners would not have personal liability; only their capital contributions would be available.

7. Dr. Vidricksen contributed $250,000 to become a limited partner in a Chevrolet car agency business with Thom, the general partner. Articles of limited partnership were drawn up, but no effort was made to comply with the state’s statutory requirement of recording the certificate of limited partnership. In March, Vidricksen learned that, because of the failure to file, he might not have formed a limited partnership. At this time, the business developed financial difficulties and went into bankruptcy on September 1. Eight days later, Vidricksen filed a renunciation of the business’s profits. Is Dr. Vidricksen a general partner? Why or why not?

Answer: Vidricksen was a general partner with Thom insofar as their relationship with third party creditors is concerned. A person who has contributed to the capital of a business erroneously believing that he has become a limited partner will not be considered a general partner if, upon ascertainment of the mistake, he promptly renounces his interest in the business’s profits. Although Vidricksen had filed a renunciation, his renunciation was not prompt because it was filed six months after he first learned that something was wrong with the organizational setup. Vidricksen v.

Grover, 363 F. 2d 372 (9th Cir. 1966).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 32: Limited Partnerships and Limited Liability Companies

8. Dale Fullerton was chairman of the board of Envirosearch and the sole stockholder in Westover Hills Management. James Anderson was president of AGFC. Fullerton and Anderson agreed to form a limited partnership to purchase certain property from WYORCO, a joint venture of which Fullerton was a member. The parties intended to form a limited partnership with Westover Hills Management as the sole general partner and AGFC and Envirosearch as limited partners. The certificate filed with the Wyoming secretary of state, however, listed all three companies as both general and limited partners of Westover Hills Ltd. Anderson and Fullerton later became aware of this error and filed an amended certificate of limited partnership, which correctly named Envirosearch and AGFC as limited partners only. Subsequently Westover Hills Ltd. became insolvent. What is the potential liability of Envirosearch and AGFC to creditors of the limited partnership?

Answer: Westover Hills Ltd. was held to be a limited partnership for purposes of bankruptcy. Under the Uniform Limited Partnership Act, if the parties intend to form a limited partnership, failure to comply with the requirements regarding the certificate of partnership results only in the nonformation of the limited partnership, not the formation of a general partnership. The parties in this case clearly intended to form a limited partnership. The Revised Uniform Limited Act of 1976 provides that an intended limited partner who subsequently discovers that the limited partnership has been defectively formed may remedy the situation either by causing an appropriate certificate of amendment to be filed or by withdrawing from the enterprise and renouncing future profits. AGFC complied with the first alternative, thereby ensuring that it did not lose its limited partner status. Therefore, Westover Hills Ltd. is a limited partnership for the purposes of bankruptcy.

9. Namvar Taghipour, Danesh Rahemi, and Edgar Jerez formed a limited liability company (the LLC) to purchase and develop a parcel of real estate. The LLC’s articles of organization designated Jerez as the LLC’s manager. In addition, the written operating agreement among the members of the LLC provided: “No loans may be contracted on behalf of the [LLC] unless authorized by a resolution of the members.” On the next day, the LLC acquired the intended real estate.

Two years later, Jerez, without the knowledge of the LLC’s other members, entered into a loan agreement on behalf of the LLC with Mount Olympus. According to the loan agreement, Mount Olympus lent the LLC $25,000 and, as security for the loan, Jerez executed and delivered a trust deed on the LLC’s real estate property. Mount Olympus then disbursed $20,000 to Jerez and retained the $5,000 balance to cover various fees. In making the loan, Mount Olympus did not investigate Jerez’s authority to enter into the loan agreement beyond determining that Jerez was the manager of the LLC. Jerez absconded with the $20,000. The LLC never made payments on the loan, since it was unaware of the loan, and consequently defaulted. Mount Olympus then foreclosed on the LLC’s property, giving notice of the default and pending foreclosure sale to only Jerez.

Explain whether the foreclosure was valid.

Answer: The LLC was bound by the loan agreement and, consequently, Mount Olympus was not liable to Taghipour for Jerez’s actions. Taghipour v. Jerez, 2002 UT 74, 52 P. 3d 1252, Supreme Court of Utah, 2002.

When two statutory provisions purport to cover the same subject, the legislature’s intent must be considered in determining which provision applies. To determine that intent, rules of statutory construction provide that “when two statutory provisions conflict in their operation, the provision more specific in application governs over the more general provision.” Section 48-2b-127(2) is the more specific provision. In this case, Jerez was designated as the LLC’s manager in the articles of organization. Jerez,

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 32: Limited Partnerships and Limited Liability Companies

acting in his capacity as manager, executed loan agreement documents, for example, the trust deed and trust deed note, on behalf of the LLC that are specifically covered by section 48-2b-127(2). As such, these documents are valid and binding on the LLC. Therefore, the court of appeals correctly concluded that the LLC was bound by the loan agreement and, consequently, that Mount Olympus was not liable to Taghipour for Jerez’s actions.

10. Carolinian is a closely held, manager-managed limited liability company, organized under the laws of South Carolina, which owns and manages various hotel and rental properties in South Carolina. In February 2022, the Levys obtained a judgment against Patel in the amount of $2.5 million. Thereafter, the Levys obtained a charging order in the circuit court, which constituted a lien against Patel's distributional interest in Carolinian. Subsequently, the Levys filed a petition to foreclose the charging lien, and the foreclosure sale was held in April 2024. The Levys were the successful bidders, purchasing Patel’s distributional interest for $215,000. Carolinian was represented at the foreclosure sale by its registered agent and its attorney, who unsuccessfully bid $190,000 on Carolinian’s behalf.

Carolinian’s Operating Agreement provides that a member’s financial rights can be redeemed at any time up until foreclosure sale but neither Carolinian nor any of the remaining members redeemed Patel’s interest prior to the foreclosure sale, and the Levys did not thereafter seek to be admitted as members of Carolinian.

Following the foreclosure sale, Carolinian asserted it was entitled to purchase Patel’s distributional interest from the Levys pursuant to Article 11 of the Operating Agreement, which provides that if a member attempts to transfer all or a portion of his membership share without obtaining the other members’ consent such member is deemed to have offered to the LLC all of his membership share. Carolinian contended that, since the Levys failed to obtain the consent required under Section 11.1 of the Operating Agreement, their distributional interest was deemed to have been offered to Carolinian, and Carolinian was entitled to purchase that interest under Section 11.2. The Levys objected to Carolinian’s attempt to force them to sell their interest, arguing they were not subject to the terms of Article 11 of the Operating Agreement. Explain who should prevail.

Answer: The provisions of Article 11 of the Operating Agreement did not restrict the Levys’ right to foreclose their charging lien against Patel’s distributional interest, and Carolinian may not invoke the provisions of Article 11 to compel the Levys to sell the distributional interest they acquired through the foreclosure sale. Levy v. Carolinian, LLC, 410 S.C. 140, 763 S.E. 2d 594 (2014).

The dispositive issue in this case is whether Carolinian may compel the Levys to sell the distributional interest they acquired through the foreclosure sale. The Levys admit Carolinian had the right to redeem Patel’s distributional interest at any time prior to the foreclosure sale; however, the Levys contend the ability to redeem that interest was extinguished by virtue of the judicial sale. Thus, the Levys argue the circuit court committed an error of law in finding that, pursuant to Article 11 of the Operating Agreement, Carolinian may compel the Levys to sell their distributional interest. We agree.

The South Carolina Uniform Limited Liability Company Act of 1996 (“LLC Act”) provides the exclusive remedy by which a judgment creditor of a member may satisfy a judgment out of the judgment debtor’s distributional interest in an LLC. S.C. Code Ann. § 33-44-504(e) (2006 & Supp. 2013).

The LLC Act provides in relevant part:

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 32: Limited Partnerships and Limited Liability Companies

(a) On application by a judgment creditor of a member of a limited liability company or of a member’s transferee, a court having jurisdiction may charge the distributional interest of the judgment debtor to satisfy the judgment. (b) A charging order constitutes a lien on the judgment debtor’s distributional interest. The court may order a foreclosure of a lien on a distributional interest subject to the charging order at any time. A purchaser at the foreclosure sale has the rights of a transferee.

S.C. Code Ann. § 33-44-504. In terms of disencumbering a member’s interest that is subject to a charging lien, consistent with Section 3.5 of Carolinian’s Operating Agreement, the LLC Act provides that a member’s distributional interest in an LLC may be redeemed at any time prior to foreclosure. Id. § 33-44-504(c).

The LLC Act defines a member’s distributional interest as “all of a member’s interest in distributions by the [LLC].” Id. § 33-44-101(6). A distributional interest in an LLC is personal property and may be transferred in whole or in part. Id. § 33-44-501(b). A distributional interest does not include the member’s broader rights to participate in management of the LLC. Id. § 33-44-501 cmt. “A transfer entitles the transferee to receive, to the extent transferred, only the distributions to which the transferor would be entitled.” Id. § 33-44-502.

“A transfer of a distributional interest does not entitle the transferee to become or to exercise any rights of a member.” Id. A transferee may become a member of the LLC if and only to the extent all other members consent or as otherwise set forth in the LLC operating agreement. Id. § 33-44-503(a). The operating agreement is the essential contract that governs the affairs of an LLC. Id. § 33-44-103 cmt. Although an LLC is generally free to modify the default provisions of the LLC Act by its operating agreement, an LLC may not “restrict [the] rights of a person, other than a manager, member, and transferee of a member’s distributional interest” through the terms of its operating agreement. Id. § 33-44-103(b) (enumerating various non-waivable provisions of the LLC Act).

We find the trial court committed an error of law in finding the provisions of Article 11 of the Operating Agreement applied and restricted the Levys right to foreclose their charging lien without the consent of Carolinian or its members. First, the transfer restrictions of Section 11.1, by their express and unambiguous terms, apply only to “members,” and unquestionably, the Levys have never been or sought to be members of Carolinian; they merely became transferees of Patel’s distributional interest by virtue of the foreclosure sale. See Schulmeyer v. State Farm Fire & Cas. Co., 353 S.C. 491, 495, 579 S.E. 2d 132, 134 (2003) (noting courts are bound to give effect to the meaning of an agreement’s terms, which are to be taken and understood in their plain, ordinary, and popular sense [citing C.A.N. Enters., Inc. v. S.C. Health & Human Servs. Fin. Comm’n, 296 S.C. 373, 377, 373 S.E. 2d 584, 586 (1988]). Further, the Levys did not attain the status of transferees until after the foreclosure sale; thus, Carolinian could not, through its Operating Agreement, restrict the statutory rights of the Levys by requiring consent from Carolinian or its members before the foreclosure sale, as the Levys were mere judgment creditors at that time. See S.C. Code Ann. § 33-44-103(b)(7) (prohibiting an operating agreement from restricting the rights of a person other than managers, members, and transferees of a member’s distributional interest). Thus, the Levys were not subject to the transfer restrictions of Section 11.1 at the time they foreclosed their charging lien.

Moreover, because the Levys were not required under Section 11.1 to obtain consent from Carolinian or its members prior to the foreclosure sale, we find Carolinian may

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 32: Limited Partnerships and Limited Liability Companies

not now invoke the right to purchase under Section 11.2, as that section, by its terms, applies only where consent under Section 11.1 is required and not obtained prior to the transfer. We hold that Carolinian’s ability to purchase Patel’s interest is not controlled by any part of Article 11, but rather by Section 3.5 of the Operating Agreement, which provided Carolinian the opportunity to purchase Patel’s interest before the foreclosure sale, not after. From the record, it appears Carolinian was simply unwilling or unable to pay the amount necessary to redeem Patel’s distributional interest prior to the foreclosure sale; however, neither the law nor the Operating Agreement gives Carolinian the unilateral right, following the foreclosure sale, to purchase the distributional interest the Levys lawfully acquired in an effort to satisfy their judgment against Patel. See Kriti Ripley, 404 S.C. at 381-82, 746 S.E. 2d at 33-34 (“A judgment creditor has a right to collect on his judgment. Foreclosure is not a penalty, but rather is simply the ultimate remedy for collection of a debt owed. Foreclosure on an LLC member’s interest does not divest the member of the interest without compensation or cause him to lose his interest. The member simply has a debt that must be paid.”).

We reverse the trial court and find that the provisions of Article 11 of the Operating Agreement did not restrict the Levys’ right to foreclose their charging lien against Patel’s distributional interest, and we further find that Carolinian may not now invoke the provisions of Article 11 to compel the Levys to sell the distributional interest they acquired through the foreclosure sale.

ANSWERS TO “TAKING SIDES” PROBLEMS On April 5, Handy contracted to purchase land with the intent of forming a limited liability company (LLC) with Ginsburg and McKinley for the purpose of building a residential community on the property. On April 21, they learned from Coastal, an environmental consulting firm they had hired, that the property contained federally protected wetlands. The presence of wetlands adversely affected the property’s value and development potential.

Handy, Ginsburg, and McKinley abandoned construction plans and instead decided to sell the property. To advertise and promote that sale, they placed on the property a sign that stated the property had “Excellent Development Potential.” Unaware of the existence of wetlands, Pepsi acquired an option to purchase the property from Handy on August 5. At that time, Willow Creek had not yet been formed and Handy had not yet purchased the property. On August 18, Handy, Ginsburg, and McKinley formed Willow Creek Estates, LLC. During the option period, Pepsi hired a soil-engineering consultant to conduct an environmental investigation of the property. In Handy’s written answers to specific questions from the consultant about the property, Handy did not disclose that the property contained wetlands or that Coastal had already performed a written preliminary wetlands determination the month before. On September 4, Willow Creek, LLC took title to the property. Four months later Willow Creek, LLC sold the property to Pepsi for more than twice the amount of its purchase price and did not disclose the existence of wetlands on the property. After Pepsi learned that the property contained wetlands, it brought an action for fraud against Willow Creek, Handy, Ginsburg, and McKinley. a. What are the arguments that Handy, Ginsburg, and McKinley are not individually liable to Pepsi for fraud? b. What are the arguments that Handy, Ginsburg, and McKinley are individually liable to Pepsi for fraud? c. Explain who should prevail.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 32: Limited Partnerships and Limited Liability Companies

Answer: (a) Handy, Ginsburg, and McKinley, as members and/or managers of a limited liability company (LLC), are not obligated personally for any debt, obligation, or liability of the LLC solely by reason of being a member or acting as a manager of the LLC. (b) Handy, Ginsburg, and McKinley committed the fraud before the LLC had been formed and thus are individually liable. (c) Handy, Ginsburg, and McKinley are individually liable to Pepsi for fraud. This problem is based on the unpublished opinion The Pepsi-Cola Bottling Company of Salisbury, Maryland v. Handy, Court of Chancery of Delaware (2000), 2000 WL 364199. The issue presented is whether the defendants are being sued “solely by reason of being a member” of Willow Creek LLC where the claim is based upon fraudulent acts committed by the LLC members before the LLC was formed and took title to the property. “To express it in terms of the facts at bar, if a person makes material misrepresentations to induce a purchaser to purchase a parcel of land at a price far above fair market value, and thereafter forms an LLC to purchase and hold the land, can that person later claim that his status as an LLC member protects him from liability to the purchaser * * *? I think not. * * *” Because the facts alleged in the complaint establish that the LLC was not formed (and the property was not acquired by the LLC) until after the allegedly critical wrongful acts had been committed, it follows that the defendants could not have been acting “solely as members of the LLC when they committed those acts. Therefore, the defendants are not protected by [the LLC statute].

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 33: Nature and Formation of Corporations

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 33: Nature and Formation of Corporations

TABLE OF CONTENTS Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems .............................................................................. 11

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

After part of the shares of a proposed corporation had been successfully subscribed, the promoter hired a carpenter to repair a building that was intended to be conveyed to the proposed corporation. The promoters subsequently secured subscriptions to the balance of the shares and completed the organization, but the corporation, finding the building to be unsuitable for its purposes, declined to use the building or to pay the carpenter. The carpenter brought suit against the corporation and the promoter for the amount that the promoter agreed would be paid to him. Who, if anyone, is liable? Explain.

Answer: The corporation is not liable on pre-incorporation contracts unless after it has been organized and comes into existence it assumes or adopts such contracts made on its behalf, or accepts the benefits of such contracts. The promoters, however, would be liable. Thus, the carpenter may recover in this case from the promoter.

2. C. A. Nimocks was a promoter engaged in organizing the Times Printing Company. On September 12, on behalf of the proposed corporation, he made a written contract with McArthur for her services as comptroller for a one-year period beginning October 1. The Times Printing Company was incorporated October 16, and on that date McArthur commenced her duties as comptroller. Neither the board of directors nor any officer took formal action on her employment, but all the shareholders, directors, and officers knew of the contract made by Nimocks. On December 1, McArthur was discharged without cause. a. Does she have a cause of action against the Times Printing Company? Explain. b. Does she have a cause of action against Nimocks? Explain.

Answer: McArthur has a cause of action against Times, but not against Nimocks.

Although her contract was made with the promoter prior to the existence of the corporation, the corporation upon being organized adopted the contract by acceptance of her services and thereby effectively became a party to it and bound by it.

3. Todd and Elaine purchased for $300,000 a building that was used for manufacturing pianos. Then, as promoters, they formed a new corporation and resold the building to the new corporation for $500,000 worth of stock. After discovering the actual purchase price paid by the promoters, the other shareholders desire to have $200,000 of the common stock canceled. Can they succeed in this action? Why or why not?

Answer: The other shareholders are entitled to have the $200,000 of stock canceled.

The promoters Todd and Elaine owe a fiduciary duty to the corporation, its subscribers

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 33: Nature and Formation of Corporations

and its initial shareholders. As such the promoters are not permitted to make a secret profit by violation of their fiduciary duty.

4. Wayne signed a subscription agreement for one hundred shares of stock of the proposed ABC Company, at a price of $18 per share. Two weeks later, the company was incorporated in a state that has adopted the Revised Act. A certificate was duly tendered to Wayne, but he refused to accept it. He was notified of all shareholders’ meetings, but he never attended. A dividend check was sent to him, but he returned it. ABC Company brings a legal action against Wayne to recover $1,800. He defends on the ground that his subscription agreement was an unaccepted offer, that he had done nothing to ratify it, and that he was therefore not liable on it. Is he correct? Explain.

Answer: No, Wayne is not correct. Under the Revised Act, Wayne would be liable for the stock subscription he signed. Therefore, judgment for ABC Company. Subscriptions for shares of stock are irrevocable for six months. Revised Model Business Corporation Act provides that a preincorporation stock subscription is irrevocable for a period of six months, unless otherwise provided by the terms of the subscription agreement or unless all of the subscribers agree to the revocation of the subscription.

5. Julian, Cornelia, and Sheila petitioned for a corporate certificate of incorporation for the purpose of conducting a retail shoe business. They complied with all the statutory provisions except having their articles of incorporation recorded. This was simply an oversight on their part, and they felt that they had fully complied with the law. They operated the business for three years, after which time it became insolvent. The creditors desire to hold the members personally and individually liable. May they do so? Explain.

Answer: The law on the subject of individual liability where a corporation has been defectively organized is not certain. Despite the legal formulas, the cases basically attempt to strike a fair balance between the interests of the associates attempting to comply with the law and the outside parties dealing with them. (a) Common Law Approach. The corporation is not a corporation de jure. Filing of the articles of incorporation with the Secretary of State is generally essential to corporate existence. Since the articles were never filed, de jure existence is generally foreclosed. (b) Individual liability can be escaped if the corporation was a corporation de facto which requires (1) the existence of a general corporation statute, (2) a bona fide attempt to comply with that law in organizing a corporation under the statute, and (3) the actual exercise of corporate power by conducting business in the belief that a corporation has been formed. The problem posed here is whether there has been a sufficient attempt to comply with the statute even though the articles were never filed. Although a conscious failure to file usually prevents de facto status, some cases recognize a bona fide attempt to file or procure the filing as sufficient.

On these facts it is unclear whether a bona fide attempt had been made. If not, Julian, Cornelia, and Sheila are jointly liable to the creditors of the defectively organized corporation. If “oversight” indicates that they were not conscious of the failure to file, some courts would not hold them liable. (c) Revised Model Business Corporation Act Approach. Section 2.04 provides that “All persons purporting to act as or on behalf of a corporation knowing there was no incorporation under this act, are jointly and severally liable for all liabilities created while so acting.” If Julian, Cornelia or Sheila knew there had been no filing, those of them who knew are jointly and severally liable to the creditors.

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6. Arthur, Barbara, Carl, and Debra decided to form a corporation for bottling and selling apple cider. Arthur, Barbara, and Carl were to operate the business, while Debra was to supply the necessary capital but was to have no voice in the management. They went to Jane, a lawyer, who agreed to organize a corporation for them under the name A-B-C Inc., and paid her funds sufficient to accomplish the incorporation. Jane promised that the corporation would definitely be formed by May 3. On April 27, Arthur telephoned Jane to inquire how the incorporation was progressing, and Jane said she had drafted the articles of incorporation and would send them to the secretary of state that very day. She assured Arthur that incorporation would occur before May 3.

On May 4, relying on Jane’s assurance, Arthur, with the approval of Barbara and Carl, entered into a written contract with Grower for his entire apple crop. The contract was executed by Arthur on behalf of “A-B-C Inc.” Grower delivered the apples as agreed.

Unknown to Arthur, Barbara, Carl, Debra, or Grower, the articles of incorporation were never filed, through Jane’s negligence. The business subsequently failed.

Explain what Grower’s rights are, if any, against Arthur, Barbara, Carl, and Debra as individuals?

Answer: (a) Common Law Approach (1) A-B-C Inc. is not a corporation de jure. Filing of the articles of incorporation with the Secretary of State is generally essential to corporate existence. Since the articles were never filed, de jure existence is generally foreclosed.

(2) Individual liability can be escaped if A-B-C Inc. was a corporation de facto. The problem posed is whether there has been a sufficient attempt to comply with the statute even though the articles were never filed. Although a conscious failure to file usually prevents de facto status, some cases recognize a bona fide attempt to file or procure the filing as sufficient, especially where, as here, because of the form of the contract, the outsider thought he was dealing with a corporation, and did not rely on the credit of individuals.

(3) Even if the requirements of de facto status are not met, Grower may be estopped from questioning the valid incorporation of A-B-C Inc. since he dealt with the participants on a corporate basis, as shown by the form of the contract. This area of law is based on considerations of fairness, however, and the law attempts to balance social interests, including the protection of the individual and protection of outside parties. Fairness does not require giving that outside party the double security of being able to recover from both a corporation and its individual participants. On the other hand, since the individuals received the benefit of the contract (the apples), and since the form of the contract is the only evidence given of the existence of the corporation and the failure to incorporate was due to the fault of the attorney they chose, it could be argued that the individuals should be held liable.

(4) If A-B-C Inc. was not de facto and the doctrine of corporation by estoppel does not apply, all four (Arthur, Barbara, Carl and Debra) may be held liable. On the other hand, some cases hold only the active managers of the business (i.e., Arthur, Barbara, and Carl) liable. (b) Model Business Corporation Act Approach.

Section 2.04 provides that “All persons purporting to act as or on behalf of a corporation knowing there was no incorporation under this act, are jointly and severally liable for all liabilities created while so acting.” Since Arthur, Barbara, and

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Debra did not know of the failure to incorporate, they are NOT jointly and severally liable to the creditors. MBCA Section 146.

7. The Pyro Corporation has outstanding twenty thousand shares of common stock, of which nineteen thousand are owned by Peter B. Arson; five hundred shares are owned by Elizabeth Arson, his wife; and five hundred shares are owned by Joseph Q. Arson, his brother. These three individuals are the officers and directors of the corporation. The Pyro Corporation obtained a $750,000 fire insurance policy to cover a certain building it owned.

Thereafter, Peter B. Arson set fire to the building, and it was totally destroyed. Can the corporation recover from the fire insurance company on the $750,000 fire insurance policy? Why or why not?

Answer: No. Judgment in favor of the fire insurance company. The court would pierce the corporate veil and not permit Arson to do indirectly, through the instrumentality of the corporation, what he could not do directly.

8. A corporation is formed for the purpose of manufacturing, buying, selling, and dealing in drugs, chemicals, and similar products. The corporation, under authority of its board of directors, contracted to purchase the land and building it occupied as a factory and store.

Collins, a shareholder, sues in equity to restrain the corporation from completing the contract, claiming that as the certificate of incorporation contained no provision authorizing the corporation to purchase real estate, the contract was ultra vires. Can Collins prevent the contract from being executed? Why or why not?

Answer: No. The corporation may execute the contract. One of the general powers conferred by statute is the authority to acquire real estate, especially real estate for use in conducting the business the corporation is organized to carry on. Section 3.02, Model Act. 9. Amalgamated Corporation, organized under the laws of State S, sends several traveling salespersons into State M to solicit orders, which are accepted only at the home office of Amalgamated Corporation in State S. Riley, a resident of State M, places an order that is accepted by Amalgamated Corporation in State S. The Corporation Act of State M provides that “no foreign corporation transacting business in this state without a certificate of authority shall be permitted to maintain an action in any court of this state until such corporation shall have obtained a certificate of authority.” Riley fails to pay for the goods, and when Amalgamated Corporation sues Riley in a court of State M, Riley defends on the ground that Amalgamated Corporation does not possess a certificate of authority from State M. Discuss what the result should be.

Answer: The Amalgamated Corporation may maintain the suit in the court of State M without obtaining a certificate of authority to transact business in State M. The activities of Amalgamated Corporation in sending traveling salespersons into State M who solicit orders there which do not ripen into contracts until accepted at the home office in State S, and the shipping of goods from state S into state M, do not amount to transacting business in State M. See Section 15.01(b) of the Model Act, in particular (6).

10. Dr. North, a surgeon practicing in Georgia, engaged an Arizona professional corporation consisting of twenty lawyers to represent him in a dispute with a Georgia hospital. West, a member of the law firm, flew to Atlanta and hired local counsel with Dr. North’s approval.

West represented Dr. North in two hearings before the hospital and in one court proceeding, also negotiating a compromise between Dr. North and the hospital. The total bill for the law firm’s travel costs and professional services was $21,000, but Dr. North refused to pay $6,000 of it. The law firm brought an action against Dr. North for the

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balance owed. Dr. North argued that the action should be dismissed because the law firm failed to register as a foreign corporation in accordance with the Georgia Corporation Statute. Will the law firm be prevented from collecting on the contract? Explain.

Answer: Judgment for the law firm. In most jurisdictions, single or isolated transactions do not constitute doing business within the meaning of such registration statutes. Even if the transactions are part of the business which the corporation is organized to conduct, such isolated acts will not constitute doing business if they indicate no intent to engage in continuous business activity. The purpose of such statutes is to require registration of foreign corporations intending to conduct business within the state on a continuous basis, not as a temporary matter.

Here, the law firm’s activities were concentrated in Arizona, although various attorneys in the firm handled litigation outside the state of incorporation. Although West had represented clients in Georgia on two prior occasions, these had nothing to do with his representation of Dr. North. The law firm’s representation of Dr. North amounted to an isolated transaction. Therefore, a certificate of authority was not required and the firm can collect from Dr. North. Reisman v. Martari, Meyer, Hendricks, & Victor, 155 Ga. App. 551, 271 8.E. S2d 685 (1980).

11. An Arkansas statute provides that if any foreign corporation authorized to do business in the state should remove to the federal court any suit brought against it by an Arkansas citizen or initiate any suit in the federal court against a local citizen, without the consent of the other party, Arkansas’s secretary of state should revoke all authority of the corporation to do business in the state. The Burke Construction Company, a Missouri corporation authorized to do business in Arkansas, has brought a suit in federal court and has also removed to a federal court a state suit brought against it. Burke now seeks to enjoin the secretary of state from revoking its authority to do business in Arkansas.

Should the injunction be issued? Explain.

Answer: No. Judgment for Burke on grounds that the statute violates the federal diversity statute. A corporation is regarded as a citizen of the state of its incorporation and of the state in which it has its principal office for the purpose of determining whether diversity of citizenship exists between the parties to a lawsuit, so as to provide a basis for federal court jurisdiction. Terral v. Burke Construction Co., 257 U.S. 529, 42 S. Ct. 188, 66 L. Ed. 352 (1922).

12. Little Switzerland Brewing Company was incorporated on January 28. On February 18, Ellison and Oxley were made directors of the company after they purchased some stock.

Then, on September 25, Ellison and Oxley signed stock subscription agreements to purchase 5,000 shares each. Under the agreement, they both issued a note that indicated that they would pay for the stock “at their discretion.” Two years later in March, the board of directors passed a resolution canceling the stock subscription agreements of Ellison and Oxley. The creditors of Little Switzerland brought suit against Ellison and Oxley to recover the money owed under the subscription agreements. Are Ellison and Oxley liable?

Why or why not?

Answer: Yes, they are liable. Judgment for the creditors. A subscriber to corporate stock is liable for his subscription regardless of any separate agreement between the subscriber and the corporation. Any person who permits the corporation to hold him out as a subscriber is estopped from denying the validity of the subscription as against creditors. Furthermore, the directors of the corporation did not have the authority to release Ellison and Oxley from liability on the agreements. Little Switzerland Brewing Co. v. Oxley, 156 W.Va. 800, 197 S.E. 2d 301 (1973).

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13. Oahe Enterprises was formed by the efforts of Emmick, who acted as a promoter and contributed shares of Colonial Manors, Inc. (CM), stock in exchange for stock in Oahe. The CM stock had been valued by CM’s directors for internal stock option purposes at $19.00 per share. However, one month prior to Emmick’s incorporation of Oahe Enterprises, CM’s board reduced the stock value to $9.50 per share. Although Emmick knew of this reduction before the meeting to form Oahe Enterprises, he did not disclose this information to the Morrises, the other shareholders of the new corporation. Can Oahe Enterprises recover the shortfall? Explain.

Answer: Yes. The court held that Emmick had failed in his duty to the corporation to disclose information regarding stock he intended to transfer into Oahe for Oahe shares and is therefore liable for the shortfall to the corporation therefrom. As a promoter of Oahe, Emmick stood in a fiduciary relationship to both the corporation and its stockholders and was bound to deal with them in the utmost good faith. “The obtaining of a secret profit by a promoter through the sale of property to a corporation is uniformly held to be a fraud on the corporation and stockholders, and the promoter may be required to account for such profit.” The case was remanded to the circuit court with directions to redetermine the fair market value of the CM stock exchanged

by Emmick for Oahe stock. Golden v. Oahe Enterprises, Inc., 295 N.W. 2d 160 (S.D. 1980).

14. In April, Cranson was asked to invest in a new business corporation that was about to be created. He agreed to purchase stock and to become an officer and director. After his attorney advised him that the corporation had been formed under the laws of Maryland, Cranson paid for and received a stock certificate evidencing his ownership of shares. The business of the new venture was conducted as if it were a corporation. Cranson was elected president, and he conducted all of his corporate actions, including those with IBM, as an officer of the corporation. At no time did he assume any personal obligation or pledge his individual credit to IBM. As a result of an oversight of the attorney, of which Cranson was unaware, the certificate of incorporation, which had been signed and acknowledged prior to May 1, was not filed until November 24. Between May 1 and November 8, the “corporation” purchased eight computers from IBM. The corporation made only partial payment. Can IBM hold Cranson personally liable for the balance due?

Explain?

Answer: No, Cranson is not personally liable. The fundamental question presented by the appeal was whether an officer of a defectively incorporated association may be subjected to personal liability. Two doctrines have been used by the courts to clothe an officer of a defectively incorporated association with the corporate attribute of limited liability; the doctrine of de facto corporations and the doctrine of estoppel. In other cases involving a failure to file articles of incorporation, the courts have held that where one has recognized the corporate existence of an association, he is estopped to assert the contrary with respect to a claim arising out of such dealings.

Since IBM was estopped to deny the existence of the “corporation” the court held that Cranson was not personally liable for the balance on account of the computers.

Cranson v. International Business Machines Corp. 234 Md. 477, 200 A. 2d 33 (1964).

15. Healthwin-Midtown Convalescent Hospital, Inc. (Healthwin), was incorporated in California for the purpose of operating a health care facility. For three years thereafter, it participated as a provider of services under the federal Medicare Act and received periodic payments from the United States Department of Health, Education and Welfare.

Undisputed audits revealed that a series of overpayments had been made to Healthwin.

The United States brought an action to recover this sum from the defendants, Healthwin and Israel Zide. Zide was a member of the board of directors of Healthwin, the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 33: Nature and Formation of Corporations

administrator of its health care facility, its president, and owner of 50 percent of its stock.

Only Zide could sign the corporation’s checks without prior approval of another corporate officer. Board meetings were not regularly held. In addition, Zide had a 50 percent interest in a partnership that owned both the realty in which Healthwin’s health care facility was located and the furnishings used at that facility. Healthwin consistently had outstanding liabilities in excess of $150,000, and its initial capitalization was only $10,000. Zide exercised control over Healthwin, causing its finances to become inextricably intertwined both with his personal finances and with his other business holdings. The United States contends that the corporate veil should be pierced and that Zide should be held personally liable for the Medicare overpayments made to Healthwin. Is the United States correct in its assertion? Why or why not?

Answer: Judgment for the U.S. The corporate veil may be pierced if (1) there is such unity of interest and ownership that the personalities of the corporation and the individual no longer exist separately; and (2) if it would be inequitable to treat the acts as those of the corporation alone. It is not necessary that there is actual fraud; it is sufficient that the failure to pierce the corporation’s veil would result in an injustice.

Other factors the courts consider in determining whether the corporate veil should be pierced include: inadequacy of the corporation’s capitalization or its insolvency; failure to observe corporate formalities; absence of regular board meetings; nonfunctioning of corporate directors; commingling of corporate and noncorporate assets; diversion of assets from the corporation to the detriment of creditors; and failure of an individual to maintain an arm’s length relationship with the corporation.

All these factors are present here. The corporation was initially undercapitalized and its liabilities continued to exceed its assets substantially: Healthwin consistently had outstanding liabilities in excess of $150,000, and its initial capitalization was only $10,000. Zide exercised his control over Healthwin so as to cause its finances to become inextricably intertwined with both his personal finances and his other business holdings. Zide handled Healthwin’s finances so as to accommodate his own business interests. Another factor present here is that the operations of Healthwin were marked by an essential disregard of corporate formalities. For example, board meetings were not regularly held. Furthermore, to leave Healthwin’s corporate veil unpierced would result in an injustice. Healthwin’s insolvency would subject all its creditors, including the United States, to inequitable risks regarding the corporation’s debts. Therefore, Healthwin’s corporate entity should be disregarded and Zide held personally liable. U.S. v. Healthwin-Midtown Convalescent Hospital, 511 F. Supp. 416 (Calif. Cent. Dist. 1981).

16. MPL Leasing Corporation is a California corporation that provides financing plans to dealers of Saxon Business Products. MPL invited Jay Johnson, a Saxon dealer in Alabama, to attend a sales seminar in Atlanta. MPL and Johnson entered into an agreement under which Johnson was to lease Saxon copiers with an option to buy. MPL shipped the equipment into Alabama and filed a financing statement with the secretary of state. When Johnson became delinquent with his payments to MPL, MPL brought an action against Johnson in an Alabama court. Johnson moved to dismiss the action, claiming that MPL was not qualified to conduct business in Alabama and was thus barred from enforcing its contract with Johnson in an Alabama court. Alabama law prevents foreign corporations not qualified to do business in Alabama from enforcing their intrastate contracts in the Alabama court system. Is Johnson correct? Explain.

Answer: Judgment for MPL affirmed. Alabama law prevents foreign corporations not qualified to do business in Alabama from enforcing their contracts in the Alabama court system. This provision, however, only applies to business that is “intrastate” in

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nature. MPL’s activities within the state of Alabama were limited to delivering the copiers to Johnson by common carrier and filing suit against Johnson when he fell behind with his payments. These minimal contacts were insufficient to constitute “intrastate” business. Therefore, MPL, though not qualified to conduct business in Alabama, may enforce its rights against Johnson in an Alabama court. Johnson v. MPL Leasing Corp. 441 So. 2d 904 (Ala. S.C. 1983).

17. Berger was planning to produce a fashion show in Las Vegas. In April, Berger entered into a written licensing agreement with CBS Films, Inc., a wholly owned subsidiary of CBS, for presentation of the show. The next year, Stewart Cowley decided to produce a fashion show similar to Berger’s and entered into a contract with CBS. CBS broadcast Cowley’s show, but not Berger’s. Berger brought an action against CBS to recover damages for breach of his contract with CBS Films. Berger claimed that CBS was liable because CBS Films was not operated as a separate entity, and that the court should disregard the parent-subsidiary form. In support of this claim, Berger showed that the directors of CBS Films’ were employees of CBS, that CBS’s organizational chart included CBS Films, and that all lines of employee authority from CBS Films passed through CBS employees to the CBS chairman of the board. CBS, in turn, argued that Berger had failed to justify piercing the corporate veil and disregarding the corporate identity of CBS Films to hold CBS liable.

Decision?

Answer: Judgment for CBS. Generally, a corporation is a creature of the law, endowed with a personality separate and distinct from that of its owners. A principal reason that legal recognition is given to the separate corporate personality is to allow stockholders an opportunity to limit their personal liability. Therefore, in order to pierce the corporate veil holding the parent liable for the acts of its subsidiary, Berger must have shown (1) control and complete domination of the subsidiary by the parent; (2) use of such control to commit fraud or wrong; and (3) that the control and breach of duty is the proximate cause of the injury complained of. Here the evidence does not sustain any finding that CBS completely dominated the finances, policy, and business practices of CBS Films. Therefore, the instrumentality rule is inapplicable, and the parent, CBS, cannot be held liable for any breach of contract by its subsidiary CBS. Berger v. Columbia Broadcasting System, Inc., 453 F. 2d 991 (1972).

18. Frank McAnarney and Joseph Lemon entered into an agreement to promote a corporation to engage in the manufacture of farm implements. Before the corporation was organized, McAnarney and Lemon solicited subscriptions to the stock of the corporation and presented a written agreement for the subscribers to sign. The agreement provided that the subscribers would pay $100 per share for stock in the corporation in consideration of McAnarney and Lemon’s agreement to organize the corporation and advance the preincorporation expenses. Thomas Jordan signed the agreement, making application for one hundred shares of stock. After the articles of incorporation had been filed with the Secretary of State but before the certificate of incorporation was issued to the corporation, Jordan died. The administrator of Jordan’s estate notified McAnarney and Lemon that the estate would not honor Jordan’s subscription.

After the formation of the corporation, Franklin Adams signed a subscription agreement making application for one hundred shares of stock. Before the corporation accepted the subscription, Adams informed the corporation that he was canceling it. a. Can the corporation enforce Jordan’s stock subscription against Jordan’s estate?

Explain. b. Can the corporation enforce Adams’s stock subscription? Explain.

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Answer: (a) The corporation may recover from Jordan’s estate. A subscription for shares of a corporation to be organized is irrevocable for a period of six months unless provided otherwise by the terms of the agreement or unless its revocation is consented to by all the subscribers. §6.20, RMBCA. Though the administrator is not personally liable, the estate is. (b) The corporation may not recover from Adams. In post-organization subscriptions or agreements to purchase the corporation’s shares, the subscriber may withdraw or cancel his subscription at any time before it is accepted by the corporation. He cannot withdraw after the subscription has been accepted as the acceptance forms a contract.

19. Green & Freedman Baking Company (Green & Freedman) was a family-owned Massachusetts corporation that produced and sold baked goods. The terms of a collective bargaining agreement required Green & Freedman Baking Company to make periodic payments on behalf of its unionized drivers to the New England Teamsters and Baking Industry Health Benefits and Insurance Fund (Health Fund). After sixty years of operation Green & Freedman experienced financial difficulties and ceased to make the agreed-upon contributions. The mixed their own finances with those of Green & Freedman’s. The Elmans, through their domination of Green & Freedman, caused the corporation to make payments to themselves and their relatives at a time when the corporation was known to be failing and could be expected to default, or was already in default, on its obligations to the Health Fund. It then transferred all remaining assets to a successor entity named Boston Bakers, Inc. (Boston Bakers). Boston Bakers operated essentially the same business as Green & Freedman until its demise two years later. The Health Fund sued Green & Freedman, Boston Bakers, and the two corporations’ principals, Richard Elman and Stanley Elman, to recover the payments owed by Green & Freedman with interest, costs, and penalties. There was no evidence of financial self-dealing in the case of Boston Bakers. Both corporate defendants conceded liability for the delinquent contributions owed by Green & Freedman to the Health Fund. The suit against the Elmans was based on piercing the corporate veil with respect to Green & Freedman and Boston Bakers. The Elmans, however, denied they were personally liable for these corporate debts. Are the Elmans liable? Explain.

Answer: The Elmans are not liable for the obligations of Green & Freedman but are liable for the obligations of Boston Bakers. The legal standard for when it is proper to pierce the corporate veil is not precise because it can vary according to the case circumstances. Courts consider the respect paid by the shareholders themselves to the separate corporate identity; the fraudulent intent of the individual defendants; and the degree of injustice that would be visited on the litigants by recognizing the corporate identity.

In this case, there is ample evidence of fraudulent intent to afford a reasonable jury, applying the these criteria, and exercising its broad authority over the veil-piercing issue, a legally sufficient basis to reach beyond Green & Freedman’s corporate identity and hold the Elmans liable for the corporation’s unpaid contributions. These facts support a reasonable inference by a jury that the Elmans, in the two years before Green & Freedman’s demise, did not treat Green & Freedman as a separate entity, placed personal interests ahead of the corporation’s responsibilities, and did not themselves honor the corporate form.

The next question is whether a jury could hold the Elmans personally liable for Boston Bakers’ successorship obligation to pay Green & Freedman’s indebtedness. For this to

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happen there must be showing of fraud related to Boston Bakers. The Health Fund claims the bulk transfer of assets is inherently fraudulent, a claim which is undercut by the fact that the Elmans did not conceal the transfer. There is no evidence of financial self-dealing in the case of Boston Bakers such as occurred with Green & Freedman. The Elmans do not have personal liability for Boston Bakers’ corporate obligation to make good Green & Freedman’s delinquent payments to the Health Fund.

Crane v. Green & Freedman Baking Company, Inc., 134 F. 3d 17 (1998).

20. Ronald Nadler was a resident of Maryland and the chief executive officer of Glenmar Cinestate, Inc., a Maryland corporation, as well as its principal stockholder. Glenmar leased certain space in the Westridge Square Shopping Center, located in Frederick, Maryland, and in Cranberry Mall, located in Westminster, Maryland. Tiller Construction Corporation and Nadler entered into two contracts for the construction of movie theaters at these locations, one calling for Tiller to do the work for Nadler at Westridge for $637,000, and the other for Tiller to do the work for Nadler at Cranberry for $688,800.

Ronald Nadler requested that Tiller send all bills to Glenmar, the lessee at both shopping malls, but agreed to be personally liable to Tiller for the payment of both contracts. All inventory was bought and paid for locally and Tiller paid sales tax in Maryland. Although there was no formal office in the state, Tiller leased a motel room for a considerable period of time, posted a sign at the job site, and maintained a Maryland telephone number that was listed in directory assistance. In addition, Tiller engaged in fairly pervasive management functions, and the value of the projects comprised a substantial part of Tiller’s revenues during the period. At the time of the suit, there was a net balance due for the Cranberry project in the amount of $229,799.46, and on the Westridge project for the sum of $264,273.85. Nadler refused to pay both balances, even though he had approved all work and the work had been performed in a timely, good, and workmanlike manner. Tiller Construction Corporation sued Ronald Nadler and Glenmar Cinestate, Inc., for breach of contract. Nadler filed a motion to dismiss based on Maryland’s business corporation statute which prohibits a foreign corporation that conducts intrastate business in Maryland from maintaining a suit in Maryland courts if the corporation fails to register or qualify under Maryland law. Nadler asserted that Tiller was a New York corporation that has never qualified to transact business in the state of Maryland. Tiller conceded that the corporation had not qualified to do business in Maryland but argued that Tiller was not required to qualify because its activities did not constitute, in the contemplation of the statute, doing business in the state as Tiller just had occasional business in Maryland.

Discuss whether Tiller could bring suit in Maryland.

Answer: Under Maryland law a foreign corporation is doing business within the state when it transacts some substantial part of its ordinary business in that state, and it is forbidden from bringing suit in a Maryland court if it has not properly registered or qualified there. Where, however, the corporation does not engage in significant business activity in Maryland, a corporation is permitted to maintain an action in the courts of this state even though it has neither registered nor qualified.

Whether the acts engaged in by a foreign corporation are sufficient to constitute “doing business” must be determined from the facts of each case, including (1) whether the foreign corporation pays state taxes; (2) whether it maintains property, an office, telephone listings, employees, agents, inventory, research and development facilities, advertising and bank accounts in the state; (3) whether it makes contracts in the state; and (4) whether its management functions in the state are pervasive.

The trial court found that all inventory was bought and paid for locally and that Tiller had paid sales tax in Maryland. The court also found that, although there was no formal office in the state, Tiller leased a motel room for a considerable period of time,

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 33: Nature and Formation of Corporations

posted a sign at the job site, and maintained telephones listed in information. In addition, Tiller engaged in fairly pervasive management functions, and the value of the projects comprised a substantial part of Tiller’s revenues during the period. From this the court properly determined that Tiller was doing business in Maryland and concluded that Tiller had indeed transacted some substantial part of its ordinary business in Maryland. Tiller, therefore, cannot bring suit against Nadler in a Maryland court. Tiller Construction Corp. v. Nadler, 334 Md. 1, 637 A. 2d 1183 (1994).

21. Harold Lang Jewelers, Inc., a Florida corporation, through its single employee, had sold and consigned merchandise to jewelry stores in western North Carolina for almost thirty years.

Lang’s employee came frequently to North Carolina for the purpose of transacting business. When the employee came to North Carolina, he always brought jewelry with him for delivery. When he visited jewelry stores in the State, he would either (a) make a direct sale on the spot without any confirmation from any other person or (b) consign the jewelry, also without any further confirmation or approval from any other person. When the employee took orders, he either shipped the ordered items to the business in North Carolina or personally delivered the merchandise. He also took returns of merchandise from customers in the State. Lang filed suit against, alleging that Johnson owed Lang $160,322.90 plus interest for jewelry sold or consigned. Johnson asserted as one of its defenses that Lang could not sue in a North Carolina court because Lang had failed to obtain a certificate of authority to transact business in the State. Explain whether the court should dismiss Lang’s action.

Answer: Yes, a foreign corporation must obtain a certificate of authority in every State in which it conducts intrastate business. Harold Lang Jewelers, Inc. v. Johnson, Court of Appeals of North Carolina, 2003, 156 N.C. App. 187, 576 S.E. 2d 360; review denied, 357 N.C. 458, 585 S.E. 2d 765.

Transacting business in the State “require[s] the engaging in, carrying on or exercising, in North Carolina, some of the functions for which the corporation was created.” The activities carried on by the corporation in North Carolina must be substantial, continuous, systematic, and regular. Lang’s business in North Carolina has been regular, systematic, and extensive. Lang has been coming to North Carolina almost thirty years to sell and consign merchandise to several jewelry stores. In fact, Lang routinely came to North Carolina as frequently as twice every four weeks during some parts of the year, and each time he brought with him merchandise to deliver. Moreover, Lang’s employee finalized the sales in North Carolina.

ANSWERS TO “TAKING SIDES” PROBLEMS In May, Parr and Presba, while in the course of negotiations with Barker (a salesperson for Quaker Hill) to purchase plants and flowers, undertook to organize a corporation to be named the Denver Memorial Nursery, Inc. On May 14 and 16, Parr signed two orders on behalf of Denver Memorial Nursery, Inc. which, to the knowledge of Quaker Hill, was not yet formed, that fact being noted in the contract. A down payment in the amount of $1,000 was made.

The corporation was not formed prior to entering into the contract because Quaker Hill insisted that the deal be concluded at once since the growing season was rapidly passing.

Under the contract, the balance of the purchase price was not due until the end of the year.

The plants and flowers were shipped immediately and arrived on May 26. The Denver Memorial Nursery, Inc. was never formed. Quaker Hill seeks to recover the unpaid balance of the purchase price from Parr and Presba.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 33: Nature and Formation of Corporations

a. What are the arguments that Parr and Presba are personally liable for the unpaid balance? b. What are the arguments that Parr and Presba are not personally liable for the unpaid balance? c. Explain who should prevail.

Answer: (a) Quaker Hill would argue that promoters who enter a contract in the name of a proposed corporation are personally liable in the absence of an agreement that they should not be liable even if the corporation adopts the contract. (b) Parr and Presba would argue that they are not personally liable because Quaker Hill manifested an intent to look for payment only from Denver Memorial Nursery, Inc. (c) Parr and Presba are not liable as individuals. Quaker Hill, Inc. v. Parr, 364 P. 2d 1056, Colorado Supreme Court (1961). The general principle applicable here is that promoters are personally liable on their contracts, though made on behalf of a corporation to be formed. A well-recognized exception to this general rule, however, is that if the contract is made on behalf of the corporation and the other party agrees to look to the corporation and not to the promoters for payment, the promoters incur no personal liability. In this case, the plaintiff, acting through its agent, was well aware of the fact that the corporation was not formed and nevertheless urged that the contract be made in the name of the proposed corporation. The entire transaction contemplated the corporation as the contracting party. Personal liability does not arise under such circumstances.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 34: Financial Structure of Corporations

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 34: Financial Structure of Corporations

TABLE OF CONTENTS Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems ............................................................................... 8

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Olympic National Agencies was organized with an authorized capitalization of preferred stock and common stock. The articles of incorporation provided for a 7 percent annual dividend for the preferred stock. The articles further stated that the preferred stock would be given priority interests in the corporation’s assets up to the par value of the stock. After some years, the shareholders voted to dissolve Olympic. Olympic’s assets greatly exceeded its liabilities. The liquidating trustee petitioned the court for instructions on the respective rights of the shareholders in the assets of the corporation upon dissolution. The court ordered the trustee to distribute the corporate assets remaining after the preference of the preferred stock is satisfied to the common and preferred stockholders on a pro rata basis. Was the court correct in rendering this decision? Explain.

Answer: No. The preferred stockholders should be paid only the par value of their stock before any liquidation dividends are paid to the common stockholders. Where one class of stock is afforded a stated preference as to assets on liquidation and the articles of incorporation are silent as to any further participation, the clear implication is that the rights of the preferred stock are exhausted once the preference has been satisfied. In Re Olympic National Liquidation Agencies, Inc. 442 P. 2d 246 (Wash. 1968).

2. XYZ Corporation was duly organized on July 10. Its certificate of incorporation provides for a total authorized capital of $1 million, consisting of ten thousand shares of common stock with a par value of $100 per share. The corporation issued for cash a total of five hundred certificates, numbered one to five hundred inclusive, representing various amounts of shares in the names of various individuals. All the shares had been paid for in advance, so the certificates were all dated and mailed on the same day. The five hundred certificates of stock represent a total of 10,500 shares. Certificate number 499 for 300 shares was issued to Jane Smith. Certificate number 500 for 250 shares was issued to William Jones. Is there any question concerning the validity of any of the stock thus issued? Explain. What are the rights of Smith and Jones? Explain.

Answer: The XYZ Corporation may not validly issue more than 10,000 shares of its common stock, as that number of shares is all that it is authorized by its charter to issue. Any certificate representing shares in excess of the amount authorized is void.

Certificates Nos. 499 and 500 are void because they each represent an over-issue of 250 shares. Jane Smith is entitled to a new certificate for five shares. Both Jane Smith and William Jones are entitled with respect to the over-issue of 250 shares to recover from the issuer the price he or the last purchaser for value paid for it with interest from the date of his demand. UCC Section 8-104 (1)(b). © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 34: Financial Structure of Corporations

3. Doris subscribed for two hundred shares of 12 percent cumulative, participating, redeemable, convertible, preferred shares of the Ritz Hotel Company with a par value of $100 per share. The subscription agreement provided that she was to receive a bonus of one share of common stock of $100 par value for each share of preferred stock. Doris fully paid her subscription agreement of $20,000 and received the 200 shares of preferred stock and the bonus stock of 200 shares of the par value common. The Ritz Hotel company later becomes insolvent. Ronald, the receiver of the corporation, brings suit for $20,000, the par value of the common stock. What judgment? Discuss.

Answer: Ronald is entitled to recover $20,000 from Doris. Par value shares may be issued for any amount, not less than par, set by the board of directors or shareholders.

The par value of stock must be stated in the articles of incorporation. Doris paid nothing for the 200 shares of bonus par value common stock. As the common stock had a par value of $100 per share and may not be issued for less than par, Doris owes the full amount of the par value of it.

4. Hyperion Company has an authorized capital stock of one thousand shares with a par value of $100 per share, of which nine hundred shares, all fully paid, were outstanding.

Having an ample surplus, Hyperion Company purchased from its shareholders one hundred shares at par. Subsequently, Hyperion, needing additional working capital, issued the two hundred shares in question to Alexander at $80 per share. Two years later, Hyperion Company was forced into bankruptcy. Explain how much, if any, the trustee in bankruptcy may recover from Alexander.

Answer: The trustee in bankruptcy may not recover with respect to the sale of the 100 treasury shares but may recover $2,000 from Alexander with respect to the 100 previously unissued shares. The outstanding 900 shares of capital stock were all fully paid. When Hyperion Company purchased from its shareholders 100 shares at par ($100) it was not only solvent but had an ample surplus. The 100 shares purchased became treasury shares. Treasury shares may be disposed of by the corporation for such consideration expressed in dollars as may be fixed from time to time by the board of directors. Hyperion had the right to sell the 100 shares of treasury stock to Alexander for $80 per share.

With respect to the sale of 100 previously unissued shares, the trustee in bankruptcy has a valid claim against Alexander for $20 per share, or $2,000. Shares having a par value may be issued for such consideration expressed in dollars, not less than the par value thereof, as shall be fixed from time to time by the board of directors. Alexander bought 100 shares at $80 per share, or $20 per share less than par, and therefore owed the Hyperion Company the unpaid balance of $2,000. This right of Hyperion Co. became an asset of its trustee in bankruptcy.

5. For five years, Henry and James had been engaged as partners in building houses. They owned the equipment necessary to conduct the business and had an excellent reputation.

In March, Joyce, who previously had been in the same kind of business, proposed that Henry, James, and Joyce form a corporation for the purpose of constructing mediumpriced houses. They engaged attorney Portia, who did all the work required and caused the business to be incorporated under the name of Libra Corp.

The certificate of incorporation authorized one thousand shares of $100 par value stock.

At the organizational meeting of the incorporators, Henry, James, and Joyce were elected directors, and Libra Corp. issued a total of six hundred and fifty shares of its stock. Henry and James each received two hundred shares in consideration for transferring to Libra Corp. the equipment and goodwill of their partnership, which had a combined value of

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 34: Financial Structure of Corporations

more than $40,000. Joyce received two hundred shares as an inducement to work for Libra Corp. in the future, and Portia received fifty shares as compensation for the legal services she rendered in forming Libra Corp.

Later that year, Libra Corp. had a number of financial setbacks and in December ceased operations. Explain what rights, if any, Libra Corp. has against Henry, James, Joyce, and Portia in connection with the original issuance of its shares.

Answer: The answer differs depending upon the statutory provision that has been adopted in the state of incorporation. In general, consideration for the issuance of capital stock is defined in a more limited fashion than under contract law. In a number of states, future services are considered to be invalid consideration. However, the Revised Act greatly liberalized the rules regarding valid consideration. The Revised Act specifically validates contracts for future services and promissory notes as consideration for the issuance of shares. However, the Revised Act requires that the corporation annually inform shareholders of all shares issued for promissory notes or future services.

Under the Revised Act, Joyce’s consideration is valid and there is no liability on her part or on the part of the directors. However, in a number of states, Joyce has obtained her shares for invalid consideration and remains liable to the corporation for the purchase price of $2,000. In those states Henry and James are also liable as directors for the issuance of stock for an illegal consideration.

The consideration given by Henry and James for their shares was sufficient. Goodwill and equipment are valid considerations. In the absence of fraud, the judgment of the Board or shareholders as to the value of the consideration received for shares is conclusive.

The consideration given by Portia was sufficient, because legal services already rendered is valid consideration. Again, the judgment of the Board or shareholders as to the value of the consideration received for shares is conclusive. See Section 6.21 of the RMBCA. 6. Paul Bunyan is the owner of noncumulative 8 percent preferred stock in the Broadview Corporation, which had no earnings or profits in 2021. In 2022 the corporation had large profits and a surplus from which it might properly have declared dividends. However, the directors refused to do so, using the surplus instead to purchase goods necessary for the corporation’s expanding business. The corporation earned a small profit in 2023. The directors at the end of 2023 declared a 10 percent dividend on the common stock and an 8 percent dividend on the preferred stock without paying preferred dividends for 2022. a. Is Bunyan entitled to dividends for 2021? For 2022? Why or why not? b. Is Bunyan entitled to a dividend of 10 percent rather than 8 percent in 2023? Why or why not?

Answer: (a) Under the majority rule, Bunyan is not entitled to dividends in either year. The preferred stock is noncumulative. When the directors do not see fit to declare a dividend on the preferred stock for any particular year, the holders of noncumulative preferred stock have lost all rights to a dividend for that year, as undeclared dividends do not cumulate. (b) No. As the holder of noncumulative preferred Bunyan is entitled to the preferred dividend of 8% for 2023. In the absence of a specific provision in the articles of incorporation that the preferred is also participating, Bunyan is not entitled to any dividends beyond 8%.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 34: Financial Structure of Corporations

7. Alpha Corporation has outstanding 400 shares of $100 par value common stock, which has been issued and sold at $105 per share for a total of $42,000. Alpha is incorporated in State X, which has adopted the earned surplus test for all distributions. At a time when the assets of the corporation amount to $65,000 and the liabilities to creditors total $10,000, the directors learn that Rachel, who holds 100 of the 400 shares of stock, is planning to sell her shares on the open market for $10,500. Believing that this will not be in the best interest of the corporation, the directors enter into an agreement with Rachel to buy the shares from her for $10,500. About six months later, when the assets of the corporation have decreased to $50,000 and its liabilities, not including its liability to Rachel, have increased to $20,000, the directors use $10,000 to pay a dividend to all of the shareholders. The corporation later becomes insolvent. a. Does Rachel have any liability to the corporation or its creditors in connection with the corporation’s reacquisition of the 100 shares? Explain. b. Was the payment of the $10,000 dividend proper? Explain.

Answer: (a) No. The agreement of the corporation to purchase the stock of Rachel was valid when made because at that time the corporation had $13,000 earned surplus and $2,000 capital surplus. (b) The payment of the $10,000 dividend was illegal. A dividend may be properly paid only out of earnings or earned surplus. At the time this dividend was paid, the liabilities of the corporation totaled $30,500 ($20,000 plus the $10,500 owed to Rachel), the stated capital was $30,000 (the original $40,000 reduced by the $10,000 of shares repurchased from Rachel), the capital surplus was $1,500(the original $2,000 reduced by the $500 of shares repurchased from Rachel), and as a result the earned surplus was a negative $12,000. Therefore, the corporation had a deficit and payment of the dividend further impaired its capital.

8. Almega Corporation, organized under the laws of State S, has outstanding twenty thousand shares of $100 par value nonvoting preferred stock calling for noncumulative dividends of $5.00 per year; ten thousand shares of voting preferred stock of $50.00 par value, calling for cumulative dividends of $2.50 per year; and ten thousand shares of no par common stock. State S has adopted the earned surplus test for all distributions as of the end of 2018, the corporation had no earned surplus. In 2019, the corporation had net earnings of $170,000; in 2020, $135,000; in 2021, $60,000; in 2022, $210,000; and in 2023, $120,000. The board of directors passed over all dividends during the four years from 2019 to 2022, as the company needed working capital for expansion purposes. In 2023, however, the directors declared a dividend of $5.00 per share on the noncumulative preferred shares, a dividend of $12.50 per share on the cumulative preferred shares, and a dividend of $30.00 per share on the common stock. The board submitted its declaration to the voting shareholders, and they ratified it. Before the dividends were paid, Payne, the record holder of five hundred shares of the noncumulative preferred stock, brought an appropriate action to restrain any payment to the cumulative preferred or common shareholders until the company paid a full dividend for the period from 2019 to 2023.

Decision? What is the maximum lawful dividend that may be paid to the owner of each share of common stock?

Answer: The board had authority to exclude noncumulative shares from any past year dividend.

The noncumulative preferred would have no right to any accrual of dividends during the four years 2019 to 2022 when no dividends were declared. The most that they could expect would be a declaration of a five per cent dividend in 2023 amounting to $100,000 out of current earnings and available surplus. This amount, added to

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 34: Financial Structure of Corporations

dividends totaling $125,000 on the cumulative preferred to make up for dividend arrearages and current dividends, would aggregate $225,000 of dividends on both classes of preferred payable in 2023. As the total earnings and earned surplus for the four years 2019 to 2022 amount to $695,000, exclusive of any surplus on hand from operations prior to 2019, the remainder available for dividends on the common stock equals $470,000 which results in a maximum lawful dividend to common of $47 per share. A dividend of $30 per share on the common stock amounting to $300,000 would therefore be permissible and would leave a remaining surplus of $170,000.

The ratification by the voting shareholders does not have any bearing on the problem.

The board is the body in complete control of dividends (barring some retention of authority in the shareholders contained in the articles of incorporation) so long as there is no abuse of discretion.

9. Sayre learned that Adams, Boone, and Chase were planning to form a corporation for the purpose of manufacturing and marketing a line of novelties to wholesale outlets. Sayre had patented a self-locking gas tank cap but lacked the financial backing to market it profitably. He negotiated with Adams, Boone, and Chase, who agreed to purchase the patent rights for $5,000 in cash and 200 shares of $100 par value preferred stock in a corporation to be formed.

The corporation was formed and Sayre’s stock issued to him, but the corporation has refused to make the cash payment. It has also refused to declare dividends, although the business has been very profitable because of Sayre’s patent and has a substantial earned surplus with a large cash balance on hand. It is selling the remainder of the originally authorized issue of preferred shares, ignoring Sayre’s demand to purchase a proportionate number of these shares. What are Sayre’s rights, if any? Explain.

Answer: The corporation is obligated to pay Sayre $5,000. Sayre will probably be unable to compel the declaration and payment of a dividend. Sayre has no preemptive right to purchase original unissued shares of preferred stock. (a) After a corporation comes into being it may either expressly or impliedly ratify a contract made on its behalf and thus become bound. There is no evidence of express ratification of the contract by vote of the shareholders or directors, but there is ample evidence of implied ratification by acceptance of the benefits of the contract for purchase of the gas tank cap rights. The corporation takes the burdens with the benefits and is bound to pay the $5,000 to Sayre. (b) As to the refusal to declare dividends, the courts say that it is not their business to operate business corporations and to substitute their business judgment for that of the board of directors. On the other hand, the courts are equally ready to say that it is the purpose of corporations to make money and pay it out to shareholders in the form of dividends. The directors will not be permitted to abuse their discretion in the withholding of dividends. Dodge v. Ford Motor Co., in text. (c) The Act, Section 6.30 provides that unless otherwise provided in the articles of incorporation, holders of shares shall not be entitled to any preemptive right.

10. Wood, the receiver of Stanton Oil Company, sued Stanton’s shareholders to recover dividends paid to them for three years, claiming that at the time these dividends were declared, Stanton was in fact insolvent. Wood did not allege that the present creditors were also creditors when the dividends were paid. Were the dividends wrongfully paid?

Explain.

Answer: No, judgment for the shareholders. Shareholders are not required to repay dividends unless (1) the dividend impairs the corporation’s capital stock and the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 34: Financial Structure of Corporations

shareholders have notice of this fact; or (2) the dividend was made while the corporation was insolvent, and suit is brought by creditors existing when the dividend was paid. Under the second theory, the shareholders are liable to the representative of the existing creditors for the amount of the dividends thus received. Because Wood did not allege that some of the present creditors were also creditors when the dividends were paid, the court must rule for the shareholders. Wood v. City National Bank, 24 F. 2d 661 (2d Cir. 1928).

11. International Distributing Export Company (IDE) was organized as a corporation on September 7, 2016, under the laws of New York and commenced business on November 1, 2016. IDE formerly had existed as a sole proprietorship. On October 31, 2016, the newly organized corporation had liabilities of $64,084. Its only assets, in the sum of $33,042, were those of the former sole proprietorship. The corporation, however, set up an asset on its balance sheet in the amount of $32,000 for goodwill. As a result of this entry, IDE had a surplus at the end of each of its fiscal years from 2017 until 2022. Cano, a shareholder, received $7,144 in dividends from IDE during the period from 2018 to 2023.

May Fried, the trustee in bankruptcy of IDE, recover the amount of these dividends from Cano on the basis that they had been paid when IDE was insolvent or when its capital was impaired? Explain.

Answer: Judgment for Cano. There was no evidence that the corporation was not paying its debts as they matured. The wrongful declaration of a dividend out of capital, in violation of the incorporation statute, is a wrong of those committing it. Innocent participants are not accomplices to its commission. In order to hold the stockholder who received the dividend liable, it is necessary to prove the stockholder’s complicity in and knowledge of the wrong. Fried did not prove that Cano had knowledge that his dividends were paid out of I.D.E.’s capital, or that the dividends impaired I.D.E.’s capital. Therefore, Cano cannot be held liable. Fried v. Cano, 167 F. Supp. 625 (S.D. N.Y. 1958).

12. Smith’s Food & Drug Centers, Inc. (SFD), is a Delaware corporation that owns and operates a chain of supermarkets in the southwestern United States. Jeffrey P. Smith, SFD’s chief executive officer, and his family hold common and preferred stock constituting 62.1 percent voting control of SFD. On January 29, SFD entered into a merger agreement with the Yucaipa Companies that would involve a recapitalization of SFD and the repurchase by SFD of up to 50 percent of its common stock. SFD was also to repurchase 3 million shares of preferred stock from Jeffrey Smith and his family. In an April 25 proxy statement, the SFD board released a pro forma balance sheet showing that the merger and self-tender offer would result in a deficit to surplus on SFD’s books of more than $100 million. SFD hired the investment firm of Houlihan Lokey Howard & Zukin (Houlihan) to examine the transactions, and it rendered a favorable solvency opinion based on a revaluation of corporate assets. On May 17, in reliance on the Houlihan opinion, SFD’s board of directors determined that there existed sufficient surplus to consummate the transactions. On May 23, SFD’s stockholders voted to approve the transactions, which closed on that day. The selftender offer was oversubscribed, so SFD repurchased fully 50 percent of its shares at the offering price of $36.00 per share. A group of shareholders challenged the transaction alleging that the corporation’s repurchase of shares violated the statutory prohibition against the impairment of capital. They argued that: a. the negative net worth that appeared on SFD’s books following the repurchase constitutes conclusive evidence of capital impairment and b. the SFD board was not entitled to rely on a solvency opinion based on a revaluation of corporate assets.

Explain who should prevail.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 34: Financial Structure of Corporations

Answer: Decision for Smith’s Food & Drug Centers. This problem is based on Klang v.

Smith’s Food & Drug Centers, Inc., Supreme Court of Delaware, 702 A. 2d 150 (1997), http://scholar.google.com/scholar_case?case=7152442145222039076&q=702+A.2d+150& hl=en&as_sclt=2,34.

A corporation may not repurchase its shares if, in so doing, it would cause an impairment of capital. A repurchase impairs capital if the funds used in the repurchase exceed the amount of the corporation’s “surplus,” defined by the statute to mean the excess of net assets over the par value of the corporation’s issued stock. The books of a corporation do not necessarily reflect the current values of its assets and liabilities.

Among other factors, unrealized appreciation or depreciation can render book numbers inaccurate. It is unrealistic to hold that a corporation is bound by its balance sheets for purposes of determining compliance with the statute. Accordingly, a corporation may revalue properly its assets and liabilities to show a surplus and thus conform to the statute. The legislature enacted the statute to prevent boards from draining corporations of assets to the detriment of creditors and the long-term health of the corporation. Allowing corporations to revalue assets and liabilities to reflect current realities complies with the statute and serves well the policies behind this statute. The SFD board of directors appropriately revalued corporate assets to comply with the statute. In the absence of bad faith or fraud on the part of the board of directors, courts will not substitute their concepts of wisdom for that of the directors. The statute entitles boards to rely on experts such as Houlihan to determine compliance with the statutory restrictions on distributions.

13. In addition to a class of common stock, Peabody Coal Company had outstanding a class of cumulative 5 percent preferred shares with a par value of $25 with the following contractual rights as stated in the corporation’s articles of incorporation: Preferences on Liquidation In the event of any liquidation, dissolution or winding up of the Company (whether voluntary or involuntary), the holders of the 5 Preferred Shares then outstanding shall, to the extent of the full par value of their shares and unpaid cumulative dividends accrued thereon be entitled to priority of payment out of the Company's assets over the holders of the Common Shares then outstanding. After such payment to the holders of the 5 percent Preferred Shares, the remaining assets shall be distributed pro rata to the holders of the Common Shares then outstanding.

Redemption The Company, upon the sole authority of its Board of Directors, may at any time redeem and retire all or any part of the 5 percent Preferred Shares at any time outstanding by paying or setting aside for payment for each share so called for redemption the sum of $26.00 plus a sum equal to the amount of all dividends accrued or in arrears thereon at the redemption date.

Peabody entered into negotiations for its sale to the Kennecott Copper Company. In order to complete the transaction, Peabody submitted to its shareholders a resolution for the approval of the sale to Kennecott and the adoption of a plan of complete liquidation. The proposed dissolution plan would (1) entitle the preferred shareholders to a preferential liquidating dividend of $25 par value per share plus any unpaid cumulative dividends accrued and (2) pay the remainder of the assets on a pro rata basis to the holders of the common stock of Peabody. The resolution was approved by the common and preferred shares voting as a single class. Preferred shareholders have challenged the plan of liquidation claiming that the corporation should have redeemed the preferred stock and then liquidated the corporation, thus entitling each preferred share to a $26 redemption

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 34: Financial Structure of Corporations

payment along with accrued dividends. Explain whether the preferred shareholders should succeed.

Answer: No, the preferred shareholders should not succeed: the preferred shareholders were given their contractual rights, pursuant to the corporate charter.

This problem is based on Elward v. Peabody Coal Co., 121 Ill. App. 2d 298, 257 N.E. 2d 500 (1970).

The rule has been stated that the rights of preferred stockholders are a matter of contract fixed by the articles of incorporation and the stock certificates. Tennant v.

Epstein, 356 Ill. 26, 189 N.E. 864 (1934); Opelka v. Quincy Memorial Bridge Co., 335 Ill. App. 402, 82 N.E. 2d 184 (1948). Furthermore, we agree with the rule cited by defendant that one who purchases and subscribes to stock of a corporation impliedly agrees to be bound by the acts approved by a majority of the stockholders, or by the corporate agents duly chosen by the majority, if accomplished within the scope of the powers conferred by the charter. Wheeler v. Pullman Iron & Steel Co., 143 Ill. 197, 32 N.E. 420 (1892). As stated in Fletcher’s Cyclopedia on Corporations, Vol. 16A, § 8022 (1962): The general rule is that where a statute confers power on a majority, or a certain percent, of the stockholders to dissolve, the right is absolute, so far as the motives of the majority are concerned, in the absence of actual fraud, and not subject to judicial review on behalf of minority stockholders.

ANSWERS TO “TAKING SIDES” PROBLEMS A closely held corporation sought to repurchase 25 percent of its outstanding shares from one of its shareholders. The corporation and the shareholder agreed that the corporation would purchase all of the shareholder’s stock at a price of $500,000, payable $100,000 immediately in cash and the balance in four consecutive annual installments. The state’s incorporation statute provides: “A corporation may purchase its own shares only out of earned surplus but the corporation may make no purchase of shares when it is insolvent or when such purchase would make it insolvent.” At the time of the repurchase of the shares, the corporation had an earned surplus of $250,000. a. What are the arguments that the repurchase of shares satisfied the incorporation statute? b. What are the arguments that the repurchase of the shares did not satisfy the incorporation statute? c. Which argument should prevail?

Answer: (a) At the time of repurchase there is sufficient earned surplus ($250,000) to pay the $100,000 due. Each subsequent installment of the repurchase transaction should be treated as an independent purchase transaction by applying the statutory earned surplus test at the time of each subsequent payment. (b) The statutory earned surplus test should be applied only once: at the time of purchase. The transaction should be viewed as a purchase for $500,000 cash and a loan of the unpaid cash price ($400,000) back to the corporation. The corporation’s earned surplus was $250,000, which was not sufficient to cover the $500,000 purchase price. (c) Courts have taken differing views on this matter. The court in Neimark v. Mel Kramer Sales, Inc., 306 N.W. 2d 278, Wisconsin Court of Appeals (1981) discussed the first approach: “For example, the effect of the Fourth Circuit Court of Appeals’ holding in

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Mountain State Steel Foundries, Inc. v. Commissioner, 284 F. 2d 737 (1960), was to treat an installment repurchase transaction as if each successive installment constituted an independent purchase transaction by applying the surplus test at the time of each payment]. In re Matthews Construction Co., 120 F. Supp. 818 (S.D. Cal. 1954), also involved application of the surplus cutoff test and like Mountain State, indiscriminately applied the reasoning found in Robinson v. Wangemann, 75 F. 2d 756 (5th Cir. 1935), that a contract of sale was executory until each payment was made in cash, and therefore applied the surplus cutoff test to each installment payment. However, the court in Neimark v. Mel Kramer Sales, Inc. took the second approach: The application of the surplus cutoff test is required to be timed to the purchase rather than the payment of cash. Such a construction comports with the need for corporate flexibility in acquiring its own stock for legitimate purposes and the protection of creditors and holders of other securities of the corporation. * * * The Minnesota and Texas Supreme Courts, and the Ninth Circuit Court of Appeals, have taken similar views.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 35: Management Structure of Corporations

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 35: Management Structure of Corporations

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ............................................................................. 14

ANSWERS TO ETHICAL DILEMMA Whom Does a Director Represent? What Are a Director’s Duties?

1.

Does Dr. Maxwell-Deane, as a director, represent Carola Campbell? Should he quietly sound out the other directors as she asks? What risks would he run by doing so?

2. Does Maxwell-Deane have a duty to disclose to the board his previous relationship with Campbell? What details, if any, of his conversation with her should he report to the board?

3. What duty does Maxwell-Deane have to follow up on Campbell’s allegation that stock options were improperly awarded to the CEO and other inside directors?

4. What should Maxwell-Deane do?

Answer: (1) Maxwell-Deane, as a director, represents the interests of the corporation and all of its shareholders, including Campbell. But the reality of his situation is that he as yet has no allies on the board and little power, which he may only realize once he has actually gone on the board. His dilemma: how to take Campbell's concerns to the board without immediately making enemies of the chairman and his cronies. He should not make quiet inquiries, as Campbell requested, because any board member MaxwellDeane sounds out will report his interest to the chairman. Rather, Maxwell-Deane should tell the full board in a straightforward manner that Campbell has asked him to look into her concerns about stock options and the chairman's age. This is reasonable behavior for a new board member, and it forces the old board members to deal with Campbell's complaints in terms of policies rather than purely on a personal basis.

(2) Maxwell-Deane has a duty to tell the board that he knows Campbell socially. And he would be prudent to tell board members what they might otherwise be likely to discover: that he and Campbell dated at one time. As to the details of his conversation with Campbell, he should factually report her specific concerns: that the chairman is past the age at which he should have retired and that she questions the propriety of the award of stock options to the chairman and others. Those are material facts. He need not report statements Campbell makes as to her poor opinion of the chairman's character.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 35: Management Structure of Corporations

(3) He has a duty to ask the board to explain the policy under which the stock options were granted. He can certainly, as a newcomer, reasonably do so. He may also suggest that the board consider instituting a mandatory retirement age and clarifying its policy on granting stock options, if need be—either suggestion would be a prudent action for a board to take. Beyond making those inquiries and suggestions, he can do little more.

(4) Besides dealing straightforwardly with both Campbell and the board, Maxwell-Deane should attempt to decide for himself whether the board has, in fact, put its own interests ahead of those of shareholders. If he is sure board members have done so, and if they are unresponsive to his requests for clarification or remedial action, then he should think about whether he will share their liability if Campbell brings any successful legal action. And he should think about an exit strategy for himself if his own ethical standards differ too much from those of the chairman and other board members.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Brown, the president and director of a corporation engaged in owning and operating a chain of motels, was advised, on what seemed to be good authority, that a superhighway was to be constructed through the town of X, which would be a most desirable location for a motel. Brown presented these facts to the board of directors of the motel corporation and recommended that the corporation build a motel in the town of X at the location described. The board of directors agreed, and the new motel was constructed.

However, the superhighway plans were changed after the motel was constructed, and the highway was never built. Later, a packinghouse was built on property adjoining the motel, and as a result the corporation sustained a considerable loss. The shareholders brought an appropriate action against Brown, charging that his proposal had caused the corporation a substantial loss. What is the result? Explain.

Answer: Decision in favor of Brown. An officer or director of a corporation is not personally liable for loss sustained by the corporation as the result of the exercise of poor or mistaken business judgment. An officer or director is liable for loss resulting from his negligence of failure to exercise reasonable care. In this case, Brown was not guilty of negligence. He merely exercised a business judgment in good faith with due care and in a manner he reasonably believed to be in the best interests of the corporation.

2. A, B, C, D, and E constituted the board of directors of the X Corporation. While D and E were out of town, A, B, and C held a special meeting of the board. Just as the meeting began, C became ill. He then gave a proxy to A and went home. A resolution was then adopted directing and authorizing the X Corporation’s purchase of an adjoining piece of land owned by S as a site for an additional factory building. A and B voted for the resolution, and A, as C’s proxy, cast C’s vote in favor of the resolution. The X Corporation then made a contract with S for the purchase of the land. After the return of D and E, another special meeting of the board was held with all five directors present. A resolution was then unanimously adopted to cancel the contract with S. May S recover damages from X Corporation for breach of contract? Explain.

Answer: No, S may not recover from X Corporation. Even if the first special meeting of the board had been properly called upon due notice to all of the directors, a director may not act by proxy. Hence, there was no quorum present at the meeting as C’s proxy to A was invalid and a majority of the five person board was not present. The contract with S was not authorized by proper board action and was not binding on the © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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corporation. At the second meeting, the invalid contract was rescinded by unanimous action of the board, precluding any ratification or acquiescence by the corporation.

3. Bernard Koch was president of United Corporation, a closely held corporation. Koch, James Trent, and Henry Phillips made up the three-person board of directors. At a meeting of the board, Trent was elected president, replacing Koch. At the same meeting, Trent attempted to have the salary of the president increased. He was unable to obtain board approval of the increase because although Phillips voted for the increase, Koch voted against it. Trent was disqualified from voting by the charter. As a result, the directors, by a two-to-one vote, amended the bylaws to provide for the appointment of an executive committee composed of three reputable businesspersons to pass upon and fix all matters of salary for employees of the corporation. Subsequently, the executive committee, consisting of Jane Jones, James Black, and William Johnson, increased the salary of the president. Will Koch succeed in an appropriate action against the corporation, Trent, and Phillips to enjoin them from paying compensation to the president above that fixed by the board of directors? Explain.

Answer: Injunction granted. An executive committee of a board of directors must be composed of persons who are directors. The executive committee in this case was composed entirely of persons who were not directors. Hence, they were ineligible to act as an executive committee and the increase in salary which they voted to give the president was ineffective to bind either the board of directors or the corporation.

Revised Act, Section 8.25.

4. Zenith Steel Company operates a prosperous business. In January, Zenith’s CEO and president, Roe, who is also a member of the board of directors, was voted a $1 million bonus by the board of directors for valuable services he provided to the company during the previous year. Roe received an annual salary of $850,000 from the company. Black, Inc., a minority shareholder in Zenith Steel Company, brings an appropriate action to enjoin the payment by the company of the $1 million bonus. Explain whether Black will succeed in its attempt.

Answer: Decision for Black and against Zenith Steel Company enjoining payment of the $1 million bonus. An officer who is also a director of a corporation is not entitled to extra compensation from the corporation for past services to the company in performing the regular duties of his office. If Roe had not been a director, many courts would uphold the payment of the bonus to him, at least if the total amount paid him could be deemed reasonable compensation for his services, and in deciding what is reasonable, much weight would be given to the discretion and judgment of the board of directors. The rule is much harsher where, as here, the recipient of the bonus is a director as well as an officer. Most courts hold that a director-officer is not entitled to compensation for the performance of the regular or agreed upon duties of his office unless provision for payment was made before he actually rendered the services in question. Here, no provision for payment of the bonus to Roe was made until after he had fully performed all the services in question. Moreover, there is no evidence that the services he performed during the year were not of the type expected and agreed upon in return for his regular salary of $850,000. If Roe could demonstrate that he did perform certain extraordinary and onerous services for the company not within or incidental to the customary or agreed upon scope of the duties of his office and so not covered by the scope of the services expected for his regular salary of $850,000, then an implied agreement for payment of reasonable compensation for such extraordinary services might justify his bonus. Absent such proof, most courts would hold Roe had no right to payment of the bonus.

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5. Raphael, a minority shareholder of the Sample Corporation, claims that the following sales are void and should be annulled. Explain whether Raphael is correct. a. Smith, a director of the Sample Corporation, sells a piece of vacant land to the Sample Corporation for $500,000. The land cost him $200,000. b. Jones, a shareholder of the Sample Corporation, sells a used truck to the Sample Corporation for $8,400, although the truck is worth $6,000.

Answer: (a) Absent approval by a disinterested board of directors or the shareholders, Smith must prove that the contract is fair and reasonable to the corporation. Section 8.61, Revised Act. If the land which cost Smith $200,000 was fairly worth at the time of its sale less than the amount paid ($500,000), the transaction is unfair to the corporation and may be set aside. However, if the land had a current market value of $500,000 or more, the sale will be upheld. (b) The sale of the truck by Jones, a shareholder, to the corporation will not be set aside.

A shareholder is not a fiduciary and does not occupy a position of trust and confidence merely by reason of his ownership of stock. The rules which apply to officers and directors who actually manage the affairs of the corporation do not apply to those whose only relation to the corporation is that of shareholder. A dominant shareholder who owns or controls a majority of the stock and thereby effectively controls the corporation, is a fiduciary. However, the facts do not indicate that Jones is a dominant or controlling shareholder.

6. X Corporation manufactures machine tools. Its two principal competitors are Y Corporation and Z Corporation. The five directors of X Corporation are Black, White, Brown, Green, and Crimson. At a duly called meeting of the board of directors of X Corporation in January, all five directors were present. A contract for the purchase of $10 million worth of steel from the D Company, of which Black, White, and Brown are directors, was discussed and approved by a unanimous vote. There was a lengthy discussion about entering into negotiations for the purchase of Q Corporation, which allegedly was about to be sold for around $150 million. By a 3-2 vote, it was decided not to open such negotiations.

Three months later, Green purchased Q Corporation for $150 million. Shortly thereafter, a new board of directors for X Corporation took office. X Corporation now brings actions to rescind its contract with D Company and to compel Green to assign to X Corporation his contract for the purchase of Q Corporation. Explain whether X Corporation should succeed on each action.

Answer: Decree for D Company against X Corporation; there is not sufficient information to decide what decree should be issued regarding Green and X Corporation. (a) Duty of Loyalty: Conflict of Interests. The general rule is that a contract between corporations with common directors is not voidable by either corporation even if the interlocking directors constitute a majority of the board of the company challenging the contract, provided the contract is fair and reasonable. If defendants can establish that the contract is fair, most courts would deny rescission. (b) Duty of Loyalty: Corporate Opportunity. All courts agree that a director’s fiduciary obligations impose limits on his personal business activities and prevent him from taking advantage of business opportunities in competition with the corporation. On the other hand, it is obvious that a director is not precluded from personally taking advantage of all business opportunities even if they may in some way affect the

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corporation. It is difficult to find any helpful criteria in judicial opinions as to where the line is to be drawn between what is permissible for a director and what is not.

Sometimes the rationale used is whether or not the corporation had a “vested interest” or “reasonable expectancy” in the business matter appropriated by the director. If so, he may not acquire it for his personal profit. This test, however, seems a mere explanation of a decision reached on other grounds. Perhaps the only criterion is the rather indefinite one of whether in all fairness, the director ought to keep the opportunity for himself or turn it over to the corporation. The fact that the corporation was actually interested in the specific opportunity before the director acquired it may show his lack of good faith. The refusal of the corporation to proceed with the matter may be discounted by the possibility that the interested director may have cast the decisive vote against further action by the corporation. On the other hand, if Green voted in favor of negotiations, this would show his good faith although it still might not free him to acquire Q Corporation on his own account. The financial ability or inability of the corporation to acquire the competitor is also relevant. However, it has been indicated that consideration should be given to the possibilities of the corporation borrowing money, or obtaining assistance from the directors or shareholders in order to complete the transaction. Irving Trust Co. v. Deutsch, 73 F. 2d 121.

7. Gore had been the owner of 1 percent of the outstanding shares of the Webster Company, a corporation since its organization ten years ago. Ratliff, the president of the company, was the owner of 70 percent of the outstanding shares. Ratliff used the shareholders’ list to submit to the shareholders an offer of $50 per share for their stock. Gore, on receiving the offer, called Ratliff and told him that the offer was inadequate and advised that she was willing to offer $60 per share and for that purpose demanded a shareholders’ list.

Ratliff knew that Gore was willing and able to supply the funds necessary to purchase the stock, but he nevertheless refused to supply the list to Gore. Further, he did not offer to transmit Gore’s offer to the shareholders of record. Gore then brought an action to compel the corporation to make the shareholders’ list available to her. Will Gore be able to obtain a copy of the shareholders’ list? Why or why not?

Answer: Yes, Gore will be able to obtain the list. A shareholder has a right to examine for a proper purpose the books and records of account, minutes, and records of shareholders, and to make extracts therefrom. The list of shareholders is necessary in order to enable Gore to communicate with the other shareholders. Her purpose is to make an offer to buy stock at a price of $10 more per share than the price offered by the president. The Revised Act, however, requires that the demanding shareholder make a written demand. Section 1602, Revised Act. 8. Mitchell, Nelson, Olsen, and Parker, experts in manufacturing baubles, each owned fifteen of one hundred authorized shares of Baubles, Inc., a corporation is a state with an incorporation statute that does not permit cumulative voting. On July 7, 2017, the corporation sold forty shares to Quentin, an investor, for $1.5 million, which it used to purchase a factory building. On July 8, 2017, Mitchell, Nelson, Olsen, and Parker contracted as follows: All parties will act jointly in exercising voting rights as shareholders. In the event of a failure to agree, the question shall be submitted to George Yost, whose decision shall be binding upon all parties.

Until a dispute arose during a meeting of shareholders on April 17, 2024, all parties to the contract had voted consistently and regularly for Nelson, Olsen, and Parker as directors. At that meeting, Yost considered the dispute and decided and directed that Mitchell, Nelson,

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Olsen, and Parker vote their shares for the latter three as directors. Nelson, Olsen, and Parker so voted. Mitchell and Quentin voted for themselves and Olsen as directors. a. Is the contract of July 8, 2017, valid, and, if so, what is its effect? b. Who were elected directors of Baubles, Inc., at the meeting of its shareholders on April 17, 2024?

Answer: (a) The pooling agreement of July 8, 2017, is lawful and enforceable. In most jurisdictions, shareholder pooling agreements are valid, in the absence of fraud, illegal object, or oppression of minority shareholders. In a minority of jurisdictions such agreements may violate an alleged fiduciary duty owing by shareholders or may conflict with provisions prohibiting sale of votes or separation of ownership from voting power. The agreements are usually valid even where less than all shareholders are parties. Here, a proper purpose is shown by a desire among experts in the business to keep control among themselves, and away from Quentin, a “mere” investor. Section 7.31, Revised Act. (b) Since the pooling agreement is lawful and enforceable, either the votes of Mitchell, cast in violation of the agreement, should not be counted; or Nelson, Olsen and Parker or the arbitrator had implied irrevocable proxies to cast Mitchell’s votes. In the former case, 45 votes (15 votes each by Nelson, Olsen and Parker, no valid votes by Mitchell) would be cast for Nelson, Olsen and Parker and 40 votes (cast

by Quentin) for Mitchell, Quentin and Olsen. Since 40 votes is a majority of the votes cast, Nelson, Olsen and Parker would be elected directors, Nelson, Olsen and Parker would be elected. In the latter case, 60 votes (15 votes each by Nelson, Olsen and Parker, plus 15 votes by Mitchell’s proxy) would be cast for Nelson, Olsen and Parker with the same result.

9. Acme Corporation’s articles of incorporation require cumulative voting for the election of its directors. The board of directors of Acme Corporation consists of nine directors, each elected annually. a. Peter owns 24 percent of the outstanding shares of Acme Corporation. Explain how many directors he can elect with his votes. b. If Acme Corporation were to classify its board into three classes, each consisting of three directors elected every three years, explain how many directors Peter would be able to elect.

Answer: (a) Peter elects 2 directors. The formula is X = ac/(b + 1) + 1. Substituting 24 for “X”, 100 for “a,” and 9 for “b” yields:

24 =

– (100)(c)

+1

9+1 24 =

100c

+1

10 23 =

10c

2.3 =

c

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 35: Management Structure of Corporations

(b) Peter may elect no director. Using the same formula but substituting 24 for “X”, 100 for “a,” and 3 for “b” yields:

24 =

– (100)(c)

+1

4 23 =

25c

.92 =

c

= less than 1

10. A bylaw of Betma Corporation provides that no shareholder can sell his shares unless he first offers them for sale to the corporation or its directors. The bylaw also states that this restriction shall be printed or stamped upon each stock certificate and shall bind all present or future owners or holders. Betma Corporation did not comply with this latter provision. Shaw, having knowledge of the bylaw restriction, nevertheless purchased twenty shares of the corporation’s stock from Rice, without having Rice first offer them for sale to the corporation or its directors. When Betma Corporation refused to effectuate a transfer of the shares to her, Shaw sued to compel a transfer and the issuance of a new certificate to her. What is the result? Explain.

Answer: Decree for Betma Corporation and against Shaw. Section 8-204 of the Uniform Commercial Code provides: “Unless noted conspicuously on the security a restriction on transfer imposed by the issuer even though otherwise lawful is ineffective except against a person with actual knowledge of it.” A purchaser with actual knowledge of an unnoted restriction certainly has notice of an adverse claim.

Section 8-304 and Comment, UCC. 11. Neese, trustee in bankruptcy for First Trust Company, brings a suit against the directors of the company for losses the company sustained as a result of the directors’ failure to use due care and diligence in the discharge of their duties. The specific acts of negligence alleged are (a) failure to give as much time and attention to the affairs of the company as its business interests required; (b) abdication of their control of the corporation by turning the entire management of the corporation over to its president, Brown; (c) failure to keep informed as to the affairs, condition, and management of the corporation; (d) failure to take action to direct or control the corporation’s affairs; (e) permission of large, open, unsecured loans to affiliated but financially unsound companies that were owned and controlled by Brown; (f) failure to examine financial reports that would have shown illegal diversions and waste of the corporation’s funds; and (g) failure to supervise properly the corporation’s officers and directors. Explain which, if any, of these allegations could constitute a breach of the duty of diligence.

Answer: Judgment for Neese. The general allegations of negligence and mismanagement are each sufficient to constitute negligence if proven. Liability of officers and directors of a corporation is not limited to acts constituting a willful breach of trust or power but also extend to acts that are merely negligent. The directors must be something more than just figureheads. Although they are not responsible for simple errors in judgment, as fiduciaries the directors have the duty of caring for the property of the corporation and the additional duty of managing its affairs honestly and in good faith. The directors must exercise their best judgment and act solely and always with reasonable care to promote the welfare of the corporation.

Therefore, the directors can be held liable for inaction where such inaction was the proximate cause of a loss to the corporation. Neese v. Brown, 218 Tenn. 686, 405 S.W. 2d 577 (1964).

12. Minority shareholders of Midwest Technical Institute Development Corporation, a closedend investment company owning assets consisting principally of securities of companies in technological fields, brought a shareholder derivative suit against officers and directors

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of Midwest, seeking to recover on Midwest’s behalf the profits the officers and directors realized through dealings in stock held in Midwest’s portfolio in breach of their fiduciary duty. Approximately three years after commencement of the action, a new corporation, Midtex, was organized to acquire Midwest’s assets. May the shareholders now add Midtex as a party defendant to their suit? Why or why not?

Answer: Judgment for the shareholders. A stockholder derivative suit is an invention of equity designed to supply a remedy where none existed at law to redress breaches of fiduciary duty by corporate officers and directors. The action is a derivative or secondary one that can be brought by a shareholder on the corporation’s behalf if he can show that the corporation refused to bring the action itself after a proper request or that such a request would be futile. Here, the allegation is that the directors realized profits personally that were a result of a breach of their fiduciary duties, so the derivative suit is appropriate. When all of Midwest’s assets were transferred to the newly organized corporation, Midtex, this did not end the stockholders’ right to seek relief. The stockholders of Midwest did not lose the right to recover for a breach of fiduciary duty simply because the assets were transferred to a new corporation.

McMenomy v. Ryden, 286 Minn. 358, 176 N.W. 2d 876 (1970).

13. Riffe, while serving as an officer of Wilshire Oil Company, received a secret commission for work he did on behalf of a competing corporation. Can Wilshire Oil recover these secret profits and, in addition, recover the compensation Wilshire Oil paid to Riffe during the period that he acted on behalf of the competitor? Explain.

Answer: Yes. Judgment for Wilshire Oil Company. Riffe’s actions in accepting the secret commission from a competing corporation constitute both a willful breach of his employment contract and a breach of his fiduciary duty to the corporation stemming from his position as a corporate officer. Either action alone is sufficient to justify denying Riffe compensation for the period of his misdealing. Riffe, then, is not only liable to the corporation for the profits realized but also must refund all compensation paid to him by the corporation during the period in which the breaches were committed. Wilshire Oil Co. of Texas v. Riffe, 406 F. 2d 1061 (10th Cir. 1969).

14. Muller, a shareholder of SCM, brought an action against SCM over his unsuccessful negotiations to purchase some of SCM’s assets overseas. He then formed a shareholder committee to challenge the position of SCM’s management in that suit. To conduct a proxy battle for management control at the next election of directors, the committee sought to obtain the list of shareholders who would be eligible to vote. At the time, however, no member of the committee had owned stock in SCM for the six-month period required to gain access to such information. Then Lopez, a former SCM executive and a shareholder for more than one year, joined the committee and demanded to be allowed to inspect the minutes of SCM shareholder proceedings and to gain access to the current shareholder list. His stated reason for making the demand was to solicit proxies in support of the committee’s nominees for positions as directors. Lopez brought this action after SCM rejected his demand. Will Lopez succeed? Explain.

Answer: Yes. Lopez’s demand was clearly set forth so there was no procedural basis for the defendant’s rejection. The inspection of shareholder lists to facilitate a proxy challenge to incumbent directors is a valid purpose and the burden is on the corporation to show an improper purpose for the demand. Lopez’ involvement with Muller, who is engaged in litigation with SCM, does not constitute a lack of good faith in his request. Further, it would even be proper to discuss such litigation with shareholders. Application of Lopez, 420 N.Y.S. 2d 225, 71 A.D. 2d 976 (N.Y. 1979).

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15. Pritchard & Baird was a reinsurance broker. A reinsurance broker arranges contracts between insurance companies so that companies that have sold large policies may sell participations in these policies to other companies in order to share the risks. Pritchard & Baird was controlled for many years by Charles Pritchard, who died in December 2021 Prior to his death, he brought his two sons, Charles, Jr. and William, into the business. The pair assumed an increasingly dominant role in the affairs of the business during the elder Charles’s later years. Starting in 2018, Charles, Jr. and William began to withdraw from the corporate account ever-increasing sums that were designated as “loans” on the balance sheet. These “loans,” however, represented a significant misappropriation of funds belonging to the corporation’s clients. By late 2023, Charles, Jr. and William had plunged the corporation into hopeless bankruptcy. A total of $12,333,514.47 in “loans” had accumulated by October of that year. Mrs. Lillian Pritchard, the widow of the elder Charles, was a member of the corporation’s board of directors until her resignation in December 2023, the day before the corporation filed for bankruptcy. Francis, as trustee in the bankruptcy proceeding, brought suit against United Jersey Bank, the administrator of the estate of Charles, Sr. He also charged that Lillian Pritchard, as a director of the corporation, was personally liable for the misappropriated funds on the basis of negligence in discharging her duties as director. Is Francis correct? Why or why not?

Answer: Yes. All corporate directors, as fiduciaries, are responsible for managing the business and affairs of the corporation. They must exercise their duties in good faith and with the diligence, care, and skill of an ordinarily prudent individual. At the very least, a director should have some basic understanding of the corporation’s business and activities. A director should also keep abreast of the financial status of the enterprise by a regular review of the financial statements. This review may result in a duty to investigate any suspicious matters. After such an investigation, a director may have a duty to object to any improprieties, to resign if the objection goes unheeded, and even to seek the advice of counsel.

Here, Mrs. Pritchard should have known that Pritchard & Baird was in the reinsurance business as a broker and that it annually handled millions of dollars belonging to, or owing to, ceding companies and reinsurers. Charged with that knowledge, a director in Mrs. Pritchard’s position had, at the bare minimum, an obligation to ask for and read the annual financial statements. She would then have the obligation to react appropriately to what a reading of the statements revealed. Mrs. Pritchard never knew what Charles, Jr. and William were doing because she never made any effort to discharge any of her responsibilities as a director. Nonetheless, her negligence does not result in liability unless it is a proximate cause of the corporation’s losses. Mrs. Pritchard, however, had the power and the duty to prevent the losses. Her objection to the “loans” might well have deterred her sons, and even if it had not, her consultation with an attorney and the threat of a lawsuit would certainly have averted the losses.

Therefore, since Mrs. Pritchard breached her duty as a director of Pritchard & Baird, she is liable for the misappropriations. Francis v. United Jersey Bank, 87 N.J. 15, 432 A. 2d 814 (1981).

16. Donald J. Richardson, Grove L. Cook, and Wayne Weaver were stockholders of Major Oil. They brought a direct action, individually and on behalf of all other stockholders of Major, against certain directors and other officers of the corporation. The complaint stated twelve causes of action. The first eight causes alleged some misappropriation of Major’s assets by the defendants and sought to require the defendants to return the assets to Major. Three of the remaining four causes alleged breaches of fiduciary duty implicit in those fraudulent acts and sought compensatory or punitive damages for the injury that

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resulted. The final cause sought the appointment of a receiver. Richardson, Cook, and Weaver moved for an order certifying the suit as a class action. Decision? Explain.

Answer: This is a derivative action, not a class action suit. The critical distinction in this case is that between a derivative action and a class action. Derivative actions seek to enforce rights belonging to the corporation, and may be initiated by a stockholder only after the corporation has failed to do so. The shareholder has no right, title, or interest in the claim itself and recovers nothing. Class actions seek to enforce the individual rights of the representative of the class and all other class members. In a class action against a corporation, the injury sued upon is an injury to the individual plaintiff shareholders, and the recovery belongs directly to the shareholders. In this case, the first eight causes of action concern injury to the corporation only, which the plaintiff stockholders can assert only derivatively on behalf of the corporation. The ninth, tenth, and eleventh causes of action, which allege breaches of the defendants’ fiduciary duty to the corporation and its stockholders, are also based upon claims for relief that belong to the corporation only and not to the individual stockholders.

Generally, the directors and other officers of a corporation owe a fiduciary duty to the corporation and to the stockholders collectively, but breach of this duty results in a corporate claim only. The ninth cause of action also accused the defendants of mismanaging the business affairs of Major Oil. Again, however, corporate mismanagement gives rise to a cause of action in the corporation and not with the stockholders individually, even though the mismanagement may injure the stockholders by reducing the value of the corporation’s shares. Richardson v. Arizona Fuels Corp., 614 P. 2d 636 (1980).

17. Klinicki and Lundgren, both furloughed Pan Am pilots stationed in West Germany, decided to start their own charter airline company. They formed Berlinair, Inc., a closely held Oregon corporation. Lundgren was president and a director in charge of developing the business. Klinicki was vice president and a director in charge of operations and maintenance. Klinicki, Lundgren, and Lelco, Inc. (Lundgren’s family business) each owned one-third of the stock. Klinicki and Lundgren, as representatives of Berlinair, met with BFR, a consortium of Berlin travel agents, to negotiate a lucrative air transportation contract. When Lundgren learned of the likelihood of actually obtaining the BFR contract, he formed his own solely owned company, Air Berlin Charter Company (ABC); and, although he continued to negotiate for the BFR contract, he did so on behalf of ABC, not Berlinair. Eventually BFR awarded the contract to ABC. Klinicki commenced a derivative action on behalf of Berlinair and a suit against Lundgren individually for usurping a corporate opportunity of Berlinair. Lundgren claimed that Berlinair was not financially able to undertake the BFR contract and therefore no usurpation of corporate opportunity could occur. Who is correct? Explain.

Answer: Judgment for Klinicki. There is no dispute that the corporate opportunity doctrine precludes corporate fiduciaries from diverting to themselves business opportunities in which the corporation has an expectation, property interest, or right, which should otherwise belong to the corporation. The doctrine follows from a corporate fiduciary’s duty of undivided loyalty to the corporation. A director or senior executive may take advantage of a corporate opportunity only after full disclosure and only if the opportunity is rejected by a majority of the disinterested directors, or if there are no disinterested directors, then by a majority of the disinterested shareholders. If, after full disclosure, the disinterested directors or shareholders unreasonably fail to reject the offer, the interested director or principal senior executive may proceed to take the opportunity if he can prove the taking was otherwise “fair” to the corporation. Lundgren, as director and principal executive

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officer, owed a fiduciary duty to Berlinair and to Klinicki, a minority shareholder.

Lundgren’s failure to disclose the BFR opportunity to Berlinair and his appropriation of the opportunity for ABC were clearly an illegal taking of a corporate opportunity.

Klinicki v. Lundgren, 298 Or. 662, 695 P. 2d 906 (1985).

18. Horton owned 112 shares of common stock in Compaq Computer Corporation (Compaq), a Delaware corporation. Horton and seventy-eight other parties sued Compaq, fifteen of its advisers, and certain management personnel, alleging that Compaq and its codefendants had (1) violated the Texas Security Act and the Texas Deceptive Trade Practices Consumer Protection Act and (2) committed fraud and breaching their fiduciary duty. All these claims arise from the contention that Compaq misled the public regarding the true value of its stock at a time when members of management were selling their own shares. Horton delivered a letter demanding to inspect Compaq’s stock ledger and related information.

The demand letter stated that the purpose of the request was to enable Horton to communicate with other Compaq shareholders to inform them of the pending shareholders’ suit and to ascertain whether any of them would desire to become associated with that suit or bring similar actions against Compaq and assume a pro rata share of the litigation expenses. Compaq refused the demand, stating that the purpose described in the letter was not a “proper purpose” for inspecting corporate books and records. Explain who should prevail and why.

Answer: Horton should prevail. Horton’s desire to contact other stockholders and solicit their involvement in the litigation is a purpose reasonably related to his interest as a stockholder. This problem is based on Compaq Computer Corp. v. Horton, 631 A. 2d 1, Supreme Court of Delaware, (1993).

In Delaware, a shareholder has the statutory right during the usual hours for business to inspect for any proper purpose the corporation’s stock ledger upon written demand under oath stating that purpose. A proper purpose is a purpose reasonably related to such person’s interest as a stockholder. When a shareholder complies with the statutory requirements as to form and manner of making a demand, then the corporation bears the burden of proving that the demand is for an improper purpose. If there is any doubt, it must be resolved in favor of the stockholder’s statutory right to inspect.

Essentially, Horton alleges that it is in the interests of Compaq’s shareholders to know that acts of mismanagement and fraud are continuing and cannot be overlooked. Thus, it is assumed that the resultant filing of a large number of individual damage claims might well discourage further acts of misconduct by the defendants. In this specific context, the antidotal effect of the Texas litigation may indeed serve a purpose reasonably related to Horton’s current interest as a Compaq stockholder.

Even though a purpose may be reasonably related to one’s interest as a stockholder, it cannot be adverse to the corporation’s interests. Nevertheless, because law and policy require corporations and their agents to answer for the breaches of their duties to shareholders, Compaq has no legitimate interest in avoiding the payment of compensatory damages that it, its management, or its advisers may owe to those who own the enterprise. Thus, common sense and public policy dictate that a proper purpose may be stated in these circumstances, notwithstanding the lack of a direct benefit flowing to the corporation.

Compaq’s burden of showing an improper purpose is not impossible to bear. Previous cases provide valuable examples of the degree to which a stated purpose is so indefinite, doubtful, uncertain, or vexatious as to warrant denial of the right of

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inspection, leading to the conclusion that when the person making the demand is acting in bad faith or for reasons wholly unrelated to his or her role as a stockholder, access to the ledger will be denied. That simply is not the case here. Horton seeks in good faith to solicit the support of other similarly situated Compaq stockholders, not only to seek monetary redress for their individual economic injuries, but also to prevent further acts of fraud or mismanagement from disrupting the fair market value of Compaq’s stock.

Compaq’s arguments fail to meet its burden to show that Horton acts from an improper purpose. Compaq’s contention that Horton’s purpose is contrary to the best interests of the corporation and its current stockholders is both speculative and specious. Any harm that may accrue to the corporation as a result of releasing the list is too remote and uncertain to warrant denial of the stockholder’s statutory right to inspection. If anything, the corporation and its stockholders, as well as public policy, will best be served by exposure of the fraud, if that is the case, and restoration of the stock to a value set by a properly informed market.

19. The Brazilian Equity Fund, Inc., is a nondiversified, publicly traded, closed-end investment company incorporated under the laws of Maryland. As a closed-end fund, it has a fixed number of outstanding shares, so that investors who wish to acquire shares in the Fund ordinarily must purchase them from a shareholder rather than, as in open-end funds, directly from the Fund itself. Shares in closed-end funds are traded in the same manner as are shares of corporate stock. Shares in the Fund are listed and traded on the New York Stock Exchange. The number of outstanding shares in the Fund are “fixed” because this number does not change on a daily basis.

Although closed-end funds do not sell their shares to the public in the ordinary course of their business, there are methods available to them to raise new capital after their initial public offering. One such device is a “rights offering,” by which a fund offers shareholders the opportunity to purchase newly issued shares. Rights so offered may be transferable, allowing the current shareholder to sell them in the open market, or nontransferable, requiring the current shareholder to use them herself or lose their value when the rights expire.

On June 6, the Fund announced that it would issue one nontransferable “right” per outstanding share to every shareholder, and that every three rights would enable the shareholder to purchase one new share in the Fund. The subscription price per share was set at 90 percent of the lesser of (1) the average of the last reported sales price of a share of the Fund’s common stock on the New York Stock Exchange on August 16, the date on which the rights expired, and the four business days preceding and (2) the per-share net asset value at the close of business on August 16.

At the close of business on August 16, the closing market price for the Fund’s shares was $12.38, and the Fund’s per-share net asset value was $17.24. The Fund’s shareholders purchased 70.3 percent of the new shares available at a subscription price set at $11.09 per share, 90 percent of the average closing price for the Fund on that and the preceding four days. Through the rights offering, the Fund raised $20.6 million in new capital.

A shareholder brought a class action against the Fund’s directors, senior officers, and investment advisor asserting that this sort of rights offering is coercive because it penalized shareholders who did not participate by diluting the value of old shares. The plaintiff’s complaint included three direct class-action claims on behalf of all shareholders alleging that the defendants breached their duties of loyalty and care at © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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common law. It asserted that these breaches of duty resulted in four kinds of injury to shareholders: (1) loss of share value resulting from the underwriting and other transaction costs associated with the rights offering; (2) downward pressure on share prices resulting from the supply of new shares; (3) downward pressure on share prices resulting from the offering of shares at a discount; and (4) injury resulting from coercion, in that “shareholders were forced to either invest additional monies in the Fund or suffer a substantial dilution.”

Explain (1) which of these claims are direct claims and (2) which of these claims are derivative claims.

Answer: The first claim is a derivative claim; the remaining three are direct claims.

This problem is based on Strougo v. Bassini, 282 F. 3d 162, United States Court of Appeals, Second Circuit, (2002).

Under Maryland law, when the shareholders of a corporation suffer an injury that is distinct from that of the corporation, the shareholders may bring direct suit for redress of that injury; there is shareholder standing. When the corporation is injured and the injury to its shareholders derives from that injury, however, only the corporation may bring suit; there is no shareholder standing. The shareholder may, at most, sue derivatively, seeking in effect to require the corporation to pursue a lawsuit to compensate for the injury to the corporation, and thereby ultimately redress the injury to the shareholders.

Applying Maryland’s law of shareholder standing to the plaintiff’s four alleged injuries, the court of appeals concluded that one of them does not support direct claims under Maryland law. On the other hand, the remaining alleged injuries do.

The plaintiff alleges a loss in share value resulting from the “substantial underwriting and other transactional costs associated with the Rights Offering.” Underwriter fees, advisory fees, and other transaction costs incurred by a corporation decrease share price primarily because they deplete the corporation’s assets, precisely the type of injury to the corporation that can be redressed under Maryland law only through a suit brought on behalf of the corporation.

The plaintiff’s remaining alleged injuries can be read to describe the set of harms resulting from the coercive nature of the rights offering. The particular harm allegedly suffered by an individual shareholder as a result of the coercion depends on whether or not that shareholder participated in the rights offering. The alleged injury from the downward pressure on share prices resulting from the setting of the “exercise price of the rights…at a steep discount from the pre-rights offering net asset value” can be read to refer to the involuntary dilution in equity value suffered by the non-participating shareholders.

On the other hand, participating shareholders may have suffered harm in the form of transaction costs in liquidating other assets to purchase the new shares, and the impairment of their right to dispose of their assets as they prefer if they purchased new shares to avoid dilution.

Thus, in the case of both the participating and nonparticipating shareholders, it would appear that the alleged injuries were to the shareholders alone and not to the Fund.

These harms therefore constitute “distinct” injuries supporting direct shareholder claims under Maryland law.

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ANSWERS TO “TAKING SIDES” PROBLEMS Sinclair Oil Corporation organized a subsidiary, Sinclair Venezuelan Oil Company (Sinven) for the purpose of operating in Venezuela. Sinclair owned about 97 percent of Sinven’s stock.

Sinclair nominates all members of Sinven’s board of directors, and none of the directors were independent of Sinclair. A minority shareholder of Sinven brought a derivative action on behalf of Sinven against Sinclair seeking to recover damages sustained by Sinven. The derivative suit alleged that Sinclair had caused Sinven to pay out such excessive dividends that the industrial development of Sinven was effectively prevented. a. What are the arguments that the transactions between Sinclair and Sinven should be subjected to judicial scrutiny and upheld only if Sinclair shows them to have been entirely fair and entered in good faith? b. What are the arguments that the transactions between Sinclair and Sinven should be subjected to the business judgment rule and overturned only if Sinven shows that Sinclair had not acted with due care, in good faith, and in a manner reasonably believed to be in the best interests of Sinven? c. Explain which standard should apply.

Answer: (a) Sinven would argue that because of Sinclair’s fiduciary duty and its control over Sinven, Sinclair is in a conflict of interest relationship with Sinven. Therefore, Sinclair’s dealings with Sinven must meet the test of intrinsic fairness: its dealings must be entirely fair and entered in good faith. The standard of intrinsic fairness involves both a high degree of fairness and a shift in the burden of proof. Under this standard the burden is on Sinclair to prove, subject to careful judicial scrutiny, that its transactions with Sinven were objectively fair. (b) Sinclair would argue that the transactions between it and Sinven should be tested by the business judgment rule under which a court will not interfere with the judgment of a board of directors unless there is a showing that Sinclair had not acted with due care, in good faith, and in a manner reasonably believed to be in the best interests of Sinven. A board of directors enjoys a presumption of sound business judgment, and a court should not disturb the board’s decisions if they can be attributed to any rational business purpose. A court under such circumstances should not substitute its own notions of what is or is not sound business judgment. (c) The test of intrinsic fairness applies to this case. This problem is based on Sinclair Oil Corporation v. Levien, 280 A. 2d 717, Delaware Supreme Court (1971).

When the situation involves a parent and a subsidiary, with the parent controlling the transaction and fixing the terms, the test of intrinsic fairness, with its resulting shifting of the burden of proof, is applied. * * * The basic situation for the application of the rule is the one in which the parent has received a benefit to the exclusion and at the expense of the subsidiary. * * * A parent does indeed owe a fiduciary duty to its subsidiary when there are parent-subsidiary dealings. However, this alone will not evoke the intrinsic fairness standard. This standard will be applied only when the fiduciary duty is accompanied by self-dealing—the situation when a parent is on both sides of a transaction with its subsidiary. Self-dealing occurs when the parent, by virtue of its domination of the subsidiary, causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of, and detriment to, the minority stockholders of the subsidiary.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 36: Fundamental Changes of Corporations

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 36: Fundamental Changes of Corporations

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ............................................................................... 9

ANSWERS TO ETHICAL DILEMMA What Rights Do Minority Shareholders Have?

1.

What moral or fiduciary obligation does Frank have to James and Thomas? What obligations do James and Thomas have to Frank?

2. To what extent should initial expectations as to business goals and operations continue to bind business associates morally? To what extent should associates spell out their expectations in advance?

3. What types of legal remedies, if any, are necessary when business associates no longer agree on fundamental business plans? To what extent should the law intervene in private management disputes among members of closely held businesses?

4. If Frank pays James and Thomas the fair value of their shares and proceeds with a merger, will this provide sufficient compensation to James and Thomas? Who owns the technological advances?

Answer: (1) Frank as a majority shareholder owes a moral obligation to James and Thomas as an outgrowth of his status as a majority shareholder. He should not use his position to the detriment of minority shareholders. James and Frank also owe a duty of honesty and fair dealing as shareholders in a jointly owned business.

(2) F. Hodge O’Neal, a leading legal authority on closely held businesses has long recommended that oppressive majority conduct be defined in terms of whether there has been a defeat of the minority’s reasonable expectations at the inception of the enterprise, and as these expectations develop over time. (See F. Hodge O’Neal, Close Corporations: Existing Legislation and Recommended Reform, 33 The Business Lawyer 873 (1978)). It is advisable for the shareholder’s expectations to be spelled out in advance in relevant shareholder’s agreements, etc.

(3) Minority shareholders may seek money damages for oppressive conduct by majority shareholders. Money damages may not always make the minority whole, however. In addition, dissolution, the appointment of a custodian, and other remedies may be provided under each state’s business corporation act.

(4) The fair market value of shares may not necessarily provide sufficient compensation. The problem underscores the care which individuals should take in

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 36: Fundamental Changes of Corporations

transferring the ownership of assets to a corporate entity, particularly where such individuals are minority shareholders.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

The stock in Hotel Management, Inc., a hotel management corporation, was divided equally between two families. For several years, the two families had been unable to agree on or cooperate in the management of the corporation. As a result, no meeting of shareholders or directors had been held for five years. There had been no withdrawal of profits for five years, and last year the hotel operated at a loss. Although the corporation was not insolvent, such a state was imminent because the business was poorly managed and its properties were in need of repair. As a result, the owners of half the stock brought an action in equity for dissolution of the corporation. Will they succeed? Explain.

Answer: The court should order a liquidation of the assets of the corporation by reason of a deadlock in the management, the inability of the shareholders to break the deadlock, and the irreparable injury threatened to the corporation. See Section 14.30, Revised Act.

2. a. When may a corporation sell, lease, exchange, mortgage, or pledge all or substantially all of its assets in the usual and regular course of its business? b. When may a corporation sell, lease, exchange, mortgage, or pledge all or substantially all of its assets other than in the usual and regular course of its business? c. What are the rights of a shareholder who dissents from a proposed sale or exchange of all or substantially all of the assets of a corporation other than in the usual and regular course of its business?

Answer: (a) When the board of directors authorizes such a sale, lease, exchange, mortgage, or pledge of all of the assets in the usual and regular course of the business. Section 12.01, Revised Act. (b) A sale, lease, exchange, mortgage, or pledge of all of the assets of a corporation otherwise than in the usual and regular course of its business can be done only by resolution of its board of directors approved by the vote of the holders of at least a majority of the outstanding shares of stock of each class entitled to vote as a class and the total shares entitled to vote thereon. See Section 12.02, Revised Act. (c) The rights of a dissenting shareholder who objects to the sale or exchange of all, or substantially all, of the assets of the corporation, and who preserves his objection as provided in the statute, is to be paid the fair value of his shares immediately prior to the effectuation of the sale or lease of assets. See Section 13.02, Revised Act. 3. Cutler Company was duly merged into Stone Company. Yetta, a shareholder of the former Cutler Company, having paid only one-half of her subscription, is now sued by Stone Company for the balance of the subscription. Yetta, who took no part in the merger proceedings, denies liability on the ground that, inasmuch as Cutler Company no longer exists, all her rights and obligations in connection with Cutler Company have been terminated. Explain whether she is correct.

Answer: No, Yetta is not correct. Decision in favor of the Cutler Company. The unpaid balance due upon the subscription by Yetta of stock in the Cutler Company was an

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asset of the Cutler Company. The Stone Company succeeded by operation of law to all of the assets of the merged Cutler Company, including this one.

4. Smith, while in the course of his employment with the Bee Corporation, negligently ran the company’s truck into Williams, injuring him severely. Subsequently, the Bee Corporation and the Sea Corporation consolidated, forming the SeaBee Corporation. Williams filed suit against the SeaBee Corporation for damages, and the SeaBee Corporation argued the defense that the injuries Williams sustained were not caused by any of SeaBee’s employees, that SeaBee was not even in existence at the time of the injury, and that the SeaBee Corporation was therefore not liable. What decision? Explain.

Answer: Decision for Williams whose tort claim against the Bee Corporation was assumed by operation of law by the new consolidated SeaBee Corporation.

5. Johnson Company, a corporation organized under the laws of State X, after proper authorization by the shareholders, sold its entire assets to Samson Company, also a State X corporation. Ellen, an unpaid creditor of Johnson Company, sues Samson Company on her claim. Is Sampson liable? Explain.

Answer: If Johnson Company received from Samson Company cash or other consideration (not shares of stock of Samson Company) Ellen has no rights against Samson Company to recover the amount of her claim against Johnson Company. A sale of assets is not a consolidation or merger and consequently the quoted provision of the Business Corporation Act of the State of X would not apply. If, however, Johnson Company received shares of stock in Samson Company as consideration for the sale of its entire assets to Samson Company, there is a conflict in the authorities as to whether such a sale of assets is the equivalent of a merger. If the transaction is treated by the courts as the equivalent of a merger, Ellen may recover from Samson Company.

6. Zenith Steel Company operates a prosperous business. The board of directors voted to spend $20 million of the company’s surplus funds to purchase a majority of the stock of two other companies—Green Insurance Company and Blue Trust Company. Green Insurance Company is a thriving business whose stock is an excellent investment at the price at which it will be sold to Zenith Steel Company. The principal reasons for Zenith’s purchase of Green Insurance stock are to invest surplus funds and to diversify its business. Blue Trust Company owns a controlling interest in Zenith Steel Company. The Blue Trust Company is subject to special governmental controls. The main purpose for Zenith’s purchase of Blue Trust Company stock is to enable the present management and directors of Zenith Steel Company to continue their management of the company. Jones, a minority shareholder in Zenith Steel Company, brings an appropriate action to enjoin the purchase by Zenith Steel Company of the stock of either Green Insurance Company or Blue Trust Company. What is the decision as to each purchase? Explain.

Answer: (a) Decision for Zenith Steel Company against Jones denying injunction against purchase of the stock of Green Insurance Company. A corporation may purchase a majority of the stock of another corporation, provided the purchase is made in good faith, and for a legitimate purpose. The purchase by Zenith Steel Company of the Green Insurance stock would be upheld, provided the purchase was made in good faith, with a reasonable hope of financial benefit to the Steel Company, and provided further that the purchase was reasonably related to the authorized objects and business of the Steel Company. The circumstances of the purchase must be carefully examined to see if the transaction is a proper means of

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accomplishing the business objectives of the Steel Company. A purchase made as an investment for surplus idle funds is clearly proper. Therefore, purchase of the Green Insurance Company stock by Zenith Steel is a legitimate investment and should not be enjoined. (b) Decision in favor of Jones and against Zenith Steel Company enjoining the purchase of the stock of Blue Trust Company. The purchase by one corporation in order to perpetuate in office the management of the first corporation is improper.

The proposed purchase of the stock of Blue Trust Company was not for investment purposes. Although a controlling interest in other corporations may be purchased by business corporations in order to further and assist the business of the purchasing corporation, here there is no evidence of any such relationship between the business of the Steel Company and of the Trust Company. Indeed, the business of the Trust Company not only differs widely from that of the Steel Company but is of a fiduciary nature and subject to special government controls and regulations not applicable to the steel business. The primary aim of the purchase of the Blue Trust Company stock was to carry out a plan to maintain in office the present management of the Steel Company and to advance the interests of that management as a group of individuals, not as representatives of the shareholders.

Such a purpose is a violation of their fiduciary duties. The burden of proof should be on the directors of the Steel Company to justify this purchase as in the best interest of the Steel Company and its shareholders. Upon their failure to sustain this burden, the contemplated purchase should be enjoined as improper.

7. Mildred, Deborah, and Bob each own one-third of the stock of Nova Corporation. On Friday, Mildred received an offer to merge Nova into Buyer Corporation. Mildred, who agreed to call a shareholders’ meeting to discuss the offer on the following Tuesday, telephoned Deborah and Bob and informed them of the offer and the scheduled meeting.

Deborah agreed to attend. Bob was unable to attend because he was leaving on a trip on Saturday and asked if the three of them could meet Friday night to discuss the offer.

Mildred and Deborah agreed. The three shareholders met informally Friday night and agreed to accept the offer only if they received preferred stock of Buyer Corporation for their shares. Bob then left on his trip. On Tuesday, at the time and place appointed by Mildred, Mildred and Deborah convened the shareholders’ meeting. After discussion, they concluded that the preferred stock payment limitation was unwise and passed a formal resolution to accept Buyer Corporation’s offer without any such condition. Bob files suit to enjoin Mildred, Deborah, and the Nova Corporation from implementing this resolution.

Explain whether the injunction should be issued.

Answer: Bob can probably have the resolution set aside due to failure to provide him with adequate notice of the shareholders’ meeting at which it was passed. (a) The first question is whether proper notice of the shareholders’ meeting was given.

Shareholders are entitled to receive a lawful and authentic notice of any shareholders’ meeting. The question of what constitutes proper notice is usually governed by a specific provision in the applicable corporation statute, or the certificate of incorporation or the bylaws of the corporation. Even in the absence of a specific provision, common law principles require that shareholders receive reasonable notice of any corporate meeting. Toombs v. Citizens’ Bank of Waynesboro, 281 U.S. 643. The notice given in this instance appears to be deficient in two respects.

It was probably improper for Mildred to give notice of the meeting to Deborah and Bob by telephone. Written notice of a shareholders’ meeting, especially a special meeting, is usually required. See Section 1.41, Revised Act.

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The notice given was probably also invalid because it was not given sufficiently far in advance. Unless specific requirements are contained in the applicable statutes or bylaws, the period of notification to shareholders of a special meeting must be reasonable under the circumstances. Here, the notice was given only four days (of which only two were working days) before the meeting itself. This would probably be held not to be a reasonable time. The Revised Act requires at least ten days’ notice for shareholders’ meetings the purpose of which is to consider a proposed plan of merger. Section 7.05. (b) The second question is, may Bob have the resolution adopted on Tuesday set aside because of the insufficient notice? Insufficient notice does not render a shareholders’ meeting void, but only renders it voidable at the instance of shareholders adversely affected thereby. Bob was adversely affected even though he held only a minority interest in the corporation because he was deprived of his right to participate in the discussion of the resolution and the vote thereon. Had he been present at the meeting, he could have presented his point of view and tried to convince the other shareholders to vote differently.

It is possible for a shareholder to waive his right to notice of a specific meeting of shareholders, but Bob did not do so here. (c) The third question is whether the corporation is bound by the agreement reached

by Mildred, Deborah, and Bob at their Friday meeting. Bob might argue the meeting held on Friday to be a valid action by the shareholders, which was in effect the meeting originally called for Tuesday.

Here, there is nothing to indicate that the parties intended their Friday meeting to be a corporate meeting rather than informal conference. There were no written consents or written proposals drawn up for filing, nor was there any evidence of prior informal corporate action. The fact that Mildred and Deborah appeared on the following Tuesday at the time and place specified militates against any argument that they thought the necessary meeting had previously been concluded.

Moreover, Section 11.01 of the Revised Act requires a resolution by the board of directors approving a plan of merger before that plan may be submitted to the shareholders for approval.

8. Tretter alleged that his exposure over the years to asbestos products manufactured by Philip Carey Manufacturing Corporation caused him to contract asbestosis. Tretter brought an action against Rapid American Corporation, which was the surviving corporation of a merger between Philip Carey and Rapid American. Rapid American denied liability, claiming that immediately after the merger it had transferred its asbestos operations to a newly formed subsidiary corporation. Can Rapid avoid liability by such transfer? Explain.

Answer: No. Judgment for Tretter. If the parties effect the transfer of a corporate enterprise through a merger, consolidation, or sale of stock, the transferee assumes its predecessor’s liabilities, including product liability claims. Therefore, when Rapid American merged with Philip Carey, Rapid American assumed the liability for Tretter’s claim. This fact was recognized in the “General Assignment & Assumption of Liabilities” agreement between Rapid American and its subsidiary. That document specifically referred to liabilities “to which Rapid American became subject as a result of the [merger between Rapid American and Philip Carey].” That Rapid American subsequently transferred this liability to its subsidiary does not defeat Tretter’s cause of action; it merely gives Rapid American a claim for indemnity. Therefore, Rapid

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American, as the successor corporation, may be held for the liabilities of Philip Carey, its predecessor. Tretter v. Rapid American Corp., 514 F. Supp. 1344 (E.D. Mo. 1981).

9. Kemp & Beatley was a company incorporated under the laws of New York. Eight shareholders held the corporation’s outstanding one thousand five hundred shares of stock. Petitioners Dissin and Gardstein together owned 20.33 percent of the stock, and each had been a longtime employee of the corporation. Kemp & Beatley had a longstanding practice of awarding compensation bonuses based upon stock ownership.

However, when the policy was changed in 2022 to compensation based on service to the corporation, not on stock ownership, Dissin resigned. The company terminated Gardstein’s employment in 2023. Dissin and Gardstein brought a suit in 2024, seeking involuntary dissolution of the corporation and alleging that the corporation’s board of directors had acted in a “fraudulent and oppressive” manner toward them, rendering their stock virtually worthless and frustrating their “reasonable expectations” regarding this business venture.

What result? Explain.

Answer: Judgment for Petitioners Dissin and Gardstein. Oppressive action within the meaning of the statute exists when the conduct of the majority serves substantially to defeat the objectively reasonable expectations of minority shareholders. Shareholders in a closely held corporation such as Kemp & Beatley often are involved in the day-today operations of the business as officers or employees, and usually look to their salaries, bonuses, and retirement benefits rather than to dividends for a return on their investment. Here, petitioners reasonably expected that their ownership in the corporation would entitle them to certain benefits. Kemp & Beatley had a tradition of awarding de facto dividends to shareholders in the form of compensation bonuses based on stock ownership. Shortly before petitioners’ complaint was initiated, this policy was changed. The fact finder did not err in finding that change in policy was, in effect, an attempt to exclude petitioners from gaining a return on their investment in the company.

Once petitioners had shown that the directors’ conduct was oppressive, the corporation had the burden of demonstrating the existence of an adequate alternative remedy short of dissolution or buy-out. The stock of closely held corporations is not readily salable. Thus, unless the corporation buys petitioners’ shares, petitioners will be stuck with what is to them worthless stock. Therefore, the trial court did not abuse its discretion by ordering the dissolution of Kemp & Beatley, subject to the opportunity to buy out petitioners’ shares.

10. All Steel Pipe and Tube is a closely held corporation engaged in the business of selling steel pipes and tubes. Leo and Scott Callier are its two equal shareholders. Scott is Leo’s uncle. Leo is one of the company’s two directors and is president of the corporation. Scott is the general manager. Scott’s father and Leo’s grandfather, Felix, is the other director.

Over the years, Scott and Leo have had differences of opinion about various aspects of the operation of the business. However, despite the deterioration of their relationship, the company has flourished. When negotiations aimed at the redemption of Scott’s shares by Leo began, the parties could not reach an agreement. The discussion then turned to voluntary dissolution and liquidation of the corporation, but still no agreement could be reached. Finally, Leo fired Scott and began to wind down All Steel’s business and to form a new corporation, Callier Steel Pipe and Tube. Leo then brought an action seeking a dissolution and liquidation of All Steel. Should the court order dissolution? Explain.

Answer: No, the court should not order dissolution. Corporations are creatures of statute and, therefore, can be dissolved only according to the applicable statute.

Corporate dissolution is a drastic remedy, and it must not be lightly invoked. Its grant

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requires proof of an inalterable deadlock in the management and of irreparable injury to the corporation. The record here does not show such proof. Although Leo and Scott were not able to get along, this is not equivalent to an inability of the corporation to operate. In fact, All Steel continued to operate profitably during the disputes and the redemption negotiations, as both Scott and Felix refrained from interfering in the management of All Steel and allowed Leo to operate the company on his own.

Accordingly, the requested order to dissolve All Steel must be denied. Callier v. Callier, 61 Ill. App. 3d 1011, 378 N.E. 2d 405 (1978).

11. The shareholders of Endicott Johnson who had dissented from a proposed merger of Endicott with McDonough Corporation brought a proceeding to fix the fair value of their stock. At issue was the proper weight to be given the market price of the stock in fixing its fair value. The shareholders argued that the market value should not be considered because McDonough controlled 70 percent of Endicott’s stock and the stock had been delisted from the New York Stock Exchange. Are the shareholders correct? Explain.

Answer: Yes. Judgment for the shareholders. Shareholders who dissent from an impending merger are entitled to be paid the “fair value” of their stock. The elements to be considered in appraising the stock’s value are its net asset value, investment value, and market value. All three elements should not be taken into account in every case, however. Here, it would be inappropriate to look at net asset value, since the corporation was not being liquidated. Furthermore, the stock has no meaningful market value because McDonough controlled 70 percent of the outstanding shares and because the stock was delisted. The stock’s investment value then is the only remaining determinant of its fair value in this case. Endicott Johnson Corp. v. Bade, 338 N.E. 2d 614 (N.Y. 1975).

12. In early 1984, Royal Dutch Petroleum Company (Royal Dutch), through various subsidiaries, controlled approximately 70 percent of the outstanding common shares of Shell Oil Co. (Shell). On January 24, 1984, Royal Dutch announced its intention to merge Shell into SPNV Holdings, Inc. (Holdings), which is now Shell Petroleum, Inc., by offering the minority shareholders $55 per share. Shell’s board of directors, however, rejected the offer as inadequate. Royal Dutch then withdrew the merger proposal and initiated a tender offer at $58 per share. As a result of the tender offer, Holdings’ ownership interest increased to 94.6 percent of Shell’s outstanding stock. Holdings then initiated a short-form merger.

Under the terms of the merger, Shell’s minority stockholders were to receive $58 per share. However, if before July 1, 1985, a shareholder waived his right to seek an appraisal, he would receive an extra $2 per share. In conjunction with the short-form merger, Holdings distributed several documents to the minority, including a document entitled “Certain Information About Shell” (CIAS).

The CIAS included a table of discounted future net cash flows (DCF) for Shell’s oil and gas reserves. However, due to a computer programming error, the DCF failed to account for the cash flows from approximately 295 million barrel equivalents of U.S. proved oil and gas reserves. Shell’s failure to include the reserves in its calculations resulted in an understatement of its discounted future net cash flows of approximately $993 million to $1.1 billion or $3.00 to $3.45 per share. Moreover, as a result of the error, Shell stated in the CIAS that there had been a slight decline in the value of its oil and gas reserves from 1984 to 1985. When properly calculated, the value of the reserves had actually increased over that time period.

Shell’s minority shareholders sued in the Court of Chancery, asserting that the error in the DCF along with other alleged disclosure violations constituted a breach of Holdings’ fiduciary “duty of candor.” Was the error in the DCF material and misleading? Explain.

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Answer: Yes, the error was material and misleading. The question whether the disclosures to Shell’s minority shareholders were adequate is a mixed one of law and fact, requiring an assessment of the inferences a reasonable shareholder would draw and the significance of those inferences to the individual shareholder.

Holdings’ duty with respect to disclosure is clear. As the majority shareholder, Holdings bears the burden of showing complete disclosure of all material facts relevant to a minority shareholders’ decision whether to accept the short-form merger consideration or to seek an appraisal. Thus, the question is one of materiality. A fact is considered material if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available. While it need not be shown that an omission or distortion would have made an investor change his overall view of a proposed transaction, it must be shown that the fact in question would have been relevant to him.

The Court of Chancery concluded that the understatement of Shell’s oil and gas reserves by 294.6-million-barrel equivalents, with a value of approximately $1 billion or $3.00 to $3.45 per share would have been viewed by a reasonable investor as significantly altering the total mix of information available. It is clear from the Vice Chancellor’s decision that he applied the proper legal standards and carefully considered the evidence presented.

Holdings contends that the billion-dollar error was insignificant because it resulted in only a 5.5% understatement in the total discounted cash flows reported. However, the significance of the error is clearly demonstrated by the fact that a Shell executive vice president stated in the Wall Street Journal that a 220-million-barrel discovery in the Gulf of Mexico was considered a major find. Thus, it is difficult to accept Holdings’ argument that the failure to report cash flows from 295 million barrels was insignificant.

Holdings also argues that a $3 per share error was not significant enough to make a reasonable stockholder change his decision and seek an appraisal. However, the question is not whether the information would have changed the stockholder’s decision to accept the merger consideration, but whether the fact in question would have been relevant to him. We cannot agree that a billion-dollar understatement of the value of Shell’s reserves would have been anything but highly relevant and material to a reasonable stockholder.

Finally, Holdings contends that the DCF is only an estimate of future cash flows and, therefore, it would be unreasonable for a shareholder to conclude that Shell’s oil and gas reserves were worth the amount presented in the DCF. In fact, according to Holdings, a reasonable shareholder should anticipate a certain margin of error simply due to the uncertainties inherent in the estimate process. Although the DCF presents an estimate of future cash flows, a shareholder could reasonably conclude that the DCF was accurately prepared based on all available information. Moreover, a reasonable shareholder could conclude that the 1985 DCF was prepared in a manner consistent with the 1984 DCF. Thus, a comparison of the 1984 and 1985 DCFs should present an accurate indication of whether the value of Shell’s reserves was increasing or decreasing. Such was not the case. A comparison of the 1984 and 1985 DCFs inevitably leads to the erroneous conclusion, as stated in the CIAS, that the value of Shell’s reserves had declined. Most importantly, the misleading statement that the value of the reserves had declined was not based upon the inherent inaccuracies of the estimate process, but upon an error made by Shell. The fact that the error was

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included in a schedule which contained estimates does not diminish its materiality.

Shell Petroleum v. Smith, 606 A. 2d 112 (1992).

13. McLoon, Morse Bros., and T-M Oil Companies were closely held companies entirely owned by members of the Pescosolido family, under the leadership of Carl Pescosolido, Sr. His sons, Carl, Jr. and Richard, each held shares in McLoon, Morse Bros., and T-M. Together, their shares constituted 50 percent of the McLoon and Morse Bros. common stock and 14.3 percent of the T-M common stock. Carl, Sr. proposed to merge all of the family-held companies into Lido Inc., over which he would exercise sole voting control. Carl, Jr. and Richard dissented in writing to the proposed merger. The parties executed a merger agreement in which the dissenters expressly preserved their statutory appraisal rights. The dissenters individually wrote to each of the three Maine companies and requested payment for their shares. Lido responded by offering each dissenter an amount that both dissenters rejected. The dissenters filed a suit for valuation of their stock in all three companies. The referee held that the fair value of each dissenter’s stock was his proportionate share of the full value of each company, as determined from the expert testimony. The fair value thus determined was 2.6 times the amount that Lido had offered. Explain whether the court should accept the referee’s report.

Answer: The court should accept the referee’s report. In determining the fair value of shares in a close corporation for the appraisal remedy, the court should prorate among the shares the highest price a single buyer would reasonably pay for the whole enterprise. This problem is based on In Re Valuation of Common Stock of Mcloon Oil Co., 565 A. 2d 997, Supreme Judicial Court of Maine, 1989.

Lido contends that the referee’s finding of fair value was inaccurate since it did not consider any minority or nonmarketability discount. The appellate court rejected this argument. The appraisal remedy for dissenting shareholders evolved as it became clear that unanimous consent was inconsistent with the growth and development of large business enterprises. Under the appraisal statute, the shareholder who disapproves of a proposed merger or other major corporate change gives up his right to veto the change in exchange for the right to be bought out—not at market value but at “fair value.” Although courts use the discount method in valuing stock for tax, probate, and other purposes when the market value is essential, the discount method has no place in the dissenter-shareholder situation. The purpose of applying discount variables is to determine the investment value or fair market value of a minority interest in the context of a hypothetical sale between a willing seller and buyer. The involuntary change of ownership caused by a merger, however, requires as a matter of fairness that a dissenting shareholder be compensated for the loss of his proportionate interest in the business. The valuation focus under the appraisal statute is not the stock as a commodity but the stock as a proportionate part of the enterprise as a whole. The question is simply, what is the best price a single buyer could reasonably be expected to pay for the firm as an entity? After answering that question, the court simply prorates the value among the shares, as was done in this case.

ANSWERS TO “TAKING SIDES” PROBLEMS Wilcox, chief executive officer and chairman of the board of directors, owned 60 percent of the shares of Sterling Corporation. When the market price of Sterling’s shares was $22 per share, Wilcox sold all of his shares in Sterling to Conrad for $29 per share. The minority shareholders of Sterling brought suit against Wilcox demanding a pro rata share of the amount Wilcox received in excess of the market price.

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a. What are the arguments to support the minority shareholders’ claim for a pro rata share of the amount Wilcox received in excess of the market price? b. What are the arguments to reject the minority shareholders’ claim for a pro rata share of the amount Wilcox received in excess of the market price? c. Which side should prevail?

Answer: (a) The minority shareholders would argue that the amount Wilcox received in excess of the market price represents the value of control over the corporation. Since control is a corporate asset, it is owned proportionately by all of the shareholders who are therefore entitled to a pro rata share of the amount Wilcox received in excess of the market price. (b) Wilcox would argue that ownership of a controlling interest entitles him to elect at least a majority of directors. Therefore, it is his right to derive a premium from the sale of a controlling block of stock. There is no impropriety per se in the fact that Wilcox received more per share than the generally prevailing market price for his Sterling stock. (c) Wilcox would most likely prevail. When one or a few shareholders own a controlling interest, the shareholder(s) may privately negotiate a sale of such interest, although the courts require that these transactions be made with due care. The controlling shareholders must make a reasonable investigation so as not to transfer control to purchasers who wrongfully plan to steal or “loot” the corporation’s assets or to act against its best interests. In addition, purchasers frequently are willing to pay a premium for a block of shares that conveys control.

Although historically some courts have required that this so-called control premium inure to the benefit of the corporation, today virtually all courts permit the controlling shareholders to retain the full amount of the control premium.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 37: Secured Transactions and Suretyship

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 37: Secured Transactions and Suretyship

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ..............................................................................12

ANSWERS TO ETHICAL DILEMMA What Price Is “Reasonable” in Terms of Repossession?

1.

Is a store responsible for ensuring a customer’s understanding of the nature and consequences of a sales transaction? Why? Why not?

2. Did Marge and Ryko act ethically or legally? Explain. In what ways would Jill’s full understanding of the repossession process change your answer?

3. What ethical or social implications does Article 9 of the UCC have in this situation?

Answer: 1. From a contract standpoint, the department store has no legal responsibility to insure that the customer totally understands the nature of the agreement unless it was the cause for this lack of understanding. The courts are not worried about the equality of the agreement, only that there was an arm’s-length transaction.

From a consumer protection standpoint, statutory requirements differ, but, typically, as long as there was no effort to hide any of the terms, there will be no problems.

Thus, legally, the responsibility for understanding the terms of an agreement belongs to each individual.

Ethically, however, the department store should make sure that the customer understands the nature and extent of their part of the agreement. This will serve to promote the integrity of commercial transactions by helping consumers maintain confidence therein.

2. The department store acted illegally as so possibly did Marge. But they both definitely acted unethically. As explained above, the purpose of the repossession portions of Article 9 are to insure that the debtor only pay the debt once (either through the paying of the debt, the use of the collateral or proceeds therefrom). When Marge decided to buy the collateral for herself without allowing a full bidding process, both the store and Marge participated in a scheme that was in violation of Article 9. While Marge might be less culpable, legally, they both seemed to violate the spirit of the Code.

Ethically, Joe Carr was left with a debt and no collateral. The store was able, basically, to collect from Joe, and Marge ended up with the collateral. Marge and the store

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seemed to purposely circumvent the bid process to benefit themselves while injuring Joe. Not only was this a purely self-serving action, but it unjustly injured another party. Neither can be said to have acted with even a semblance of ethics.

Even if Joe fully understood the nature of the repossession process, the actions of Marge and Shady must be considered unethical. If you take advantage of someone because they let you, you are no less unethical. This is Marge and Shady’s precise position in the current situation. In “Ethical Codes Are Not Enough”, Business Horizons, Mar/April, 1990, Hyman, Skipper and Tansey state that when ethical codes exist, just following them is not enough. We must look at the position in which the other party is placed and ask questions. We must always use our conscience whether codes exist or not. This was obviously not done.

3. As was mentioned above, the ethical or social implications of Article 9 are clear. A debtor must pay a debt, and, if not, suffer the consequences of a possible repossession. But if the item was never really offered for sale to the public, a debtor should not be forced to both lose the item to the creditor in an undervalued sale, and pay off the debt. To do so would be to take advantage of a bad situation, as well as do a great deal to undermine the confidence that may exist in credit transactions.

Without these transactions our economy would suffer greatly. Thus, the ethical and social implications of Article 9 could be astronomical.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Victor sells to Bonnie a refrigerator for $600 payable in monthly installments of $30 for twenty months. Bonnie signs a security agreement granting Victor a security interest in the refrigerator. The refrigerator is installed in the kitchen of Bonnie’s apartment. There is no filing of any financing statement. Assume that after Bonnie has made the first three monthly payments: a. Bonnie moves from her apartment and sells the refrigerator in place to the new occupant for $350 cash. What are the rights of Victor? b. Bonnie is adjudicated bankrupt, and her trustee in bankruptcy claims the refrigerator.

What are the rights of the parties?

Answer: (a) Other Buyers. Victor has the right to recover the unpaid balance of the price from the original buyer Bonnie, but he no longer has a security interest in the refrigerator if the new occupant of the apartment who purchased it from Bonnie had no knowledge of Victor’s security interest and bought it for value for his own personal, family, or household purposes. In such cases the new bona fide purchaser takes the refrigerator free of the perfected security interest as no financing statement was filed. Section 9-320 (a)(b). No filing is required to perfect a purchase money security interest in consumer goods, Section 9-309 (1); but, such automatically perfected security interest is defeated when the goods are transferred to a bona fide consumer purchaser (i.e., a consumer to consumer sale). §9-320 (b). (b) Retention of Collateral. Victor may repossess the refrigerator from Bonnie’s trustee in bankruptcy. Victor’s purchase money security interest in consumer goods is perfected upon attachment, Section 9-309 (1), and defeats the trustee in bankruptcy’s interest. Section 9-317, 9-322. Upon retaking possession of the refrigerator Victor may resell it as provided in Section 9-610, or inasmuch as

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Bonnie has not paid sixty per cent of the price, retain the refrigerator in satisfaction of the debtor’s obligation as provided in Section 9-620.

2. On January 2, Burt asked Logan to loan him money “against my diamond ring.” Logan agreed to do so. To guard against intervening liens, Logan received permission to file a financing statement, and Burt and Logan signed a security agreement giving Logan an interest in the ring. Burt also signed a financing statement that Logan properly filed on January 3. On January 4, Burt borrowed money from Tillo, pledging his ring to secure the debt. Tillo took possession of the ring and paid Burt the money on the same day. The next day, January 5, Logan loaned Burt the money under the assumption that Burt still had the ring. Who has priority, Logan or Tillo? Explain.

Answer: Logan has priority. A security interest is perfected when it has attached and when all of the applicable steps required for perfection have been taken. A security interest may be perfected by filing a financing statement authenticated by the debtor or by possession of the collateral by the secured party.

Priority, however, between conflicting security interests rank according to time of filing or perfection. Priority dates from the time a filing is first made covering the collateral or the time the security is first perfected, whichever first occurs. Section 9-322 (a). In this case, in which both Tillo and Logan have perfected their security interest, Tillo’s priority dates from the time of perfection (January 4) while Logan’s dates from the time of filing (January 3).

3. Joanna takes a security interest in the equipment in Jason Store and files a financing statement claiming “equipment and all after-acquired equipment.” Berkeley later sells Jason Store a cash register, taking a security interest in the register and (a) files nine days after Jason receives the register, or (b) files twenty-five days after Jason receives the register. If Jason fails to pay both Joanna and Berkeley and they foreclose their security interests, who has priority on the cash register? Explain.

Answer: (a)(i) If Berkeley files 9 days after Jason received the register (i.e., within 20 days or whatever the statutory period has been amended to) Berkeley has priority over Joanna. (ii) If he files after 20 days (or the statutory period), he does not. Section 9-324 (a), UCC. Note that Berkeley has a purchase money security interest under Section 9103(a) and as such a grace period after receipt of the collateral in which to perfect a security interest in non-inventory goods in order to take priority over conflicting security interests.

Accordingly, in (i) Berkeley would prevail, while in (ii) Joanna would prevail under the 20 day period.

4. Finley Motor Company sells an automobile to Sara and retains a security interest in it. The automobile is insured, and Finley is named beneficiary. Three days after the automobile is totally destroyed in an accident, Sara files a petition in bankruptcy. As between Finley and Sara’s trustee in bankruptcy, who is entitled to the insurance proceeds? Explain.

Answer: Assuming that Finley has done whatever was required to perfect his security interest in the automobile, Finley has a perfected security interest in the insurance proceeds as proceeds of the collateral under Section 9-315 (a) (2), and would prevail.

5. On September 5, Wanda, a widow who occasionally teaches piano and organ in her home, purchased an electric organ from Murphy’s music store for $4,800, trading in her old organ for $1,200 and promising in writing to pay the balance at $120 per month and granting to

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Murphy a security interest in the property in terms consistent with and incorporating provisions of the UCC. A financing statement covering the transaction was also properly filled out and signed, and Murphy properly filed it. After Wanda failed to make the December or January payments, Murphy went to her home to collect the payments or take the organ. Finding no one home and the door unlocked, he went in and took the organ. Two hours later, Tia, a third party and the present occupant of the house, who had purchased the organ for her own use, stormed into Murphy’s store, demanding the return of the organ. She showed Murphy a bill of sale from Wanda to her, dated December 15, that listed the organ and other furnishings in the house. a. What are the rights of Murphy, Tia, and Wanda? b. Would your answer change if Murphy had not filed a financing statement? Explain why or why not. c. Would your answer change if the organ had been used principally to give lessons?

Explain.

Answer: (a) Murphy would prevail. Murphy has properly perfected his security interest and would prevail against both Tia and Wanda. Tia, of course, has a cause of action against Wanda based upon breach of warranty of title and possibly fraud. Tia may also have a cause of action against Murphy for breaking and entering. (b) Yes, if the goods are consumer goods. Murphy’s perfection would be automatic upon attachment: a purchase money security interest in consumer goods, Section 9-309 (1), and would be cut off by the purchase of the organ by a bona fide purchaser for value. Section 9-320 (b). (c) Yes, if the organ was equipment, then Murphy would have had to perfect the security interest at the time Wanda took possession or within the statutory grace period. Section 9-322.

The facts as presented are intentionally ambiguous in order to allow discussion of the result, and its variance, under both possibilities.

6. On May 1, Lincoln lends Donaldson $200,000 and receives from Donaldson his agreement to pay this amount in two years and takes a security interest in the machinery and equipment in Donaldson’s factory. A proper financing statement is filed with respect to the security agreement. On August 1, upon Lincoln’s request, Donaldson executes an addendum to the security agreement covering after-acquired machinery and equipment in Donaldson’s factory. A second financing statement covering the addendum is filed. In September, Donaldson acquires $50,000 worth of new equipment from Thompson, which Donaldson installs in his factory. In December, Carter, a judgment creditor of Donaldson, causes an attachment to issue against the new equipment. What are the rights of Lincoln, Donaldson, Carter, and Thompson? What can the parties do to best protect themselves?

Answer: Lincoln’s security interest in the after-acquired equipment installed in the debtor’s factory has priority over the attachment by the judgment creditor Carter. The Code Section 9-204 (a) provides “a security agreement may create or provide for a security interest in after-acquired collateral.”

Thompson can protect his interest in the equipment by perfecting the purchase money security interest at the time Donaldson takes possession or within twenty days.

Section 9-324 (a). Failing this, Thompson could take separate action against Donaldson to collect on the amount owed. Thus, if Thompson perfected his security interest (PMSI) within the statutory period Thompson would prevail against all parties. If he did not properly perfect his PMSI Lincoln would prevail against all parties under his perfected after-acquired property clause.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 37: Secured Transactions and Suretyship

7. Anita bought a television set from Bertrum for her personal use. Bertrum, who was out of security agreement forms, showed Anita a form he had executed with Nathan, another consumer. Anita and Bertrum orally agreed to the terms of the form. Anita subsequently defaulted on payment, and Bertrum sought to repossess the television. a. Explain who would prevail. b. Explain whether the result would differ if Bertrum had filed a financing statement. c. Explain whether the result would differ if Anita subsequently sent Bertrum an e-mail that met all the requirements of an effective security agreement.

Answer: (a) Decision for Anita. Bertrum has neither perfected nor attached his security interest.

In order for a security interest to be enforceable against the debtor it must attach, i.e.: (1) value has been given (2) the debtor has rights in the collateral, and (3) there must be an agreement between the debtor and secured party which in most instances must be authenticated by the debtor. Section 9-203(a). In the problem at hand Bertrum neither took possession of the collateral nor obtained an authenticated record; accordingly, Bertrum’s security interest in the television set never became enforceable against Anita. (b) The decision would not differ if Bertrum had filed a financing statement unless the financing statement satisfied the requirements of a security agreement. Section 9203 (1), 9-102. (c) If the e-mail satisfied the requirements of an authenticated record, sections 9-203, 9-102, Bertrum would prevail.

8. Aaron bought a television set for personal use from Penny. Aaron properly signed a security agreement and paid Penny $125 down, as their agreement required. Penny did not file, and subsequently Aaron sold the television for $800 to Clark, his neighbor, for use in Clark’s hotel lobby. a. When Aaron fails to make the January and February payments, may Penny repossess the television from Clark? Explain. b. What if, instead of Aaron’s selling the television set to Clark, a judgment creditor levied (sought possession) on the television? Who would prevail? Explain. c. What if Clark intended to use the television set in his home? Explain who would prevail.

Answer: (a) Yes. Penny has automatically perfected her security interest in the television set he sold to Aaron. Section 9-309(1): a purchase money security interest in consumer goods. Since Clark bought the television from Aaron for Clark’s hotel lobby and not for his own family, household or personal use, Penny’s security interest continues in the goods. (b) Penny. Penny’s automatically perfected security interest would also take priority against the judgment creditor. (c) Clark would prevail, because a consumer purchaser (one who buys for his own family, personal, or household purposes) who buys for value without knowledge of the security interest defeats a purchase money security interest that was automatically perfected. Section 9-320 (b).

9. Jones bought a used car from the A–Herts Car Rental System, which regularly sold its used equipment at the end of its fiscal year. First National Bank of Roxboro had previously obtained a perfected security interest in the car based upon its financing of A–Herts’s automobiles. Upon A–Herts’s failure to pay, First National is seeking to repossess the car from Jones. Does First National have an enforceable security interest in the car against Jones? Explain. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 37: Secured Transactions and Suretyship

Answer: The answer depends upon whether Jones is buyer in the ordinary course of business and/or buyer of consumer goods or whether he has knowledge of the perfected security interest of the First National Bank of Roxboro. A buyer in the ordinary course of business is defined in 1-201 (9) as “a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party in the goods buys in the ordinary course from a person in the business of selling goods of that kind.” It seems likely that Jones is a buyer in the ordinary course of business here, although the facts as stated are vague as to whether he qualifies for this status. If Jones qualifies as a buyer in the ordinary course of business, he takes the collateral free of any security interest created by AHerts even if the security interest is perfected as here and even if he knows of its existence. §9-320(a). However, if he does know of its existence, this knowledge may raise an issue as to whether Jones is in fact dealing in good faith and as to whether he is buying with knowledge that the sale to him is in violation of the security interest of the bank. In the case of consumer goods, a buyer who buys without knowledge of a security interest, for value, and for his own personal, family, or household use takes the goods free of any purchase money security interest automatically perfected, but takes the goods subject to a security interest perfected by filing. Thus, if Jones does not qualify for buyer in the ordinary course of business status, but is purchasing the goods as consumer goods, he takes them free of the bank’s security interest. If the bank for some reason neglected to file its financing statement, Jones will have priority.

However, if the bank has filed a financing statement, then the bank will prevail. This problem is a good illustration of how important it is for the holder of a purchase money security interest to file a financing statement even though that holder may have an automatically perfected security interest.

This problem is loosely based on Hempstead Bank v. Andy’s Car Rental System, 312 N.Y.S. 2d 317 (1970), in which the court found against the purchaser and held that “a buyer in the ordinary course of business” does not include a buyer of used cars from a rental agency that regularly sold its cars, since rental agencies are in the business of leasing, not selling cars.

10. Allen, Barker, and Cooper are cosureties on a $750,000 loan by Durham National Bank to Kingston Manufacturing Co., Inc. The maximum liability of the sureties is as follows: Allen—$750,000, Barker—$300,000, and Cooper—$150,000. If Kingston defaults on the entire $750,000 loan, what are the liabilities of Allen, Barker, and Cooper? Explain.

Answer: Their liabilities are as follows: Allen—$468,750; Barker—$187,500; and Cooper—$93,750, but it is important to understand the difference between their liabilities and the amount that a creditor may collect. When there is more than one surety, the cosureties are jointly and severally liable for the principal debtor’s default up to the amount of each surety’s undertaking. The creditor may proceed against any or all of the cosureties and collect the entire amount of the default from any of them, limited to the amount that surety has agreed to guarantee. As a result, it is possible that one cosurety (Allen, in this example) may pay the creditor the entire amount of the principal debtor’s obligation.

When a surety pays her principal debtor’s obligation, she is entitled to have her cosureties pay to her their proportionate share of the obligation paid. So, if Allen had paid the whole $750,000, she would be able to demand reimbursement of $187,500 from Barker and $93,750 from Cooper. This right of contribution arises when a surety has paid more than her proportionate share of the debt even if the cosureties originally were not aware of each other or were bound on separate instruments. All that is required is that they are sureties for the same principal debtor and the same

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 37: Secured Transactions and Suretyship

obligation. The right and extent of contribution can be determined by contractual agreement among cosureties. In the absence of such agreement, sureties’ obligations for equal amounts share equally; where they are obligated for varying amounts, the proportion of the debt that each surety must contribute is determined by proration according to each surety’s undertaking. The total undertakings of the cosureties is $1,200,000 ($750,000 + $300,000 + $150,000).

Allen =

$750,000 x ($750,000) = $468,750 $1,200,00 0

Barker =

$300,000 x ($750,000) = $187,500 $1,200,00 0

Cooper =

$150,000 $1,200,00 0

x ($750,000) = $93,750

TOTAL

$750,000

11. Peter Diamond owed Carter $500,000 secured by a first mortgage on Diamond’s plant and land. Stephens was a surety on this obligation in the amount of $250,000. After Diamond defaulted on the debt, Carter demanded and received payment of $250,000 from Stephens. Carter then foreclosed upon the mortgage and sold the property for $375,000.

What rights, if any, does Stephens have in the proceeds from the sale of the property?

Explain.

Answer: Stephens may recover $125,000 from the proceeds. Upon the creditor’s full payment of the principal debtor’s obligation, a surety is subrogated to the creditor’s rights against the principal debtor including any security interests. Carter had been paid $250,000 by Stephens so Carter is only entitled to $250,000 of the proceeds of the sale of the property. Stephens is entitled to the remainder of $125,000 ($375,000– $250,000).

12. Paula Daniels purchased an automobile from Carey on credit. At the time of the sale, Scott agreed to be a surety for Paula, who is sixteen years old. The automobile’s odometer stated fifty-two thousand miles, but Carey had turned it back from seventy-two thousand miles. Paula refuses to make any payments due on the car. Carey proceeds against Paula and Scott. Discuss what defenses, if any, are available to (a) Paula and (b) Scott.

Answer: (a) Paula as principal debtor may properly assert the defenses of (i) infancy and (ii) fraud, which consisted of Carey's setting back the odometer. (b) Scott as surety may not assert Paula’s infancy, which is a personal defense of the debtor, but he may assert the fraud practiced upon Paula by Carey in setting back the odometer.

13. Stafford Surety Co. agreed to act as the conditional guarantor of collection on a debt owed by Preston Decker to Cole. Stafford was paid a premium by Preston to serve as surety. Preston defaults on the obligation. Explain what Cole’s rights are against Stafford Surety Co.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 37: Secured Transactions and Suretyship

Answer: Because Stafford has agreed to act only as a conditional guarantor of collection, it is liable only if Cole first obtains a judgment against Preston and then is unable to collect under the judgment.

14. Campbell loaned Perry Dixon $70,000, which was secured by a possessory security interest in stock owned by Perry. The stock had a market value of $40,000. In addition, Campbell insisted that Perry obtain a surety. For a premium, Sutton Surety Co. agreed to act as a surety for the full amount of the loan. Prior to the due date of the loan, Perry convinced Campbell to return the stock because its value had increased and he wished to sell it to realize the gain. Campbell released the stock and Perry subsequently defaulted.

Is Sutton released from his liability? Explain why or why not.

Answer: Sutton is released from his liability as a surety to the extent of the value of the security released by Campbell.

15. Pamela Darden owed Clark $50,000 on an unsecured loan. On May 1, Pamela approached Clark for an additional loan of $30,000. Clark agreed to make the loan only if Pamela could obtain a surety. On May 5, Simpson agreed to be a surety on the $30,000 loan, which was granted that day. Both loans were due on October 1. On June 15, Pamela sent $10,000 to Clark but did not provide any instructions. a. Explain what Clark’s rights are. b. Explain what Simpson’s rights are.

Answer: (a) Clark may apply the $10,000 payment to whichever loan he pleases. (b) Simpson has no right to direct the application of the payment.

16. Patrick Dillon applied for a $100,000 loan from Carlton Savings & Loan. Carlton required him to obtain a surety. Patrick approached Sinclair Surety Co., which insisted that Patrick provide it with a financial statement. Patrick did so, but the statement was materially false. In reliance upon the financial statement and in return for a premium, Sinclair agreed to act as surety. Upon Sinclair’s commitment to act as surety, Carlton loaned Patrick the $100,000. After one payment of $4,000, Patrick defaulted. He then filed a voluntary petition in bankruptcy. Does Sinclair have any valid defense against Carlton? Explain.

Answer: Carlton may recover from Sinclair who has no defense. Fraud exercised by the principal debtor upon the surety may not be asserted against the creditor if the creditor is unaware of the fraud.

17. On June 1, Smith contracted with Martin doing business as Martin Publishing Company to distribute Martin’s newspapers and to account for the proceeds. As part of the contract, Smith agreed to furnish Martin a bond in the amount of $10,000 guaranteeing the payment of the proceeds. At the time the contract was executed and the credit extended, the bond was not furnished, and no mention was made as to the prospective sureties. On July 1, Smith signed the bond with Black and Blue signing as sureties. The bond recited the awarding of the contract for distribution of the newspapers as consideration for the bond.

On December 1, payment was due from Smith to Martin the sum of $3,600 under the distributor’s contract. Demand for payment was made, but Smith failed to make payment.

As a result, Martin brought an appropriate action against Black and Blue to recover the $3,600. What result? Explain.

Answer: Decision for Black and Blue. The promise of a surety is not binding without consideration. Here, the surety’s promise was made after the principal debtor (Smith) received an extension of credit from Martin Publishing Company. Consequently, Black

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 37: Secured Transactions and Suretyship

and Blue’s suretyship promise must be supported by new consideration, which it was not. The extension of credit by Martin is not sufficient consideration because it was not contemporaneous with the sureties’ promise.

18. Diggitt Construction Company was the low bidder on a well-digging job for the Village of Drytown. On April 15, Diggitt signed a contract with Drytown for the job at a price of $40,000. At the same time, pursuant to the notice of bidding, Diggitt prevailed upon Ace Surety Company to execute a performance bond indemnifying Drytown on the contract.

On May 1, after Diggitt had put in three days on the job, the president of the company refigured his bid and realized that if his company were to complete the job it would lose $10,000. Accordingly, Diggitt notified Drytown that it was canceling the contract, effective immediately. What are the rights and duties of Ace Surety Company?

Answer: Ace Surety Company is liable to the Village of Drytown on the performance bond. Ace Surety has the right of reimbursement and exoneration against Diggitt Construction Company and is subrogated to Drytown’s rights against Diggitt.

19. Standridge purchased a Chevrolet automobile from Billy Deavers, an agent of Walker Motor Company. According to the sales contract, the balance due after the trade-in allowance was $2,282.50, to be paid in twelve weekly installments. Standridge claims that he was unable to make the second payment and that Billy Deavers orally agreed that he could make two payments the next week. The day after the double payment was due, Standridge still had not paid. That day Ronnie Deavers, Billy’s brother, went to Standridge’s place of employment to repossess the car, which the Walker Motor contract permitted. Rather than consenting to the repossession, Standridge drove the car to the Walker Motor Company’s place of business and tendered the overdue payments. The Deavers refused to accept the late payment and instead demanded the entire unpaid balance. Standridge could not pay it. The Deavers then blocked Standridge’s car with another car and told him he could just “walk his…home.” Standridge brought suit, seeking damages for the Deavers’s wrongful repossession of his car. The Deavers deny that they granted Standridge permission to make a double payment, that Standridge tendered the double payment, and that they rejected it. They claim that he made no payment and that, therefore, they were entitled to repossess the car. Discuss whether the car was properly repossessed.

Answer: Judgment for Standridge. Unless otherwise agreed in the contract, the secured party on default has the right to repossess the collateral without judicial process. Here, the sales contract specifically provided for repossession upon Standridge’s default of any payments. The Deavers were then entitled to repossess without judicial process. However, the repossession must be done without breaching the peace. The jury determined that the Deaver’s combined acts of blocking-in Standridge’s car and speaking to him in offensive, insulting language were sufficiently provocative of violence to be a breach of the peace. Therefore, the Deaver’s repossession was unlawful and Standridge is entitled to recover damages. Deaver’s v.

Standridge, 144 Ga. App. 673, 242 S.E. 2d 331 (1978).

20. National Acceptance Company loaned Ultra Precision Industries $692,000, and to secure repayment of the loan, Ultra executed a chattel mortgage security agreement on National’s behalf on March 7, 2022. National perfected the security interest by timely filing a financing statement. Although the security interest covered specifically described equipment of Ultra, both the security agreement and the financing statement contained an after-acquired property clause that did not refer to any specific equipment.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 37: Secured Transactions and Suretyship

Later in 2022 and in 2023, Ultra placed three separate orders for machines from Wolf Machinery Company. In each case it was agreed that after the machines had been shipped to Ultra and installed, Ultra would be given an opportunity to test them in operation for a reasonable period. If the machines passed inspection, Wolf would then provide financing that was satisfactory to Ultra and properly filed its financing statement. In all three cases, financing was arranged with Community Bank (Bank) and accepted, and a security interest was given in the machines. Furthermore, in each case a security agreement was entered into, and the secured parties then filed a financing statement within ten days. Ultra became bankrupt on October 7, 2024. National claimed that its security interest in the after-acquired machines should take priority over those of Wolf and Bank because their interests were not perfected by timely filed financing statements. Discuss who has priority in the disputed collateral.

Answer: Judgment for Wolf and Bank. Wolf and Bank provided funds for Ultra to purchase the machines and, therefore, had an interest classified as a purchase money security interest in equipment. National, on the other hand, had an ordinary secured interest in the equipment that it had properly perfected. Between these two conflicting interests, the purchase money security interest in the equipment has priority if it was perfected at the time that the debtor, Ultra, received possession of the collateral or within twenty days thereafter. Section 9-324 (a). Here, Wolf and Bank filed financing statements long after the debtor received physical delivery of the machines but within twenty days of when Ultra completed testing and secured financing and thereby incurred the obligation to purchase the machines. Only when Ultra executed and delivered the security agreements on the machines did it become a debtor. Therefore, since the financing statements were filed within twenty days of that date, Wolf and Bank had properly perfected purchase money security interests in the machines that take priority over National’s claims.

21. Elizabeth Tilleraas received three student loans totaling $35,500 under the Federal Insured Student Loan Program (FISLP) of the Higher Education Act. These loans were secured by three promissory notes executed in favor of Dakota National Bank & Trust Co., Fargo, North Dakota. Under the terms of these student loans, periodic payments were required beginning twelve months after Tilleraas ceased to carry at least one-half of a full-time academic workload at an eligible institution. Her student status terminated on January 28, 2021, and the first installment payment thus became due January 28, 2022. She never made any payment on any of her loans. Under the provisions of the FISLP, the United States assured the lender bank repayment in event of any failure to pay by the borrower.

The first payment due on the loans was in default” on July 27, 2022, one hundred and eighty days after the failure to make the first installment payment. On December 17, 2022, Dakota National Bank & Trust sent notice of its election under the provisions of the loan to accelerate the maturity of the note. The bank demanded payment in full by December 27, 2023. It then filed FISLP insurance claims against the United States on May 6, 2024, and assigned the three Tilleraas notes to the United States on May 10, 2024. The government, in turn, paid the bank’s claim in full on July 5, 2024. The government subsequently filed suit against Tilleraas. Discuss whether the United States will prevail.

Answer: Judgment for the United States. A surety is responsible for the payment of the debt of another should the principal debtor fail to repay the creditor. The purpose of the arrangement is to induce the creditor to extend a loan where he might otherwise be unwilling to do so. The benefit thus received by the debtor places the debtor under an implied legal obligation to reimburse the surety for any payment made by the surety to the creditor. In this case, Tilleraas was able to borrow money from Dakota National with no collateral and upon favorable terms. The United States

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 37: Secured Transactions and Suretyship

insured repayment to Dakota National in the event of default by Tilleraas. Therefore, a surety-principal-debtor-lender relationship was created. When Tilleraas in fact defaulted and the United States, the surety-guarantor, paid Dakota National’s claim, it obtained the right to sue Tilleraas on the underlying loan.

22. New West Fruit Corporation (New West) and Coastal Berry Corporation are both brokers of fresh strawberries. In the second half of 2022, New West’s predecessor, Monc’s Consolidated Produce, Inc., loaned money and strawberry plants to a group of strawberry growers known as Cooperativa La Paz (La Paz). In September 2022, Monc’s and La Paz signed a “Sales and Marketing Agreement” to allow Monc’s the exclusive right to market the strawberries grown by La Paz during the 2022–2023 season. The agreement did not mention the advances of money or plants, but did give Monc’s a security interest in all crops and proceeds on specified property in the 2022–2023 season. The financing statement was properly signed and filed. Monc’s closed down in January 2023, and its assets were assigned to New West. In April, New West learned that La Paz had agreed to market its 2023 crop through Coastal Berry. New West immediately arranged a meeting to advise the Coastal Berry officers of its contract with the growers. New West requested that Coastal Berry either pay New West the amounts owed by the growers or allow New West to market the berries to recover the money. Coastal Berry did not respond. After Coastal Berry began marketing the berries, New West sent letters demanding payment of the proceeds. In August 2023, New West filed suit against Coastal Berry, La Paz, the individual growers, and a berry freezing company asserting that its security interest was valid and that it had duly notified Coastal Berry both through the financing statement on file and through the letters it had sent to Coastal Berry directly. Coastal Berry claimed that the security agreement was not effective because it did not specifically identify the debt (money and plants) being secured. Explain.

Answer: Judgment for New West. A security agreement in some form is necessary to create a valid security interest. Although the writing does not need to be formally designated “Security Agreement,” it must contain language that grants rights in the collateral. A nonpossessory security interest becomes enforceable when (1) the debtor has signed the agreement containing a description of the collateral (including a description of the land in the case of crops), (2) value has been given, and (3) the debtor has rights in the collateral.

In this case, the Sales and Marketing Agreement, though poorly written, was sufficient to create a security agreement because it did grant to New West rights in the collateral (the crops). The agreement described the crops and the land and was signed by a representative from La Paz, New West (Monc’s) had given value, and La Paz had rights in the crops. Additionally, Coastal Berry was given sufficient notice of the debt and should have retained funds from the sales to cover the debt. The security agreement was therefore enforceable.

23. Edward Slater purchased a new Galaxy boat primarily for personal purposes. To finance the purchase Slater obtained a loan from Howell State Bank, agreeing to repay the loan in ninety-six monthly installments of $151.41. The Galaxy boat was purchased in the state of New Jersey, and Howell State Bank filed a copy of the Financing Statement Agreement in the office of the Secretary of State of New Jersey. Subsequently, the boat was moved to the state of New York. Explain whether Howell has a perfected security interest in the boat.

Answer: Howell has a perfected security interest in the boat. Since the Galaxy boat was a consumer good, it was unnecessary for Howell State Bank to file a financing statement to perfect its purchase money security interest. Notwithstanding the moving

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 37: Secured Transactions and Suretyship

of the boat to New York, because Howell State Bank’s security interest was a purchase money security interest, that security interest remained perfected without the need for any further action under Part 3 of Article 9 of the Uniform Commercial Code.

Howell State Bank v. Jericho Boats, Inc., 141 Misc. 2d 314, 533 N.Y.S. 2d 363 (N.Y. Supreme Court, 1988).

ANSWERS TO “TAKING SIDES” PROBLEMS James Koontz agreed to purchase a Plymouth Sundance from Chrysler Credit Corporation (Chrysler) in exchange for sixty payments of $185.92. Koontz soon thereafter defaulted, and Chrysler notified Koontz that, unless he made the payments, it would repossess the vehicle.

Koontz responded by notifying Chrysler that he would make every effort to make up missed payments, that he did not want the car repossessed, and that Chrysler was not to enter his private property to repossess the vehicle. A few weeks later, Chrysler sent the M & M Agency to repossess the vehicle. When he heard the repossession in progress, Koontz, dressed only in his underwear, came outside and yelled, “Don’t take it!” The repossessor ignored him and took the car anyway. Koontz did not physically challenge or threaten the repossessor. a. Discuss the arguments that Chrysler legally repossessed the automobile. b. Discuss arguments that Chrysler illegally repossessed the automobile. c. Who should prevail?

Answer: (a) The repossession was legal. Whether a given act provokes a breach of the peace depends upon the accompanying circumstances of each particular case. In this case, Koontz testified that he only yelled, “Don’t take it,” and that the repossessor made no verbal or physical response. He also testified that although he was close enough to the repossessor to run over and get into a fight, he elected not to because he was in his underwear.

Furthermore, there was no evidence in the record that Koontz implied violence at the time of or immediately prior to the repossession by holding a weapon, clenching a fist, or even vehemently arguing toe-to-toe with the repossessor so that a reasonable repossessor would understand that violence was likely to ensue if he continued with the vehicle repossession. We think that the evidence, viewed as a whole, could lead a reasonable fact finder to determine that the circumstances of the repossession did not amount to a breach of the peace. (b) Koontz argues that Chrysler breached the peace by repossessing the vehicle under circumstances which would constitute a Class C misdemeanor, criminal trespass to real property. In this case, Koontz testified that he notified Chrysler prior to the repossession that it was not permitted to enter onto his property. (c) Chrysler should prevail. There was no testimony that Chrysler entered through any barricade or did anything other than simply enter onto the property and drive the car away. Chrysler enjoyed a limited privilege to enter Koontz’s property for the sole and exclusive purpose of effecting the repossession. So long as the entry was limited in purpose (repossession), and so long as no gates, barricades, doors, enclosures, buildings, or chains were breached or cut, no breach of the peace occurred by virtue of the entry onto his property.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 38: Bankruptcy

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 38: Bankruptcy

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ............................................................................... 9

ANSWERS TO ETHICAL DILEMMA For a Company Contemplating Bankruptcy, When Is Disclosure the Best Policy?

1.

Was it ethical for Williams to acquiesce with regard to the first and second quarters?

Consider the interests of the consumer/policyholder, the company, the shareholders, and the members of the committee. Was there merit to the committee’s request for more time to remedy the company’s problems?

2. Should bankrupt insurers be treated differently from other bankrupt corporations? What role, if any, should government play in insuring insurance companies?

3. Should the old management team be allowed to retain control of Foundation? Why? Why not?

Answer: 1. Many would agree that it was not ethical for Williams to acquiesce during the first and second quarters. The denial and deferral of remedial action with regard to the company’s problems fostered false confidence in the company to the detriment of investors and purchasers of policyholders. The integrity of the company, and the committee, was compromised. On the other hand, there could have been mitigating circumstances. If there was a realistic possibility of reversing the decline of the company, perhaps the inaction of the committee was justifiable.

2. The question of the wisdom of federal regulation of insurance has been raised repeatedly in recent years. The General Accounting Office Findings included in the February 1990 report by the House Subcommittee emphasized the alarming weakness in state regulation. Most states require field examinations only once every three to five years. Further, the five states visited by the GAO had 29 staff available to analyze 6,450 annual statements.

3. A case may be maintained that the old management team should be removed from control. Their inaction led to a severe compounding of the company’s problems and resulted in damages to a large number of individuals.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 38: Bankruptcy

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. a. Benson goes into bankruptcy. His estate is not sufficient to pay all taxes owed. Explain whether Benson’s taxes are discharged by the proceedings. b. Benson obtained property from Anderson on credit by representing that he was solvent when in fact he knew he was insolvent. Explain whether Benson’s debt to Anderson is discharged by Benson’s discharge in bankruptcy.

Answer: (a) Benson’s taxes are not discharged in the bankruptcy proceedings. Section 523, Bankruptcy Code. (b) Benson’s obligation to Anderson is not discharged in the bankruptcy proceedings, as it is a liability for obtaining money or property by false pretenses or false representations. See Section 523, Bankruptcy Code.

2. Bradley goes into bankruptcy under Chapter 7 owing $25,000 as wages to his four employees. There is enough in his estate to pay all costs of administration and enough to pay his employees, but nothing will be left for general creditors. Do the employees take all the estate? If so, under what conditions? If the general creditors received nothing at all, would these debts be discharged?

Answer: Section 507 provides a priority for wages, salaries or commissions earned within ninety days before the filing of the petition. To the extent that an employee falls within these limitations he will be paid in full. Even if general creditors receive nothing at all–a situation that occurs in a large percentage of bankruptcy cases–the debts of all general creditors are discharged except for those which are nondischargeable under Section 523 of the Bankruptcy Code.

3. Jessica sold goods to Stacy for $2,500 and retained a security interest in them. Two months later, Stacy filed a voluntary petition in bankruptcy under Chapter 7. At this time, Stacy still owed Jessica $2,000 for the purchase price of the goods, the value of which was $1,500. a. May the trustee invalidate Jessica’s security interest? If so, under what provision? b. If the security interest is invalidated, what is Jessica’s status in the bankruptcy proceeding? c. If the security interest is not invalidated, what is Jessica’s status in the bankruptcy proceeding?

Answer: (a) Possibly. The retention of a security interest in the goods sold would constitute a (1) transfer (2) to a creditor (3) made within 90 days before the date of the filing of the petition (4) that would almost surely result in Jessica’s receiving more than she would have otherwise received under Chapter 7. However, since the security interest is a purchase money security interest, if it is perfected within twenty days after it attaches, the trustee may not invalidate Jessica’s security interest. If Jessica had not perfected within twenty days, then the trustee may avoid the security interest. Section 547(c)(3). (b) Jessica’s status would be that of a general creditor with a claim for $2,000. (c) Jessica has a secured claim for $1,500 and an unsecured claim for $500.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 38: Bankruptcy

4. A debtor went through bankruptcy under Chapter 7 and received his discharge. Explain which of the following debts were completely discharged, and which remain as future debts against him. a. A claim of $9,000 for wages earned within five months immediately prior to bankruptcy. b. A judgment of $3,000 against the debtor for breach of contract. c. Sales taxes of $1,800. d. $1,000 for past domestic support obligations. e. A judgment of $4,000 for injuries received because of the debtor’s negligent operation of an automobile.

Answer: Section 523 sets forth which debts are not dischargeable in bankruptcy. (a) Discharged (b) Discharged (c) Not discharged (d) Not discharged (e) Discharged, unless the debtor was operating the motor vehicle while legally intoxicated 5. Rosinoff and his wife, who were business partners, entered bankruptcy. A creditor, Baldwin, objected to their discharge in bankruptcy on the grounds that a. the partners had obtained credit from Baldwin on the basis of a false financial statement; b. the partners had failed to keep books of account and records from which their financial condition could be ascertained; and c. Rosinoff had falsely sworn that he had taken $70 from the partnership account when he actually took $700.

Were the debtors entitled to a discharge? Why or why not?

Answer: The debtors were not entitled to a discharge because of (b). (a) The obtaining of credit on the basis of a false financial statement would not bar a discharge of all debts but would make that debt non-dischargeable. (b) Failure to keep books of account would bar both debtors from a discharge. (c) Rosinoff’s false oath would bar him from a discharge.

6. X Corporation is a debtor in a reorganization proceeding under Chapter 11 of the Bankruptcy Code. By fair and proper valuation, its assets are worth $100,000. The indebtedness of the corporation is $105,000, and it has outstanding preferred stock of par value of $20,000 and common stock of par value of $75,000. The plan of reorganization submitted by the trustees would eliminate the common shareholders and would issue new bonds of the face amount of $5,000 to the creditors and new common stock in the ratio of 84 percent to the creditors and 16 percent to the preferred shareholders. Should this plan be confirmed? Explain.

Answer: The plan should not be approved in the Chapter 11 reorganization proceedings because it is not fair and equitable. It is unfair because the amount owing by the X Corporation to its creditors exceeds the total value of its assets. The corporation is insolvent, and no assets are available for any class of shareholders. All of the securities of the reorganized corporation should go to its creditors, and any pay out to any class of shareholders would be unfair to the creditors. Under Section 1129 of the Bankruptcy Code, fair and equitable with respect to unsecured creditors means that such creditors receive property of value equivalent to the full amount of their claim or

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 38: Bankruptcy

that no junior claim or interest receive anything at all. Since the creditors were not paid in full the preferred shareholders could not participate at all.

7. Alex is a wage earner with a regular income. He has unsecured debts of $42,000 and secured debts owing to Betty, Connie, David, and Eunice totaling $120,000. Eunice’s debt is secured only by a mortgage on Alex’s house. Alex files a petition under Chapter 13 and a plan providing payment as follows: (a) 60 percent of all taxes owed; (b) 35 percent of all unsecured debts; and (c) $100,000 in total to Betty, Connie, David, and Eunice. Should the court confirm the plan? If not, explain how the plan must be modified or what other conditions must be satisfied.

Answer: No. The plan may not modify the rights of a secured party with a security interest in the debtor’s principal residence. The plan must provide for full payment on a deferred basis of all claims entitled to a priority. Therefore, the plan must pay 100% of the taxes unless the taxing authority agrees otherwise. The plan must be accepted

by Betty, Connie, David, and Eunice or (a) it must provide for Alex to surrender to Betty, Connie, David, and Eunice the collateral or (b) it must permit Betty, Connie, David, and Eunice to retain their security interest and the value of property to be distributed to them must be not less than the allowed amount of their claims.

8. John Bunker has assets of $130,000 and liabilities of $185,000 owed to nine creditors.

Nonetheless, his cash flow is positive, and he is making payment on all of his obligations as they become due. I. M. Flintheart, who is owed $22,000 by Bunker, files an involuntary petition in bankruptcy under Chapter 7 against Bunker. Bunker contests the petition. What will be the result? Explain.

Answer: Decision for Bunker. Where there are fewer than twelve creditors, one creditor owed $10,000 or more may file an involuntary petition in bankruptcy. Thus, Flintheart may file such a petition against Bunker. However, upon Bunker’s contesting the petition, the court must dismiss the petition unless the creditor shows that the debtor is not generally paying his undisputed debts as they become due. The facts indicate that Bunker is making payment on all of his obligations as they become due.

Accordingly, the court will dismiss the petition and it may award damages in favor of Bunker against Flintheart for (1) costs, (2) reasonable attorney’s fees, (3) damages caused by seizure of Bunker’s property and (4) if Flintheart acted in bad faith, punitive damages.

9. Karen has filed a voluntary petition for a Chapter 7 proceeding. The total value of Karen’s estate is $35,000. Ben, who is owed $18,000, has a security interest in property valued at $12,000. Lauren has an unsecured claim of $9,000, which is entitled to a priority of $2,000.

The United States has a claim for income taxes of $7,000. Steve has an unsecured claim of $10,000 that was filed on time. Sarah has an unsecured claim of $17,000 that was filed on time. Wally has a claim of $14,000 that he filed late, even though Wally was aware of the bankruptcy proceedings. Explain what each of the creditors should receive in a distribution under Chapter 7.

Answer: (a) Ben receives $14,100. (b) Lauren receives $4,450. (c) United States receives $7,000. (d) Steve receives $3,500. (e) Sarah receives $5,950. (f) Wally receives $0.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 38: Bankruptcy

Ben receives $12,000 as a secured creditor and has an unsecured claim of $6,000.

Lauren receives $2,000 on the portion of her claim entitled to a priority and has an unsecured claim of $7,000. The United States has a priority of $7,000. After paying $12,000 to Ben, $2,000 to Lauren, and $7,000 to the United States, there remains $14,000 ($35,000 - $12,000 - $2,000 - $7,000) to be distributed pro rata to unsecured creditors who filed on time. Their claims total $40,000 (Ben = $6,000, Lauren = $7,000, Steve = $10,000 and Sarah = $17,000). Therefore, each will receive $14,000 divided by $40,000 or 35 cents on the dollar. Accordingly, Ben receives an additional $2,100, Lauren receives an additional $2,450, Steve receives $3,500, and Sarah receives $5,950. Because there were insufficient assets to pay all unsecured claimants who filed on time, Wally, who filed tardily, receives nothing.

10. Landmark at Plaza Park, Ltd., filed a plan of reorganization under Chapter 11 of the Bankruptcy Code. Landmark is a limited partnership whose only substantial asset is a 200-unit garden apartment complex. City Federal holds the first mortgage on the property in the face amount of $2,250,000. The mortgage is due and payable six years from now.

Landmark has proposed a plan of reorganization under which the property now in possession of City Federal would be returned. Landmark will then deliver a nonrecourse note, payable in three years, in the face amount of $2,705,820.31 to City Federal in substitution of all of the partnership’s existing liabilities. On the sixteenth month through the thirty-sixth month after the effective date of the plan, Landmark will make monthly interest payments computed on a property value of $2,260,000 at a rate of 3 percent above the original mortgage rate but 2.5 percent below the market rate for loans of similar risk. Finally, the note will be secured by the existing mortgage. Landmark’s theory is that the note will be paid off at the end of thirty-six months by a combination of refinancing and accumulation of cash from the project. The key is Landmark’s proposal to obtain a new first mortgage in three years in the face amount of $2,400,000.

City Federal is a first mortgagee without recourse that has been collecting rents pursuant to a rent assignment agreement since the default on the mortgage eleven months ago.

City Federal is impaired by the plan and has rejected it. May it complete its foreclosure action? Explain.

Answer: Decision for City Federal. For Landmark’s plan to be accepted over City Federal’s objection, it must be shown that (1) City Federal had retained its lien on the property; (2) that the total stream of deferred cash payments proposed by the plan must at least total the amount of the secured claim; and (3) that the total stream of payments has a value equal to the value of the property. Landmark has shown that its plan satisfies the first two requirements, but fails to satisfy the third. The rate of interest on the $2,260,000 loan that City Federal is supposed to make is 2.5% lower than the market rate for a loan of similar risk. The second step is to scrutinize the proposed plan with the market rate to determine whether it offers a reasonable prospect of success. It must be shown that confirmation of the plan is not likely to be followed by liquidation or the need for further financial reorganization of the debtor.

Factors to be considered include: (1) the adequacy of the capital structure, (2) the earning potential of the business, (3) economic conditions, and (4) the ability of management. The requirement of confirmation of the plan is intended to prevent unrealistic schemes from being forced on creditors. Here, with the market interest rate factored onto realistic income and expense projections substituted for those supplied

by Landmark, it appears that confirmation of the plan would likely be followed by liquidation or further reorganization proceedings. So, Landmark’s request for confirmation of its plan of reorganization is denied. Matter of Landmark at Plaza Park Ltd. United States Bankruptcy Court, D.N.J., 1980 7 B.R. 653.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 38: Bankruptcy

11. Freelin Conn filed a voluntary petition under Chapter 7 of the Bankruptcy Code on September 30. Conn listed BancOhio National Bank as having a claim incurred in October of the previous year in the amount of $4,000 secured by an eight-year-old Oldsmobile.

The car is listed as having a market value of $4,100. During the period from June 30 to September 30 Conn made three payments totaling $439.17 to BancOhio. May the trustee in bankruptcy set aside those three payments as voidable preferences? Explain.

Answer: Judgment for BancOhio. The trustee may avoid the transfer from Conn to BancOhio only if he can show that all five elements of a voidable preference are met.

BancOhio has admitted that the first four elements are present. The trustee, however, has failed to show the final element—that the effect of the payments was to enable the creditor to obtain a greater percentage of its debt than it would receive under Chapter 7 of the Bankruptcy Act. BancOhio’s claim is secured to the extent of the value of the collateral, the Oldsmobile. The market value of the car was listed at $4,100. Conn, however, claims that it is worth much more, and the trustee did not show that it was worth less than BancOhio’s claim of $4,000. Thus, the value of the car is held to be equal to the amount of BancOhio’s claim, and therefore, it has a fully secured claim. Since the trustee did not establish that the transfer enabled BancOhio to recover more on its claim than other secured creditors, the transfer is not a voidable preference, and the trustee may not recover the payments made to BancOhio.

In Re Conn, 9 B.R. 431 (N.D. Ohio, 1981).

12. David files a bankruptcy petition under Chapter 13. After the claims of secured and priority creditors have been satisfied, David’s remaining bankruptcy estate has a value of $100,000. David’s creditors with allowed unsecured claims are owed $250,000 in total.

Chris, an unsecured creditor, is owed $13,500. David’s Chapter 13 plan proposes to pay Chris $150 per month for three years. Should the Bankruptcy Court confirm David’s plan?

Explain.

Answer: No. The plan proposes to pay Chris $5,400 in deferred payments. That is the amount Chris would have received under Chapter 7. ($100,000/$250,000 = 0.4; 0.4  $13,500 = $5,400.) For a Chapter 13 plan to be confirmed by the court, the present value of the property to be distributed to unsecured creditors must be not less than the amount they would receive under Chapter 7. Accordingly, Chris is entitled to payments whose present value is $5,400. However, the present of value of $5,400 paid over three years is less than $5,400. Therefore, this plan cannot be confirmed.

13. Yolanda Christophe filed a bankruptcy petition under Chapter 13. Her scheduled debts consist of $11,100 of secured debt, $9,300 owed on an unsecured student loan, and $6,960 of other unsecured debt. Christophe asserts that the student loan is nondischargeable and that assertion has not been questioned. Christophe’s proposed amended Chapter 13 plan calls for fifty-six monthly payments of $440 a month. The questioned provision in that plan is the division of the unsecured creditors into two classes. Under Christophe’s proposed plan, the general unsecured creditors would receive 32 percent and the separately classified student loan creditor would receive 100 percent. Should this plan be confirmed? Why or why not?

Answer: Confirmation of Debtor’s Chapter 13 Plan is denied. A bankruptcy judge may not confirm a Chapter 13 plan that is not presented in good faith or unfairly discriminates. A debtor may designate classes of unsecured claims but may not discriminate unfairly against any class of claims. Christophe has proposed to place the student loan claimant in a separate class and proposes to treat it differently from all other unsecured, nonpriority creditors. It must be determined whether this disparate treatment constitutes unfair discrimination.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 38: Bankruptcy

The courts have recognized four issues to determine whether discrimination is unfair: (1) whether the discrimination has a reasonable basis; (2) whether the debtor can carry out a plan without the discrimination; (3) whether the plan is proposed in good faith; and (4) whether the degree of discrimination is directly related to the basis or rationale for the discrimination.

Discrimination is considered reasonable and fair when it is related to the debtor’s objective interest in completing the plan and obtaining a fresh start or maintaining a decent quality of life. The special rights of student loan creditors may form a basis for allowing a debtor to treat them favorably. However, finding a basis for discrimination does determine whether discrimination is unfair. The court must consider whether the basis for the discrimination directly supports the nature and degree of disparate treatment proposed in the Plan.

Debtor has not shown that her Plan does not exceed the necessity for discrimination.

The missing details that would be particularly relevant to the analysis below are the following: (1) what payments were due; (2) when is the last payment due; (3) whether any arrearages exist; (4) whether the payments have been accelerated before the bankruptcy petition was filed; and (5) whether or not the proposed 100% payout would accelerate payments under the loan agreement. If the student loan creditor is not entitled to 100% repayment of its loan before the scheduled completion of the Chapter 13 plan, then a plan which pays 100% of that student loan during that period would accelerate payment of the student loan debt. That would be unfair to the other unsecured creditors, because the debtor would be forcing them to bear the cost of early payment of the student loan without a corresponding justification. Because Christophe has failed to prove that her Chapter 13 Plan does not discriminate unfairly and is presented in good faith, it must be denied. In re Christophe, 151 B.R. 475 (1993).

14. On December 17 ZZZZ Best Co., Inc. (the debtor), borrowed $7 million from Union Bank (the bank). On July 8 of the following year the debtor filed a voluntary petition for bankruptcy under Chapter 7. During the preceding ninety days, the debtor had made interest payments of $100,000 to the bank on the loan. The trustee of the debtor’s estate filed a complaint against the bank to recover those payments as a voidable preference.

The bank asserts that the payments were not voidable because they came within the ordinary course of business exception. The trustee maintains that the exception applies only to short-term, not long-term, debt. Who is correct? Explain.

Answer: The Bankruptcy Code authorizes bankruptcy trustees to avoid any transfer of the debtor’s interest in property that: (1) benefits a creditor; (2) is on account of an antecedent debt; (3) is made while the debtor was insolvent; (4) is made within 90 days before the filing of the petition for bankruptcy; and (5) enables the creditor to receive a larger share of the estate than if the transfer had not been made. All five conditions are satisfied in this case. However, the Bankruptcy Code provides an exception for payments made in the ordinary course of business. This exception does not distinguish between long-term debt and short-term debt. Rather, it focuses on whether the debt was incurred, and payment made, in the “ordinary course of business of the debtor and transferee.” Thus, there is no textual support for a contention that the exception’s coverage is limited to short-term debt. The bank is correct in its assertion.

15. A landlord owned several residential properties, one of which was subject to a local rent control ordinance. The local rent control administrator determined that the landlord had been charging rents above the levels permitted by the ordinance and ordered him to refund the wrongfully collected rents to the affected tenants. The landlord did not comply

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 38: Bankruptcy

with the order. The landlord subsequently filed for relief under Chapter 7 of the Bankruptcy Code, seeking to discharge his debts. The tenants filed an adversary proceeding against the landlord in the Bankruptcy Court, arguing that the debt owed to them arose from rent payments obtained by “actual fraud” and that the debt was therefore nondischargeable under the Bankruptcy Code. They also sought treble damages and attorney’s fees and costs pursuant to the state Consumer Fraud Act. The Bankruptcy Court ruled in favor of the tenants, finding that the landlord had committed “actual fraud” and that his conduct violated state law. The court therefore awarded the tenants treble damages totaling $94,147.50. Does the Bankruptcy Code bar the discharge of treble damages awarded on account of the debtor’s fraud? Explain.

Answer: Yes. The Bankruptcy Code has long prohibited debtors from discharging liabilities incurred on account of their fraud, embodying a basic policy animating the Code of affording relief only to an “honest but unfortunate debtor.” Section 523(a)(2)(A) continues the tradition, as it prevents discharge of “any debt” respecting “money, property, services, or...credit” that the debtor has fraudulently obtained. This would include treble damages assessed on account of the fraud.

Once it is established that specific money or property has been obtained by fraud, however, “any debt” arising therefrom is excepted from discharge. In this case, petitioner received rent payments from respondents for a number of years, of which $31,382.50 was obtained by fraud. His full liability traceable to that sum—$94,147.50 plus attorney’s fees and costs—thus falls within the exception, and is nondischargeable in bankruptcy.

16. Krieger is a 53-year-old woman who has not held a job in more than twenty-five years.

Prior to that period, she did not earn more than $12,000 a year in her working career.

Krieger is living with her mother, age 75, in a rural community where few jobs are available. Between the two of them, she and her mother receive only a few hundred dollars from governmental programs every month. Krieger is too poor to move in search of better employment prospects elsewhere. Her car needs repairs, and she lacks Internet access, both of which hamper a search for work. Having no assets or income, Krieger filed for, and is entitled to receive, a discharge in bankruptcy. Her largest creditor—Educational Credit Management, which acts on behalf of some federal loan guarantors—seeks to exclude Krieger’s student loans from the discharge. Explain whether Krieger should be discharged from her educational loans.

Answer: Perhaps. Educational loans are generally not discharged in bankruptcy, though they can be if repayment of the loans imposes an undue hardship. The facts in this case may qualify Krieger under this hardship provision to have her student loans discharged.

17. Robert Marrama filed a voluntary bankruptcy petition under Chapter 7. In the filing, Marrama made a number of statements about his principal asset, a house in Maine, which were misleading or inaccurate. He reported that he was the sole beneficiary of the trust that owned the property and he listed its value as zero. He also denied that he had transferred any property other than in the ordinary course of business during the year preceding the filing of his petition. In fact, the Maine property had substantial value, and Marrama had transferred it into the newly created trust for no consideration seven months prior to filing his petition. Marrama later admitted that the purpose of the transfer was to protect the property from his creditors. The trustee stated that he intended to recover the Maine property as an asset of the estate. Thereafter, Marrama sought to convert to Chapter 13, claiming that he had an absolute right to convert his case Both the trustee and Marrama’s principal creditor objected, contending that the request to convert

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 38: Bankruptcy

was made in bad faith. Explain whether Marrama should be permitted to convert the case to Chapter 13.

Answer: Prepetition bad-faith conduct may cause a forfeiture of the right to convert a Chapter 7 proceeding into a Chapter 13 case. The facts in this case established bad faith case, and therefore the request for conversion should be denied. Marrama v.

Citizens Bank, Supreme Court of the United States, 2007, 549 U.S. 365, 127 S. Ct. 1105, 166 L. Ed. 2d 956.

The principal purpose of the Bankruptcy Code is to grant a “fresh start” to the “honest but unfortunate debtor.” Both Chapter 7 and Chapter 13 of the Code permit an insolvent individual to discharge certain unpaid debts toward that end. Chapter 7 authorizes a discharge of prepetition debts following the liquidation of the debtor’s assets by a bankruptcy trustee, who then distributes the proceeds to creditors.

Chapter 13 authorizes an individual with regular income to obtain a discharge after the successful completion of a payment plan approved by the bankruptcy court. Under Chapter 7 the debtor’s nonexempt assets are controlled by the bankruptcy trustee; under Chapter 13 the debtor retains possession of his property. A proceeding that is commenced under Chapter 7 may be converted to a Chapter 13 proceeding and vice versa. *** The class of honest but unfortunate debtors who do possess an absolute right to convert their cases from Chapter 7 to Chapter 13 includes the vast majority of the hundreds of thousands of individuals who file Chapter 7 petitions each year. Congress sought to give these individuals the chance to repay their debts should they acquire the means to do so. Moreover, the unenforceability of a waiver of the right to convert functions as a consumer protection provision against contracts requiring a debtor to give up the right to convert to Chapter 13 as a nonnegotiable condition *** .

A statutory provision protecting a borrower from waiver, however, is not a shield against forfeiture. Nothing in the text of Section 706(a) of the Bankruptcy Code limits the authority of the court to take appropriate action in response to fraudulent conduct by the atypical litigant who has demonstrated that he is not entitled to the relief available to the typical debtor. On the contrary, the broad authority granted to bankruptcy judges to take any action that is necessary or appropriate “to prevent an abuse of process” is adequate to authorize an immediate denial of a motion to convert filed under Section 706(a) of the Bankruptcy Code in lieu of a conversion order that merely postpones the allowance of equivalent relief and may provide a debtor with an opportunity to take action prejudicial to creditors.

ANSWERS TO “TAKING SIDES” PROBLEMS Leonard and Arlene Warner sold the Warner Manufacturing Company to Elliott and Carol Archer for $610,000. A few months later the Archers sued the Warners in a state court for fraud connected with the sale. The parties settled the lawsuit for $300,000. The Warners paid the Archers $200,000 and executed a promissory note for the remaining $100,000. After the Warners failed to make the first payment on the $100,000 promissory note, the Archers sued for the payment in state court. The Warners then filed for bankruptcy under Chapter 7 of the Bankruptcy Code. The Archers claimed that the $100,000 debt was nondischargeable because it was for “money obtained by fraud.” Arlene Warner claimed that the $100,000 debt was

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 38: Bankruptcy

dischargeable in bankruptcy because it was a new debt for money promised in a settlement contract and thus it was not a debt for money obtained by fraud. a. What are the arguments that the debt is dischargeable in bankruptcy? b. What are the arguments that the debt is not dischargeable in bankruptcy? c. Explain whether the debt is dischargeable in bankruptcy.

Answer: (a) The settlement agreement and promissory note were a novation, which replaced an original potential debt to the Archers for money obtained by fraud with a new debt. The new debt was not for money obtained by fraud. It was for money promised in a settlement contract. Consequently, it was dischargeable in bankruptcy. (b) All debts arising out of fraud are not dischargeable, no matter what their form. The mere fact that a creditor has previously settled his fraud claim does not change the true nature of the debt. A debt embodied in the settlement of a fraud case still arises out of fraud. (c) It is nondischargeable. Archer v. Warner, U.S. Supreme Court, 2003, 538 U.S. 314, 123 S. Ct. 1462, 155 L. Ed. 2d 454. The Supreme Court held as follows: The Bankruptcy Code provides that a debt shall not be dischargeable in bankruptcy “to the extent” it is “for money…obtained by…false pretenses, a false representation, or actual fraud.” Can this language cover a debt embodied in a settlement agreement that settled a creditor’s earlier claim “for money…obtained by…fraud?” In our view, the statute can cover such a debt * * *.

The dischargeability provision applies to all debts that “arise out of” fraud. A debt embodied in the settlement of a fraud case “arises” no less “out of” the underlying fraud than a debt embodied in a stipulation and consent decree. We conclude that the Archers’ settlement agreement and releases may have worked a kind of novation, but that fact does not bar the Archers from showing that the settlement debt arose out of “false pretences, a false representation, or actual fraud,” and consequently is nondischargeable.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 39: Securities Regulation

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 39: Securities Regulation

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ..............................................................................13

ANSWERS TO ETHICAL DILEMMA Who Is Responsible for Commercial Speech?

1.

What should Jane do? What is best for (a) her company and (b) society? Should Jane raise her concerns to the department head?

2. Identify the competing social values at stake with regard to cigarette advertising. What role should the government play in regulating speech that promotes products such as tobacco and alcohol?

3. Should the age of Dazzling’s prospective audience influence the choice of advertisements?

Explain.

Answer: (1) One may argue that it is important for Jane to voice concerns about the cigarette advertisements, particularly in light of the company’s drive to target younger audiences. While she does have a commitment to helping her company maximize profits, and to indirectly benefit her fellow employees by doing so, her concern for the effect of the advertisements on the readers appears well-placed. Raising these concerns with the department head would allow him or her to make a managementlevel decision which would clarify the company’s commitment to its audience’s health and well-being.

(2) The competing interests include the freedom of speech and the need to regulate commercial speech to protect the public, and particularly minors. A further societal concern is a monetary one, based on the health costs which society must sustain due to illnesses resulting from smoking.

There is a wide range of views on the extent to which the government should regulate commercial speech. At one end of the spectrum is the view that all regulations should be removed. The other extreme is that a product as inherently dangerous as cigarettes should not be advertised at all.

(3) The age of the prospective audience may affect the degree to which the cigarette advertising is ethically (and legally) acceptable. The total message communicated to the reader is also a factor (e.g., cigarette advertisements juxtaposed with articles on health tips).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 39: Securities Regulation

It is enormously difficult to make distinctions with regard to the regulation of commercial speech in light of the large number of products, the range of users and uses, and the degree of product dangers.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Acme Realty, a real estate development company, is a limited partnership organized in Georgia. It is planning to develop a two-hundred-acre parcel of land for a regional shopping center and needs to raise $1.25 million. As part of its financing, Acme plans to offer $1.25 million worth of limited partnership interests to about one hundred prospective investors in the southeastern United States. It anticipates that about forty to fifty private investors will purchase the limited partnership interests. a. Must Acme register this offering? Why or why not? b. If Acme must register but fails to do so, what are the legal consequences?

Answer: (a) Acme's offering would be an offering of a security under the 1933 Act as limited partnership interests are almost always considered securities. So, Acme must register its offering of limited partnership interests unless exempt. Under these facts Acme could use Regulation A, which permits an issuer to offer up to $75 million of securities in any 12-month period without registering them if the issuer files notification and an offering circular with the SEC. The circular must also be provided to offerees and purchasers.

It is conceivable, though unlikely, that Acme could qualify for the private placement exemption. Securities sold under this exemption are restricted securities and may be resold only by registration or in a transaction exempt from registration. General advertising or solicitation is not permitted. The issue may be purchased by an unlimited number of "accredited investors" and by no more than thirty-five other purchasers. Accredited investors include banks, insurance companies, savings and loan associations, and investment companies, executive officers or directors of the issuer, registered broker-dealers, certain employee benefit plans and business entities with total assets in excess of $5 million, any natural person whose individual net worth, or joint net worth with that person’s spouse or spousal equivalent, exceeds $1 million, and any natural person who had an individual income in excess of $200,000 in each of the two most recent years, or joint income with that person’s spouse or spousal equivalent in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year, and (7) any natural person holding in good standing one or more professional certifications or designations or credentials from an accredited educational institution that the SEC has designated as qualifying an individual for accredited investor status. If the sale involves any nonaccredited investors, the issuer must, before the sale, give such purchasers specified information about the issuer, its business, and the securities being offered. If all the purchasers are accredited investors, such disclosure is not mandatory. The issuer must reasonably believe that each purchaser who is not an accredited investor has sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the investment or has the services of a representative who possesses such knowledge and experience. The issuer must notify the SEC of sales made under the exemption and must take precautions against nonexempt, unregistered resales.

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It is possible, but not likely, that Acme could qualify for the exemption provided to limited offers not exceeding $5,000,000, if it meets all of the requirements of Rule 505: General advertising or solicitation is not permitted. The issue may be purchased by an unlimited number of "accredited" purchasers and by no more than thirty-five other purchasers. If the sale involves any nonaccredited persons, they must be given prior to the sale information material to an understanding of the issuer, its business, and the securities being offered; otherwise, such information is not required. However, unlike Rule 506, the issuer is not required to reasonably believe that each nonaccredited investor, alone or with their representative, has such knowledge and experience in financial matters that they are capable of evaluating the merits and risks of the investment. The issuer must take precautions against nonexempt unregistered resales and must notify the SEC of sales made pursuant to the exemption.

Even less likely, although possible, is that Acme could qualify for an exemption under Section 4(6). To do so, only accredited persons may purchase not more than $5,000,000 of securities, no advertising is permitted, Acme must notify the SEC of the sale and take precautions against nonexempt, unregistered resales. (b) Acme is civilly liable under Section 12(a)(l) to any person who purchased the security from it. Such purchasers may rescind and recover the purchase price, or they may sue for damages. If Acme willfully failed to register, it is subject to criminal sanctions under Section 24.

2. Bigelow Corporation has total assets of $850,000; sales of $1,350,000; and one class of common stock with 375 shareholders and a class of preferred stock with 250 shareholders, both of which are traded over the counter. Explain which provisions of the Securities Exchange Act of 1934 apply to Bigelow Corporation.

Answer: Bigelow is subject to Section 10(b) of the 1934 Act and the anti-bribery provisions of the Foreign Corrupt Practices Act. Bigelow is not required to register under the 1934 Act because it is not listed on any national stock exchange, does not have assets in excess of $5 million, and does not have a single class of equity securities with 500 or more shareholders. It is not subject to the Act's periodic reporting requirements, the short-swing profits provision, the tender offer provision, the proxy solicitation provisions and the internal control and record keeping requirements of the Foreign Corrupt Practices Act. 3. Capricorn, Inc., is planning to “go public” by offering its common stock, which previously had been owned by only three shareholders. The company intends to limit the number of purchasers to twenty-five persons residing in the state of its incorporation. All of Capricorn’s business and all of its assets are located in its state of incorporation. Based on these facts, explain what exemptions from registration, if any, are available to Capricorn, and what conditions would each of these available exemptions impose on the terms of the offer.

Answer: (a) The most likely exemption would be the intrastate exemption. Rule 147 requires that: (1) the issuer is incorporated or organized in the state in which the issuance occurs; (2) the issuer is principally doing business in that state, which means that 80% of its gross revenues must be derived from that state, 80% of its assets must be located in that state, and 80% of the net proceeds from the issue must be used in that state; (3) all of the offerees and purchasers are residents of that state; (4) during the period of sale and for nine months after the last sale, no resales to nonresidents are made; and (5) precautions are taken against interstate

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distribution. The facts indicate that the first and second requirements have been met. If Capricorn also limits all the offerees to residents of the state of its incorporation and meets the fourth and fifth requirements, then the intrastate exemption would be available. (b) Rule 504 of the SEC provides private, noninvestment company issuers with an exemption from registration for small issues. The exemption requires that the aggregate offering price within twelve months does not exceed $10 million and that the issuer notifies the SEC of sales under the rule. If Capricorn meets these conditions (the dollar limitation in particular), Rule 504 would provide an exemption. (c) This regulation permits an issuer to offer up to $75 million of securities in any twelve-month period without registering them provided that the issuer files a notification and an offering circular with the SEC's regional office. The circular must also be provided to offerees and purchasers. The facts do not indicate how much securities are to be sold. If Capricorn plans to sell less than $75 million, then Regulation A would be available. (d) Rule 506 of the SEC establishes a nonexclusive safe harbor for limited offers and sales without regard to the dollar amount of the offering. Securities sold under this exemption are restricted securities and may be resold only by registration or in a transaction exempt from registration. General advertising or solicitation is not permitted. The issue may be purchased by an unlimited number of "accredited investors" and by no more than thirty-five other purchasers. Accredited investors include banks, insurance companies, savings and loan associations, investment companies, executive officers or directors of the issuer, registered broker-dealers, certain employee benefit plans and business entities with total assets in excess of $5 million, any natural person whose individual net worth, or joint net worth with that person’s spouse or spousal equivalent, exceeds $1 million, and any person who had an individual income in excess of $200,000 in each of the two most recent years, or joint income with that person’s spouse or spousal equivalent in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year, and (7) any natural person holding in good standing one or more professional certifications or designations or credentials from an accredited educational institution that the SEC has designated as qualifying an individual for accredited investor status.. If the sale involves any nonaccredited investors, the issuer must, before the sale, give such purchasers specified information about the issuer, its business, and the securities being offered. If all the purchasers are accredited investors, such disclosure is not mandatory. The issuer must reasonably believe that each purchaser who is not an accredited investor has sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the investment or has the services of a representative who possesses such knowledge and experience. The issuer must notify the SEC of sales made under the exemption and must take precautions against nonexempt, unregistered resales. The facts of this problem make it unlikely, although conceivable, that this exemption would be available to Capricorn. (e) Section 4(6) provides an exemption for offers and sales by an issuer made solely to accredited investors if not in excess of $5 million. General advertising or general solicitation is not permitted. Like Rules 505 and 506, an unlimited number of accredited investors may purchase the issue; however, unlike these rules, no unaccredited investors may purchase at all. No information is required to be furnished to the purchasers. Securities sold under this exemption are restricted

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securities and may be resold only by registration or in a transaction exempt from registration. The issuer must take precautions against nonexempt, unregistered resales and must notify the SEC of sales made pursuant to the exemption.

4. The boards of directors of DuMont Corp. and Epsot, Inc., agreed to enter into a friendly merger, with DuMont Corp. to be the surviving entity. The stock of both corporations was listed on a national stock exchange. In connection with the merger, both corporations distributed to their shareholders proxy statements seeking approval of the proposed merger.

The shareholders of both corporations voted to approve the merger. About three weeks after the merger was consummated, the price of DuMont stock fell from $25 to $13 as a result of the discovery that Epsot had entered into several unprofitable long-term contracts two months before the merger had been proposed. The contracts will result in substantial losses from Epsot’s operations for at least the next four years. The existence and effect of these contracts, although known to both corporations at the time of the proposed merger, were not disclosed in the proxy statements of either corporation. Can the shareholders of DuMont recover in a suit against DuMont under the 1934 Act? Explain.

Answer: Yes, decision for the shareholders of DuMont Corp. DuMont is subject to the proxy regulations of the 1934 Act as it was listed on a national exchange. These regulations require the issuer to furnish security holders with a proxy statement describing all material facts concerning the matter being submitted to their vote– i.e., the proposed merger with Epscot Inc. Without question, several unprofitable long-term contracts entered into by Epscot, which will result in substantial losses for at least four years, is a material fact. Omitting to disclose it renders the proxy statement false and misleading and makes the issuer liable to any person who suffers a loss caused by reliance upon the statement.

5. Farthing is a director and vice president of Garp, Inc., whose common stock is listed on the New York Stock Exchange. Farthing engaged in the following transactions in the same calendar year: on January 2, Farthing sold five hundred shares at $30.00 per share; on January 15, she purchased three hundred shares at $30 per share; on February 1, she purchased two hundred shares at $45 per share; on March 1, she purchased three hundred shares at $60 per share; on March 15, she sold two hundred shares at $55 per share; and on April 1, she sold one hundred shares at $40 per share. Howell brings suit on behalf of Garp, alleging that Farthing has violated the Securities Act of 1934. Farthing defends on the ground that she lost money on the transactions in question. Is Farthing liable? If so, under which provisions and for what amount of money? Explain.

Answer: Decision for Howell on behalf of Garp in the amount of $6,000. Even though Farthing lost $6,000 on these transactions, because she was an insider under Section 16 (b) and all the transactions were within six months of each other, she is liable for any profit realized. The profit recoverable is calculated by matching the highest sale price against the lowest purchase price within six months of each other. Losses cannot be offset against profits. The 200 shares sold for $55 will be matched with 200 of the shares purchased for $30. Then, the 100 shares sold for $40 will be matched with the remaining 100 shares purchased for $30. After that, all matches result in a loss which cannot be used to offset the recovery.

Accordingly: 200 ($55 - $30) = $5,000 100 ($40 - $30) = $1,000 Recovery = $6,000

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6. Intercontinental Widgets, Inc., had applied for a patent for a new state-of-the-art widget that, if patented, would significantly increase the value of Intercontinental’s shares. On September 1, the Patent Office notified Jackson, the attorney for Intercontinental, that the patent application had been approved. After informing Kingsley, the company’s president, of the good news, Jackson called his broker and purchased one thousand shares of Intercontinental at $18 per share. He also told his partner, Lucas, who immediately proceeded to purchase five hundred shares at $19 per share. Lucas then called his brotherin-law, Mammon, and told him the news. On September 3, Mammon bought four thousand shares at $21 per share. On September 4, Kingsley issued a press release that accurately reported that a patent had been granted to Intercontinental. On the next day, Intercontinental’s stock soared to $38 per share. A class action suit is brought against Jackson, Lucas, Mammon, and Intercontinental for violations of Rule 10b-5. Who, if anyone, is liable? Explain.

Answer: Jackson, Lucas, and Mammon are all liable for violating Rule 10b-5 by trading on inside information. When any person possesses material information regarding a security, which information is nonpublic and that person has reason to know it is nonpublic, they may not buy or sell that security without first disclosing the "inside information" or waiting until the information becomes public. The affirmative duty of disclosure extends beyond executives and directors to all employees and any person who is entrusted with the information solely for corporate purposes, as Jackson was. Moreover, Jackson's tippees—Lucas and Mammon—are also liable if they knew, or should have known, that Jackson had breached his fiduciary duty. Jackson, Lucas, and Mammon all traded before the press release was disseminated, and the information was material as indicated by the sharp increase in market price of stock after the press release.

It is unlikely that Intercontinental would be liable, as the press release was accurate. A possible basis could be the delay in issuing the press release.

7. Nova, Inc., sought to sell a new issue of common stock. It registered the issue with the SEC but included false information in both the registration statement and the prospectus. The issue was underwritten by Omega & Sons and was sold in its entirety by Periwinkle, Rameses, and Sheffield, Inc., a securities broker-dealer. Telford, who was unaware of the falsity of this information, purchased five hundred shares at $6.00 per share. Three months later, the falsity of the information contained in the prospectus was made public, and the price of the shares fell to $1.00 per share. The following week, Telford brought suit against Nova, Inc.; Omega & Sons; and Periwinkle, Rameses, and Sheffield, Inc., under the Securities Act of 1933. a. Who, if anyone, is liable under the 1933 Act? If liable, under which provisions? b. What defenses, if any, are available to the various defendants?

Answer: (a) Under Section 11, liability is imposed upon (1) the issuer; (2) all persons who signed the registration statement; (3) every person who was, or who consents to be named as being or about to become, a director or partner; (4) every accountant, engineer, appraiser, or expert who prepared or certified any part of the registration statement; and (5) all underwriters.

Under Section 12(a)(2) liability is imposed upon any person who offers or sells a security by means of a prospectus or oral communication that includes an untrue statement of material fact or an omission of a material fact. This would result in potential liability for Periwinkle, Ramses, and Sheffield, Inc.

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(b) Under Section 11 all defendants have the defense available that Telford knew of the untruth at the time of purchase. Moreover, any defendant, other than the issuer, may assert the defense of due diligence. This defense generally requires a showing that the defendant had reasonable grounds to believe that there were no untrue statements or material omissions. In some instances, due diligence requires that a reasonable investigation be made.

Under Section 12(a)(2) the seller has the defense available that the purchaser knew of the untruth at the time of purchase. In addition, the seller may avoid liability by proving that they did not know, and in the exercise of reasonable care could not have known, of the untrue statement or omission.

8. Tanaka, a director and officer of Deep Hole Oil Company, telephoned Romani for the purpose of buying two hundred shares of Deep Hole Company stock owned by Romani. During the period of negotiations, Tanaka concealed his identity and did not disclose the fact that earlier in the day he had received a report of two rich oil strikes on the oil company’s property. Romani sold his two hundred shares to Tanaka for $10 per share. Taking into consideration the new strikes, the fair value of the stock was approximately $20 per share.

Romani sues Tanaka to recover damages. Is Tanaka liable? If so, under which provisions and for what amount of money?

Answer: Tanaka is liable for damages to Romani. Section 10(b) of the Act and SEC Rule 10b-5 make it unlawful for any person by use of the mails or facilities of interstate commerce in connection with the purchase or sale of any security: (1) to employ any device, scheme, or artifice to defraud; (2) to make any untrue statement of a material fact; (3) to omit a material fact necessary to make the statements made not misleading; or (4) to engage in any transaction, practice, or course of business that operates or would operate as a fraud or deceit upon any person.

Rule 10b-5 applies to any purchase or sale of any security, whether it is registered under the 1934 Act or not, whether it is publicly traded or closely held, whether it is listed on an exchange or sold over the counter. There are no exemptions. Unlike the liability provisions of the 1933 Act, Rule 10b-5 applies to misconduct of purchasers as well as sellers and allows both defrauded sellers and buyers to recover. As in this problem, when an insider possesses material information regarding a security, which information is nonpublic and that person has reason to know it is nonpublic, they may not buy or sell that security without first disclosing the "inside information" or waiting until the information becomes public.

9. Venable Corporation has seven hundred and fifty thousand shares of common stock outstanding, which are owned by 2,640 shareholders. The assets of Venable Corporation are valued at more than $10 million. In March, Underhill began purchasing shares of Venable’s common stock in the open market. By April, he had acquired forty thousand shares at prices ranging from $12 to $14. Upon discovering Underhill’s activities in late April, the directors of Venable had the corporation purchase the forty thousand shares from Underhill for $18 per share. Explain which provisions of the 1934 Act, if any, have been violated.

Answer: Underhill has violated Section 14(e) of the 1934 Act regarding tender offers. Because Venable has assets in excess of $5 million and a class of equity securities with 500 or more shareholders, it is subject to the tender offer provisions of the 1934 Act. These provisions require any person that acquires more than 5 percent of a class of registered equity securities to file with the SEC a

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statement disclosing (1) the acquisitor’s background, (2) the source of the funds used to acquire the securities, (3) the purpose of the acquisition, (4) the number of shares owned, (5) the terms of the transaction, and (6) any relevant contracts, arrangements, or understandings. Underhill became subject to this requirement when he acquired more than 37,500 shares. His failure to file the required disclosures is a violation of the 1934 Act, and he is subject to civil and criminal sanctions.

10. Kirk was an officer of a New York broker-dealer firm who specialized in providing investment analysis of insurance company securities to institutional investors. On March 6, Kirk received information from Ronald Secrist, a former officer of Equity Funding of America. Secrist alleged that the assets of Equity Funding, a diversified corporation primarily engaged in selling life insurance and mutual funds, were vastly overstated as the result of fraudulent corporate practices. Kirk decided to investigate the allegations. He visited Equity Funding’s headquarters in Los Angeles and interviewed several officers and employees of the corporation. The senior management denied any wrongdoing, but certain corporation employees corroborated the charges of fraud. Neither Kirk nor his firm owned or traded any Equity Funding stock, but throughout his investigation he openly discussed the information he had obtained with a number of clients and investors. Some of these persons sold their holdings of Equity Funding securities, including five investment advisers who liquidated holdings of more than $16 million.

While Kirk was in Los Angeles, he was in touch regularly with William Blundell, The Wall Street Journal’s Los Angeles bureau chief. Kirk urged Blundell to write a story on the fraud allegations. Blundell did not believe, however, that such a massive fraud could go undetected and declined to write the story. He feared that publishing such damaging hearsay might be libelous.

During the two-week period in which Kirk pursued his investigation and spread word of Secrist’s charges, the price of Equity Funding stock fell from $26 per share to less than $15 per share. This led the New York Stock Exchange to halt trading on March 27. Shortly thereafter, California insurance authorities impounded Equity Funding’s records and uncovered evidence of the fraud. Only then did the Securities and Exchange Commission (SEC) file a complaint against Equity Funding.

The SEC began an investigation into Kirk’s role in the exposure of the fraud. After a hearing by an administrative law judge, the SEC found that Kirk had aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 by repeating the allegations of fraud to members of the investment community who later sold their Equity Funding stock. Has Kirk violated Section 10(b) and Rule 10b-5? Explain.

Answer: No, Kirk has not violated either Section 10(b) or Rule 10b–5. Judgment for Kirk. An insider is liable under Rule 10b-5 for insider trading only when they do not disclose material, nonpublic information before trading on it and thus makes "secret profits." This duty to disclose before trading arises from a fiduciary relationship between the insider and the shareholders of the corporation. A "tippee" assumes such a duty only if they receive information from the insider improperly. This occurs (1) when the insider has breached their fiduciary duty to the shareholders by disclosure to the tippee, and (2) the tippee knows or should know of the breach. The test is whether the insider personally will benefit from their disclosure. Absent personal gain, there is no breach of duty to the stockholders and, therefore, no derivative breach by the tippee.

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Here, Kirk was a stranger to Equity Funding, with no fiduciary duty to its shareholders. The insiders who provided him with the information did not intend to receive monetary gain from the disclosure. Rather, they were motivated by a desire to expose the fraud. The insiders breached no duty to the shareholders of Equity Funding. Therefore, there was no derivative breach by Kirk. Dirks v. Securities and Exchange Commission, 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983).

11. Texas Gulf Sulphur Company (TGS) was a corporation engaged in exploring for and mining certain minerals. A particular tract of Canadian land looked very promising as a source of desired minerals, and TGS drilled a test hole on November 8. Because the core sample of the hole contained minerals of amazing quality, TGS began to acquire surrounding tracts of land. Stevens, the president of TGS, instructed all on-site personnel to keep the find a secret. Because subsequent test drillings were performed, the amount of activity surrounding the drilling had resulted in rumors as to the size and quality of the find. To counteract these rumors, Stevens authorized a press release denying the validity of the rumors and describing them as excessively optimistic. The release was issued on April 12 of the following year, though drilling continued through April 15. In the meantime, several officers, directors, and employees had purchased or accepted options to purchase additional TGS stock on the basis of the information concerning the drilling. They also recommended similar purchases to outsiders without divulging the inside information to the public. At 10:00 a.m. on April 16, an accurate report on the find was finally released to the American financial press. The SEC brought an action against TGS and several of its officers, directors, and employees to enjoin conduct alleged to violate Section 10(b) of the Securities Act of 1934 and to compel rescission by the individual defendants of securities transactions assertedly conducted in violation of Rule 10b-5. Have any of the defendants violated Section 10(b)? Explain.

Answer: Judgment for SEC. Where corporate employees learn of information that is considered material as it relates to the investment market of their corporation's securities, they have no duty to disclose that information if there is a valid business reason for nondisclosure. However, these employees may not benefit from transactions in the corporation's securities until they effectively disclose the inside information to the public. Moreover, the corporation itself may be liable under Rule 10b-5 when it issues public statements relating to material information concerning a matter which could affect its stock in the market. In these public statements, the corporation must fully and fairly state facts upon which investors can reasonably rely.

1.

Here, individual defendants had purchased TGS stock from November 12 through April 16 on the basis of material inside information concerning the results of TGS's drilling in Canada, while such information remained undisclosed to the investing public generally or to the particular sellers of the stock; 2. Some of the defendants had divulged such inside information to others for use in purchasing TGS stock or had recommended its purchase while the information was undisclosed to the public or to sellers; and 3. Some of the defendants had accepted options to purchase TGS stock on February 20 without disclosing the material information as to the drilling progress to either the Stock Option Committee or the TGS Board of Directors.

Securities and Exchange Commission v. Texas Gulf Sulphur Co., 401 F.2d 833 (2nd Cir. 1968).

12. W. J. Howey Co. and Howey-in-the-Hills Service, Inc., were Florida corporations under direct common control and management. The Howey Company owned large tracts of citrus

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acreage in Florida. The service company cultivated, harvested, and marketed the crops. For several years, Howey Company offered one-half of its planted acreage to the public to help it “finance additional development.” Each prospective customer was offered both a land sales contract and a service contract with Howey-in-the-Hills after being told that it was not feasible to invest in the grove without a service arrangement. Upon payment of the purchase price, the land was conveyed by warranty deed. The service company was given full discretion over cultivating and marketing the crop. The purchaser had no right of entry to market the crop. The service company also was accountable only for an allocation of the net profits after the companies pooled the produce. The purchasers were predominantly nonresident businesspersons attracted by the expectation of substantial profits. Contending that this arrangement was an investment contract within the coverage of the Securities Act of 1933, the SEC brought an action against the two companies to restrain them from using the mails and instrumentalities of interstate commerce in the offer and sale of unregistered and nonexempt securities. Explain whether the SEC should succeed.

Answer: Judgment for the SEC. The land sale and service contracts constitute an investment contract within the scope of the Securities Act of 1933. By including investment contracts within the act, Congress chose a more flexible definition of a security so as to include any contract, transaction, or scheme whereby a person invests their money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party. Such a definition fulfills the statutory purpose of compelling full and fair disclosure relative to the issuance of the many types of instruments that in the commercial world fall within the ordinary concept of a security. The Securities Act prohibits the offer of unregistered, nonexempt securities as well as their sale. Therefore, if the companies merely offer the essential ingredients of an investment contract, that is enough to find a violation of the Securities Act. Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293 (1946).

13. Between December 4 and December 17, John Malone, a director and large shareholder of Discovery Communications, Inc., engaged in sales of Discovery’s “Series C” stock totaling 953,506 shares and purchases of Discovery’s “Series A” stock totaling 632,700 shares.

Discovery’s Series A stock and Series C stock are different equity securities, are separately registered, and are traded separately on the NASDAQ stock exchange under the ticker symbols DISCA and DISCK. The principal difference between the two securities is that Series A stock comes with voting rights whereas Series C stock does not confer any voting rights.

Series A stock and Series C stock are not convertible into each other. A shareholder brought a shareholder suit seeking disgorgement of the profits that Malone realized from these transactions. Explain whether the plaintiff should succeed.

Answer: The plaintiff should not succeed. An insider's purchase and sale of shares of different types of stock in the same company does not trigger liability under Section 16(b) of the 1934 Act, where those securities are separately traded, nonconvertible, and come with different voting rights. This problem is based on Gibbons v. Malone, 703 F.3d 595 (Court of Appeals, 2nd Circuit, 2013).

Section 16(b) of the 1934 Act provides, in relevant part: For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer ... within any period of less than six months ... shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner,

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director, or officer in entering into such transaction.... This subsection shall not be construed to cover ... any transaction or transactions which the [SEC] by rules and regulations may exempt as not comprehended within the purpose of this subsection.

15 U.S.C. §78p(b). Notably, although Section 16(b) is designed to curb the use of nonpublic knowledge by corporate "insiders," see note 1, ante, the provision offers merely the "prophylactic" remedy of disgorgement, Blau v. Lehman, 368 U.S. 403, 414, 82 S.Ct. 451, 7 L.Ed.2d 403 (1962), and "operates mechanically, with no required showing of intent" to profit from the use of inside information, At Home Corp. v. Cox Commc'ns, Inc., 446 F.3d 403, 407 (2d Cir. 2006). The statute, in other words, "imposes a form of strict liability." Credit Suisse Sec. (USA) LLC v.

Simmonds, ___ U.S. ___, 132 S.Ct. 1414, 1417, 182 L.Ed.2d 446 (2012) (internal quotation marks omitted).

As we have previously explained, "if the conversion can be paired with another ‘sale' or ‘purchase,' and the paired transactions occur within a six-month period, the paired transactions are ... the type of insider activity that Section 16(b) was designed to prevent," Blau v. Lamb, 363 F.2d 507, 517 (2d Cir. 1966), but transactions of securities that cannot be "paired" are not within the scope of Section 16(b). Cf. Foremost-McKesson, Inc. v. Provident Sec. Co., 423 U.S. 232, 24344, 96 S.Ct. 508, 46 L.Ed.2d 464 (1976) (short-swing profit rule applies to profits realized from "a pair" of securities transactions). The question presented is whether a sale of one security and a purchase of a different security issued by the same company can be "paired" under Section 16(b).

Congress's use of the singular term "any equity security" supports an inference that transactions involving different equity securities cannot be paired under Section 16(b). See At Home Corp., 446 F.3d at 408-09. As the District Court explained, correctly in our view: The text limits liability to profits realized from "the purchase and sale, or sale and purchase, of any equity security of the issuer." The drafters specifically chose to group "purchase and sale" and "sale and purchase" into single compounded units.

This indicates that, to incur Section 16(b) liability, an insider's "purchase and sale" or "sale and purchase" must both be directed at the same prepositional object— i.e., the same equity security.

Gibbons, 801 F.Supp.2d at 247; cf. Am. Standard, Inc. v. Crane Co., 510 F.2d 1043, 1058 (2d Cir. 1974) ("The statute speaks of ‘such issuer' in the singular. There is no room for a grammatical construction that would convert the singular into a plural."). The regulations promulgated by the SEC implicitly support this understanding of §16(b) by noting that that the statute covers the purchase and sale, or sale and purchase, of "a security," and by providing for an exception when the purchase and sale of "such security" meets certain conditions. 17 C.F.R. §240.16b-1. *** Accordingly, as we recently observed in passing, §16(b) applies to the purchase and sale, or sale of purchase, of "the same security." Analytical Surveys, Inc. v. Tonga Partners, L.P., 684 F.3d 36, 43 (2d Cir. 2012). Indeed, it has been our longstanding view that although §16(b) "might be read literally to permit a recovery where stock of one class is purchased and stock of another class sold," the likelihood "that

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Congress intended such a result is beyond the realm of judicial fantasy." Smolowe v. Delendo Corp., 136 F.2d 231, 237 n. 13 (2d Cir. 1943) (emphasis supplied). *** Discovery's Series A stock and Series C stock, however, are readily distinguishable.

Most importantly, Series A shares confer voting rights, whereas Series C shares do not. The two securities, therefore, are distinct not merely in name but also in substance. An insider could easily prefer one security over the other for reasons not related to short-swing profits. *** To summarize, we hold that an insider's purchase and sale of shares of different types of stock in the same company does not trigger liability under §16(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78p(b), where those securities are separately traded, nonconvertible, and come with different voting rights.

14. James O’Hagan was a partner in the law firm of Dorsey & Whitney in Minneapolis, Minnesota.

In July 1988, Grand Metropolitan PLC, a company based in London, England, retained Dorsey & Whitney as local counsel to represent Grand Met regarding a potential tender offer for the common stock of the Pillsbury Company, headquartered in Minneapolis. Both Grand Met and Dorsey & Whitney took precautions to protect the confidentiality of Grand Met’s tender offer plans. O’Hagan did no work on the Grand Met representation. On August 18, 1988, O’Hagan began purchasing call options for Pillsbury stock. Each option gave him the right to purchase one hundred shares of Pillsbury stock by a specified date in September 1988. Later in August and in September, O’Hagan made additional purchases of Pillsbury call options.

By the end of September, he owned two thousand five hundred unexpired Pillsbury options, apparently more than any other individual investor. In September 1988, O’Hagan also purchased five thousand shares of Pillsbury common stock at a price just under $39 per share. When Grand Met announced its tender offer in October, the price of Pillsbury stock rose to nearly $60 per share. O’Hagan then sold his Pillsbury call options and common stock, making a profit of more than $4.3 million. Explain whether O’Hagan violated the federal securities laws.

Answer: Yes. O’Hagan is liable under Section 10(b) and Rule 10b-5 based on the “misappropriation theory” of securities fraud. A person who trades in securities for personal profit using confidential information misappropriated in breach of a fiduciary duty to the source of the information may be held liable for insider trading under Rule l0b-5. His conduct also violates Rule 14e-3, which prohibits insider trading during a tender offer. United States v. O’Hagan, Supreme Court of the United States (1997), 521 U.S. 642, 117 S.Ct. 2199, 138 L.Ed.2d 724.

Under the “traditional” or “classical theory” of insider trading liability, Section 10(b) and Rule 10b-5 are violated when a corporate insider trades in the securities of their corporation on the basis of material, nonpublic information. Trading on such information qualifies as a “deceptive device” under Section 10(b) because “a relationship of trust and confidence [exists] between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation.” The classical theory applies not only to officers, directors, and other permanent insiders of a corporation but also to attorneys, accountants, consultants, and others who temporarily become fiduciaries of a corporation.

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The “misappropriation theory” holds that a person commits fraud “in connection with” a securities transaction and thereby violates Section 10(b) and Rule 10b-5, when they misappropriate confidential information for securities trading purposes, in breach of a duty owed to the source of the information. Under this theory, a fiduciary’s undisclosed, self-serving use of a principal’s information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that information. In lieu of premising liability on a fiduciary relationship between a company insider and the purchaser or seller of the company’s stock, the misappropriation theory premises liability on a fiduciaryturned-trader’s deception of those who entrusted him with access to confidential information.

The two theories are complementary, each addressing efforts to capitalize on nonpublic information through the purchase or sale of securities.

In this case, the indictment alleged that O’Hagan, in breach of a duty of trust and confidence he owed to his law firm, Dorsey & Whitney, and to its client, Grand Met, traded on the basis of nonpublic information regarding Grand Met’s planned tender offer for Pillsbury common stock. This conduct, the government charged, constituted a fraudulent device in connection with the purchase and sale of securities. The misappropriation at issue here was properly made the subject of a Section 10(b) charge because it meets the statutory requirement that there be “deceptive conduct” “in connection with” securities transactions.

ANSWERS TO “TAKING SIDES” PROBLEMS Basic, Inc., was a publicly traded company. Combustion Engineering, Inc., and Basic began discussions concerning the possibility of a merger of the two companies. During the next two years, Basic made three public statements denying that it was engaged in merger negotiations.

In December of the second year, Basic publicly announced its approval of Combustion’s offer for all its outstanding shares. Former owners of Basic stock who sold their shares after Basic publicly denied that it was engaged in merger negotiations brought a class action suit against Basic and its directors for having released false or misleading information in violation of Section 10(b) of the 1934 Act and Rule 10b-5. The plaintiffs claimed that they were injured by selling their shares at prices that were artificially depressed as a consequence of Basic’s misleading public statements. The defendants claimed that the plaintiffs had not proven that the plaintiffs had, in fact, relied upon the misleading statements in selling their stock. a. What are the arguments that the plaintiffs have satisfied the reliance requirement of Section 10(b) of the 1934 Act and Rule 10b-5? b. What are the arguments that the plaintiffs have not satisfied the reliance requirement of Section 10(b) of the 1934 Act and Rule 10b-5? c. Which side should prevail?

Answer: (a) The plaintiffs could argue that they had traded Basic shares in reliance on the integrity of the price set by the market. Because of the defendants’ material misrepresentations, that price had been fraudulently depressed. Under the “fraud-on-the-market” theory, in an efficient stock market, misleading statements will defraud purchasers of stock even if the purchasers do not directly rely on the misstatements.

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(b) The defendants could oppose the fraud-on-the-market theory by arguing that it effectively eliminates the requirement of proving reliance in claims under Section 10(b) of the 1934 Act and Rule 10b-5. Applying the fraud-on-the-market theory would result in the unfair result of permitting someone who sold Basic shares to recover for fraud even if the seller did not believe the defendants’ misleading statements. The defendants could also argue that at the time of the statements Basic was merely in preliminary negotiations and any statement would have been premature and in itself misleading. (c) The former shareholders should prevail. Basic Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194, Supreme Court of United States, 1988. A person who traded a corporation’s shares on a securities exchange after the issuance of a materially misleading statement by the corporation may invoke a rebuttable presumption that, in trading, they relied on the integrity of the price set by the market. The Court of Appeals found that Basic “made public, material misrepresentations” and found that the shareholders “sold Basic stock in an impersonal, efficient market.” The plaintiffs thereby “established the threshold facts for proving their loss.” The lower court was correct in applying a rebuttable presumption of reliance supported in part by the “fraud-on-themarket” theory, instead of requiring each plaintiff to show individual direct reliance on Basic’s statements. A presumption of reliance upon public information is warranted in an impersonal, efficient market. It would be extremely burdensome to require plaintiffs to prove that they personally knew about the misleading or false information and actually relied upon it. A presumption of reliance also is consistent with the legislative policy embodied in the 1934 Act. Congress expressly relied upon the fact that securities markets are affected by information and that a free and open market relies upon the theory that the market price reflects a just price. Furthermore, a presumption of reliance is supported by empirical evidence and common sense. Studies have confirmed the fact that market price generally reflects all publicly available information, and reasonable people would not take the risk of trading in a market in which such integrity of market price did not exist. Any showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or their decision to trade at a fair market price, will be sufficient to rebut the presumption of reliance.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 40: Intellectual Property

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 40: Intellectual Property

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ..............................................................................12

ANSWERS TO ETHICAL DILEMMA Who Holds the Copyright on Lecture Notes?

1.

Who does hold the copyright in this case? Did Rigsby act ethically in not seeking the professors’ permission? Should he be required to share a part of his profits as royalties with the professors whose classes are covered by his Take Note packages?

2. Are the students acting ethically in buying Rigsby’s Take Note packages? Does using one of Rigsby’s exam packages constitute cheating? Does employing someone else’s notes or old exam questions to study for an exam differ from using someone else’s notes or outline to write a term paper?

3. Is the University of the Midwest acting responsibly in scheduling such large classes? What responsibility does it have to protect students from an impersonal or inadequate education? Is the university acting responsibly toward its professors? How should the university protect a professor’s intellectual work?

Answer: 1. The question of copyright comes down to how one defines the property in question. Is it plagiarism or new work based on the professors' lectures? Since in all likelihood, only enrolled students would choose to buy the notes, have these students purchased anything they do not already have the right to: access to the words spoken by the professor in class? Whether Rigsby acted ethically or not depends on how one views the property involved. Obtaining the instructors’ permission would eliminate the legal and ethical problems, but not seeking it leaves all the problems raised by this dilemma.

2. Students who buy the packages obtain that which they legally could obtain by recording and transcribing the lecture. If a purpose of the course is note taking, then the issue of cheating could arise. If the student uses the notes instead of attending class, other ethical issues arise but the instructor’s attendance policy would be relevant. If the notes are already available to fraternities, then Rigsby’s note packages only “level the playing field” for all students.

3. These considerations are primarily resource allocation decisions by the university. To some extent, students accept large class size in return for a tuition that is lower than it would be with small classes. How a university protects a professor's intellectual work, however, could bring up legal questions of work for hire and individual authorship.

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ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Keller, a professor of legal studies at Rhodes University, is a diligent instructor. Late one night, while reading a newly published, copyrighted treatise of 1,800 pages written by Gilbert, he came across a three-page section discussing the subject matter he intended to cover in class the next day. Keller considered the treatment to be illuminating and therefore photocopied the three pages and distributed the copies to his class. One of Keller’s students is a second cousin of Gilbert, the author of the treatise, and she showed Gilbert the copies. May Gilbert recover from Keller for copyright infringement? Explain.

Answer: Probably not. It is most probable that Keller will be protected by the Copyright Act’s codification of the common law fair use doctrine. Section 107 of the Act provides that it is not an infringement to make fair use of a copyrighted work for purposes of, inter alia, teaching, including multiple copies for classroom use. In determining what is fair use the following factors are to be considered: (a) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (b) the nature of the copyrighted work; (c) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (d) the effect of the use upon the potential market for or value of the copyrighted work.

In that Keller taught at a nonprofit educational institution, made use of an insubstantial portion of the whole work (less than two-tenths of a percent) and distributed it to a group of undergraduates who would not likely have otherwise purchased the whole work, it appears that Keller comes clearly within the protection of the fair use doctrine.

2. Jennings conceived a secret process for the continuous freeze-drying of foodstuffs and related products and constructed a small pilot plant that practiced the process. However, Jennings lacked the financing necessary to develop the commercial potential of the process and, in hopes of obtaining a contract for its development and the payment of royalties, disclosed it in confidence to Merrick, a coffee manufacturer, who signed an agreement not to disclose it to anyone else. At the same time, Jennings signed an agreement not to disclose the process to any other person as long as Jennings and Merrick were considering a contract for its development. Upon Jennings’s disclosure of the process, Merrick became extremely interested and offered to pay Jennings the sum of $1.75 million if, upon further development, the process proved to be commercially feasible. While negotiations between Jennings and Merrick were in progress, Nelson, a competitor of Merrick, learned of the process and requested a disclosure from Jennings, who informed Nelson that the process could not be disclosed to anyone unless negotiations with Merrick were broken off. Nelson offered to pay Jennings $2.5 million for the process, provided it met certain defined objective performance criteria. A contract was prepared and executed between Jennings and Nelson on this basis, without any prior disclosure of the process to Nelson. Upon the making of this contract, Jennings rejected Merrick’s offer. The process was thereupon disclosed to Nelson, and demonstration runs of the pilot plant in the presence of Nelson representatives were conducted under varying conditions. After three weeks of observing experimental demonstrations, compiling data, and analyzing results, Nelson informed Jennings that the process did not meet the performance criteria in the contract and that for this reason Nelson was rejecting the process. Two years later, Nelson placed on the market freeze-dried coffee that resembled

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 40: Intellectual Property

in color, appearance, and texture the product of Jennings’s pilot plant. Discuss the rights of the parties.

Answer: Jennings may recover against Nelson the profits realized by Nelson for misappropriation of Jennings’s secret process, and is also entitled to an injunction against further use of the process by Nelson. The disclosure of the secret process to Nelson pursuant to the contract was confidential. Jennings had property rights in the secret process which are separate and distinct from patent rights. Jennings and Nelson might differ in opinion as to whether the process met all of the objective performance criteria, but even if the process failed to meet all of the performance criteria, after the confidential disclosure, Nelson would have no right to appropriate and use for his own benefit the knowledge acquired through the disclosure, without becoming accountable thereby to Jennings.

3. Stella, a chemist, was employed by Johnson, a manufacturer, to work on a secret process for Johnson’s product under an exclusive three-year contract. Johnson employed Dabney, a salesperson, on a week-to-week basis. Stella and Dabney resigned their employment with Johnson and accepted employment in their respective capacities with Washington, a rival manufacturer. Dabney began soliciting patronage from Johnson’s former customers, whose names he had memorized. Explain what the rights of the parties are in (a) a suit by Johnson to enjoin Stella from working for Washington and (b) a suit by Johnson to enjoin Dabney from soliciting Johnson’s customers.

Answer: (a) Johnson is entitled to enjoin Stella from working for Washington. Although a court of equity will not compel an individual to perform personal services for another pursuant to a contract, the court will in a proper case enjoin the defaulting employee from performing service for another in breach of contract. The granting of a negative injunction indirectly results in granting specific performance of a portion of the contract. However, such injunction will not be granted unless the court is satisfied that the services of the employee are unique. Ordinarily, the services of a chemist are not unique, but a unique situation exists in this case because Stella was working on a secret process and undoubtedly acquired confidential information and related know-how which she would impart to Johnson’s business rival Washington. The injury to Johnson would thus be irreparable. (b) Most likely, Johnson will succeed in obtaining an injunction. A former employee, even in the absence of an enforceable covenant not to compete, remains under a duty not to use or disclose, to the detriment of the former employer, trade secrets acquired in the course of their employment. Where the former employee seeks to use the trade secrets of the former employer in order to obtain a competitive advantage, then competitive activity can be enjoined or result in an award of damages. Whether a customer list is protected as a trade secret depends on three factual inquiries: (1) whether the list is a compilation of information; (2) whether it is valuable because it is unknown to others; and (3) whether the owner has made reasonable attempts to keep the information secret. The Uniform Trade Secrets Act does not distinguish between written and memorized information. The Act does not require a plaintiff to prove actual theft or conversion of physical documents embodying the trade secret information to prove misappropriation. If Johnson can satisfy the three requirements, he should be protected by the issuance of an injunction.

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4. Conrad and Darby were competitors in the business of dehairing raw cashmere, the fleece of certain Asiatic goats. Dehairing is the process of separating the commercially valuable soft down from the matted mass of raw fleece, which contains long coarse guard hairs and other impurities. Machinery for this process is not readily available on the open market. Each company in the business designed and built its own machinery and kept the nature of its process secret. Conrad contracted with Lawton, owner of a small machine shop, to build and install new improved dehairing machinery of increased efficiency for which Conrad furnished designs, drawings, and instructions. Lawton, who knew that the machinery design was confidential, agreed that he would manufacture the machinery exclusively for Conrad and that he would not reproduce the machinery or any of its essential parts for anyone else. Darby purchased from Lawton a copy of the dehairing machinery that Conrad had specially designed. What are Conrad’s rights, if any, against (a) Darby and (b) Lawton? Explain.

Answer: Conrad is entitled to an injunction and/or damages against Lawton and, possibly, Darby. There is no indication that the machine has been patented.

Nevertheless, the process and the new, improved machine used therein are trade secrets. Lawton has appropriated these trade secrets in violation of his agreement with Conrad. The issue here is whether Darby has also appropriated these trade secrets by purchasing a copy of the dehairing machine. In a case based on these facts, the defendant (Darby) was held to be liable for the tort of appropriation of trade secrets. Atlantic Wool Combing Co. v. Norfolk Mills, Inc., 357 F. 2d 866 (1st Cir. 1966).

5. Sally, having filed locally an affidavit required under the assumed name statute, has been operating and advertising her exclusive toy store for twenty years in Centerville, Illinois.

Her advertising has consisted of large signs on her premises reading “The Toy Mart.” Bob, after operating a store in Chicago under the name of “The Chicago Toy Mart,” relocated in Centerville, Illinois, and erected a large sign reading “TOY MART” with the word “Centerville” written underneath in substantially smaller letters. Thereafter, Sally’s sales declined, and many of Sally’s customers patronized Bob’s store, thinking it to be a branch of Sally’s business. Discuss the rights of the parties.

Answer: Sally should be entitled to obtain an injunction against Bob’s use of a name or sign which would mislead customers of Sally into thinking that Bob’s store was a branch of Sally business. Unfair competition is a question of fact and no inflexible rule can be stated as to what conduct will constitute unfair competition, the test being whether the public is likely to be deceived or misled. In order for unfair competition to exist in respect to a trade name, the name must have acquired a secondary meaning identifying it with Sally, and Bob must have unfairly used this name or a simulation thereof. In Radio Station KTLN, Inc. v. Steffen, 140 Colo. 596, 346 P. 2d 307, the court says: “In the determination of property interest in trademarks or names, we are guided by concepts that have been developed to protect the owner of a trademark or name and the public at large from unfair competition, confusion, in the public’s mind and false or misleading claims.” Courts have been diligent in protecting these property interests and have gone far to widen the scope of equitable relief.

If Sally can show that her trade name was widely known and accepted in the City of Centerville and that Bob’s trade name was used to draw Sally’s customers by misleading them into believing that they were doing business with Sally, while in fact they were doing business with Bob, the court would grant an injunction in favor of Sally against Bob.

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6. Ryan Corporation manufactures and sells a variety of household cleaning products in interstate commerce. On national television, Ryan falsely advertises that its laundry liquid is biodegradable. Has Ryan violated the Lanham Act? Explain.

Answer: Ryan has violated Lanham Act, Sect 43(a) by making false descriptions or representation of his own goods.

7. Gibbons, Inc., and Marvin Corporation are manufacturers who sell a variety of household cleaning products in interstate commerce. On national television Gibbons states that its laundry liquid is biodegradable and that Marvin’s is not. In fact, both products are biodegradable. Has Gibbons violated the Lanham Act? Explain.

Answer: Until 1988, a company would have violated the act if it misrepresented its own product, but would not have done so for misrepresenting another person’s goods, services, or commercial activities. In 1988, Section 43(a) was amended to prohibit misrepresentation of another person’s goods. Thus, Gibbons has violated the Lanham Act. 8. George McCoy of Florida has been manufacturing and distributing a cheesecake for more than five years, labeling his product with a picture of a cheesecake, which serves as a background for a Florida bathing beauty and under which is written the slogan “McCoy All Spice Florida Cheese Cake.” George McCoy has not registered his trademark.

Subsequently, Leo McCoy of California begins manufacturing a similar product on the West Coast using a label similar in appearance to that of George McCoy, containing a picture of a Hollywood star and the words “McCoy’s All Spice Cheese Cake.” Leo McCoy begins marketing his products in the eastern United States, using labels with the word “Florida” added, as in George McCoy’s label. Leo McCoy has registered his product under the Federal Trademark Act. To what relief, if any, is George McCoy entitled? Discuss.

Answer: George McCoy is entitled to injunctive relief against Leo McCoy’s use of George McCoy’s label in markets where George McCoy’s Cheese Cake was sold. George McCoy does not have an easy case to prove because of failure to register his trademark. However, lack of registration would not necessarily be fatal since registration does not give the registrant the absolute right to use a trademark, but rather presents a prima facie presumption of first use. George McCoy may be able to produce evidence to overcome this presumption of this case. See, Hanover Star Milling Co. v. Metcalf, 240 U.S. 403 at 415, 36 S. Ct. 357, 60 L. Ed. 713.

Leo McCoy would no doubt claim that the word “Florida” was geographical in nature and not protectable; but copying of geographic names has been enjoined where the name is employed for purposes of unfair competition by one manufacturing a product in other than the geographic area named, even though an injunction would be refused against a competitor manufacturing within the designated area.

As for the phrase “All Spice,” it is probably descriptive of the product and hence not subject to protection. “The validity of a trademark ends where suggestion ends and description begins.” Franklin Knitting Mills v. Fashionit Sweater Mills, 297 F. 247 (D.C.S.D.N.Y).

The picture of the bathing beauty is not unique, but the label itself may be protected against deliberate copying of design and colors to prevent unfair competition by Leo through the palming off of his product as that of George McCoy. As for the use of the name McCoy, courts are loathe to interfere with the use of one’s own name even though unfair competition may result, but protection may be given to the extent of

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requiring Leo McCoy in his advertising to use his full name on his labels as well as in his advertising.

9. Sony Corporation manufactured and sold home video recorders, specifically Betamax videotape recorders (VTRs). Universal City Studios, Inc. (Universal) owned the copyrights on some programs aired on commercially sponsored television. Individual Betamax owners frequently used the device to record some of Universal’s copyrighted television programs for their own noncommercial use. Universal brought suit, claiming that the sale of the Betamax VTRs to the general public violated its rights under the Copyright Act. It sought no relief against any Betamax consumer. Instead, Universal sued Sony for contributory infringement of its copyrights, seeking money damages, an equitable accounting of profits, and an injunction against the manufacture and sale of Betamax VTRs. Explain whether Universal will prevail in its action.

Answer: Judgment for Sony. The sale of copying equipment does not constitute contributory infringement if the product is widely used for legitimate, unobjectionable purposes. The product need merely be capable of substantial noninfringing uses.

Moreover, an unlicensed use of the copyright is not an infringement unless it conflicts with one of the five exclusive rights conferred by the Copyright Act. According to the act, a “fair use” is not an infringement.

Here, the Betamax VTRs were widely used to have television programs time-shifted to suit the VTR owner’s schedule. Under the “fair use” doctrine, proof that the noncommercial use of the copyrighted work would be harmful, or, if widespread, would adversely affect the potential market for the copyrighted work, is required to render the use an infringement. Sony demonstrated that substantial numbers of copyright holders of commercial television broadcasts would not object to timeshifting. Also, Universal failed to show that time-shifting would cause any substantial harm to the potential market for, or the value of their copyrighted works. The Betamax then is capable of substantial noninfringing uses. Consequently, Sony’s sale of such equipment to the general public does not constitute contributory infringement of Universal’s rights. Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984).

10. The Coca-Cola Company manufactures a carbonated beverage, Coke, made from coca leaves and cola nuts. The Koke Company of America introduced into the beverage market a similar product named Koke. The Coca-Cola Company brought a trademark infringement action against Koke. Coca-Cola claimed unfair competition within the beverage business due to Koke’s imitation of the Coca-Cola product and Koke’s attempt to reap the benefit of consumer identification with the Coke name. Should Coca-Cola succeed? Explain.

Answer: Yes, judgment for Coca-Cola. The name Coke has become associated with a specific product in the minds of consumers. The community assumes that any product named Coke comes from a single source. The name has acquired a secondary meaning which emphasizes the product more than the producer. The original producer, however, is entitled to derive the profits from the consumer response to its product.

Even though the name Coca-Cola was derived from its ingredients, the name of the beverage is associated with the final product by consumers and may not be duplicated by another manufacturer. The Coca-Cola Co. v. The Koke Co. of America, 254 U.S. 143, 41 S. Ct. 113, 65 L. Ed. 189 (1920).

11. Vuitton, a French corporation, manufactures high-quality handbags, luggage, and accessories. Crown Handbags, a New York corporation, manufactures and distributes ladies’ handbags. Vuitton handbags are sold exclusively in expensive department stores,

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and distribution is strictly controlled to maintain a certain retail selling price. The Vuitton bags bear a registered trademark and a distinctive design. Crown’s handbags appear identical to the Vuitton bags but are of inferior quality. May Vuitton recover from Crown for manufacturing counterfeit handbags and selling them at a discount? Explain.

Answer: Yes, Vuitton will prevail. Trademark law protects the goodwill of a trademark owner’s business and protects the public from buying goods of inferior quality and unknown origin. The Trademark Act provides that: (a) Any person who shall without consent of the registrant– (b) Use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark in connection with the sale, offering for sale, distribution, or advertising of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive…shall be liable in a civil action by the registrant…

It was Crown’s duty under this provision of the Trademark Act to avoid consumer confusion between its handbags and Vuitton’s antecedent products. Crown made no attempt to create dissimilar bags or inform the public that its bags were not Vuitton products. Vuitton et Fils v. Crown Handbags, 492 F. Supp. 1071 (S.D.N.Y. 1979).

12. T.G.I. Friday’s, a New York corporation and registered service mark, entered into an exclusive licensing agreement with Tiffany & Co. that allowed Tiffany to open a Friday’s restaurant in Jackson, Mississippi. International Restaurant Group, operated by the owners of Tiffany, applied for a license to open a Friday’s in Baton Rouge, Louisiana, but was refused. In Baton Rouge, International then opened a restaurant, called E.L. Saturday’s, or Ever Lovin’ Saturday’s, which had the same type of menu and decor as Friday’s. Friday’s sues International for trademark infringement. Explain who will prevail.

Answer: Judgment for International. The test for trademark infringement is whether confusion about the source of the product is caused. There is no such confusion in this case, however. The names T.G.I. Friday’s and Ever Lovin’ Saturdays are visually and phonetically dissimilar. In addition, the citizens of Baton Rouge are unfamiliar with Friday’s so there can be no source of confusion between the restaurants. T.G.I. Friday’s, Inc. v. International Restaurant Group, Inc., 569 F. 2d 895 (5th Cir. 1978).

13. As part of its business, Kinko’s Graphics Corporation (Kinko’s) copied excerpts from books, compiled them in “packets,” and sold the packets to college students. Kinko’s did this without permission from the owners of the copyrights to the books and without paying copyright fees or royalties. Kinko’s has more than 200 stores nationwide and reported $15 million in assets and $3 million in profits for 1989. Basic Books, Harper & Row, John Wiley & Sons, and others (plaintiffs) sued Kinko’s for violation of the Copyright Act. The plaintiffs owned copyrights to the works copied and sold by Kinko’s and derived substantial income from royalties. They argued that Kinko’s had infringed on their copyrights by copying excerpts from their books and selling the copies to college students for profit. Kinko’s admitted that it had copied excerpts without permission and had sold them in packets to students, but it contended that its actions constituted a fair use of the works in question under the Copyright Act. What is the result? Explain.

Answer: Judgment for all plaintiffs: Basic Books, Harper & Row, John Wiley & Sons, McGraw-Hill, Penguin Books, Prentice Hall, Richard D. Irwin, and William Morrow.

Coined as an “equitable rule of reason,” the fair use doctrine has existed for as long as the copyright law. It was codified in Section 107 of the Copyright Act of 1976, Article 17 of the United States Code. The Section reads in its entirety: Notwithstanding the provisions of Section 106, the fair use of a copyrighted work, including such use by

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reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include: (a) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (b) the nature of the copyrighted work; (c) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (d) the effect of the use upon the potential market for or value of the copyrighted work.

The use of the Kinko’s packets, in the hands of the students, was no doubt educational. However, the use in the hands of Kinko’s employees is commercial.

Kinko’s claims that its copying was educational and, therefore, qualifies as a fair use.

Kinko’s fails to persuade us of this distinction.

Kinko’s has not disputed that it receives a profit component from the revenue it collects for its anthologies. The amount of that profit is unclear; however, we need only find that Kinko’s had the intention of making profits. Its Professor Publishing promotional materials clearly indicate that Kinko’s recognized and sought a segment of a profitable market, admitting that “[t]remendous sales and profit potential arise from this program.” Basic Books, Inc. v. Kinko’s Graphics Corporation 758 F. Supp. 1522 (S.D.N.Y. 1991).

In 1996, the Sixth Circuit held that (1) a copy shop’s preparation of course packs was not fair use; (2) infringement was not willful, for purposes of awarding statutory damages; and (3) injunction prohibiting infringement could extend to future copyrighted works Princeton University Press v. Michigan Document Services, Inc., 99 F. 3d 1381 (1996).

14. In 1967, a Chicago brewer, Meister Brau, Inc., began making and selling a reduced-calorie, reduced-carbohydrate beer under the name “LITE.” Late in 1968, that company filed applications to register “LITE” as a trademark in the United States Patent Office, which ultimately approved three registrations of labels containing the name “LITE” for “beer with no available carbohydrates.” In 1972, Meister Brau sold its interest in the “LITE” trademarks and the accompanying goodwill to Miller Brewing Company. Miller decided to expand its marketing of beer under the brand “LITE.” It developed a modified recipe, which resulted in a beer lower in calories than Miller’s regular beer but not without available carbohydrates. The label was revised, and one of the registrations was amended to show “LITE” printed rather than in script. In addition, Miller undertook an extensive advertising campaign. From 1973 through 1976, Miller expanded its annual sales of “LITE” from 50 thousand barrels to 4 million barrels and increased its annual advertising expenditures from $500,000 to more than $12 million.

Beginning in early 1975, a number of other brewers, including G. Heileman Brewing Company, introduced reduced calorie beers labeled or described as “light.” In response, Miller began filing trademark infringement actions against competitors to enjoin the use of the word “light.” Should Miller be granted the injunction? Explain.

Answer: Preliminary injunction reversed. Miller claims that the original registration is evidence of their exclusive right to use the registered mark. The three registrations on which Miller relies, however, specify “beer with no available carbohydrates” as the

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goods on which the registered mark is to be used. This limitation came about because the Patent Office refused registration on the applications as initially filed, which described the goods as “beer,” on the ground that “LITE” was “merely descriptive” and therefore not registerable. In response, Meister Brau offered evidence of secondary meaning, “a no-available carbohydrates beer...” which also had “one-third less calories than ordinary draft beer,” and that “LITE” was suggestive rather than merely descriptive of these qualities. Therefore, the registrations provide the right to use the word “LITE” only for beer with no available carbohydrates. Miller Brewing Company v.

G. Heileman Brewing Company, Inc. 15. B. C. Ziegler and Company (Ziegler) was a securities company located in West Bend. It had established an internal procedure by which its customer lists were treated confidentially.

This procedure included burning or shredding any paper to be disposed of that contained a customer name or information. Nonetheless, Ziegler delivered a number of boxes of unshredded scrap paper to Lynn’s Waste Paper Company for disposal. One of Lynn’s employees, Ehren, who had been in the securities business and had worked for two of Ziegler’s competitors, noticed the information contained in the delivery from Ziegler and purchased six boxes of the Ziegler wastepaper for $16.75 from Lynn’s. Shortly thereafter, Ehren and his daughter sorted through the information and ultimately obtained 11,600 envelopes of information on Ziegler’s customers, including names, account summaries, and other information. Ehren sold this information to Thorson, a broker in competition with Ziegler. Thorson then sent a mailing to the Ziegler customers to solicit security sales for his firm and obtained an abnormally high response rate as a result. Ziegler, with the help of the West Bend Police Department, traced the dissemination of this information to Ehren and sought from the court a permanent injunction against Ehren using or disclosing the information regarding Ziegler’s clients. What is the result? Explain.

Answer: Ziegler would prevail. The court stated that in determining whether a trade secret exists under the common law, factors to be considered include (1) the extent to which the information is known outside the business of the party asserting trade secret status, (2) the extent to which it is known by the employees and others involved in the business, (3) the extent or measures taken to guard the secrecy of the information, (4) the value the information represents to party seeking to protect it and to that party’s competitors, (5) the amount of effort or money expended by the party developing the information, and (6) the ease or difficulty with which such information could be duplicated by others. Each factor should indicate that trade secrets exist if the information is to be afforded protection. Applying these factors, the court concluded that Ziegler’s customer information qualified for trade secret status. Ehren argued that trade secret status does not survive an accidental or negligent disclosure, but the court stated that trade secret status would be unimpaired even if there was negligent disclosure by Ziegler. Public policy would be harmed and it would be inequitable to allow Ehren to take advantage of Ziegler’s confidential information even though there was no wrongdoing on Ehren’s part in acquiring the information in the first place.

16. Since the 1950s, Qualitex Company has used a special shade of green-gold color on the pads that it makes and sells to dry cleaning firms for use on dry cleaning presses. In 1989, Jacobson Products (a Qualitex rival) began to sell its own press pads to dry cleaning firms, and it colored those pads a similar green-gold. In 1991, Qualitex registered the special green-gold color on press pads with the Patent and Trademark Office as a trademark.

Qualitex sued Jacobson for trademark infringement. Jacobson argues that the Lanham Act does not permit registering “color alone” as a trademark. Explain whether a trademark violation has been committed.

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Answer: Lanham Act gives a seller or producer the exclusive right to “register” a trademark, and to prevent his or her competitors from using that trademark. Both the language of the Act (trademarks “includ[e] any word, name, symbol, or device, or any combination thereof”) and the basic underlying principles of trademark law would seem to include color within the universe of things that can qualify as a trademark.

The courts and the Patent and Trademark Office have authorized for use as a mark a particular shape (of a Coca-Cola bottle), a particular sound (of NBC’s three chimes), and even a particular scent (of plumeria blossoms on sewing thread). If a shape, a sound, and a fragrance can act as symbols why, one might ask, can a color not do the same?

A color is also capable of satisfying the more important part of the statutory definition of a trademark, which requires that a person “us[e]” or “inten[d] to use” the mark “to identify and distinguish his or her goods, including a unique product, from those manufactured or sold by others and to indicate the source of the goods, even if that source is unknown.”

Over time, customers may come to treat a particular color on a product or its packaging (such as pink on a firm’s insulating material or red on the head of a large industrial bolt) as signifying a brand. And, if so, that color would have come to identify and distinguish the goods. In this circumstance, trademark law says that a word (or a color), although not inherently distinctive, has developed “secondary meaning.”

In principle, trademark law, by preventing others from copying a source-identifying mark, “reduce[s] the customer’s costs of shopping and making purchasing decisions, for it quickly and easily assures a potential customer that this item—the item with this mark—is made by the same producer as other similarly marked items that he or she liked (or disliked) in the past. At the same time, the law helps assure a producer that it (and not an imitating competitor) will reap the financial, reputation-related rewards associated with a desirable product.”

It would seem, then, that color alone, at least sometimes, can meet the basic legal requirements for use as a trademark. It can act as a symbol that distinguishes a firm’s goods and identifies their source, without serving any other significant function.

Qualitex’s green-gold press pad color has met these requirements; it acts as a symbol.

17. Napster, Inc. (“Napster”) facilitates the transmission of MP3 files between and among its users. Through a process commonly called “peer-to-peer” file sharing, Napster allows its users to: (1) make MP3 music files stored on individual computer hard drives available for copying by other Napster users; (2) search for MP3 music files stored on other users’ computers; and (3) transfer exact copies of the contents of other users’ MP3 files from one computer to another via the Internet. These functions are made possible by Napster’s MusicShare software, available free of charge from Napster’s Internet site, and Napster’s network servers and server-side software. The plaintiffs include A&M Records, Geffen Records, Sony Music Entertainment, MCA Records, Atlantic Recording Corporation, Motown Record Company, and Capitol Records. The plaintiffs are engaged in the commercial recording, distribution, and sale of copyrighted musical compositions and sound recordings. The plaintiffs allege that Napster is a contributory and vicarious copyright infringer. Explain whether Napster should be enjoined “from engaging in, or facilitating others in copying, downloading, uploading, transmitting, or distributing plaintiffs’ copyrighted musical compositions and sound recordings, protected by either federal or state law, without express permission of the rights owner.”

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Answer: Yes. The evidence establishes that a majority of Napster users use the service to download and upload copyrighted music, constituting direct infringement of plaintiffs’ musical compositions, recordings. Napster users who upload file names to the search index for others to copy violate plaintiffs’ distribution rights. Napster users who download files containing copyrighted music violate plaintiffs’ reproduction rights.

Liability for contributory copyright infringement exists if the defendant engages in “personal conduct that encourages or assists the infringement.” Contributory liability requires that the secondary infringer “know or have reason to know” of direct infringement. The district court found that Napster had both actual and constructive knowledge that its users exchanged copyrighted music. Under the facts as found by the district court, Napster materially contributes to the infringing activity. A&M Records, Inc. et al. v Napster Inc., 239 F. 3d 1004 (2001).

18. Bernard L. Bilski and Rand A. Warsaw sought patent protection for a claimed invention that explains how buyers and sellers of commodities in the energy market can protect, or hedge, against the risk of price changes. Claim 1 describes a series of steps instructing how to hedge risk. Claim 4 puts the concept articulated in claim 1 into a simple mathematical formula. The remaining claims explain how claims 1 and 4 can be applied to allow energy suppliers and consumers to minimize the risks resulting from fluctuations in market demand for energy. Bilski and Warsaw sought to patent both the concept of hedging risk and the application of that concept to energy markets. Explain whether a patent for this invention should be granted.

Answer: A patent should not be granted. Laws of nature, physical phenomena, and abstract ideas are not patentable. This problem is based on Bilski v. Kappos, 561 U.S. 593, 130 S. Ct. 3218, 177 L. Ed. 2d 792 (Supreme Court of the United States, 2010).

Section 101 of the Patent Act specifies four independent categories of inventions or discoveries that are eligible for protection: processes, machines, manufactures, and compositions of matter. The Supreme Court’s precedents provide three specific exceptions to Section 101’s broad patent-eligibility principles: “laws of nature, physical phenomena, and abstract ideas.” Even if an invention qualifies as a process, machine, manufacture, or composition of matter, to receive the Patent Act’s protection, the claimed invention must also satisfy additional requirements including novelty, nonobviousness, and a full and particular description.

This case involves an invention that is claimed to be a “process,” which Section 100(b) defines as a “process, art or method, and includes a new use of a known process, machine, manufacture, composition of matter, or material.” Three arguments have been advanced for the proposition that petitioner’s claimed invention is outside the scope of patent law: (1) it is not tied to a machine and does not transform an article, (2) it involves a method of conducting business, and (3) it is merely an abstract idea.

Supreme Court precedents establish that the machine-or-transformation test is a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under Section 101. However, the machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible “process.” The machine-or-transformation test may well provide a sufficient basis for evaluating processes similar to those in the Industrial Age—for example, inventions grounded in a physical or other tangible form. But there are reasons to doubt whether the test should be the sole criterion for determining the patentability of inventions in the Information Age.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 40: Intellectual Property

Section 101 similarly precludes the broad contention that the term “process” categorically excludes business methods. The term “method,” which is within Section 100(b)’s definition of “process,” may include at least some methods of doing business.

Thus, the Patent Act leaves open the possibility that there are at least some processes that can be fairly described as business methods that are within patentable subject matter under Section 101.

Petitioners seek to patent both the concept of hedging risk and the application of that concept to energy markets. The patent application at issue here falls outside of Section 101 because it claims an abstract idea. Claims 1 and 4 in petitioners’ application explain the basic concept of hedging, or protecting against risk: “Hedging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class.” The concept of hedging, described in claim 1 and reduced to a mathematical formula in claim 4, is an unpatentable abstract idea.

Allowing petitioners to patent risk hedging would preempt use of this approach in all fields and would effectively grant a monopoly over an abstract idea.

ANSWERS TO “TAKING SIDES” PROBLEMS Southwire Company and Essex Group, Inc. are direct competitors in the cable and wire industry. Southwire’s logistics system is a warehouse organizational system with components extending from architectural layout features to customized equipment and modified computer software. Southwire’s logistics system was primarily designed over a three-year period, with a development cost exceeding $2 million, by a project team headed by Richard McMichael. In addition to self-testing and a trial-and-error learning process, development of Southwire’s logistics system also included modifications based on observation of logistics systems in other industries and the adaptation of commercially-available components. The selection and arrangement of components and equipment in the new logistics system is unique to the Southwire logistics system. The new logistics system has resulted in substantial efficiencies to Southwire, with annual savings of $12 million. Because Southwire and its competitors produce basically identical goods for sale, the marketing advantage gained by the important efficiencies that have resulted from the new logistics system has proved especially valuable for Southwire. Essex hired McMichael, and Southwire brought suit against its former employee, McMichael, and his new employer, Essex, to enjoin McMichael from disclosing to Essex any Southwire trade secrets, particularly, trade secrets involving Southwire’s logistics system. a. What are the arguments in favor of the court not issuing the injunction? b. What are the arguments in favor of the court issuing the injunction? c. Explain whether the court should issue the injunction.

Answer: (a) Essex could argue that Southwire’s logistics system is not a trade secret because (i) it is composed primarily of computer hardware components and warehouse equipment that are commercially available, (ii) it may be independently discovered or ascertained by others, and (iii) it reflects only McMichael’s general knowledge, skill and experience. (b) Southwire could argue that its logistics system is trade secret even if it used known components and known techniques because it combined these elements to produce a useful process that is not known in the industry. In addition, trade secret information is protected until others have acquired it by proper means.

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Moreover, McMichael had information that specifically applied to the design and start-up of a logistics system for a cable and wire company. (c) The injunction should be issued. This is based on Essex Group, Inc. v. Southwire Co., 269 Ga. 553, 501 S.E. 2d 501 (Georgia Supreme Court, 1998). “The fact that some or all of the components of the trade secret are well-known does not preclude protection for a secret combination, compilation, or integration of the individual elements.” Restatement of the Law 3d, Unfair Competition. Although information is accorded trade secret status in part because it is not “readily ascertainable by proper means,” the Trade Secret Act recognizes that trade secrets may be acquired by others either through independent development or by reverse engineering and that the acquisition of trade secret information by these means is not improper in the absence of any misappropriation. Thus, the Act explicitly recognizes that trade secret information is protectable until others have acquired it by proper means. This position is consistent with that taken in the Restatement.

McMichael possessed not only general logistics information but also particularized information learned solely through his position of trust at Southwire. In conclusion, Essex sought to obtain, by the simple act of hiring McMichael, all the logistics information it had taken Southwire millions of dollars and years of testing and modifications to develop as part of Southwire’s plan to acquire a competitive edge over other cable and wire companies such as Essex.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 41: Employment Law

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 41: Employment Law

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ............................................................................. 14

ANSWERS TO ETHICAL DILEMMA What (Unwritten) Right to a Job Does an Employee Have?

1.

2.

3.

4.

5.

Should James have waited so long before reporting the problem to his supervisor?

Explain.

Does the nature of the product and the role of the employee affect the ethical considerations in such a decision? Assume, for example, that the juicer Gary produced would be potentially harmful if defective and consider, as well, his role in quality control.

How should a company handle alcohol and drug abuse among its employees?

Compare the goal of supporting recovering addicts with the need to ensure that the best employees are selected to perform a job.

How, if at all, should the state or federal government be involved in this type of situation?

Answer: 1. James should not have waited so long before reporting the problem. He should have considered his ethical obligations to perform his job in accordance with company policies, notwithstanding his personal affiliations, particularly where matters of public safety were at stake.

2. The nature of the product and the potential threat to public safety underscores the importance of following a company’s protective procedures regarding safety, inspections of products, etc.

3. Many take the position that companies should develop strategies such as recognition procedures, counseling, etc. which assist employees in overcoming substance abuse problems. Advice from psychologists may be useful in formulating specific employee programs. Admittedly, these efforts result in an additional cost to the business. The implications of these additional costs must be balanced against the social value in extending help to members of society with substance abuse problems. The hidden costs of failing to help individuals with substance abuse problems in terms of crime, and health costs should be weighed in this analysis.

4. There is a need to protect the public safety by selecting the best employees, and a competing need to have employment policies to support the disabled or addicted.

5. State or federal government involvement may be useful in providing funding for counseling programs, etc. This raises the question of the extent to which the private or public sector should bear the burden of this social problem.

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ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Gooddecade manufactures and sells automobile parts throughout the eastern part of the United States. Among its full-time employees are 220 fourteen- and fifteen-year-olds.

These teenagers are employed throughout the company and are paid at an hourly wage rate of $5 per hour. Discuss the legality of this arrangement.

Answer: This problem raises two Fair Labor Standards Act questions: (a) minimum wage and (b) child labor. Gooddecade is paying below the minimum wage. Second, by employing individuals on a full-time basis who are less than sixteen years of age Gooddecade has likewise violated the Act. The Act prohibits the employment of anyone under fourteen years in non-farm work with certain exceptions and only permits the employment of fourteen- and fifteen-year-olds for a limited number of hours (part-time) outside of school hours and only under special conditions.

2. Janet, a twenty-year-old woman, applied for a position driving a truck for Federal Trucking, Inc. Janet, who is 5’4” tall and weighs 135 pounds, was denied the job because the company requires that all employees be at least 5’6” tall and weigh at least 150 pounds. Federal justifies this requirement on the basis that its drivers are frequently forced to move heavy loads in making pickups and deliveries. Janet brings a cause of action. Has Federal Trucking violated the Civil Rights Act? Explain.

Answer: Yes. Janet would prevail under the Civil Rights Act of 1964. Height and weight tests are questionable on their face in that they disproportionately act across gender and hence the courts have placed upon employers the burden of justifying such restrictions. As stated in Griggs v. Duke Power the Civil Rights Act of 1964 prohibits “not only overt discrimination but also practices that are fair in form, but discriminatory in operation.”

In this situation other less arbitrary tests could be utilized, for instance Federal Trucking could have employed a strength test or could equip its truck with equipment to allow for the easier movement of heavy loads.

3. N. I. S. promoted John, a forty-two-year-old employee, to a supervisor’s position while passing over James, a fifty-eight-year-old employee. N. I. S. told James that he was too old for the job and that it preferred a younger man. Discuss whether James will succeed if he brings a cause of action.

Answer: James would succeed. The Age Discrimination in Employment Act protects individuals between the ages of forty and seventy for discrimination in hiring, firing, salaries or otherwise on the basis of age. In Moore v. Sears, F. Supp. 357 (1979) the United States district Court held that an employer violates the Age Discrimination Act if it favors a younger employee on the basis of age even if that younger employee does come within the protection of the Act; i.e., is between the ages of forty and seventy.

Thus, in this problem when N.I.S. promoted forty-two-year-old John over a fifty-eightyear-old James because it preferred the younger man, N. I. S. violated the law.

4. Anthony was employed as a forklift operator for Blackburn Construction Company. While on the job, he operated the forklift in a manner that was careless and in direct violation of Blackburn’s procedural manual and, as a result, caused himself severe injury. Blackburn denies liability based on Anthony’s (a) gross negligence, (b) disobedience of the procedural manual, and (c) written waiver of liability. Can Anthony recover for his injury? Explain.

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Answer: Under Worker’s Compensation laws an employee who is injured on the job is entitled to compensation regardless of fault. The amounts recoverable are established by state law for each type of injury sustained. In return, in the great majority of states, the employee forfeits his rights to bring a cause of action against the employer from injuries which come within the Act. The courts only have jurisdiction to review whether the state board or commission ruling is in accordance with the Act, therefore Anthony cannot bring an action at law against Blackburn.

5. Hazelwood School District is located in Sleepy Hollow Township. It is being sued by several teachers who applied for teaching positions with the school but were rejected. The plaintiffs, who are all African Americans, produce the following evidence: a. 1.8 percent of the Hazelwood School District’s certified teachers are African American, whereas 15.4 percent of the certified teachers in Sleepy Hollow Township are African American; and b. the hiring decisions by Hazelwood School District are based solely on subjective criteria.

What decision should be made? Explain.

Answer: In the case of Hazelwood School District v. United States, 433 U.S. 299, 97 S. Ct 2736, 53 L. Ed. 2d 768 (1977) the Supreme Court held that proof that 1.8% of a particular school district’s teachers were black while 15.4% of the region’s school teachers were black, when combined with subjective hiring practices that could have produced such a disproportionate result, is sufficient for a prima facie case of racial discrimination. In remanding the case to the U.S. Court of Appeals the Court was mindful that “When special qualifications are required to fill particular jobs comparisons to the general population rather than to the smaller group of individuals who possess the necessary qualifications may have little probative value.” Thus, the court only compared minority and non-minority certified teachers.

6. T. W. E., a large manufacturer, prohibited its employees from distributing union leaflets to other employees while on the company’s property. Richard, an employee of T. W. E., disregarded the prohibition and passed out the leaflets before his work shift began. T. W. E. discharged Richard for his actions. Has T. W. E. committed an unfair labor practice?

Explain.

Answer: The National Labor Relations Act provides the right to self-organize and declares certain conduct by an employer as unfair labor practices. An employer cannot prevent an employee during non-working hours from distributing union related information, provided he did not interfere with the work of others. An employer violates Section 8(a)(1) of the National Labor Relations Act when it threatens employees with reprisals or other unfavorable consequences as a result of their union activities. Since Richard’s activity occurred before his work shift began, and therefore did not interfere with his performance on the job, the T. W. E. prohibition would be deemed an unfair labor practice. Hence, T. W. E’s discharge of Richard is unlawful.

7. Erwick was dismissed from her job at the C&T Steel Company because she was “an unsatisfactory employee.” At the time, Erwick was active in an effort to organize a union at C&T. Discuss whether the dismissal is valid.

Answer: Under the National Labor Relations Act, it would be considered an unfair labor practice for C&T to interfere with its employees’ rights to unionize. Under the facts as stated, since Erwick was a union organizer and then dismissed, the burden of proof would fall upon C&T to demonstrate Erwick’s “unsatisfactory” performance and thereby its legitimate right to terminate Erwick.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 41: Employment Law

8. Johnson, president of the First National Bank of A, believes that it is appropriate to employ only female tellers. Hence, First National refuses to employ Ken Baker as a teller but does offer him a maintenance position at the same salary. Baker brings a cause of action against First National Bank. Is First National illegally discriminating based on gender? Why or why not?

Answer: Yes, this is discrimination; decision for Baker. First National’s hiring criteria based on gender is violative of the Civil Rights Act of 1964. Title VII of the Act prohibits discrimination on the basis of sex, race, color, religion, or national origin in the hiring, firing, compensating, or otherwise treating employees. First National’s belief that it is only appropriate for females to work as bank tellers is not a valid defense. The three basic defenses are: (1) a bona fide seniority system; (2) a professionally developed ability test; and (3) a bona fide occupational qualification. The third test does not encompass arbitrary and personal standards of opinion.

9. Section 103 of the Federal Public Works Employment Act establishes the Minority Business Enterprise (MBE) program and requires that, absent a waiver by the Secretary of Commerce, 10 percent of all federal grants given by the Economic Development Administration be used to purchase services or supplies from businesses owned and controlled by U.S. citizens belonging to one of six minority groups: African American, Spanish speaking, Asian, Native American, Eskimo, and Aleut. White owners of businesses contend that the act constitutes illegal reverse discrimination. Discuss.

Answer: The Act is Constitutional since Congress relied on its right to provide for the general welfare. Also, it could be argued that Congress had a rational basis for concluding that the prejudicial activities of primary contractors in not subcontracting to minorities had an effect on interstate commerce. The equal protection clause could also be relied upon here as a basis for breaking down barriers to minority firms.

10. Worth H. Percivil, a mechanical engineer, was employed by General Motors (GM) for twenty-six years until he was discharged. At the time his employment was terminated, Percivil was head of GM’s Mechanical Development Department. Percivil sued GM for wrongful discharge. He contends that he was discharged as a result of a conspiracy among his fellow executives to force him out of his employment because of his age, because he had legitimately complained about certain deceptive practices of GM, because he had refused to give the government false information although urged to do so by his superiors, and because he had, on the contrary, undertaken to correct certain alleged misrepresentations made to the government. General Motors claims that Percivil’s employment was terminable at the will of GM for any reason and with or without cause, provided that the discharge was not prohibited by statute. Has Percivil been wrongly discharged? Why or why not?

Answer: Judgment for General Motors. In the 1975 case which serves as the basis for this problem, Percival v. General Motors, 400 F. Supp. 1322, the court held that Percival’s “discharge did not involve a breach of public policy sufficient to state a cause of action for wrongful or retaliatory discharge." Simply because the discharge was unjustified does not create a cause of action unless it can be demonstrated that there existed compelling contractual, statutory, or public policy considerations. It should be noted also that the trend against the termination at will contract was a “newly emerging theory” at that time. The instructor could explore the possibility as to whether this case would be decided similarly by a court today. Percival v. General Motors, 400 F. Supp. 1322.

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11. Samsoc brought an action against the Sailors’ Union alleging that the Union induced and encouraged employees of Moore Dry Dock Company to engage in a strike or concerted refusal in the course of their employment to perform services for Moore in connection with the conversion into a bulk gypsum carrier of the S. S. Phopho, a vessel owned by Samsoc. The object was to force Moore to cease doing business with Samsoc and thus force Samsoc to resolve its dispute with the respondent. Has an unfair labor practice been committed? Explain.

Answer: The activity of the union is in violation of Section 8(b) of the Labor Management Relations Act. A secondary activity is a boycott, strike, or picketing of an employer with whom a union has no labor dispute in order to persuade the employer to cease doing business with the company that is the target of the labor dispute. The strike against Moore is secondary activity that is prohibited as an unfair labor practice.

In the Matter of Sailors’ Union Of The Pacific, AFL and Moore Dry Dock Company Case No. 20-CC-55, NLRB. 12. The United Steelworkers of America and Kaiser Aluminum entered into a master collective bargaining agreement covering terms and conditions of employment at fifteen Kaiser plants. The agreement contained an affirmative action plan designed to eliminate conspicuous racial imbalances in Kaiser’s then almost exclusively white craftwork forces.

African American craft-hiring goals were set for each Kaiser plant equal to the percentage of African Americans in the respective local labor forces. To meet these goals, on-the-job training programs were established to teach unskilled production workers—African Americans and whites—the skills necessary to become craftworkers. The plan reserved for African American employees 50 percent of the openings in these newly created in-plant training programs.

Pursuant to the national agreement, Kaiser altered its craft-hiring practice in its Gramercy, Louisiana, plant by establishing a program to train its production workers to fill craft openings. Selection of craft trainees was made on the basis of seniority. At least 50 percent of the new trainees were to be African American until the percentage of African American skilled craftworkers in the Gramercy plant approximated the percentage of African Americans in the local labor force. During this affirmative action plan’s first year of operation, thirteen craft trainees (seven African American, six white) were selected from Gramercy’s production workforce. The most senior African American selected had less seniority than several white production workers who were denied admission to the program. Does the affirmative action plan wrongfully discriminate against white employees and therefore violate the Civil Rights Act of 1964? Justify your decision.

Answer: No, the plan did not wrongfully discriminate against white employees; judgment for United Steelworkers of America. The Civil Rights Act of 1964 was primarily intended to open employment opportunities to African Americans in occupations that have been traditionally closed to them. It is not intended to prohibit the private sector from implementing voluntary, private affirmative action plans to accomplish this purpose.

Here, the Kaiser-USWA affirmative action plan promotes the Act’s goal of providing equal employment opportunities to African Americans without unnecessarily trammeling the interests of the white employees. It did not require the discharge of the white workers and their replacement with new African American hirees. Nor did the plan create an absolute bar to the advancement of white employees because half of those trained in the program were white. Furthermore, the plan was a temporary measure to eliminate manifest racial imbalance. Therefore, the Kaiser-USWA affirmative action plan did not violate the Civil Rights Act. United Steelworkers of America v. Weber, 443 U.S. 193, 99 S. Ct. 2721 (1979).

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13. At Whirlpool’s manufacturing plant in Ohio, overhead conveyors transported household appliance components throughout the plant. A wire mesh screen was positioned below the conveyors in order to catch falling components and debris. Maintenance employees frequently had to stand on the screens to clean them. Whirlpool began installing heavier wire because several employees had fallen partly through the old screens, and one had fallen completely through to the plant floor. At this time, the company warned workers to walk only on the frames beneath the wire but not on the wire itself. Before the heavier wire had been completely installed, a worker fell to his death through the old screen. A short time after this incident, Deemer and Cornwell, two plant employees, met with the plant safety director to discuss the mesh, to voice their concerns, and to obtain the name, address, and telephone number of the local Occupational Safety and Health Administration (OSHA) representative. The next day, the two employees refused to clean a portion of the old screen. They were then ordered to punch out for the remainder of the shift without pay and received written reprimands, which were placed in their employment files. Does Whirlpool’s actions against Deemer and Cornwell constitute discrimination in violation of the Occupational Safety and Health Act? Explain.

Answer: Judgment for the employees. The U.S. Supreme Court held that when an employee is ordered by his employer to work under conditions that the employee reasonably believes pose an imminent risk of death or serious bodily injury, and the employee has reason to believe that there is not sufficient time or opportunity to either seek effective redress from his employer or to apprise OSHA of the danger, he may refuse to expose himself to the dangerous condition, without being subjected to “subsequent discrimination” by his employer. Whirlpool v. Marshall, 445 U.S. 1.

14. The defendant, Berger Transfer and Storage, operated a national moving and transfer business employing approximately forty persons. In May and June, Local 705 of the International Brotherhood of Teamsters spoke with a number of Berger employees, obtaining twenty-eight cards signed in support of the union. The management of Berger, unwilling to work with the union, attempted to prevent it from representing Berger employees. The company first assigned all work to those with high seniority, in effect temporarily laying off low-seniority employees. The management then threatened to lay off permanently those with low seniority and threatened all employees with a total closedown of the plant. The management interrogated several employees about their union involvement and attempted to extract information about other employees’ activities.

When the union presented the company with the signed cards and recognition agreement, Berger refused to acknowledge the union’s existence or its right to bargain on behalf of the employees. The union then called a strike, with employees picketing the Berger warehouse. During the picketing, the company threatened to terminate the picketers if they did not return to work. Later, one manager on two occasions recklessly drove a truck through the picket line, striking employees. Finally, the company contacted several of the employees and offered them the “grievance procedures and job security” the union would provide. The employees refused the offer. On June 15, the strike ended, with most of the picketers returning to work. Local 705 filed a complaint with the National Labor Relations Board, alleging that Berger had committed unfair labor practices in violation of the National Labor Relations Act. Will Local 705 succeed? Explain.

Answer: N.L.R.B. order in favor of the union affirmed. The NLRB concluded that Berger had violated sections 8(a)(1), (3), and (5) of the Act. The board’s findings are supported by substantial evidence in the record. Berger committed eighteen 8(a)(1) violations, which may be classified as follows: (1) questioning employees about union activities, (2) threatening employees with termination, layoff, and plant closure, (3) creating the impression of surveillance of employees, (4) promising to redress employee

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complaints, (5) assaulting employees, and (6) actual layoff and termination of employees. These actions were all unfair labor practices under Section 8(a)(1) in that they tended to interfere with, restrain, or coerce employees in their exercise of the right of self-organization. Berger also violated Section 8(a)(3) of the Act, which makes it an unfair labor practice to discriminate against an employee in order to discourage membership in a labor organization, where such discrimination is “in regard to hire or tenure of employment or any term or condition of employment.” Berger discharged and laid off several employees and demoted another, all in reaction to union activities.

Finally, Section 8(a)(5) of the Act provides that an employer who has been presented with cards showing majority employee support for the union, and who has subsequently engaged in unfair labor practices, loses any right to demand an election and must bargain with the union. Berger violated this section of the Act as well. The union had valid authorization cards from twenty-eight of forty-two employees, but Berger met its request for recognition only with flagrant, unfair labor practices. NLRB v.

Berger Transfer & Storage, 678 F. 2d 679.

15. City of Richmond, Virginia (the City) adopted a Minority Business Utilization Plan requiring prime contractors awarded city construction contracts to subcontract at least 30 percent of the dollar amount of each contract to one or more Minority Business Enterprises (MBEs). The plan defined an MBE to include a business from anywhere in the United States that is at least 51 percent owned and controlled by African American, Spanish speaking, Asian, Native American, Eskimo, or Aleut citizens. Although the plan declared that it was “remedial” in nature, it was adopted after a public hearing at which no direct evidence was presented that the City had discriminated on the basis of race in letting contracts or that its prime contractors had discriminated against minority subcontractors.

The evidence introduced in support of the plan included a statistical study indicating that, although the City’s population was 50 percent African American, less than 1 percent of its prime construction contracts had been awarded to minority businesses in recent years.

Additional evidence showed that a variety of local contractors’ trade associations had virtually no MBE members. J. A. Croson Co., the sole bidder on a city contract, was denied a waiver and lost its contract because of the plan. Discuss the legality of the plan.

Answer: The Court affirmed in favor of Crosen. The Court noted that the distinction made in levels of review of affirmative action programs in the Fullilove and Wygandt opinions was proper. Under Fullilove, Federal affirmative action programs are not subject to a “strict scrutiny” review since Congress was acting pursuant to its unique enforcement powers under the Fourteenth Amendment. No such ability is preserved under the Fourteenth Amendment for non-federal governments. An affirmative action program implemented by non-federal governments, being racially based, is subject to review under the strict scrutiny test. A generalized assertion that there has been past discrimination in the entire construction industry cannot justify the use of an unyielding racial quota, since it provides no guidance for the City’s legislative body to determine the precise scope of the injury it seeks to remedy and would allow racebased decision-making to be essentially limitless in scope and duration. Moreover, the Plan is not narrowly tailored to remedy the effect of specific and localized prior discrimination, since it entitles a black, Hispanic, Indian, or Asian from anywhere in the United States to an absolute preference over other citizens based solely on their race.

Although many of the barriers to minority participation in the construction industry relied upon by the City to justify the Plan appear to be race neutral, there is no evidence that the City considered using alternative, race-neutral means to increase minority participation in City contracting. The Plan’s rigid 30% quota rests upon the completely unrealistic assumption that minorities will choose to enter the

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construction industry in exact proportion to their representation in the local population. City of Richmond v. JA Croson, 109 S. Ct. 706.

16. Burdine, a woman, was hired by the Texas Department of Community Affairs as a clerk in the Public Service Careers (PSC) Division. The PSC provides training and employment opportunities for unskilled workers. At the time she was hired, Burdine already had several years’ experience in employment training. She was soon promoted, and later, when her supervisor resigned, she performed additional duties that usually had been assigned to the supervisor. Burdine applied for the position of supervisor, but the position remained unfilled for six months, until a male employee from another division was brought in to fill it. Burdine alleges discrimination violating Title VII of the 1964 Civil Rights Act. The defendant, Texas Department of Community Affairs, responds that nondiscriminatory evaluation criteria were used to choose the new supervisor. To comply with Title VII, must the Texas Department of Community Affairs hire Burdine as supervisor if she and the male candidate are equally qualified? Explain.

Answer: No, the Texas Department of Community Affairs is not required to hire Burdine. Title VII prohibits employment discrimination on the basis of race, color, sex, religion, or national origin. However, Title VII does not require an employer to give preferential treatment to minorities or women. The statute was not intended to diminish traditional management prerogatives. An employer still has the discretion to choose among equally qualified candidates, as long as the choice is not based upon unlawful criteria as listed in Title VII. Texas Dept. of Community Affairs v. Burdine, 450 U.S. 248, 101 S. Ct. 1089. 67 L. Ed. 2d 207 (1981).

17. Wise was fired from her job at the Mead Corporation after she was involved in a fight with a coworker. On four other unrelated occasions, fights had occurred between male coworkers. Only one of the males was fired, but this was after his second fight, in which he seriously injured another employee. There is no dispute that Wise was qualified and performed her duties adequately. Wise successfully established a prima facie case of discrimination. However, the defendant, Mead Corporation, met its burden to “articulate legitimate and nondiscriminatory reasons” for firing Wise. Can she prevail? Explain.

Answer: Ms. Wise may still win this case. Plaintiff must first establish a prima facie case of discrimination by showing 1) she is a member of a protected class; 2) she was qualified for the job from which she was fired; and 3) the misconduct for which she was fired was similar to that engaged in by employees outside the protected class whom the employer retained. The burden then shifts to the defendant to “articulate some legitimate, non-discriminatory reason for the employee’s discharge.” Note, however, that this is only an intermediate burden of production, for the burden of persuasion never shifts to the defendant. The defendant need not persuade the court that it was motivated by the proffered reasons. Of course, failure to meet this burden of production would cause the plaintiff to win with no further showing. If the defendant meets this burden, the plaintiff may still prevail if she proves that the articulated reasons for discharge were in fact a pretext for discrimination. Plaintiff can prove pretext by convincing the trier of fact that discrimination was a more likely motivation, or that the employer’s stated reasons are not credible. Wise v. Mead Corp., 614 F. Supp 1131 (D.C. Ga. 1985).

18. John Novosel was employed by Nationwide Insurance Company for fifteen years. Novosel had been a model employee and, at the time of discharge, was a district claims manager and a candidate for the position of division claims manager. During Novosel’s fifteenth year of employment, Nationwide circulated a memorandum requesting the participation of all employees in an effort to lobby the Pennsylvania state legislature for the passage of a

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certain bill before the body. Novosel, who had privately indicated his disagreement with Nationwide’s political views, refused to lend his support to the lobby, and his employment with Nationwide was terminated. Novosel brought two separate claims against Nationwide, arguing, first, that his discharge for refusing to lobby the state legislature on behalf of Nationwide constituted the tort of wrongful discharge in that it was arbitrary, malicious, and contrary to public policy. Novosel also contended that Nationwide breached an implied contract guaranteeing continued employment so long as his job performance was satisfactory. What decision as to each claim? Explain.

Answer: Decision for Novosel—the allegation of breach of the implied contract on the part of Nationwide is a question of fact that must be decided by the fact-finder. A cause of action in tort for wrongful discharge is permitted under Pennsylvania law where the employment termination contradicts a significant and recognized public policy. Pennsylvania law does not directly address the public policy question at issue in this case, and Nationwide suggests that the only limit upon employee termination is the violation of some “statutorily recognized public policy.” Novosel’s tort action, however, is supported by the definition of a “clearly mandated public policy” as one that “strikes at the heart of a citizen’s social right, duties and responsibilities.” Clearly, society has a compelling interest in protecting an employee’s freedom of political expression. With respect to the breach of contract action, Pennsylvania law does not currently require just cause for employee discharges. Rapidly unfolding judicial developments, however, have addressed the contractual claims of non-union employees. Thus, Novosel’s allegations of breach of an implied contract on the part of Nationwide is a question of fact that should not be dismissed. Novosel v. Nationwide Insurance, 721 F. 2d 894.

19. During the years prior to the passage of the Civil Rights Act of 1964, Duke Power openly discriminated against African Americans by allowing them to work only in the labor department of the plant’s five departments. The highest paying job in the labor department paid less than the lowest paying jobs in the other four “operating” departments in which only whites were employed. In 1955, the company began requiring a high school education for initial assignment to any department except labor. However, when Duke Power stopped restricting African Americans to the labor department in 1965, it made completion of high school a prerequisite to transfer from labor to any other department. White employees hired before the high school education requirement was adopted continued to perform satisfactorily and to achieve promotions in the “operating” departments.

In 1965, the company also began requiring new employees in the departments other than labor to register satisfactory scores on two professionally prepared aptitude tests, in addition to having a high school education. In September 1965, Duke Power began to permit employees to qualify for transfer to another department from labor by passing either of the two tests, neither of which was directed or intended to measure the ability to learn to perform a particular job or category of jobs. Griggs brought suit against Duke Power, claiming that the high school education and testing requirements were discriminatory and therefore prohibited by the Civil Rights Act of 1964. Is Griggs correct? Why or why not?

Answer: Yes, judgment for Griggs. The 1964 Civil Rights Act is meant to achieve equality of employment opportunities and to remove barriers that have operated to favor white employees over other workers. The act prohibits not only overt discrimination but also practices, procedures, or tests that are fair in form yet discriminatory in practice. The standard is business necessity. If an employment practice works to exclude African Americans and does not relate to job performance, the practice is prohibited.

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In this case, even in departments that required a high school education and passing scores on the tests, employees lacking these qualifications were able to perform satisfactorily and make progress. Thus, Duke Power simply was not able to demonstrate that a high school education and scores on a general intelligence test were linked to successful job performance. Rather, the company’s requirements served covertly to discriminate and therefore were prohibited by the 1964 Civil Rights Act. Griggs v. Duke Power, 401 U.S. 424.

20. Michelle Vinson was an employee of Meritor Savings Bank for approximately four years.

Beginning as a teller-trainee, she ultimately advanced to the position of assistant branch manager. Her promotions were based solely upon merit. Sidney Taylor, a vice president of the bank and manager of the branch office in which Vinson worked, was Vinson’s supervisor throughout her employment with the bank. After the bank fired Vinson for her abusive use of sick leave, she brought an action against Taylor and the bank, alleging that during her employment she had “constantly been subjected to sexual harassment” by Taylor in violation of Title VII of the Civil Rights Act of 1964. At trial, Vinson introduced evidence that Taylor repeatedly demanded sexual favors from her, fondled her in front of other employees, and forcibly raped her on a number of occasions. Taylor and the bank categorically denied Vinson’s allegations. Does the conduct constitute sexual harassment?

Explain.

Answer: Judgment for Vinson affirmed. Title VII of the 1964 Civil Rights Act prohibits sexual discrimination in the workplace “against any individual with respect to his compensation, terms, conditions, or privileges of employment.” The Court of Appeals correctly held that a violation exists if sexual harassment creates a hostile or offensive working environment, even if employment benefits are not linked to sexual favors. The language of Title VII and guidelines issued by the Equal Employment Opportunity Commission in 1980 support this conclusion.

In contrast, the District Court’s finding that any sexual relationship between Vinson and Taylor “was a voluntary one” cannot be supported under Title VII. Vinson’s willingness is immaterial if Taylor allegedly made unwelcome advances or if he made her comply with his advances as a condition of her continued employment.

The Court of Appeals also erred, however, in holding that an employer is strictly liable for a hostile working environment created by a supervisor’s sexual advances even when the employer neither knows nor could reasonably know of the employee’s alleged misconduct. While lack of notice may not necessarily protect the employer from liability, Congress, by defining “employee” to include an “agent” of an employer, apparently intended to put limits on the acts of workers for which employers are held liable under Title VII. 21. Plaintiff, Beth Lyons, a staff attorney for the Legal Aid Society (Legal Aid) brought suit against her employer, alleging that Legal Aid violated the Americans with Disabilities Act (ADA) and the Rehabilitation Act by failing to provide her with a parking space near her office. Plaintiff worked for defendant in its lower Manhattan office.

Lyon’s disability was the result of being struck and nearly killed by an automobile. For six years from the date of the accident, Lyons was on disability leave from Legal Aid; she underwent multiple reconstructive surgeries and received “constant” physical therapy.

Since the accident, Lyons has been able to walk only by using walking devices, including walkers, canes, and crutches. Since returning to work Lyons has performed her job duties successfully. Nevertheless, her condition severely limits her ability to walk long distances either at one time or during the course of a day.

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Before returning to work, Lyons asked Legal Aid to accommodate her disability by providing her a parking space near her office and the courts in which she would practice.

She stated that this would be necessary because she is unable to take public transportation from her home in New Jersey to the Legal Aid office in Manhattan because such “commuting would require her to walk distances, climb stairs, and on occasion to remain standing for extended periods of time,” thereby “overtax[ing] her limited physical capabilities.” Lyons’s physician advised Legal Aid by letter that such a parking space was “necessary to enable [Lyons] to return to work.” Legal Aid informed Lyons that it would not pay for a parking space for her. Accordingly, Lyons has spent $300 to $520 a month, representing 15 percent to 26 percent of her monthly net salary, for a parking space adjacent to her office building. Are the accommodations requested by Lyons unreasonable? Why or why not?

Answer: As defined by the ADA, discrimination includes not making reasonable accommodations to the known physical or mental limitations of an otherwise qualified individual with a disability who is an applicant or employee, unless...[the employer] can demonstrate that the accommodation would impose an undue hardship on the operation of the...[employer’s] business. The Rehabilitation Act, which prohibits disability-based discrimination by government agencies and other recipients of federal funds, is similar.

Thus, under either the ADA or the Rehabilitation Act, a plaintiff can state a claim for discrimination based upon her employer’s failure to accommodate her handicap showing (1) that the employer is subject to the statute, (2) that she is an individual with a qualifying disability, (3) that, with or without reasonable accommodation, she could perform the essential functions of the job, and (4) that the employer had notice of the plaintiff’s disability. Of these four elements, the only question is whether Lyons’s request that Legal Aid provide her with a parking space near work is, as a matter of law, not a request for a “reasonable” accommodation (number 3 above).

Neither the ADA nor the Rehabilitation Act provides a closed-end definition of “reasonable accommodation.” The ADA’s nonexclusive list of different methods of accommodation includes (A) making existing facilities used by employees readily accessible to and usable by individuals with disabilities; and (B) job restructuring or reassignment to a vacant position, acquisition or modification of equipment or devices, appropriate adjustment or modifications of examinations, training materials or policies, the provision of qualified readers or interpreters, and other similar accommodations for individuals with disabilities. The regulations promulgated under the Rehabilitation Act use virtually the same language as the ADA. Additional regulations promulgated by the EEOC under the ADA state that the employer is required to provide [m]odifications or adjustments to the work environment, or to the manner or circumstances under which the position held or desired is customarily performed, but does not require the employer to make accommodations that are “primarily for personal benefit,” or to provide “any amenity or convenience that is not job-related.”

Legal Aid argues that Lyons’s claim for financial assistance in parking her car is a demand for unwarranted preferential treatment because the accommodation is “a matter of personal convenience that she uses regularly in daily life.”

Although the question of whether it is reasonable to require an employer to provide parking spaces may well be susceptible to differing answers depending on the employer’s location and financial resources, it is clear that Congress envisioned that

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employer assistance with transportation to get the employee to and from the job might be covered.

An accommodation may not be considered unreasonable merely because it requires the employer “to assume more than a de minimis cost,” or because it will cost the employer more overall to obtain the same level of performance from the disabled employee. Lyons v. Legal Aid, 68 F. 3d 1 51.

22. The Steamship Clerks Union has approximately 124 members, 80 of whom are classified as active. Members serve as steamship clerks who, during the loading and unloading of vessels in the port of Boston, check cargo against inventory lists provided by shippers and consignees. The work is not taxing; it requires little in the way of particular skills. On October 1, the Union formally adopted the membership sponsorship policy (the MSP), which provided that any applicant for membership in the Union (other than an injured longshoreman) had to be sponsored by an existing member for his application to be considered. The record reveals, without contradiction, that (1) the Union had no African American or Hispanic members when it adopted the MSP; (2) blacks and Hispanics constituted from 8 percent to 27 percent of the relevant labor pool in the Boston area; (3) the Union welcomed at least thirty new members over the next six years and then closed the membership rolls; (4) all “sponsored” applicants during this period and, hence, all the new members, were Caucasian; and (5) every recruit was related to (usually the son or brother of) a Union member.

After conducting an investigation and instituting administrative proceedings, the EEOC brought suit, alleging that the Union had discriminated against African Americans and Hispanics by means of the MSP. Explain whether or not the EEOC will prevail.

Answer: Broadly speaking, Title VII of the Civil Rights Act of 1964, outlaws discrimination based on race, color, religion, gender, or national origin. In so doing, the law forbids both “overt discrimination” in the form of disparate treatment, and more subtle forms of discrimination, known as disparate impact discrimination, arising from “the consequences of employment practices, not simply the motivation.”

Discrimination may result from otherwise neutral policies and practices that, when actuated in real-life settings, operate to the distinct disadvantage of certain classes of individuals. Thus, the disparate impact approach roots out “employment policies that are facially neutral in their treatment of different groups but that in fact fall more harshly on one group than another and cannot be justified by business necessity.”

In the disparate impact approach, the prima facie case consists of three elements: identification, impact, and causation. In this case, the district court adroitly applied the substantive law and concluded that the Union’s sponsorship-based membership policy constituted disparate impact discrimination. The EEOC carried its burden of producing facts sufficient to show the three elements essential to its prima facie case.

The first element—identification—requires no elaboration. The combined pool of potential black and Hispanic applicants for union membership ranged between 8% and 27% of the overall pool of potential applicants. Despite the fact that during the MSP’s heyday, the Union admitted 30 new members, no African American or Hispanic was granted Union membership. Based on a comparison of these figures, the district court found that the EEOC adequately demonstrated a race-based disparate impact.

Once the EEOC demonstrated a prima facie case of discrimination, the burden of production shifted. In the absence of any applicable statutory exemption, it became incumbent upon the Union either to mount a satisfactory empirical rebuttal or to show that the challenged practice was job-related and consistent with business necessity.

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The Union suggests that the MSP is job-related and consistent with business necessity because it represents an important vehicle for continuing family traditions. Most of the 30 new members, according to the Union, “joined simply because their fathers had been members and because they wanted to maintain a family tradition...” We approach the task of evaluating this rationale mindful that the meaning and scope of the “business necessity” concept are blurred at the edges. In the case at bar, however, such potential indeterminacy is of no consequence, for the Union’s “family tradition” thesis falls hopelessly short of being a business necessity. EEOC v. Steamship Clerks Union, local 1066, 48 F. 3d 594.

23. Johnson Controls implemented a policy that women who are pregnant or who are capable of bearing children would not be placed in jobs involving lead exposure. Employees filed a class action lawsuit challenging Johnson Controls’ fetal-protection policy as sex discrimination that violated Title VII of the Civil Rights Act of 1964. Among the individual plaintiffs were Mary Craig, who had chosen to be sterilized to avoid losing her job; Elsie Nason, a fifty-year-old divorcee, who had suffered a loss in compensation when she was transferred out of a job that exposed her to lead; and Donald Penney, who had been denied a request for a leave of absence for the purpose of lowering his lead level because he intended to become a father. Discuss whether the plaintiffs have a valid cause of action.

Answer: Yes, judgment for the petitioners. The bias in Johnson Controls’ policy is obvious. Fertile men, but not fertile women, are given a choice as to whether they wish to risk their reproductive health for a particular job. [T]he Civil Rights Act of 1964, [citation], prohibits sex-based classifications in terms and conditions of employment, in hiring and discharging decisions, and in other employment decisions that adversely affect an employee’s status. Respondent’s fetal-protection policy explicitly discriminates against women on the basis of their sex. The policy excludes women with childbearing capacity from lead-exposed jobs and so creates a facial classification based on gender.

24. Ella Williams began working at Toyota’s automobile manufacturing plant in Georgetown, Kentucky, in August 2010. She was placed on an engine fabrication assembly line, where her duties included work with pneumatic tools. Use of these tools eventually caused pain in her hands, wrists, and arms. She sought treatment at Toyota’s in-house medical service, where she was diagnosed with bilateral carpal tunnel syndrome and bilateral tendinitis.

Williams consulted a personal physician who placed her on permanent work restrictions that precluded her from lifting more than 20 pounds or from “frequently lifting or carrying of objects weighing up to 10 pounds,” engaging in “constant repetitive...flexion or extension of [her] wrists or elbows,” performing “overhead work,” or using “vibratory or pneumatic tools.” In light of these restrictions, for the next two years Toyota assigned Williams to various modified duty jobs. Nonetheless, Williams missed some work for medical leave and eventually filed a claim under the Kentucky Workers’ Compensation Act. The parties settled this claim, and Williams returned to work.

Upon her return, Toyota placed Williams on a team in Quality Control Inspection Operations (QCIO). QCIO is responsible for four tasks: (1) “assembly paint”; (2) “paint second inspection”; (3) “shell body audit”; and (4) “ED surface repair.” Williams was initially placed on a team that performed only the first two of these tasks, and for a couple of years, she rotated on a weekly basis between them. Williams was physically capable of performing both of these jobs and that her performance was satisfactory.

During the fall of 2016, Toyota announced that it wanted QCIO employees to be able to rotate through all four of the QCIO processes. Williams therefore received training for the

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shell body audit job, in which team members apply a highlight oil to the hood, fender, doors, rear quarter panel, and trunk of passing cars at a rate of approximately one car per minute. The highlight oil has the viscosity of salad oil, and employees spread it on cars with a sponge attached to a block of wood. After they wipe each car with the oil, the employees visually inspect it for flaws. Wiping the cars required respondent to hold her hands and arms up around shoulder height for several hours at a time.

A short while after the shell body audit job was added to Williams’ rotations, she began to experience pain in her neck and shoulders. However, she could still brush her teeth, wash her face, bathe, tend her flower garden, fix breakfast, do laundry, and pick up around the house. Williams requested that Toyota accommodate her medical conditions by allowing her to return to doing only her original two jobs in QCIO, which Williams claimed she could still perform without difficulty. Toyota refused. Subsequently Williams was terminated.

Williams sued Toyota for failing to provide her with a reasonable accommodation as required by the Americans with Disabilities Act (ADA). Explain whether Williams has a successful cause of action against Toyota.

Answer: Reasonable to qualify as disabled, a claimant must show that the limitation on the major life activity is “substantial.” To be substantially limited in performing manual tasks, an individual must have an impairment that prevents or severely restricts the individual from doing activities that are of central importance to most people’s daily lives. The impairment’s impact must also be permanent or long term.

The District Court noted that at the time respondent sought an accommodation from petitioner, she admitted that she was able to do the manual tasks required by her original two jobs in QCIO. In addition, according to respondent’s deposition testimony, even after her condition worsened, she could still brush her teeth, wash her face, bathe, tend her flower garden, fix breakfast, do laundry, and pick up around the house.

The record also indicates that her medical conditions caused her to avoid sweeping, to quit dancing, to occasionally seek help dressing, and to reduce how often she plays with her children, gardens, and drives long distances. But these changes in her life did not amount to such severe restrictions in the activities that are of central importance to most people’s daily lives that they establish a manual-task disability as a matter of law.

ANSWERS TO “TAKING SIDES” PROBLEMS Mark Hunger was the safety director at Grand Central Sanitation. On September 7, Hunger “became aware” that hazardous materials consisting of blasting caps were being deposited into garbage containers at Shu-Deb, Inc. Grand Central collected garbage from these containers and dumped it at a dump site. Hunger knew that Grand Central was not licensed to dispose of hazardous materials and believed that it would violate state and/or federal law if the company transported or disposed of hazardous materials. Hunger also became concerned about the safety of company employees from the danger of transporting blasting caps. On September 9, Hunger informed Grand Central’s owner and vice president, Gary Perin, of the information he received about the blasting caps. On September 12, Hunger, accompanied by Pennsylvania state police and agents of the Federal Bureau of Alcohol, Tobacco, and Firearms, went to search the contents of Shu-Deb’s containers. However, the garbage had already been collected, so Hunger and the police located the garbage truck that had collected the garbage and searched it. No hazardous materials were found in the truck.

On October 4, Hunger was terminated because of the incident. Hunger sued Grand Central for wrongful termination.

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a. What are the arguments that Hunger was wrongfully terminated? b. What are the arguments that Hunger was legally terminated? c. Will Hunger will prevail? Explain.

Answer: (a) Hunger’s discharge was wrongful due to the public-policy exception to the doctrine of at-will employment. Hunger was taking action that was to protect the public against dangers of transporting blasting caps. It is necessary to support individuals who are acting in good faith to protect the public. (b) Hunger was not correct in his assertion and thus does not come within the publicpolicy exception to the doctrine of at-will employment. Hunger should not be protected to make false claims against his employer. Grand Central did not do anything improperly. (c) Wrongful Termination—Hunger will not prevail. To state a public-policy exception to the at-will-employment doctrine, the employee must point to a clear public policy articulated in the constitution, in legislation, an administrative regulation, or a judicial decision. Furthermore, the stated mandate of public policy must be applicable directly to the employee and the employee’s actions. It is not sufficient that the employer’s actions toward the employee are unfair.

In this case, the claim is made (rightly) that it is illegal to transport hazardous materials without a license. However, Hunger admitted in his complaint that no blasting caps were discovered. Thus, Grand Central did not violate the law. If Hunger had observed a deliberate violation of the law, reported it to proper authorities, and was fired, then the reasoning of a public-policy exception may have been applicable. There is no indication that this occurred here.

The outcome of this case may have been different if Hunger had discovered that his employer was deliberately transporting hazardous materials after being told of the situation. That is not what occurred, regardless of Hunger’s concern with the public safety. The source of appellant’s “awareness” of the alleged illegal activities is completely unsubstantiated. Furthermore, his employer’s criminal intent is not established. At most, one of the employer’s customers allegedly was dumping illegal explosives. Hunger v. Grand Central Sanitation, Superior Court of Pennsylvania, 1996, 447 Pa. Superior Ct. 575, 670 A. 2d 173.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 42: Antitrust

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 42: Antitrust

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ............................................................................... 9

ANSWERS TO ETHICAL DILEMMA When Is an Agreement Anticompetitive?

1. Was Robert’s sense of discomfort with the discussion justified? Explain.

2. What action should Robert have taken?

3. Whose interests were at stake at this meeting? How might such a meeting affect the public, Sandra Renee, and the company’s competitors?

4. To what extent should employees be informed about the ethical and legal obligations of trade associations before attending meetings such as this?

5. What actions are open to an employee who disagrees with a company position that violates the law?

Answer: 1. Yes, his instinctive discomfort was justified. The agreement does not seem fair and may be unlawful.

2. Robert could have taken the opportunity to call his superior during the break. Perhaps he could have received some guidance on the best manner in which to deal with the situation. If the employer were to find nothing objectionable with the agreement, Robert would be faced with a difficult decision. He would then have to develop a strategy for extricating himself from the improper conduct.

3. The interest of the public, the manufacturers, the retailers, and the employees such as Robert are at stake.

4. Training is appropriate to inform employees of actions which constitute antitrust violations. Too often, it is mistakenly believed that a written policy will be sufficient in absolving the company of responsibilities.

5. An employee can register his or her objections to superiors and to the personnel department. Ultimately, however, if an employer engages in consistent patterns of violations, it is prudent for the employee to leave the job as soon as possible.

The extent to which the employee has an ethical duty to expose the employer to third parties or to the government is a difficult question and depends upon the facts and the severity of the offenses. The industry involved, the presence of danger to public safety, or the existence of a threat to the environment are among the numerous factors to consider.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 42: Antitrust

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Discuss the validity and effect of each of the following: a. A, B, and C, manufacturers of radios, orally agree that due to the disastrous, cutthroat competition in the market, they will establish a reasonable price to charge their purchasers. b. A, B, C, and D, newspaper publishers, agree not to charge their customers more than $0.30 per newspaper. c. A, a distiller of liquor, and B, A’s retail distributor, agree that B should charge a price of $5.00 per bottle.

Answer: (a) This horizontal price fixing agreement is a per se violation of Section 1 of the Sherman Antitrust Act. Socony Vacuum Oil Co. v. United States, 310 U.S. 150 (1940). (b) This maximum vertical price fixing agreement is a per se violation of Section 1 of the Sherman Antitrust Act. Albrecht v. The Herald Co., 390 U.S. 145 (1968). (c) This vertical resale price maintenance is a per se violation of Section 1 of the Sherman Act. Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).

2. Discuss the validity of the following: a. A territorial allocation agreement between two manufacturers of the same type of products, whereby neither will sell its products in the area allocated to the other. b. An agreement between manufacturer and distributor not to sell a dealer a particular product or parts necessary for the product’s repair.

Answer: (a) An agreement between competitors allocating territories for the sale of their respective products is a per se violation of the antitrust laws (Section 1 of the Sherman Act). United States v. Topco Assoc, 405 U.S. 596 (1972). (b) An agreement between a manufacturer and a distributor not to sell products to a particular dealer is a group boycott and a per se violation of the antitrust laws (Section 1 of the Sherman Antitrust Act). Klor’s v. Broadway Hale Stores, 359 U.S. 207 (1959).

3. Universal Video sells 40 percent of the video recording equipment in the United States. Onehalf of Universal’s sales is to Giant Retailer, a company that possesses 50 percent of the retail market. Giant seeks (a) to obtain an exclusive dealing arrangement with Universal or (b) to acquire Universal. Advise Giant as to the validity of its alternatives.

Answer: Both alternatives would violate the antitrust statutes. The exclusive dealership arrangement would tend to create a monopoly or might substantially lessen competition since both companies are rather large and powerful (Universal controls 40% of the total sales market while Giant controls 50% of the retail market).

Accordingly, this arrangement would run afoul of Section 3 of the Clayton Act. The acquisition would also violate the Clayton Act, Section 7, in that it might substantially lessen competition or tend to create a monopoly.

4. Z sells cameras to A, B, C, and D for $160 per camera. Y, one of Z’s competitors, sells a comparable camera to A for $148.50. Z, in response to this competitive pressure from Y, lowers its price to A to $148.50. B, C, and D insist that Z lower its price to them to $148.50, but Z refuses. B, C, and D sue Z for unlawful price discrimination. Decision?

Would your answer differ if Z reduced its price to A to $140? Explain.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 42: Antitrust

Answer: (a) Decision for Z. Z would possess a valid defense against a charge of illegally violating Section 2(a) of the Robinson-Patman Act in that Z was in good faith meeting the price of a competitor. Only A was receiving this lower price and Z could lawfully lower his price to A and not to B, C, and D. Of course, Z could have lawfully lowered his price to A, B, C, and D. (b) If Z lowered his price to A to $140.00, he would be in violation of the RobinsonPatman Act in that he was not meeting competition but was beating competition.

In order to lower his price to A to $140.00, Z would have to lower his price to $140.00 to B, C, and D. 5. Discount is a discount appliance chain store that continually sells goods at a price below manufacturers’ suggested retail prices. A, B, and C, the three largest manufacturers of appliances, agree that unless Discount ceases its discount pricing, they will no longer sell to Discount. Discount refuses, and A, B, and C refuse to sell to Discount. Discount contends that A, B, and C are in violation of antitrust law. Explain whether Discount is correct.

Answer: Decision for Discount. These facts provide a situation of per se violation of Section 1 of the Sherman Antitrust Act in that A, B, and C have jointly refused to deal (boycotted) with Discount.

6. Taylor Company produces 77 percent of the coal used in the United States. Coal provides 25 percent of the energy used in the United States. In a suit brought by the United States against Taylor for violation of the antitrust laws, what is the result? Explain.

Answer: There are two issues raised by these facts: (1) Whether Taylor possesses monopoly power in the relevant market–is the relevant market the coal market or all energy utilized in the United States. Seemingly, the relevant market would be the coal industry due to the limited substitutability of other energy sources for a coal system already in place. The interchangeability would be over the long-run and is not the short-run. See United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377 (1956). (2) Whether Taylor Company has engaged in any unlawful conduct. Since monopoly power alone is not sufficient to prove a violation of Section 2 of the Sherman Antitrust Act one must also find the illusive “plus” factor. The problem as here presented does not provide any such information; consequently, decision for Taylor.

7. Whirlpool Corporation manufactured vacuum cleaners under both its own name and under the Kenmore name. Oreck exclusively distributed the vacuum cleaners sold under the Whirlpool name. Sears, Roebuck & Co. exclusively distributed the Kenmore vacuum cleaners. Oreck alleged that its exclusive distributorship agreement with Whirlpool was not renewed because an unlawful conspiracy existed between Whirlpool and Sears. Oreck further contended that a per se rule was applicable because the agreement was (a) price fixing or (b) a group boycott, or (c) both. Who should prevail? Why or why not?

Answer: Judgment for Whirlpool. Oreck must demonstrate more than just an agreement between Whirlpool and Sears to eliminate his distributorship. Such an agreement violates Section 1 of the Sherman Act only where it is demonstrated that it is anticompetitive in purpose or effect. As a result, these agreements must be tested by the rule of reason.

8. Indian Coffee of Pittsburgh, Pennsylvania, marketed vacuum-packed coffee under the Breakfast Cheer brand name in the Pittsburgh and Cleveland, Ohio, areas. Folger Coffee, a leading coffee seller, began selling coffee in Pittsburgh. To make inroads into the new territory, Folger sold its coffee at greatly reduced prices. At first, Indian Coffee met

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 42: Antitrust

Folger’s prices but could not continue operating at such a reduced price and was forced out of the market. Indian Coffee brings an antitrust action. Explain whether Folger has violated the Sherman Act. Answer: Judgment for Folger’s. Here there is no evidence that Folger’s adopted some type of additional predatory practice in addition to the lowered prices. Pricing below marginal costs would be an example of impermissible market conduct. It also is not clear whether Folger’s might have acquired its market share as a result of a better product or superior implementation of marketing strategies available to all competitors.

9. Justin Manufacturing Company sells high-fashion clothing under the prestigious “Justin” label. The company has a firm policy that it will not deal with any company that sells below its suggested retail price. Justin is informed by one of its customers, XYZ, that its competitor, Duplex, is selling the “Justin” line at a great discount. Justin now demands that Duplex comply with the agreement not to sell the “Justin” line below the suggested retail price. Discuss the implications of this situation.

Answer: In a 2007 case, Leegin Creative Leather Products, Inc v. PSKS, Inc., the U.S. Supreme Court ruled that vertical price restraints are to be judged by the rule of reason. This decision overruled a 1911 U.S. Supreme Court decision that established the rule that it is per se illegal under Section 1 of the Sherman Act for a manufacturer to agree with its retailers to set the minimum price the retailer can charge for the manufacturer’s goods.

10. Jay Corporation, the largest manufacturer of bicycles in the United States with 40 percent of the market, has recently entered into an agreement with Retail Bike, the largest retailer of bicycles in the United States with 37 percent of the market, under which Jay will furnish its bicycles only to Retail, and Retail will sell only Jay’s bicycles. The government is now questioning this agreement. Discuss.

Answer: The agreement would violate Section 3 of the Clayton Act in that this exclusive dealing relationship would tend to create a monopoly or might substantially lessen competition. Parties with as much market power as Jay (40%) and Retail (37%) are too powerful to permit to enter into an exclusive dealing agreement.

11. Von’s Grocery, a large retail grocery chain in Los Angeles, sought to acquire Shopping Bag Food Stores, a direct competitor. At the time of the proposed merger, Von’s sales ranked third in the Los Angeles area and Shopping Bag’s ranked sixth. Both chains were increasing their number of stores. The merger would have created the second largest grocery chain in Los Angeles, with total sales in excess of $170 million. Prior to the proposed merger, the number of owners operating single stores declined from 5,365 to 3,590 over a thirteen year period. During this same period, the number of chains with two or more stores rose from 96 to 150. The United States brought suit against Von’s to prevent the merger, claiming that the proposed merger violated Section 7 of the Clayton Act in that it could result in the substantial lessening of competition or could tend to create a monopoly.

Explain what the result should be.

Answer: Judgment for the United States. The fundamental purpose behind Section 7 of the Clayton Act is to prevent economic concentration by keeping a large number of small competitors in business. The language of Section 7 looks not only to a present danger of concentration but also to a merger’s impact on future competition. Thus, to preserve competition, a trend toward concentration should be arrested in its early stages, before the market falls into the hands of a few big companies.

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Here, in the Los Angeles area, the number of single owner stores was decreasing substantially, while the number of chains was on a marked rise. This is the type of trend toward concentration that the Clayton Act addresses. Since the proposed merger between Von’s and Shopping Bag contributes significantly to this trend, it is prohibited. Furthermore, Von’s cannot argue that the two stores had to merge to save themselves from business failure or from destruction by some larger competitor. Both were already powerful companies merging in a way that would make them even more powerful. US v. Von’s Grocery Co., 384 U.S. 270, 86 S. Ct. 1478, 16 L. Ed. 2d 555 (1966).

12. Boise Cascade Corporation is a wholesaler and retailer of office products. The FTC issued a complaint charging that Boise had violated the Robinson-Patman Act by receiving a wholesaler’s discount from certain suppliers on products that Boise resold at retail, in competition with other retailers that could not obtain wholesale discounts. Has the Robinson-Patman Act been violated? Explain.

Answer: Judgment for FTC. This case deals with functional (in this case as a wholesaler) discounts, which occur when one buyer is allowed to purchase a product at a lower price than another buyer. Functional discounts are usually justified by the marketing functions provided by the favored buyer, such as, in the case of a wholesaler, warehousing inventory, publishing product catalogs, and furnishing sales assistance to dealers. Indeed, Boise claims that the discounts on the prices it pays represent the value of the distributional services it performs. Boise, a wholesaler and retailer, however, receives a wholesaler’s discount on all goods purchased. It then makes retail sales in competition with dealers who perform distributional functions similar to Boise but who cannot obtain the wholesaler discount because they do not make wholesale sales. Yet the discounts received by Boise on goods resold at retail are only illegal if they cause injury to these competing retailers. Boise maintains that there is no competitive injury since the price difference is no greater than its costs of performing services. The fact remains, though, that Boise purchases goods at lower prices than are available to other dealers and can thus price its goods lower than its competitors at retail. Boise also argues that the discounts it receives are available to other retailers. According to Boise, a retailer can obtain the same prices Boise gets from its suppliers by becoming a wholesaler too, or a retailer can look to other suppliers for equally low prices. The first suggestion is impractical in that it would require the purchaser to change his purchasing status, and as for the second idea, the record indicates that equivalent goods were not available on comparable terms from alternative suppliers. Therefore, the price advantage received by Boise did result in competitive injury to other retailers and was hence a violation of the Robinson-Patman Act. In Re Boise Cascade Corp., 50 ATRR 335 (1986).

13. Great Atlantic and Pacific Tea Company desired to achieve cost savings by switching to the sale of “private label” milk. A&P asked Borden Company, its longtime supplier of “brand label” milk, to submit a bid to supply certain A&P private label dairy products. A&P was not satisfied with Borden’s bid, however, so it solicited other offers. Bowman Dairy, a competitor of Borden’s, submitted a lower bid. At this point, A&P contacted Borden and asked it to rebid on the private label contract. A&P included a warning that Borden would have to lower its original bid substantially in order to undercut Bowman’s bid. Borden offered a bid that doubled A&P’s potential annual cost savings. A&P accepted Borden’s bid.

The FTC then brought this action, charging that A&P had violated the Robinson-Patman Act by knowingly inducing or receiving illegal price discrimination from Borden. Discuss whether the FTC is correct in its allegations.

Answer: Judgment for A&P. A buyer cannot be held liable for knowingly inducing or receiving illegal price discrimination from a seller unless the seller itself could be

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found liable. Here, Borden has a valid meeting competition defense. Accordingly, since A&P has done no more than accept the lower of two prices competitively offered, it did not violate the price discrimination prohibition of the Robinson-Patman Act. Great Atlantic & Pacific Tea Co. v. Federal Trade Comm. United States Supreme Court, 1979.

440 U.S. 69, 99 S. Ct. 925, 59 L. Ed. 2d 153.

14. Clorox is the nation’s leading manufacturer of household liquid bleach (accounting for 49 percent—$40 million—of sales annually) and is the only brand sold nationally. Clorox and its next largest competitor, Purex, hold 65 percent of national sales; and the top four bleach manufacturers control 80 percent of sales. Because all bleach is chemically identical, Clorox spends more than $5 million each year in advertising to attract and keep customers.

Procter & Gamble is the dominant national manufacturer of household cleaning products, with yearly sales of $1.1 billion. As with bleach, advertising is vital in the household cleaning products industry. Procter & Gamble annually spends more than $127 million in advertising and promotions. Procter & Gamble decided to diversify into the bleach business because its household cleaning products and bleach are both low-cost, highturnover consumer goods, are dependent on mass advertising, and are sold to the same customers at the same stores by the same merchandising methods. Procter & Gamble decided to merge with Clorox, rather than start its own bleach division, in order to secure the dominant position in the bleach market immediately. Should the FTC take action against this merger, and if so, what decision should it make? Explain.

Answer: The merger between Procter & Gamble and Clorox violated Section 7 of the Clayton Act. Procter & Gamble had sought to expand its product line by adding household bleach to it. The Court noted that the markets for the products of each of the companies were highly concentrated markets, that is, they were already dominated by a few companies. Thus, barriers to entry by potential competitors were already high, and competition was at a minimum. Justice Douglas gave the majority opinion: “In the marketing of soaps, detergents, and cleansers, as in the marketing of household bleach, advertising and sales promotion are vital. The substitution of Procter with its huge assets and advertising advantages for the already dominant Clorox would dissuade new entrants and discourage active competition from the firms already in the industry due to fear of retaliation by Procter.” Federal Trade Commission v. Procter & Gamble Co., 386 U.S. 568, 87 S. Ct. 1224 (1967).

15. The National Collegiate Athletic Association (NCAA) adopted a plan for televising college football games to reduce the adverse effect of TV coverage on spectator attendance. The plan limited the total number of televised intercollegiate football games and the number of games any one school could televise. No member of the NCAA was permitted to sell any television rights except in accordance with the plan. As part of the plan, the NCAA had agreements with the American Broadcasting Company (ABC) and the Columbia Broadcasting System (CBS) to pay to each school at least a specified minimum price for televising football games. Several member universities now join to bring suit against the NCAA, claiming the new plan is a horizontal price fixing agreement and output limitation and as such is illegal per se. The NCAA counters that the existence of the product, college football, depends upon member compliance with restrictions and regulations. According to the NCAA, its restrictions, including the television plan, have a procompetitive effect. Is the television plan a reasonable restraint? Explain.

Answer: The U.S. Supreme Court held that the NCAA’s television plan violated Section 1 of the Sherman Act. The court recognized that a certain degree of cooperation was necessary to college sports and applied the rule of reason, rather than a per se

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analysis. In applying the rule of reason, the court concluded that the television regulations operated to raise the price and reduce the output of televised college football. In this industry, however, the Court found that “horizontal restraints on competition are essential if the product is to be available to all.” Thus, many NCAA regulations may be procompetitive and legal under the antitrust laws. The court ruled against the limits on televising college games, however, holding that the television plan restricted, rather than enhanced intercollegiate athletics. National Collegiate Athletic Association v. University of Oklahoma, 468 U.S. 85, 104 S. Ct. 2948 (1984).

16. The National Society of Professional Engineers (Society) had an ethics rule that prohibited member engineers from disclosing or discussing price/fee information with customers until after the customer had hired a particular engineer. This rule against competitive bidding was designed to maintain high standards in the field of engineering. The Society felt that competitive pressure to offer engineering services at the lowest possible price would encourage engineers to design and specify inefficient, unsafe, and unnecessarily expensive structures and construction methods. According to the Society, awarding engineering contracts to the lowest bidder, regardless of quality, would be dangerous to the public health, safety, and welfare. The Society emphasizes that the rule is not an agreement to fix prices. Rather, it claims the rule was drafted by experienced, highly trained professional engineers to prevent public harm and is therefore reasonable. Does the rule unreasonably restrain trade and thus violate Section 1 of the Sherman Act? Why or why not?

Answer: Yes, this rule does violate the Sherman Act. The Rule of Reason analysis focuses directly on the challenged restraint’s impact on competitive conditions. “[T]he true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.” Note that the Sherman Act does not require competitive bidding—rather, it prohibits unreasonable restraints on competition. Here the Society seems to view competition as a bad influence. This is contrary to the basic premise of the Sherman Act—that competition is beneficial, yielding lower prices as well as better goods and services. A complete ban on competitive bidding goes too far. The Society must utilize less anti-competitive means to police and control deceptively low bids and inferior engineering work. National Society of Professional Engineers v. U.S., 435 U.S. 6789, 98 S. Ct. 1355, 55 L. Ed. 2d 637 (1978).

17. During a period of a few years, intense price competition characterized both the retail and the wholesale oil markets. At times, prices in the wholesale market fell below the manufacturer’s cost. One cause of the volatile situation was the supply of “distress gasoline” placed on the market by seventeen independent refiners. These independent refiners had no retail sales outlets and little storage capacity, so they were forced to sell their product at “distress prices.” In spite of their unprofitable operations, they could not afford to shut down, for, if they did so, they would be apt to lose both their oil connections in the field and their regular customers.

In an attempt to remedy this problem, the major oil companies entered into an informal agreement whereby each selected as its “dancing partner” one or more independent refiners having distress gasoline. The major oil company would then assume responsibility for purchasing the independent’s distress supply at the “fair going market price.” As a result, the market price of oil rose and the spot market became stable. Have the companies engaged in horizontal price fixing in violation of the Sherman Act? Why or why not?

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 42: Antitrust

Answer: Yes. Although the major oil companies had not explicitly agreed on the price at which they would sell their oil, the court found that the purpose of the arrangement was to curtail competition and raise prices. In so ruling, the court rejected the defendants’ contention that the agreement was to prevent cutthroat competition which would destroy the oil industry and force numerous oil wells to be closed.

Moreover, it would be extremely expensive to re-open these closed wells at a future date. The court judged that reasonableness of prices is no defense. Horizontal agreements with the purpose and effect of raising, depressing, fixing, pegging, or stabilizing prices are illegal per se. United States v. Soconoy-Vacuum Oil Co., 310 U.S. 150 (1940).

18. As part of a corporate plan to stimulate sagging color television sales, GTE Sylvania began to phase out its wholesale distributors and began to sell its television sets directly to a smaller and more select group of franchised retailers. To this end, Sylvania limited the number of franchises granted for any given area and required each franchisee to sell Sylvania products only from the location or locations at which he was franchised. A franchise did not constitute an exclusive territory, and Sylvania retained sole discretion to increase the number of retailers in an area in light of the success or failure of existing retailers. The strategy apparently was successful, as Sylvania’s national market share increased from less than two percent to five percent.

In the course of carrying out its plan, Sylvania franchised Young Brothers as a television retailer at a San Francisco location one mile from that of Continental T.V., Inc., one of Sylvania’s most successful franchisees. A course of feuding began between Sylvania and Continental that reached a head when Continental requested permission to open a store in Sacramento, and Sylvania refused. Continental opened the Sacramento store anyway and began shipping merchandise there from its San Jose warehouse. Shortly thereafter, Sylvania terminated Continental’s franchise. Is the franchise location restriction a per se violation of the Sherman Act? Explain.

Answer: No; judgment for Sylvania. In an earlier decision, the Court erroneously held that territorial and customer restrictions on sales by wholesalers in the purchasing and selling of Schwinn bicycles was per se illegal. Per se rules of illegality are appropriate, however, only when they relate to conduct that is manifestly anti-competitive. Vertical market allocation restrictions in franchise agreements are not manifestly anticompetitive, and, therefore, would be judged under the prevailing standard of analysis, the “rule of reason.”

Under the rule of reason analysis, the court must weigh all of the circumstances of the case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition. The market impact of vertical restrictions is complex because of their potential for a simultaneous reduction of interbrand competition and stimulation of interbrand competition. On one hand, location restrictions and other vertical restraints reduce intrabrand competition by limiting the number of sellers of a particular brand product competing for the business of a given group of buyers. On the other hand, these vertical restrictions promote interbrand competition by allowing the manufacturer to achieve certain efficiencies in the distribution of his products. Overall, the franchise location clause imposed by Sylvania does not impose an unreasonable restraint on trade and, so, does not violate the Sherman Act. Continental T.V. Inc v. GTE Sylvania, Inc., 433 U.S. 36.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 42: Antitrust

ANSWERS TO “TAKING SIDES” PROBLEMS The California Dental Association (CDA) is a voluntary nonprofit association of local dental societies to which some nineteen thousand dentists belong, about three-quarters of those practicing in the state. The CDA lobbies on behalf of its members’ interests and conducts marketing and public relations campaigns for their benefit. The dentists who belong to the CDA through these associations agree to abide by a Code of Ethics (Code), which includes a regulation limiting their right to advertise. Responsibility for enforcing the Code rests in the first instance with the local dental societies. Applicants who refuse to withdraw or revise objectionable advertisements may be denied membership, and members are subject to censure, suspension, or expulsion from the CDA. The FTC brought a complaint against the CDA, alleging that it applied its Code so as to restrict truthful, nondeceptive advertising and therefore violated Section 5 of the FTC Act. The FTC alleged that the CDA unreasonably restricted price advertising—particularly discounted fees— and advertising relating to the quality of dental services. a. What are the arguments that the per se standard applies to this case? b. What are the arguments that a rule of reason standard applies to this case? c. Which standard should apply to this case? Explain.

Answer: (a) A regulation which prevents important information from being disseminated is clearly anti-anticompetitive and of no redeeming value. The regulation prevents information on price, quality and other matters that a free market mandates be given to the consumer. (b) To determine the impact of this regulation on the competitive landscape, one must look at the procompetitive impact against the anticompetitive impact. A rule of reason test should be applied. (c) Although the Court of Appeals seems to have accepted that the restrictions here were like restrictions on advertisement of price and quality generally, the majority of the Supreme Court held that the California Dental Association’s (CDA’s) advertising restrictions might plausibly be thought to have a net procompetitive effect, or possibly no effect at all on competition. The restrictions on both discount and nondiscount advertising are, at least on their face, designed to avoid false or deceptive advertising in a market characterized by striking disparities between the information available to the professional and the patient. (d) The Court of Appeals was also tolerant in accepting the sufficiency of abbreviated rule-of-reason analysis as to the nonprice advertising restrictions. Although the Court of Appeals acknowledged the CDA’s view that “claims about quality are inherently unverifiable and therefore misleading,” it responded that this concern “does not justify banning all quality claims without regard to whether they are, in fact, false or misleading.”

The point is not that the CDA’s restrictions necessarily have the procompetitive effect claimed by the CDA; it is possible that banning quality claims might have no effect at all on competitiveness if, for example, many dentists made very much the same sort of claims. And it is also possible that the restrictions might in the final analysis be anticompetitive. The point, rather, is that the plausibility of competing claims about the effects of the professional advertising restrictions rules out the indulgently abbreviated review to which the Commission’s order was treated. The obvious anticompetitive effect that triggers abbreviated analysis has not been shown.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 42: Antitrust

Saying that the Court of Appeals should have conducted a more extended examination of the possible factual underpinnings does not necessarily call for the fullest market analysis. As the circumstances here demonstrate, there is generally no categorical line to be drawn between restraints that give rise to an intuitively obvious inference of anticompetitive effect and those that call for more detailed treatment. What is required, rather, is an enquiry appropriate for the case, looking to the circumstances, details, and logic of a restraint. The object is to see whether the experience of the market has been so clear, or necessarily will be, that a confident conclusion about the principal tendency of a restriction will follow from a quick (or at least quicker) look, in place of a more comprehensive one. A less quick look was required for the initial assessment of the tendency of these professional advertising restrictions. California Dental Association v.

Federal Trade Commission, Supreme Court of the United States, 1999 526 U.S. 756, 119 S. Ct. 1604, 143 L. Ed. 2d 935.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 43: Accountants' Legal Liability

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 43: Accountants' Legal Liability

TABLE OF CONTENTS Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems ............................................................................... 6

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Baldwin Corporation made a public offering of $250 million of convertible debentures and registered the offering with the SEC. The registration statement contained financial statements certified by Adams and Allen, CPAs. The financial statements overstated Baldwin’s net income and assets by 20 percent while understating the company’s liability by 15 percent. Because Adams and Allen did not carefully follow GAAS, it failed to detect these inaccuracies, the discovery of which has caused the bond prices to drop from their original selling price of $1,000 per bond to $720. Can Conrad, who purchased $10,000 of the debentures, collect from Adams and Allen for his damages? Explain.

Answer: Yes, decision for Conrad. Adams and Allen certified financial statements included in a registration statement, which were materially false. They are, therefore, liable to anyone who purchased the securities pursuant to that registration statement unless they can prove their due diligence defense. In that Adams and Allen failed to carefully follow GAAS, it is most probable that they will not be able to prove that they exercised due diligence. Therefore, they are jointly and severally liable to Conrad for the $280 depreciation in the bond price, for a total loss of $2,800.

2. Ingram is a CPA employed by Jordan, Keller and Lane, CPAs, to audit Martin Enterprises, Inc., a fast-growing service firm that went public two years ago. The financial statements that Ingram audited were included in a proxy statement proposing a merger with several other firms. The proxy statement was filed with the SEC and included several inaccuracies. First, approximately $10 million, or more than 20 percent, of the previous year’s “net sales originally reported” had proven nonexistent by the time the proxy statement was filed and had been written off on Martin’s own books. This was not disclosed in the proxy statement, in violation of Accounting Board Opinion Number 9.

Second, Martin’s net sales for the current year were stated as $110,300,000, when in truth they were less than $100,500,000. Third, Martin’s net profits for the current year were reported as $1,700,000, when in fact the firm had no earnings at all. a. Explain what civil liability, if any, Ingram has. b. Explain what criminal liability, if any, Ingram has.

Answer: (a) Ingram is civilly liable under Section 18 of the 1934 Act unless he can show that he acted in good faith and had no knowledge of the falsity. Section 18 imposes express civil liability upon an accountant if she makes or causes to be made any

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 43: Accountants' Legal Liability

false or misleading statement with respect to any material fact in any application, report, document, or registration filed with the SEC under the 1934 Act. Liability extends to any person who purchased or sold a security in reliance upon that false or misleading statement and without knowing that it was false or misleading. An accountant is not liable, however, if she proves that she acted in good faith and had no knowledge that such statement was false or misleading. On these facts, it seems unlikely that this defense would be available. See part (b) below. (b) Ingram is probably criminally liable for a fine of up to $1 million (formerly $100,000) and/or imprisonment of not more than ten years. In U.S. v. Matelli, 527 F. 2d 311 (1975), upon which this problem is based, the U.S. Circuit Court upheld a conviction imposing a one-year sentence with all but 60 days suspended and a $10,000 fine (which was the maximum fine at that time). The court found that these facts were sufficient for a jury to have found sufficient criminal intent. As the court stated: “Congress equally could not have intended that men holding themselves out as members of these ancient professions [law and accounting] should be able to escape criminal liability on a plea of ignorance when they have shut their eyes to what was plainly to be seen or have represented a knowledge they knew they did not possess.”

3. Girard & Company, CPAs, audited the financial statements included in the annual report submitted by PMG Enterprises, Inc., to the SEC. The audit failed to detect numerous false and misleading statements contained in the financial statements. a. Investors who subsequently purchased PMG stock have brought suit against Girard under Section 18 of the 1934 Act. What defenses, if any, are available to Girard?

Explain. b. The SEC has initiated criminal proceedings under the 1934 Act against Girard. Explain what must be proven for Girard to be held criminally liable.

Answer: (a) Under Section 18 of the 1934 Act, Girard’s defense would be that it acted in good faith and that it had no knowledge that the financial statement was false or misleading. Section 18 imposes express civil liability upon an accountant if she makes or causes to be made any false or misleading statement with respect to any material fact in any application, report, document, or registration filed with the SEC under the 1934 Act. Liability extends to any person who purchased or sold a security in reliance upon that false or misleading statement and without knowing that it was false or misleading. An accountant is not liable, however, if she proves that she acted in good faith and had no knowledge that such statement was false or misleading. (b) The SEC must prove that Girard willfully and knowingly made and caused to be made false and misleading statements with respect to material facts in the annual report filed with the SEC. 4. Dryden, a certified public accountant, audited the books of Elixir, Inc., and certified incorrect financial statements in a form that was filed with the SEC. Shortly thereafter, Elixir, Inc., went bankrupt. Investigation into the bankruptcy disclosed that through an intricate and clever embezzlement scheme, Kraft, the president of Elixir, had siphoned off substantial sums of money that now support Kraft in a luxurious lifestyle in South America. Investors who purchased shares of Elixir have brought suit against Dryden under Rule 10b–5. At trial, Dryden produces evidence that demonstrates that his failure to discover the embezzlement resulted merely from negligence on his part and that he had

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 43: Accountants' Legal Liability

no knowledge of the fraudulent conduct. Is Dryden liable under the Securities Exchange Act of 1934? Why or why not?

Answer: No, Dryden is not liable. In Ernst & Ernst v. Hochfelder, the United States Supreme Court held that in an action for damages under Rule 10b-5, it must be shown that the violation was committed with scienter. Since Dryden did not know of the defalcations, he did not have scienter and it not liable under Rule 10b-5.

5. Johnson Enterprises, Inc., contracted with the accounting firm of P, A & E to perform an audit of Johnson. The accounting firm performed its duty in a non-negligent, competent manner but failed to discover a novel embezzlement scheme perpetrated by Johnson’s treasurer. Shortly thereafter, Johnson’s treasurer disappeared with $175,000 of the company’s money. Johnson now refuses to pay P, A & E its $50,000 audit fee and is seeking to recover $175,000 from P, A & E. a. What are the rights and liabilities of P, A & E and Johnson? Explain. b. Would your answer to (a) differ if the scheme were a common embezzlement scheme that GAAS should have disclosed? Explain.

Answer: (a) P, A & E will collect its $20,000 audit fee from Johnson and will not be liable to Johnson for the $75,000 embezzled by Johnson’s treasurer. An auditor’s duty to its client is limited to discovering fraud which can be detected by following GAAS audit procedures. The auditor must perform his duty in a non-negligent, competent manner, which P, A & E in fact did. There is no duty on an auditor to discover novel embezzlement schemes. (b) Yes, under the revised facts P, A & E would not be entitled to collect its audit fee and would be liable to Johnson for any harm P, A & E caused by not properly performing its audit duty. The accountant is obligated to perform its audit in a competent manner in accordance with GAAS procedures.

6. The accounting firm of T, W & S was engaged to perform an audit of Progate Manufacturing Company. During the course of its investigation, T, W & S discovered that the company had overvalued its inventory by carrying the inventory on the books at the previous year’s prices, which were significantly higher than current prices. When T, W & S approached Progate’s president, Lehman, about the improper valuation of inventory, Lehman became enraged and told T, W & S that unless the firm accepted the valuation, Progate would sue T, W & S. Although T, W & S knew that Progate’s suit was frivolous and unfounded, it wished to avoid the negative publicity that would arise from any suit brought against it. Therefore, on the assumption that the overvaluation would not harm anybody, T, W & S accepted Progate’s inflated valuation of inventory. Progate subsequently went bankrupt, and T, W & S is now being sued by (1) First National Bank, a bank that relied upon T, W & S’s statement to loan money to Progate, and (2) Thomas, an investor who purchased 20 percent of Progate’s stock after receiving T, W & S’s statement. Explain what the rights and liabilities of First National Bank, Thomas, and T, W & S are.

Answer: T, W & S was a party to the issuance of false statements which amounted to fraud. T, W & S’s knowing acceptance of Progate’s overvaluation of its inventory constituted a material misrepresentation of fact with knowledge of falsity upon which First National Bank and Thomas justifiably relied. Both First National and Thomas will prevail against T, W & S since a perpetrator of fraud is liable to all parties who justifiably rely upon the intentional misrepresentation.

7. J, B & J, CPAs, has audited the Highcredit Corporation for the past five years. Recently, the SEC has commenced an investigation of Highcredit for possible violations of federal

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 43: Accountants' Legal Liability

securities law. The SEC has subpoenaed all of J, B & J’s working papers pertinent to the audit of Highcredit. Highcredit insists that J, B & J not turn over the documents to the SEC. What action should J, B & J take? Explain.

Answer: J, B & J must submit the papers to the SEC. Accountants’ workpapers are not subject to the same protection afforded attorney-client work-product. The nature of the accountant’s work as a public watchdog means that a duty is owed to the general investing public. Investors rely on the work of independent auditors in making investment decisions, and therefore, workpapers cannot be shielded from public scrutiny.

8. On February 1, the Gazette Corporation hired Susan Sharp to conduct an audit of its books and to prepare financial statements for the corporation’s annual meeting on July 1. Sharp made every reasonable attempt to comply with the deadline but could not finish the report on time due to delays in receiving needed information from Gazette. Gazette now refuses to pay Sharp for her audit and is threatening to bring a cause of action against Sharp. What course of action should Sharp pursue? Discuss.

Answer: Based on the contract of employment, an accountant is obligated to perform her work in a reasonable, non-negligent manner within the stated deadline. Failure to complete work as prescribed will result in a material breach by the accountant for which she will be liable. In this case Sharp will not be liable since she attempted in good faith to complete the audit on time but was hampered by the intentional actions of her employer. Sharp can initiate a suit against Gazette seeking contract damages on the theory that Gazette was in breach by preventing a timely performance.

9. John P. Butler Accountancy Corporation agreed to audit the financial statements of Westside Mortgage, Inc., a mortgage company that arranged financing for real property, for the year ending December 31, 2022. On March 22, 2023, after completing the audit, Butler issued unqualified audited financial statements listing Westside’s corporate net worth as $175,036. The primary asset on the balance sheet was a $100,000 note receivable that had, in reality, been rendered worthless in August 2020 when the trust deed on real property securing the note was wiped out by a prior foreclosure of a superior deed of trust. The note constituted 57 percent of Westside’s net worth and was thus material to an accurate representation of Westside’s financial position. In October 2023, International Mortgage Company (IMC) approached Westside for the purpose of buying and selling loans on the secondary market. IMC signed an agreement with Westside in December after reviewing Westside’s audited financial statements. In June 2024, Westside issued a $475,293 promissory note to IMC, on which it ultimately defaulted. IMC brought an action against Westside, its owners, principals, and Butler. IMC alleged negligence and negligent misrepresentation against Butler in auditing and issuing without qualification the defective financial statements on which IMC relied in deciding to do business with Westside. Butler moved for summary judgment, claiming that it owed no duty of care to IMC, a third party who was not specifically known to Butler as an intended recipient of the audited financial statements. Is Butler correct? Explain.

Answer: Judgment for IMC. The landmark opinion in applying the “duty” doctrine to the accounting profession is that of Justice Cardozo in Ultramares Corp. v. Touche, where the liability of a CPA in preparing and issuing unqualified audited financial statements was limited to those “in privity” with the accountant. The Restatement has rejected Ultramares’ requirement of privity but has limited liability to those “intended” recipients of the information. But the accountant’s role in modern society has changed from the time of Ultramares. Today, in contrast with the days when the auditor’s primary obligation was to the client, the accountant occupies a position of public trust.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 43: Accountants' Legal Liability

The auditor of a corporation’s financial statements is ultimately responsible to the creditors, stockholders, investors, and lenders who, he must realize, will rely upon the statements. Accountants should be held to the same foreseeability standard of negligence liability as other professionals. Therefore, since an independent auditor owes a duty of care to reasonably foreseeable third parties who rely upon negligently prepared and issued financial statements, the summary judgment must be reversed.

International Mortgage Company v. John P. Butler Accountancy Corp., 177 Cal. App. 3d 806 (4th Dist. 1986).

10. Equisure, Inc., was required to file audited financial statements when it applied to have its stock listed on the American Stock Exchange (AmEx). It retained an accounting firm, defendant Stirtz Bernards Boyden Surdel & Larter, P.A. (Stirtz). Stirtz issued a favorable interim audit report that Equisure used to gain listing on the stock exchange.

Subsequently, Equisure retained Stirtz to audit the financial statements required for Equisure’s Form 10 filing with the U.S. Securities and Exchange Commission (SEC). Stirtz’s auditor knew that the audit was for the SEC reports. Stirtz issued a “clean” audit opinion, which, with the audited financial statements, was included in Equisure’s SEC filing and made available to the public. NorAm Investment Services, Inc., also known as Equity Securities Trading Company, Inc. (NorAm), a securities broker, began lending margin credit to purchasers of Equisure stock. These purchasers advanced only a portion of the purchase price; NorAm extended credit (a margin loan) for the balance and held the stock as collateral for the loan, charging interest on the balance. When NorAm had loaned approximately $900,000 in margin credit, its president, Nathan Newman, reviewed Stirtz’s audit report and the audited financial statements. Based on his review, NorAm extended over $1.6 million of additional margin credit for the purchase of Equisure shares. When AmEx stopped trading Equisure stock due to allegations of insider trading and possible stock manipulation, the stock became worthless. NorAm was left without collateral for over $2.5 million in margin loans. Stirtz resigned as auditor of Equisure and warned that its audit report might be misleading and should no longer be relied upon. NorAm sued Stirtz for negligent misrepresentation and negligence. Explain whether or not NorAm will prevail.

Answer: NorAm should not prevail. The Restatement (Second) of Torts § 552 sets out the criteria for accountants’ liability to third parties who rely on the accountants’ negligent audits: An auditor may be held liable for negligent misrepresentations in an audit report to those persons who act in reliance upon those misrepresentations in a transaction which the auditor intended to influence. Also, an auditor may also be held liable to reasonably foreseeable third persons for intentional fraud in the preparation and dissemination of an audit report. It is not enough, however, that the maker merely knows of the ever-present possibility of repetition to anyone, and the possibility of action in reliance upon it, on the part of anyone to whom it may be repeated.

In this case, NorAm argues that a “chain of reliance” links Stirtz, the SEC—that Stirtz knew would rely on its work, and NorAm, which should be protected by the SEC’s reliance. The court disagreed. NorAm as a broker extending margin credit is not clearly in the class that should be protected by the SEC’s reliance. “If that liability is to be drawn somewhere short of foreseeability, it must be drawn on pragmatic grounds alone.” NorAm Investment Services, Inc. v. Stirtz Bernards Boyden Surdel & Larter, P.A., 611 N.W. 2d 372 11. Holtz Rubenstein Reminick, CPAs, audited year-end financial statements of Quality Food Brands, Inc. and related companies. Signature Bank, relying upon the audited financial reports prepared by Holtz Rubenstein Reminick, extended a term note to Quality in the principal sum of $10 million. Quality subsequently filed a petition under Chapter 7 of the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 43: Accountants' Legal Liability

United States Bankruptcy Code, and Signature Bank only then learned of various false and misleading statements contained in the audited financial reports. Explain whether Signature bank can recover damages for negligent misrepresentation.

Answer: Signature bank may not recover damages for negligent misrepresentation. In certain circumstances, accountants may be held liable for negligent misrepresentations made to third parties with whom they have no contractual relationship, but who have relied to their detriment on inaccurate financial statements prepared by the accountant. In order to establish such liability, the relationship between the accountant and the party must be found to approach privity, through a showing that the following prerequisites are satisfied: “(1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants' understanding of that party or parties’ reliance.”

Here, the allegations supporting the cause of action to recover damages for negligent misrepresentation do not satisfy the third Credit Alliance prong. Viewing the complaint in the light most favorable to the plaintiff, as amplified by the evidence submitted by the plaintiff in opposition to the defendant’s motion, the complaint failed to allege some conduct by the defendant “linking” it to the plaintiff, which evinced the defendant’s understanding of the plaintiff’s reliance. Accordingly, the Supreme Court should have granted the subject branch of the defendant’s motion. Signature Bank v.

Holtz Rubenstein Reminick, 109 A.D. 3d 465, 970 N.Y.S. 2d 281 (Appellate Division of the Supreme Court of New York, Second Department, 2013).

ANSWERS TO “TAKING SIDES” PROBLEMS Arthur Young & Co., a firm of certified public accountants, was the independent auditor for Amerada Hess Corporation. During its review of Amerada’s financial statements as required by federal securities laws, Young confirmed Amerada’s statement of its contingent tax liabilities and prepared tax accrual work papers. These work papers, which pertained to Young’s evaluation of Amerada’s reserves for contingent tax liabilities, included discussions of questionable positions Amerada might have taken on its tax returns. The Internal Revenue Service (IRS) initiated a criminal investigation of Amerada’s tax returns when, during a routine audit, it discovered questionable payments made by Amerada from a “special disbursement account.” The IRS summoned Young to make available all its information relating to Amerada, including the tax accrual work papers. Amerada instructed Young not to obey the summons.

The IRS then brought an action against Young to enforce the administrative summons. a. What are the arguments that Young must turn over the work papers? b. What are the arguments that the work papers are protected from government summons? c. Who should prevail? Explain.

Answer: (a) The work papers of an accountant, like attorney work papers, should be protected from government subpoena. If not, clients will not be fully honest with their accountant in fear of information being divulged to government officials. (b) The work papers should not be protected because accountants serve a public role and need to be truly honest and protective of public interest. (c) Work papers are not protected by work-product immunity. The system of federal taxation demands forthright disclosure of all material information to the taxing

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 43: Accountants' Legal Liability

authorities. Hence, the Internal Revenue Service (IRS) has been given extensive information-gathering authority by Congress. This authority should be curtailed only by congressional action.

The argument comparing a work-product immunity for accountants’ tax accrual work papers to the attorney work-product doctrine is based upon a misunderstanding of the differing roles of the private attorney and the independent certified public accountant.

The attorney is his client’s loyal and confidential advisor and advocate. The Certified Public Accountant, in certifying a corporation's financial statements, is a “public watchdog” who “assumes a public responsibility transcending any employment relationship with the client” and “owes ultimate allegiance to the corporation's creditors and stockholders, as well as to the investing public.”

Moreover, in contrast with the view of the court of appeals, allowing the IRS access to tax accrual work papers poses no danger to the integrity of the securities markets. The court of appeals expressed the fear that, if tax accrual work papers were available to the IRS, a business might be tempted to withhold certain relevant and material information from its auditor. Such an action, however, could result in the auditor issuing a qualified opinion as to the accuracy of the financial statements, a possibility that responsible corporate management would be unwilling to risk. U.S. v. Arthur Young and Company, 465 U.S. 805.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 44: Consumer Protection

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 44: Consumer Protection

TABLE OF CONTENTS Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems .............................................................................. 11

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

The Federal Trade Commission (FTC) brings a deceptive trade practice action against Beneficial Finance Company based on Beneficial’s use of its “instant tax refund” slogan.

The FTC argues that Beneficial’s advertising a tax refund loan or instant tax refund is deceptive in that the loan is not in any way connected with a tax refund but is merely Beneficial’s everyday loan based on the applicant’s creditworthiness. Is this an unfair or deceptive trade practice? Explain.

Answer: Yes, decision for the FTC. This problem is based upon Beneficial Corp. v. FTC, 542 F. 2d 611 (3rd Cir. 1976), cert. denied, 430 U.S. 983 (1977). The court had little difficulty in finding the slogan (“instant tax refund”) deceptive.

2. Brenda borrows $1,000 from Lincoln for one year, agreeing to pay Lincoln $200 in interest on the loan and to repay the loan in twelve monthly installments of $100. The contract that Lincoln provides and Brenda signs specifies that the APR is 20 percent. Does this contract violate the Federal Consumer Credit Protection Act? Why or why not?

Answer: Yes, judgment for Barnes. The true APR is approximately 40%, since Barnes only has, on average, the use of $500 for the life of the loan. Barnes must start paying off the loan immediately and is therefore paying on a diminishing loan value and not the full use of the $1,000 for one year.

3. A consumer entered into an agreement with Rent-It Corporation for the rental of a television set at a charge of $17 per week. The agreement also provides that if the renter chooses to rent the set for seventy-eight consecutive weeks, title will be transferred. The consumer now contends that the agreement is really a sales agreement, not a lease, and therefore is a credit sale subject to the Truth-in-Lending Act. Explain whether the consumer is correct.

Answer: The agreement does not constitute a “credit sale” within the meaning of the Truth in Lending Act. Under the contract the consumer was merely obligated to rent the TV for one week; not until the rent was equal to the value of the rented television.

By contrast, a purchaser under a conditional sales contract is obligated to pay the full purchase price.

4. Central Adjustment Bureau allegedly threatened Consumer with a lawsuit, service at his office, and attachment and sale of his property in order to collect a debt, although it did

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 44: Consumer Protection

not intend to carry out the threat and did not have the authority to commence litigation.

On some notices sent to Consumer, Central failed to disclose that it was attempting to collect a debt. In addition, Consumer contends that Central sent notices demanding payment that were purportedly from attorneys but were written, signed, and sent by Central. Has Central violated the Fair Debt Collection Act? Explain.

Answer: If the allegations can be proven, Central would be in violation of the Fair Debt Collection Act. The FDCPA was enacted in order to eliminate abusive, deceptive and unfair practices in the collection of consumer debts by debt collection agencies.

5. The Giant Development Company undertakes a massive real estate venture to sell 9,000 one-acre unimproved lots in Utah. The company advertises the project nationally.

Arrington, a resident of New York, learns of the opportunity and requests information about the project. The company provides Arrington with a small advertising brochure that contains no information about the developer and the land. The brochure consists of vague descriptions of the joys of homeownership and nothing else. Arrington purchases a lot.

Two weeks after entering into the agreement, Arrington wishes to rescind the contract.

Will Arrington prevail? Explain.

Answer: Yes. The Interstate Land Sales Full Disclosure Act, which applies to the sale or lease of 100 or more lots of unimproved land as part of a common promotional plan, requires that the developer file a detailed statement of record with the Department of Housing and Urban Development and provide each prospective purchaser or lessee with a condensed version of the statement. If such a property report has not been presented to the purchaser in evidence of the purchase, as is the case in this problem, the purchaser may revoke the contract for a period of two years from the date of entering into the contract.

Giant's advertising brochure, which was devoid of information, would not satisfy the informational requirements of the report which must be furnished to all prospective purchasers.

6. Jane Jones, a married woman, applies for a credit card from Exxon but is refused credit.

Jane is bewildered as to why she was turned down. Explain what her legal rights are in this situation.

Answer: Under the Equal Credit Opportunity Act, Jane Jones is entitled to be notified of specific reasons for the denial of her credit. Moreover, if the denial is based upon her gender, she could successfully maintain a cause of action under said act.

7. On a beautiful Saturday in October, Francie decides to take the twenty-mile ride from her home in New Jersey into New York City to do some shopping. Francie finds that Brown’s Retail Sales, Inc., has a terrific sale on televisions and decides to surprise her husband with a new high definition television. She purchases the set from Brown’s on her VISA card for $1,450. When the set is delivered, Francie discovers that it does not work. Brown’s refuses to repair or replace it or to credit Francie’s account. Francie therefore refuses to pay VISA for the television. VISA brings a suit against Francie. Will VISA prevail? Why or why not?

Answer: No, VISA will not prevail. Francie, under the Fair Credit Billing Act, will maintain her defenses against her credit card issuer, VISA, since she has made a good faith attempt to settle her dispute with the seller and the sale involves more than $50.

Although Francie's billing address (New Jersey) is not within the same state as the seller's place of business (New York), her residence is within 100 miles of the seller's

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 44: Consumer Protection

place of business. Consequently, Francie's defense of breach of contract (the television's failure to work) can be successfully asserted against the plaintiff–VISA. 8. Frank finds Thomas’s wallet, which contains many credit cards and Thomas’s identification. By using Thomas’s identification and VISA card, Frank goes on a shopping spree and runs up $5,000 in charges. Thomas does not discover that he has lost his wallet until the following day, when he promptly notifies his VISA bank. Explain how much VISA may collect from Thomas.

Answer: $50. The FCCPA limits the card holder’s liability for unauthorized use of a credit card to $50 for purchases made prior to Thomas’s notification of the loss of the card to VISA. 9. Robert applies to Northern National Bank for a loan. Before granting the loan, Northern requests that Callis Credit Agency provide it with a credit report on Robert. Callis reports that three years earlier, Robert had embezzled money from his employer. Based on this report, Northern rejects Robert’s loan application. a. Robert demands to know why the loan was rejected, but Northern refuses to divulge the information, arguing that it is privileged. Is Robert entitled to the information?

Explain. b. Assume that Robert obtains the information and alleges that it is inaccurate. Explain what recourse Robert has.

Answer: (a) Yes. Under the Fair Credit Reporting Act, Robert has the right to obtain information regarding the nature and substance of all information in the consumer reporting agency’s files, the source of the information, and all recipients of such information. (b) Robert may notify Callis of this disagreement. Callis must then reinvestigate the matter and if it finds the information to be inaccurate it must promptly delete the information. If it confirms the information, the consumer, if he still disputes the information, will be permitted to have a brief statement setting forth the nature of the dispute entered into the report.

10. Colgate-Palmolive Co. produced a television advertisement that dramatically demonstrated the effectiveness of its Rapid Shave shaving cream. The ad purported to show the shaving cream being used to shave sandpaper. But because actual sandpaper appeared on television to be regular colored paper, Colgate substituted a sheet of Plexiglas with sand sprinkled on it. The FTC brought an action against Colgate, claiming that Colgate’s ad was deceptive. Colgate defended on the ground that the consumer was merely being shown a representation of the actual test. Explain whether Colgate has engaged in an unfair or deceptive trade practice.

Answer: Yes, judgment for FTC. The advertisement was deceptive because it did not appropriately represent an actual test of the shaving cream. Under the traditional deceptions standard, the ad had the tendency or capacity to deceive since it was a material misrepresentation that would tend to mislead the members of the public who were potential purchasers of shaving cream. The advertisement purported to show the test, but in fact was not. If evaluated by the current deception standard the advertisement would also be found to be deceptive. It would mislead a consumer acting reasonably under the circumstances who would assume that actually shaving with the product would be done as fast and efficiently as the ad represented. FTC v.

Colgate-Palmolive, Co. 380 U.S. 374.

11. Several manufacturers introduced into the American market a product known as allterrain vehicles (ATVs). ATVs are motorized bikes that sit on three or four low-pressure

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 44: Consumer Protection

balloon tires and are meant to be driven off paved roads. Almost immediately, the Consumer Product Safety Commission began receiving reports of deaths and serious injuries. As the number of injuries and deaths increased, the CPSC began investigating ATV hazards. According to CPSC staff, children under the age of sixteen accounted for roughly half the deaths and injuries associated with this product. What type of rule, if any, may the CPSC issue for ATVs? Explain.

Answer: Normally, the CPSC has the authority to: (1) work with consumers and industry to promote voluntary standards for product safety, (2) set and enforce mandatory standards, (3) ban unsafe products when a safety standard would not adequately protect the public, (4) order recalls of hazardous products, (5) provide information to help consumers select and properly use safe products, and (6) work with state and local governments to promote consumer safety. However, the agency does not have jurisdiction over all consumer goods. Motor vehicles are exempt from CPSC coverage, and therefore, no rule could be issued.

12. Sears formulated a plan to increase sales of its top-of-the-line Lady Kenmore brand dishwasher. Sears’s plan sought to change the Lady Kenmore’s image without reengineering or making any mechanical improvements in the dishwasher itself. To accomplish this, Sears undertook a four-year, $8 million advertising campaign that claimed that the Lady Kenmore completely eliminated the need to prerinse and prescrape dishes. As a result of this campaign, sales rose by more than 300 percent. The “no scraping, no prerinsing” claim was not true, however; and Sears had no reasonable basis for asserting the claim. In addition, the owner’s manual that customers received after they purchased the dishwasher contradicted the claim.

After a thorough investigation, the Federal Trade Commission (FTC) filed a complaint against Sears, alleging that the advertisements were false and misleading. The final FTC order required Sears to stop making the “no scraping, no prerinsing” claim. The order also prevented Sears from (1) making any “performance claims” for “major home appliances” without first possessing a reasonable basis consisting of substantiating tests or other evidence; (2) misrepresenting any test, survey, or demonstration regarding “major home appliances”; and (3) making any advertising statements not consistent with statements in postpurchase materials supplied to purchasers of “major home appliances.” Sears contends the order is too broad, because it covers appliances other than dishwashers and includes “performance claims” as well. Explain whether Sears is correct.

Answer: Judgment for the FTC. The Ninth Circuit Court of Appeals enforced the order.

The court began its analysis by noting that the FTC has wide latitude for judgment and that the courts would not interfere except where the remedy had no reasonable relation to the unlawful practices found to exist. A judgment regarding “reasonable relation” in multi-product order cases “depends upon the specific circumstances of the case.” The facts of the present case indicated to the court that the petitioner had acted with a blatant and utter disregard for the law, the result of an advertising campaign which was well planned and highly financed. Consequently, sufficient cause exists for concern regarding further, additional violations. In addition, as the court noted, the prevention of “transfers” of unfair practices to other product lines was a fundamental goal of the FTC’s remedial work and that the danger of such transfers was particularly likely for a national brand such as Sears which sells a variety of home appliances. The appellate court concluded by holding that the multi-product order is reasonably related to the petitioner’s conduct, that a multi-product order is appropriate, and that the inclusion of the “performance claims” provision in that order is supported by the record before us and does not render the order overbroad. Sears, Roebuck and Co. v. F.T.C., 676 F. 2d 385 (9th Cir. 1982).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 44: Consumer Protection

13. Onondaga Bureau of Medical Economics (OBME), a collection agency for physicians, sent the plaintiff, Seabrook, a letter demanding payment for a $198 physician’s bill. In addition to demanding payment, the letter stated that the bureau’s client could commence against Seabrook a legal action that could result in a garnishment of his wages. Does OBME’s letter violate the Fair Debt Collection Practices Act in that it (a) does not give Seabrook the required notice or (b) threatened legal action against him? Explain.

Answer: The District Court held in favor of Seabrook. It noted that the letter in threatening garnishment of wages violated the Act in that it did not accurately reflect New York State garnishment law at the time it was sent. Moreover, the letter violated the disclosure provisions of the Act by failing to include language to the effect that any information obtained would be used for purposes of debt collection. This was true even though the letter did not request any information from Seabrook. Lastly, the OBME could not rely on any bona fide error defense since it did not present any evidence that it maintained proper procedures to avoid the errors complained of.

Seabrook v. Onandage Bureau of Medical Economics, Inc. 705 F. Supp 81 (1989).

14. William Thompson was denied credit based on an inaccurate credit report compiled by the San Antonio Retail Merchant’s Association. The Association confused Thompson’s credit history with that of another William Thompson and failed to use social security numbers to distinguish the two men. The second Mr. Thompson had a poor credit history.

Thompson made numerous attempts to have the Association correct its mistake, but the error was never corrected. Has the Association violated the Fair Credit Reporting Act? Explain.

Answer: Yes, judgment for Thompson. The Fair Credit Reporting Act, 15 U.S.C. 1681e(b), provides: “When a consumer reporting agency prepares a consumer report, it shall follow reasonable procedures to assure maximum possible accuracy of information concerning the individual about whom the report relates.”

The Association breached its duty of accurate reporting by failing to use adequate procedures to distinguish consumers, in this case the failure to use social security numbers in addition to names for identification purposes. The Association also failed to correct its error in a timely fashion. Thompson v. San Antonio Merchant’s Assoc., 682 F. 2d 509 (5th Cir. 1982).

15. Thompson Medical Company manufactures and sells Aspercreme, a topical analgesic.

Aspercreme is a pain reliever that contains no aspirin. Thompson’s advertisements strongly suggest that Aspercreme is related to aspirin, however, by claiming that it provides “the strong relief of aspirin right where you hurt.” Is Thompson’s advertisement for Aspercreme false and misleading? Explain.

Answer: Yes, it is misleading. Judgment for the Federal Trade Commission. Actual deception is not required for an advertisement to be misleading. An advertisement is considered deceptive if it is reasonably capable of misleading the public, regardless of its truth or falsity. Aspercreme’s name and its advertisements reasonably suggest that the product contains aspirin and are likely to mislead the public. Thompson Medical Co., Inc. v. Federal Trade Commission, 791 F. 2d 189 (D.C. Cir. 1986).

16. Mary Smith bought a car from Doug Chapman under an installment sales contract. Smith carried the insurance on the car, as required by the contract. Shortly after Smith purchased the car, it was wrecked in an accident. Smith’s insurance company paid Chapman the installments still owed on the car, as well as Smith’s equity in the car.

Smith requested a new car from Chapman under an installment plan the same as the one under which she had purchased the first car. Chapman refused, claiming that the contract

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 44: Consumer Protection

for the first car allowed him to retain the equity amount as security interest and that Smith understood this as a term of the contract. The provision relating to the security interest appeared on the back of the contract, although the Truth-in-Lending Act required it to be on the front side. The front side had a notice referring to provisions on the back side. Explain whether Chapman’s contract violates the Truth-in-Lending Act. Answer: Yes, it does. Judgment for Smith. A customer does not have to be deceived to maintain an action for violation of the Truth-in-Lending Act. The purpose of the Act is to prevent the use of illegal contracts that are not ordinarily discovered. The Act was designed not merely to compensate borrowers but to punish lenders. Under the Act, lenders are required to disclose conspicuously all terms of credit in a meaningful sequence. Chapman’s contract put the interest rate and the security interest on the back page. Chapman also failed to disclose delinquency charges and the listing of sales tax as an “original fee” in the itemized charges. The terms of a sales agreement must be written and organized so that a reasonable person will have notice of his rights and duties. Chapman’s contract did not meet these standards. Smith v.

Chapman, 614 F. 2d 978 (5th Cir. 1980).

17. The Federal Trade Commission (FTC)ordered Warner-Lambert to cease and desist from advertising that its product, Listerine antiseptic mouthwash, prevents, cures, or alleviates the common cold and sore throats. The order further required Warner-Lambert to disclose in future advertisements that “[c]ontrary to prior advertising, Listerine will not help prevent colds or sore throats or lessen their severity.” Warner-Lambert contended that even if its past advertising claims were false, the corrective advertising portion of the order exceeded the FTC’s statutory power. The FTC claimed that corrective advertising was necessary in light of Warner-Lambert’s one hundred years of false claims and the resulting persistence of erroneous consumer beliefs. Explain whether the FTC is correct.

Answer: Judgment for the FTC. Congress intended for the FTC to have broad remedial powers in order to protect the public from deceptive trade practices. Corrective advertising represents an appropriate remedy in this case because of WarnerLambert’s long history of deceptive advertising, the success of the advertising campaign to create a false image in the public’s mind, and the fact that this false perception would continue if not corrected. Warner-Lambert, Co. v. FTC, 562 F. 2d 749.

18. Lenvil Miller owed $2,501.61 to the Star Bank of Cincinnati. Star Bank referred collection of Miller’s account to Payco-General American Credits, Inc. (Payco), a debt collection agency.

Payco sent Miller a collection form. Across the top of the form was the caption, “DEMAND FOR PAYMENT,” in large, red, boldface type. The middle of the page stated “THIS IS A DEMAND FOR IMMEDIATE FULL PAYMENT OF YOUR DEBT,” also in large, red, boldface type.

That statement was followed in bold by “YOUR SERIOUSLY PAST DUE ACCOUNT HAS BEEN GIVEN TO US FOR IMMEDIATE ACTION. YOU HAVE HAD AMPLE TIME TO PAY YOUR DEBT, BUT YOU HAVE NOT. IF THERE IS A VALID REASON, PHONE US AT [***] TODAY. IF NOT, PAY US—NOW.” The word “NOW” covered the bottom third of the form. At the very bottom in the smallest type to appear on the form was the statement, “NOTICE: SEE REVERSE SIDE FOR IMPORTANT INFORMATION.” The notice was printed in white against a red background. On the reverse side were four paragraphs in gray ink. The last three paragraphs contained the validation notice required by the Fair Debt Collection Practices Act (FDCPA) to inform the consumer how to obtain verification of the debt.

Miller sued Payco on the ground that the validation notice did not comply with the FDCPA. Miller argued that even though the validation notice contained all the necessary information, it violated the FDCPA because it contradicted other parts of the collection

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 44: Consumer Protection

letter, was overshadowed by the demands for payment, and was not effectively conveyed to the consumer. Discuss whether Payco has violated the FDCPA. Answer: The FDCPA requires a debt collector to send a consumer, either in its initial communication or within five days of its initial communication, a written notice containing: (1) the debt amount; (2) the name of the current creditor; (3) a statement that if the consumer disputes the debt in writing within thirty days, the collector will send verification of the debt to the consumer; (4) a statement that if the consumer does not dispute the debt within thirty days, the collector will assume the debt to be valid; (5) a statement that the collector will send the name of the original creditor, upon written request within thirty days. If the consumer, in writing, disputes the debt or requests the name of the original creditor, then the collector must halt all collection efforts until it mails verification of the debt or the creditor’s name to the consumer. The debt verification provisions are intended to protect the consumers’ legal rights and should not be contradicted or overshadowed by other messages in the notice. In this case, Payco’s notice clearly overshadowed and contradicted some paragraphs in the verification notice. Miller v. Payco-General American Credits, Inc. 943 F. 2d 482.

19. Greg Henson sold his Chevrolet Camaro Z-28 to his brother, Jeff Henson. To purchase the car, Jeff secured a loan with Cosco Federal Credit Union (Cosco). Soon thereafter, the car was stolen, and Jeff stopped making payments on his loan from Cosco. At the time, Cosco was unsure whether Greg retained an interest in the car, so Cosco sued both Jeff and Greg for possession of the car. The trial court rendered a default judgment against Jeff and ruled that Greg had no longer any interest in the car. The court further entered a deficiency judgment against Jeff in the amount of $4,076. However, the clerk erroneously noted in the judgment docket that the money judgment had been rendered against Greg as well as against Jeff. However, the official record of judgments and orders correctly reflected that only Jeff was affected by the money judgment. Two credit agencies, CSC Credit Services (CSC) and Trans Union Corporation (Trans Union), relied on the state court judgment docket and indicated in Greg’s credit report that he owed the money judgment.

Greg and his wife, Mary Henson, allege that they then “contacted Trans [Union] twice, in writing, to correct this horrible injustice.” When Trans Union did not respond, the Hensons brought an action alleging violations of the Federal Credit Reporting Act. Explain whether the Hensons should prevail.

Answer: Under FCRA, a consumer reporting agency is required to follow “reasonable procedures to assure maximum possible accuracy” of the information contained in a consumer’s credit report. A credit reporting agency is not liable under the FCRA if it followed “reasonable procedures to assure maximum possible accuracy,” but nonetheless reported inaccurate information in the consumer’s credit report.

First, the information reported by CSC and Trans Union was inaccurate. Contrary to CSC and Trans Union’s contention that the Judgment Docket conclusively shows that a money judgment was entered against Greg Henson, it is the physical placing of the judgment into the “Record of Judgments and Orders” that constitutes the official entry of judgment. The official records conclusively establish that no money judgment was rendered against Greg.

Although the information they reported was inaccurate, CSC and Trans Union are not liable under the FCRA if they followed “reasonable procedures to assure maximum possible accuracy” of the information reported. It may be said that the Judgment Docket is a presumptively reliable source and therefore it is reasonable to rely upon it as an initial source of information. Thus, as a matter of law, a credit reporting agency

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 44: Consumer Protection

is not liable under the FCRA for reporting inaccurate information obtained from a court’s Judgment Docket, absent prior notice from the consumer that the information may be inaccurate.

Finally, the Hensons’ allegation that they contacted Trans Union in an attempt to remedy the situation implicates Trans Union’s duty to reinvestigate. A credit reporting agency that has been notified of potentially inaccurate information in a consumer’s credit report is in a very different position than one who has no such notice. A credit reporting agency may initially rely on public court documents, because to require more may be unduly burdensome in the normal case. However, such exclusive reliance may not be justified once the credit reporting agency receives notice that the consumer disputes information contained in his credit report. The reasonableness of the defendant’s conduct must be resolved by the trial court on remand. Henson v. CSC Credit, 29 F. 3d 280.

20. Pantron I Corporation and Hal Z. Lederman market a product known as the Helsinki Formula. This product supposedly arrests hair loss and stimulates hair regrowth in baldness sufferers. The formula consists of a conditioner and a shampoo, and it sells at a list price of $49.95 for a three-month supply. The ingredients that allegedly cause the advertised effects are polysorbate 60 and polysorbate 80. Pantron offers a full moneyback guarantee for those who are not satisfied with the product. The Federal Trade Commission (FTC)challenged both Pantron’s claims that the formula arrested hair loss and promoted growth of new hair as unfair and deceptive trade practices. The FTC presented a variety of evidence that tended to show that the Helsinki Formula had no effectiveness other than its placebo effect (achieving results due solely to belief that the product will work). The FTC introduced expert testimony of a dermatologist and two other experts who denied there was any scientific evidence that the Helsinki Formula would be in any way useful in treating hair loss. Finally, the FTC introduced evidence of two studies that had determined that polysorbate-based products were ineffective in stopping hair loss and promoting regrowth. In response, Pantron introduced evidence that users of the Helsinki Formula were satisfied that it was effective. It offered testimony of eighteen users who had experienced hair regrowth or a reduction in hair loss after using the formula. It also introduced evidence of a “consumer satisfaction survey” it had conducted. Pantron also introduced evidence that more than half of its orders come from repeat purchasers, that it had received very few written complaints, and that very few of Pantron’s customers (less than 3 percent) had redeemed the money-back guarantee. Pantron finally introduced several clinical studies of its own, none performed in the United States or under U.S. standards for scientific studies. The evidence from these studies did show effectiveness, but the studies were not random, blind-reviewed studies and thus did not take into account the placebo effect. Discuss.

Answer: Section 5(a) of the Federal Trade Commission Act, declares unlawful “unfair or deceptive acts or practices in or affecting commerce” and empowers the Commission to prevent such acts or practices. Section 12 of the Act is specifically directed to false advertising. That section prohibits the dissemination of “any false advertisement” in order to induce the purchase of “food, drugs, devices, or cosmetics.”

The district court concluded that the FTC failed to carry its burden of proving that Pantron’s efficacy representations were false. It held that “[t]o prevail on its charge that defendant has misrepresented the efficacy of the ‘Helsinki Formula,’ the FTC must prove that the product is wholly ineffective; i.e., that it does not work at all.” *** We hold that the district court erred in concluding that Pantron’s representations regarding the Helsinki Formula’s efficacy did not amount to false advertising. Although

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 44: Consumer Protection

there was sufficient evidence in the record to support the district court’s finding that use of the Helsinki Formula might arrest hair loss in some of the people some of the time, the overwhelming weight of the proof at trial made clear that any effectiveness is due solely to the product’s placebo effect. [W]e conclude that a claim of product effectiveness is “false” for purposes of section 12 of the Federal Trade Commission Act if evidence developed under accepted standards of scientific research demonstrates that the product has no force beyond its placebo effect. FTC v. Patron I Corp. 33 F. 3d 1088.

21. Lavon Phillips became engaged to marry Sarah Grendahl and moved in with her. Sarah’s mother, Mary, became suspicious that Phillips was not telling the truth about his past, particularly about whether he was an attorney and where he had worked. She also was confused about who his ex-wives and girlfriends were and where they lived. She did some preliminary investigation herself, but she felt that she was hampered by not being able to use a computer, so she contacted Kevin Fitzgerald, a family friend who worked for McDowell, a private investigation agency. She asked Fitzgerald to do a “background check” on Phillips. Fitzgerald searched public records in Minnesota and Alabama, where Phillips had lived earlier and discovered one suit against Phillips for delinquent child support in Alabama, a suit to establish child support for two children in Minnesota, and one misdemeanor conviction for writing dishonored checks. Fitzgerald then supplied the social security information to Econ Control (a business which furnishes credit reports, Finder’s Reports, and credit scoring for credit companies and for private investigators) and asked for “Finder’s Reports” on Phillips. Fitzgerald testified that he believed that Finder’s Reports were not consumer reports and therefore they were not subject to the Federal Credit Reporting Act (FCRA). William Porter, president of Econ Control, stated that he believed a “Finder’s Report” could be obtained without authorization of the person who was the subject of the report because the Finder’s Report contained no information on credit history or creditworthiness. Econ Control then obtained a consumer report on Phillips from Computer Science Corporation and passed it onto McDowell. Fitzgerald met with Mary Grendahl and gave her the results of his investigation, including the Finder’s Report. Did this investigation violate the Fair Credit Reporting Act? Explain.

Answer: Phillips must prove that there was a consumer report, that defendants used or obtained it, and that they did so without a permissible statutory purpose. He must also prove that the defendants acted with the specified level of culpability.

In this case, there is no dispute that the Finder’s Report was (1) a written communication (2) by a consumer reporting agency, Computer Science Corporation.

The two issues in dispute pertaining to whether the Finder’s Report is a consumer report are (3) whether it contained the sort of personal information that would bring it within the definition and (4) whether anyone “expected” the Finder’s Report or the information in it to be used for one of the purposes listed in the definition or “collected” the information in it for that purpose.

Finally, although there is evidence that none of the three defendants believed their conduct to be covered by the FCRA, all three knew that such reports can only be obtained legally under certain circumstances. This can support an inference that the defendants knew their actions were impermissible and were therefore liable for their actions.

Phillips v. Grendahl, United States Court of Appeals, 312 F. 3d 357 (Eighth Circuit, 2002).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 44: Consumer Protection

22. Ian Eisenberg and Chris Hebard formed Electronic Publishing Ventures, LLC (EPV) and its four subsidiaries: Cyberspace.com, LLC, Essex Enterprises, LLC, Surfnet Services, LLC, and Splashnet.net, LLC. Two offshore entities, French Dreams Investments, N.V. (collectively EFO and owned by Eisenberg) and Coto Settlement (controlled by Hebard) owned EPV in equal parts. EPV’s four subsidiaries mailed approximately 4.4 million solicitations offering internet access to individuals and small businesses. The solicitations included a check, usually for $3.50, attached to a form resembling an invoice designed to be detached from the check by tearing at the perforated line. The check was addressed to the recipient and the recipient’s phone number appeared on the “re” line. The back of the check and invoice contained small-print disclosures revealing that cashing or depositing the check would constitute agreement to pay a monthly fee for internet access, but the front of the check and the invoice contained no such disclosures. The mailing explained in small print that a monthly fee would be billed to the customer’s local phone bill after the check was cashed or deposited. At least 225,000 small businesses and individuals cashed or deposited the solicitation checks. The EPV subsidiaries used a billing aggregation service to place charges for $19.95 or $29.95 a month on the small businesses’ and individuals’ ordinary telephone bills. Internet usage records show, however, that less than 1 percent of the 225,000 individuals and businesses billed for Internet service actually logged on to the service.

Eisenberg and Hebard were aware that the solicitation had misled some consumers. The companies received complaints from recipients of the solicitations, which indicated that some customers had deposited the solicitation check without realizing that they had contracted for Internet services. The Federal Trade Commission alleges that the solicitations were deceptive in violation of Section 5 of the Federal Trade Commission Act. Explain whether the FTC is correct.

Answer: The FTC is correct. An act or practice is deceptive if (1) there is a representation, omission, or practice that, (2) is likely to mislead consumers acting reasonably under the circumstances, and (3) the representation, omission, or practice is material. Federal Trade Commission v. Cyberspace.com LLC, United States Court of Appeals, Ninth Circuit, 2006, 453 F. 3d 1196.

Section 5 of the FTCA prohibits “deceptive acts or practices in or affecting commerce.”

A practice falls within this prohibition (1) if it is likely to mislead consumers acting reasonably under the circumstances (2) in a way that is material. In this case, Hebard and EFO wrongfully contend that the fine print notices they placed on the reverse side of the check, invoice, and marketing insert preclude liability under FTCA Section 5. A solicitation may be likely to mislead by virtue of the net impression it creates even though the solicitation also contains truthful disclosures. Hebard and EFO’s mailing created the deceptive impression that the $3.50 check was simply a refund or rebate rather than an offer for services. The front of the check and invoice lacked any indication that by cashing the check, the consumer was contracting to pay a monthly fee. This solicitation was likely to deceive consumers acting reasonably under the circumstances. This conclusion is bolstered by undisputed evidence indicating that Hebard and EFO’s solicitation actually deceived nearly 225,000 individuals and small businesses. Hebard and EFO billed each of these consumers for a service that less than 1 percent of them ever attempted to use. It is reasonable to infer that most of the remaining 99 percent did not realize they had contracted for Internet service when they cashed or deposited the solicitation check. Clearly, the solicitation was likely to mislead in a way that is material. A misleading impression created by a solicitation is material if it “involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding, a product.”

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 44: Consumer Protection

ANSWERS TO “TAKING SIDES” PROBLEMS Kevin Miller bought a house in Atlanta in 2019 and took out a mortgage. He lived in the house until 2022, when he accepted a job in Chicago; from then on, he rented the house. He received a letter demanding payment from a law firm on behalf of the mortgage company in 2024. By this time, Miller was renting the property to strangers and thus was making a business use of the property. Miller claimed that the law firm had violated the Fair Debt Collection Practices Act. The law firm replied that the letter is outside the scope of the Act because it was trying to collect a business debt rather than a consumer debt. a. What are the arguments that the debt is a consumer debt? b. What are the arguments that the debt is a business debt? c. Which arguments would prevail? Explain.

Answer: (a) The relevant time for deciding whether the debt is business or consumer is the time that the debt was undertaken. Here the debt was taken by a consumer and only became a rental because they had to move out of the house. The owners of the property needed protection since they were not sophisticated landlords. (b) The property at the time of the letter was used as a business property and thus should be treated as such. (c) The debt is a consumer debt. The Fair Debt Collection Practices Act regulates the debt collection tactics employed against individual borrowers on the theory that they are likely to be unsophisticated about debt collection and thus prey to unscrupulous collection methods. Collections made on loans to businesses are not subject to the Act because it is assumed that businesspeople do not need the warnings.

The defendants contend that since the Act governs debt collection, the relevant time is when the attempt at collection is made. Since the house was being used for business purposes at the time of collection, the defendants claim that they were not required to state the exact total of the debt. The relevant time is when the loan is made, not when collection is attempted.

It makes more sense to base the debt collector’s obligation on the character of the debt when it arose rather than when it is to be collected. The original creditor is more likely to know whether the debt was personal or commercial at its issuance.

Against this, the defendants argue that the plaintiff’s interpretation creates a loophole.

Suppose the plaintiff had bought the house to use as an office, and later converted it to personal use; on the plaintiff’s interpretation of the Act, the debt collector would not have to give him the statutory warnings. But this makes perfect sense. A businessman who converts a business purchase to personal use does not by virtue of that conversion lose his commercial sophistication and so acquire a need for statutory protection. Thus, the Act is applicable. Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, and Clark, L.L.C., United States Court of Appeals, Seventh Circuit, 2000, 214 F. 3d 872.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 45: Environmental Law

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 45: Environmental Law

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ............................................................................... 6

ANSWERS TO ETHICAL DILEMMA Distant Concerns 1. What should Ewing do?

2. Would your advice to Ewing be any different if R-11 were already banned in the United States?

3. If a chemical is banned in the United States but not in certain foreign nations, should the U.S. government prohibit the manufacturer from making the chemical here and exporting it to countries where it’s not banned? What about a U.S. company that manufactures a banned chemical offshore, for example, in joint venture with a foreign partner?

4. In answering Question 3, would you take a chemical-by chemical approach? Or would you stand for or against an export ban based on the principle that what’s not safe enough for Americans is not safe enough for others?

5. What, if any, would be the justifications for a double standard of safety?

Answer: 1. R-11 has not yet been banned in the United States at the time Ewing faces this decision. Even if it is banned, presumably the chemical has not been banned by any of the Caribbean and South American nations where Ewing and his partners do business.

Thus, students’ answers will probably be based on three approaches to ethical decision-making: (a) legalistic: "As long as it’s not illegal, sell it”; (b) golden rule: “Treat others as you’d have them treat you” (though students may have a double standard when others are not of their nationality or culture); and (c) cost-benefit: Does the risk of using a potentially cancer-promoting chemical outweigh the benefit of preventing diseases borne by mosquitoes and biting flies, many of which are debilitating and some, fatal?

2. Same decision-making principles as in Question 1.

3., 4., and 5. The cost-benefit approach is compelling when students consider poor countries with burgeoning populations and low life expectancies, as in a number of sub-Saharan African nations. In those countries, one could argue, a cheap insecticide that saves many lives is a godsend, despite the risks. This decision-making approach, however, is harder to justify when students look at the global environment.

Environmental damage, for example from an insecticide like DDT, may not remain tidily

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 45: Environmental Law

within national boundaries. Students should consider what might happen if a country's near neighbors object to its use of a particular chemical—or what about countries farther away? These same questions apply to other environmental problems with global implications, such as the dumping of highly radioactive wastes in the oceans or the use of ozone-depleting CFCs.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Atlantic Cement operated a large cement plant. Neighboring landowners sued for damages and an injunction, claiming that their properties were injured by the dirt, smoke, and vibrations coming from the plant. The lower court found that the plant constituted a nuisance and granted temporary damages but refused to grant an injunction because the benefits of operating the plant outweighed the harm to the plaintiffs’ properties. The landowners appealed. Does the plant constitute a nuisance? Should it be shut down?

Explain.

Answer: This would be a private nuisance action because the alleged harm was suffered by the nearby landowners and not the general public. The defense asserted

by Atlantic Cement will be upheld based upon their socially useful activity, and it should not be shut down.

2. Seindenberg and Hutchinson (the site owners) leased a four-acre tract of land (the Bluff Road site) to a chemical manufacturing corporation (COCC). While the lease initially was for the sole purpose of allowing COCC to store raw materials and finished products in a warehouse on the land, COCC later expanded its business to include the brokering and recycling of chemical waste generated by third parties. COCC’s owners subsequently formed a new corporation, South Carolina Recycling and Disposal, Inc. (SCRDI), for the purpose of taking over COCC’s waste-handling business. The site owners accepted rent from SCRDI. The waste stored at Bluff Road contained many chemical substances that federal law defines as hazardous. Subsequently, the Environmental Protection Agency concluded that the site was a major fire hazard. The federal government contracted with a third party to perform a partial cleanup of the site. The state of South Carolina completed the cleanup. The federal government and the state sued SCRDI, COCC, the site owners, and three third-party generators as responsible parties under the Resource Conservation and Recovery Act and Comprehensive Environmental Response, Compensation, and Liability Act. Explain whether the federal government and the state of South Carolina will prevail.

Answer: Judgment for the United States and South Carolina. Landowners are strictly liable regardless of their degree of participation. The Superfund was created to pay for removal and cleanup of hazardous wastes, but is not to be used when there are responsible parties.

3. The state of Y submits a plan under the Clean Air Act to attain national ambient air quality standards. Can the Environmental Protection Agency administrator deny approval of the state plan because it is (a) less stringent or (b) more stringent than the agency believes is feasible? Explain.

Answer: The EPA Administrator may deny approval of a state plan because it is less stringent than the agency believes is feasible. A plan must provide for attainment and maintenance of national ambient air standards. The Administrator may not deny approval of a more stringent plan, in that the Act gives the “Agency no authority to question the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 45: Environmental Law

wisdom of a state’s choices of emission limitations if they are part of a plan which satisfies the standards...” Train v. Natural Resources Def. Council, 42 U.S. 60 (1975).

4. Kennecott Copper Corp. brings this challenge to an Environmental Protection Agency (EPA) order that rejected a portion of the state of Nevada’s implementation plan dealing with the control of stationary sources of sulfur dioxide (SO2). All of the SO2 emissions come from a single source—the Kennecott copper smelter at McGill. The EPA based its decision on the belief that the Clean Air Act national ambient air quality standards (NAAQS) must be met by continuous emission limitations to the maximum extent possible and that the Act permits the intermittent use of emission controls only when continuous controls are not economically feasible. Kennecott contends that the EPA must approve any state implementation plan that will attain and maintain an NAAQS within the statutory time period. Who will prevail? Why or why not?

Answer: The EPA acted within its authority in refusing to accept intermittent controls as adequate compliance with the Act. That is, EPA correctly interpreted the Act as requiring that national air quality standards be met by continuous emission limitations to the maximum extent possible, and that intermittent controls and dispersion systems be used only when continuous emission controls are not economically feasible. The EPA order is upheld. Kennecott Copper Corp. v. Train, 526 F. 2d 1149 (9th Cir. 1975).

5. The Environmental Protection Agency (EPA) administrator issued an order suspending the registration of the pesticides heptachlor and chlordane under the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA). Velsicol Chemical Corp., the sole manufacturer of these pesticides, brings this action, contending that the evidence does not support the administrator’s contention that the continued use of these chemicals poses an imminent hazard to human health. Velsicol and the U.S. Department of Agriculture (USDA) contend (1) that the EPA’s laboratory tests on mice and rats do not “conclusively” show that either chemical is carcinogenic; (2) that mice are too prone to tumors to be reliable test subjects; and (3) that human exposure to these chemicals is insufficient to create a risk.

Nonetheless, human epidemiology studies on both chemicals provide no basis for concluding that either pesticide is safe. The administrator based part of his claim on residues of these chemicals found in soil, air, and the aquatic ecosystem over long periods of time and on the presence of these chemicals in the human diet and human tissue. Does FIFRA apply in this situation? Explain.

Answer: The manufacturer’s voluntary cessation of production of heptachlor did not moot consideration of suspension order for heptachlor. The Administrator is not required to establish that the product is unsafe in order to suspend and the burden of proof as to the safety of the product rests on the applicant and the registrant. The substantial evidence, including experimental evidence establishing carcinogenicity of heptachlor and chlordane on laboratory animals, supported the suspension of registration and the Administrator properly found that the pesticides posed a carcinogenic risk to humans on the basis of the finding of risk to laboratory animals in view of evidence of widespread residues of heptachlor and chlordane present in the human diet and in human tissues. Environmental Defense Fund, Inc. v. Environmental Protection Agency, 548 F. 2d 998 (D.C. 1976).

6. The U.S. Department of the Interior filed an environmental impact statement (EIS) with regard to its proposal to lease approximately eighty tracts of submerged land, primarily located off the coast of Louisiana, for oil and gas exploration. Adjacent to the proposed area is the greatest estuarine coastal marsh in the United States. This marsh provides rich nutrients for the Gulf of Mexico, the most productive fishing region of the country. The EIS

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 45: Environmental Law

focused primarily on oil pollution and its negative environmental effect. Three conservation groups contend that the EIS is insufficient in that it does not properly discuss alternatives. The government contends that (a) it need only provide a detailed statement of the alternatives, not a discussion of their environmental impact, and (b) the only alternatives the National Environmental Policy Act requires it to discuss are those that can be adopted and implemented by the agency issuing the impact statement. Is the government correct in its contentions? Why or why not?

Answer: The National Environmental Policy Act requires both a detailed statement of alternative courses of action and also a presentation of environmental risks incident to them. Although this discussion is only required for those alternatives that are reasonably available, it should not be limited to measures which a particular agency or official can adopt. Natural Resources Defense Council, Inc. v. Morton, 458 F. 2d 827 (D.C. 1972).

7. Chemical Manufacturers Association (CMA) and four companies that manufacture chemicals challenged a test rule promulgated by the Environmental Protection Agency (EPA) under the Toxic Substances Control Act, (TSCA). The plaintiffs asserted that the EPA must find that the existence of an unreasonable risk of injury to health is more probable than not before it may issue a test rule under the act. In response, the EPA claimed that it may issue a test rule under the TSCA if the agency determines that there is a substantial probability of an unreasonable risk of injury to health. The test rule required toxicological testing to determine the health effects of the chemical 2-ethylhexanoic acid and imposed on exporters of this chemical a duty to file certain notices with the EPA. Explain what standard should be applied.

Answer: The toxic substances control act establishes a two-tier structure: the EPA must find that a chemical substance “presents or will present an unreasonable risk of injury to health or the environment” in order to regulate that substance. In contrast, the EPA has the authority to require testing if the substance “may present an unreasonable risk to health or the environment.” The question here is whether the “unreasonable risk” must be more probable than not, as CMA contends, or must only be a probability that is more than merely theoretical or speculative, as the EPA contends. The court concluded that an “unreasonable risk” need not be established to a more-probable-than-not degree. If the EPA were required to find that a substance presents an unreasonable risk, then the EPA could regulate the substance and there would be no role for required testing. While Congress did not intend to authorize the EPA to issue test rules on the basis of mere hunches, the EPA’s reading of the TSCA is a reasonable accommodation of the congressional policies regarding the gathering of information about suspect chemicals. Chemical Manufacturer Association v. EPA, 859 F. 2d 977.

8. National-Southwire Aluminum Company (NSA) owns and operates a plant that emits fluoride. When its wet scrubbers were turned off as part of its regular maintenance program, NSA discovered no appreciable change in ambient fluoride levels. Because of the expense of operating the scrubbers and its belief that using the scrubbers did not significantly affect ambient fluoride levels, NSA desired to turn the scrubbers off permanently. Accordingly, NSA sought a determination from the Environmental Protection Agency (EPA) that turning off the scrubbers would not constitute a modification requiring the application of new source performance standards to the plant. Turning off the scrubbers would result in an increase of more than 1,100 tons per year of fluoride emissions with no decrease in the emission of any other pollutant. This increase was nearly four hundred times the level the EPA had established as inconsequential. The EPA determined that turning off the scrubbers would constitute a “new source” modification.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 45: Environmental Law

Accordingly, NSA was required either to leave the scrubbers on or to install new pollutant control equipment. Is the EPA correct in its assertion? Explain.

Answer: Determination of the EPA affirmed. The Clean Air Act defines “modification” as any physical change or change in operation of a “stationary source” that increases the emission of air pollutants. Under NSA’s argument, a “modification” depends on the amount of pollutant the pollution-generating equipment creates, without regard to the amount of pollution actually emitted into the atmosphere. The trial court disagreed. It is clear from EPA regulations that “modification” includes any change in operation that increases the emission of any air pollutant. The proposal to turn off the wet scrubbers does not suggest the addition or use of any device whose primary function is the reduction of air pollutants. Rather, the proposal involves the removal or replacement of a system, and in such a case the EPA can determine that such a change is a modification if it results in less environmentally beneficial operations. Here, it is clear that turning off the scrubbers is less environmentally beneficial, since it would increase the emission of fluorides without decreasing the emission of other pollutants.

National-Southwire Aluminum Co v. EPA, 838 F. 2d 835.

9. The city of Fayetteville, Arkansas, received a National Pollutant Discharge Elimination System permit from the Environmental Protection Agency (EPA) for the discharge of sewage into a stream that ultimately reaches the Illinois River, twenty-two miles upstream from the Oklahoma border. The EPA permit limited the effluent discharge to comply with Oklahoma water quality standards, but the EPA stated that those standards would be violated only if the discharge would cause an actual, detectable violation of Oklahoma standards. Oklahoma appealed the permit, arguing that the permit violated Oklahoma water quality standards, which allow no degradation of water quality. Explain whether the permit should be granted.

Answer: Yes. Affected states cannot block an EPA-issued permit, but instead, must seek to have the EPA administrator disapprove the permit on the grounds that the discharge will have an undue impact on the interstate waterway. In issuing the permit in this case, the EPA required that the discharge not violate Oklahoma’s water quality standards. This is a reasonable exercise of the EPA’s broad discretionary power under the Clean Water Act to establish conditions for issuing NPDES permits. Arkansas v.

Oklahoma, 112 S. Ct. 1046.

10. On October 20, 1999, a group of nineteen private organizations filed a rulemaking petition asking the Environmental Protection Agency (EPA) to regulate greenhouse gas emissions from new motor vehicles under the Clean Air Act. Fifteen months after the petition’s submission, the EPA requested public comment on all the issues raised in the petition, adding a “particular” request for comments on “any scientific, technical, legal, economic or other aspect of these issues that may be relevant to EPA’s consideration of this petition.” The EPA received more than fifty thousand comments over the next five months.

On September 8, 2003, the EPA entered an order denying the rulemaking petition. The agency gave two reasons for its decision: (1) that contrary to the opinions of its former general counsels, the Clean Air Act does not authorize the EPA to issue mandatory regulations to address global climate change and (2) that even if the agency had the authority to set greenhouse gas emission standards, it would be unwise to do so at this time. In concluding that it lacked statutory authority over greenhouse gases, the EPA observed that Congress “was well aware of the global climate change issue when it last comprehensively amended the [Clean Air Act] in 1990,” yet it declined to adopt a proposed amendment establishing binding emissions limitations. Calling global warming “the most pressing environmental challenge of our time,” twelve states, including Massachusetts, local governments, and private organizations, alleged that the EPA had abdicated its

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 45: Environmental Law

responsibility under the Clean Air Act to regulate the emissions of four greenhouse gases, including carbon dioxide, and challenged the decision. Explain who is correct.

Answer: The petitioners should prevail. The Clean Air Act’s sweeping definition of “air pollutant” includes “any air pollution agent or combination of such agents, including any physical, chemical…substance or matter which is emitted into or otherwise enters the ambient air.” Because greenhouse gases fit well within this definition of “air pollutant,” the EPA has statutory authority to regulate such gases from new motor vehicles.

The EPA’s reliance on subsequent congressional actions and deliberations it views as tantamount to a command to refrain from regulating greenhouse gas emissions is not persuasive. Even if postenactment legislative history could shed light on the meaning of an otherwise-unambiguous statute, EPA identifies nothing suggesting that Congress meant to curtail EPA’s power to treat greenhouse gases as air pollutants. Also unpersuasive is EPA’s argument that its regulation of motor-vehicle carbon dioxide emissions would require it to tighten mileage standards, a job the EPA felt Congress had assigned to the Department of Transportation. The fact that DOT’s mandate to promote energy efficiency by setting mileage standards may overlap with EPA’s environmental responsibilities in no way permits EPA to avoid its duty to protect the public “health” and “welfare.”

EPA’s alternative basis for its decision—that even if it has statutory authority to regulate greenhouse gases, it would be unwise to do so at this time—rests on reasoning divorced from the statutory text. While the statute conditions EPA action on its formation of a “judgment,” that judgment must relate to whether an air pollutant “cause[s], or contribute[s] to, air pollution which may reasonably be anticipated to endanger public health or welfare.” Under the Act’s clear terms, EPA can avoid promulgating regulations only if it determines that greenhouse gases do not contribute to climate change or if it provides some reasonable explanation as to why it cannot or will not exercise its discretion to determine whether they do. It has not done so.

Instead, EPA rejected the rulemaking petition based on arbitrary and capricious reasons.

ANSWERS TO “TAKING SIDES” PROBLEMS When considering an application for a special use permit to develop and operate a ski resort at Sandy Butte, a mountain in Washington that is part of a national forest, the Forest Service prepared an environmental impact statement (EIS). The EIS recommended the issuance of a special use permit for what was to be a sixteen-lift ski area, and the forest service issued the permit as recommended. Four organizations sued, claiming that the EIS was inadequate. The lower court held that the EIS was adequate, but the Court of Appeals reversed, concluding that the National Environmental Policy Act required that actions be taken to mitigate the adverse effects of a major federal action and that the EIS contain a detailed mitigation plan. a. What are the arguments that the EIS should only take a hard look at the relevant environmental consequences? b. What are the arguments that the EIS should propose actions that mitigate the relevant environmental consequences? c. What should the EIS include in this situation?

Answer: (a) The Act mandates that the relevant government agency review all environmental consequences, but not propose ways to mitigate these consequences. Results are © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 45: Environmental Law

not mandated only the appropriate review. (b) An agency’s environmental impact statement (EIS) should include a fully developed plan detailing what steps will be taken to mitigate adverse environmental impacts.

Otherwise, the law does not make any sense. (c) Decision of the Court of Appeals reversed and remanded. The National Environmental Policy Act (NEPA) ensures government commitment to protecting environmental quality by establishing important “action-forcing” procedures.

Pursuant to these procedures, a federal agency must prepare an EIS, which forces the agency to take a “hard look” at the environmental consequences of proposed actions. It is implicit that through such procedures the NEPA requires that an EIS discuss which adverse effects are avoidable. The NEPA, however, only mandates certain procedures, not particular results. An agency that adequately identifies and evaluates the adverse environmental effects of a proposed action in its EIS is not constrained by the NEPA from deciding that other values outweigh the environmental costs. Thus, the NEPA requires neither that action be taken to mitigate the adverse effects of federal actions nor that an EIS include specific measures to mitigate the adverse impacts of the proposed action. NEPA only prohibits uninformed—rather than unwise—agency action and is procedural, not substantive, in nature. Robertson v. Methow Valley Citizens Council, 90 U.S. 332, 109 S. Ct. 1835, 104 L. Ed. 2d 351.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 46: International Business Law

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 46: International Business Law

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ............................................................................... 8

ANSWERS TO ETHICAL DILEMMA Who May Seek Economic Shelter Under U.S. Trade Law? 1.

Should a foreign corporation be free to sell goods at the lowest price possible? What is the social policy behind laws that prohibit foreign companies from selling below cost?

What cost should be considered fair?

2. Is it in U.S. consumers’ interest to encourage all competition from foreign enterprises?

3. How would your answers change if a foreign drug company were selling a medically valuable drug at a price significantly below that charged by its U.S. competitors?

Answer: 1. The social policy behind dumping restrictions is to protect the U.S. economy from unfair competition and unfair conduct in obtaining a market share in the U.S. economy.

2. It is clearly in the interest of the consumer to obtain products at a reasonable price.

However, one may argue that some protection of U.S. companies is required to preserve U.S. business and U.S. jobs.

3. Certain drug companies have come under attack for failing to charge reasonable prices for drugs for schizophrenic patients and for drugs for life-threatening diseases.

Johnson & Johnson charges $1,495 annually to treat colon cancer patients with levamisole. Levamisole, when taken with another drug, fluorouracil, reduced the recurrence rate of cancer by 41 percent and cancer deaths by one-third. The drug kills microscopic cancer cells which surgeons cannot find in surgery.

When levamisole has been sold for other uses (to treat animals with worms) the comparable price for the medicine was $14.95. The price of the medicine for cancer patients has been criticized as being unconscionable by Dr. Charles G. Moertel of the Mayo Clinic. The drug is typically not covered by insurance plans and many patients have trouble paying for it. (See Haney, Firm Criticized for Disparity in Cancer Drug’s Cost, Philadelphia Inquirer, May 20, 1992, pg. A2.)

Against this background, the consumer may argue that competition of any kind which would drive the prices down would be welcome.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 46: International Business Law

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Three banks that are wholly owned by the Republic of Costa Rica had issued promissory notes, payable in U.S. dollars in New York City. The notes are now in default due solely to actions of the Costa Rican government, which had suspended all payments of external debt because of escalating economic problems. Efforts by Costa Rica to curb foreign debt payment difficulties conflicted with U.S. policy for debt resolution procedures as conducted under the auspices of the International Monetary Fund. A syndicate of U.S. banks brought suit to recover on the promissory notes. The three Costa Rican banks assert the act of state doctrine as a defense. Should the doctrine apply? Explain.

Answer: No. The act of state doctrine provides that the judicial branch of a nation should not question the validity of actions taken by a government within that foreign sovereign's own borders. In the United States, the doctrine is inapplicable to commercial activities of a foreign sovereign. Furthermore, the notes in question were to be paid in U.S. dollars in New York City—outside the border of Costa Rica. The act of state doctrine would be applicable to this dispute only if the situs of debt was Costa Rica. So, the doctrine is not applicable. Allied Bank International et al. v. Banco Credito Agricola de Cartago (Costa Rica), 757 F. 2d 516 (2d Cir. 1985).

2. Six U.S. manufacturers of broad-spectrum antibiotics derived a large percentage of their sales from overseas markets, including India, Iran, the Philippines, Spain, South Korea, Germany, Colombia, and Kuwait. The manufacturers agreed to a common plan of marketing, whereby territories were divided and prices for products were set. The plan members also agreed not to grant foreign producers licenses to the manufacturing technology of any of their “big money” drugs. May the above foreign countries recover treble damages for violation of the U.S. antitrust laws? Why or why not?

Answer: Yes, decision for the foreign nation plaintiffs. The foreign nations are entitled to prosecute civil claims in the courts of the United States on the same basis as domestic corporations or individuals. The treble damages provision of the Sherman Act has two purposes: (1) to deter violators; and (2) to deprive them of their illegality and to compensate victims of antitrust laws for their injuries. The Sherman Act provision granting “any person” an action for treble damages was intended to be broad and inclusive and thus includes foreign governments recognized by and at peace with the United States. Pfizer Inc. v. Government of India et al., 424 U.S. 306, 96 S. Ct. 584 (1978).

3. After reading attractive brochures advertising a package tour of the Dominican Republic, a U.S. family decided to purchase tickets for the family vacation plan. The tour was a product of four different business entities, two domestic (U.S.) and two foreign. Sheraton Hotels & Inns, World Corporation, was to provide food and lodging; Dominicana Airlines, wholly owned by the government of the Dominican Republic, which routinely flew into Miami International Airport and sold tickets within the United States, was to provide round-trip air transportation and “tourist cards” necessary for entry into the Dominican Republic; and two U.S. firms organized and sold the tour. Problems for the family began when their Dominicana flight landed in the Dominican Republic, and immigration officials denied them entry. Forced to leave, the family was shuttled first to Puerto Rico and then to Haiti, where they had to secure their own passage back to the United States at additional expense. The family brings suit for battery, false imprisonment, breach of warranty, and breach of contract against all four business entities. The Dominicana Airlines asserts the act of state doctrine as a defense. Explain whether this defense applies in this situation.

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Answer: It applies to part of the claim, but not all of it. The act of state doctrine precludes judicial inquiry into the illegality, validity and propriety of the acts and motivations of foreign sovereigns acting in their governmental roles within their own boundaries. However, it does not preclude the judicial resolution of all commercial consequences stemming from the occurrence of public acts. Although the plaintiffs’ battery and false imprisonment claims against the airline wholly owned by the government of the Dominican Republic were foreclosed under the act of state doctrine and the Foreign Sovereign Immunities Act and were therefore dismissed, the claims for breach of warranty and breach of contract are valid and do not lie within any exception to the Foreign Sovereign Immunities Act. There is no blanket grant of immunity to the government of the Dominican Republic to protect it from any breach of warranty or breach of contract. Arango v. Guzman Travel Advisors Corp., 621 F. 2d 1371 (1980).

4. A privately-owned business in a developing country determines that current computer technology could solve many of the problems faced by its country’s private and public sectors. This business, however, lacks the capital resources necessary for research and development to acquire such computer technology, even if trained personnel were available. Furthermore, despite a sense of patriotism, the business concludes that its national government could not efficiently or effectively handle such a development project. What business forms are available to this business for acquiring sophisticated computer technology? Discuss the advantages and problems inherent in the various options.

Answer: The following business forms are available and should be considered. (a) Foreign Agency–The business may become the foreign agent of a major international computer company. As an agent, they would need to invest little or no capital, yet they could make the current state of the art technology available in their country. (b) Distributorship–The business may become the foreign distributor of a major international computer company, with many of the same advantages of a foreign agency relationship. It may involve the investment of slightly more capital than would an agency relationship, but it would also give the company a little more control over the marketing of the product. (c) Licensing Agreement–The company might seek to become a franchisee or licensee of a major computer corporation. Under this sort of arrangement, the company would have to do its own manufacture of the computers. This would require a larger capital expenditure than an agency or distributorship relationship, but it would ensure the availability of the technology and would also involve citizen employees in the developing country in the manufacturing process, thus providing jobs and ensuring the technical training of local personnel. (d) Joint Venture–The company might also seek to negotiate a joint venture agreement with a major computer corporation. Under such an arrangement, the two companies would share profits and liabilities according to the negotiated agreement. This would involve a greater expenditure of capital than would either an agency or distributorship agreement, but less than a franchise or license agreement. At the same time, it would allow the local company to actively participate in the manufacture and marketing of the computers. Of the options available, this might be the one that should be chosen by the local company, because it has the most potential for accomplishing the long-term goals of the local company.

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5. King Faisal II of Iraq was killed on July 14, 1958, in the midst of a revolution in that country that led to the establishment of a republic subsequently recognized by the U.S. government. On July 19, 1958, the new republic issued a decree that all property of the former ruling dynasty, regardless of location, should be confiscated. Subsequently, the Republic of Iraq brought suit in the United States to obtain possession of money and stocks deposited in the deceased king’s U.S. bank account in New York City. Explain whether Iraq will be able to collect the funds.

Answer: Decision for the U.S. bank and against the Republic of Iraq. Under the traditional application of the act of state doctrine, the principle of judicial refusal of examination applies only to a taking by a foreign sovereign of property within its own territory. When the property in question is within the United States at the time of the attempted confiscation, the confiscation will be given effect only if consistent with the policy and law of both the United States and the country seeking to confiscate it.

Republic of Iraq v. First National City Bank, 353 F. 2d 47 (1965).

6. A business entity incorporated under the laws of one of the European Union (EU) member nations contracts with the government of a developing nation to form a joint venture for the mining and refining of a scarce raw material used by several industrial nations in the manufacture of highly sensitive weapons systems. The contract calls for the EU-based corporation to invest money and technology that will be used to build permanent refinery plants that will eventually revert to the developing nation. The developing nation also reserves the right to set quotas on sales of this scarce resource and to choose the destination of exports. Due to political conflicts, the developing nation refuses to allow any exports of the scarce material to the United States. This causes a sharp price increase in exports to the United States by other suppliers. The United States asserts antitrust violations against the EU-based corporation for the effects produced within the United States. Should the United States succeed? Explain.

Answer: Yes. The United States courts have asserted the right to apply the Sherman Act to foreign commerce intended to or affecting the United States market. Even though the agreement was made outside of the United States between a business entity incorporated under the laws of an EU member nation and the government of a developing nation, it was intended to and did in fact affect the United States market.

7. A Panamanian corporation lends money to a Turkish enterprise, which issues a promissory note. The loan contract specifies that payment on the interest and principal shall be made to the Chemical Bank of New York City, where both parties maintain accounts. The loan contract contains no choice of law designation, but the Panamanian and Turkish companies have referred to the Chemical Bank in New York as their “legal address.” As a result of a contractual performance dispute, the Turkish company suspends payments on the loan. The Panamanian corporation then brings suit in the United States to recover the balance of the payments due. Explain what possible options for choice of law apply.

Answer: In the facts as stated in the problem, the law applied could be New York State law (the issues raised involve commercial paper, which is governed by Article 3 of the UCC.), Panamanian law, or Turkish law. In the actual case on which this problem is based, payment of the note was to be made in Swiss francs, and at the time this action was brought in New York State, another action was pending between the parties in Switzerland. Nevertheless, the New York State court entered judgment for the Panamanian corporation. Weston Bank v. Turkiye Garanti Bankasi, 446 N.Y.S. 2d 67 (App. Div. 1982).

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8. New England Petroleum Corporation (NEPCO), a New York corporation, was in the business of selling fuel oil in the United States. PETCO, a refinery incorporated in the Bahamas, was a wholly owned subsidiary of NEPCO. In 1968, PETCO entered into a long-term contract to purchase crude oil from Chevron Oil Trading (COT), which held 50 percent of an oil concession in Libya. In 1973, Libya nationalized COT and several other foreign-owned oil concessions, thereby forcing COT to terminate its contract with PETCO. To secure needed oil supplies, PETCO entered into a new contract with National Oil Corporation (NOC), which was wholly owned by the Libyan government. This contract was at a substantially higher price than the original contract with COT. The following month, Libya declared an oil embargo on exports to the United States, the Netherlands, and the Bahamas.

Accordingly, NOC canceled its contracts with PETCO. After oil prices rose dramatically, NOC accepted bids for new contracts to replace the ones inactivated by the embargo.

NEPCO brought suit in a U.S. district court against the Libyan government and NOC, alleging breach of contract. Does the district court have jurisdiction? Explain.

Answer: The district court does not have jurisdiction. Libya and NOC are immune from this suit in the courts of the U.S. The exception to sovereign immunity contained in the Foreign Sovereign Immunities Act of 1976 allows U.S. jurisdiction based on “an act outside of the territory of the U.S. in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the U.S.” The actions of Libya in this case had a direct impact only upon the Bahamian company PETCO. Carey v. National Oil Corporation, 592 F. 2d 673 (2d Cir. 1979).

9. Nigeria, experiencing an economic boom due to exports of high-grade oil, embarked on an infrastructure development plan. Accordingly, Nigeria entered into at least 109 contracts with 68 suppliers for the purchase of cement at a price of almost $1 billion. Among the contracting suppliers were four US corporations, including Texas Trading & Milling Corporation. Nigeria misjudged the cement market (having anticipated only a 20 percent fulfillment rate) and was forced to repudiate most of the contracts. Texas Trading & Milling Corporation and three other U.S. companies brought suit, alleging anticipatory breach of contract. Nigeria claimed immunity under the Foreign Sovereign Immunities Act. Is Nigeria’s claim correct? Explain.

Answer: No. The Foreign Sovereign Immunities Act denies immunity to foreign governments from suits arising from commercial, as opposed to public or governmental, activity. The commercial character of an activity is determined by the nature of the course of conduct or particular transaction rather than by its purpose. If a government enters into a contract to purchase goods and services, that is considered a commercial activity. Immunity cannot be claimed with respect to acts or transactions that are commercial in nature, regardless of their underlying purpose. If a government department goes into the marketplaces of the world and buys boots or cement as a commercial transaction, that government department should be subject to all the rules of the marketplace. Accordingly, Nigeria’s cement contracts and letters of credit qualify as commercial activity for purposes of the Foreign Sovereign Immunities Act. Therefore, the defense of sovereign immunity is not available to Nigeria in this situation. Texas Trading & Milling Corp v. Federal Republic of Nigeria, 647 F. 2d 300 (1981).

10. Prior to 1918, a Russian corporation had deposited sums of money with August Belmont, a private banker doing business in New York City. In 1918, the Soviet government nationalized the corporation and appropriated all of the corporation’s property and assets, including the deposit account with Belmont. The deposit became the property of the Soviet government until 1933, when it was released and assigned to the U.S. government as part of an international compact between the United States and the former Soviet

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Union. The purpose of this arrangement was to bring about a final settlement of the claims and counterclaims between the two countries. The United States brought an action to recover the deposit from Belmont. Belmont resists, arguing that the act of nationalization by the Soviets was a confiscation prohibited by the Fifth Amendment to the U.S. Constitution and was also a violation of New York public policy. Explain who will prevail.

Answer: Judgment for the United States. Governmental power over external affairs is vested exclusively in the national government, not the several states. Accordingly, the laws of New York cannot prevail against the international compact in this case.

Principles of international courtesy and respect forbid the courts of one country to examine the validity of the acts of a foreign government done within its own territory.

“What another country has done in the way of taking over property of its nationals, and especially of its corporations, is not a matter for judicial consideration.” The U.S. constitution, laws, and policies have no extraterritorial operation, except with respect to U.S. citizens. No U.S. interests were involved here, since August Belmont was merely a custodian for the deposit account. United States v. Belmont, 301 U.S. 324 (1937).

11. A federal grand jury handed down an indictment naming as a defendant Nippon Paper Industries Co., Ltd. (NPI), a Japanese manufacturer of facsimile paper. The indictment alleged that five years earlier NPI and certain unnamed coconspirators held a number of meetings in Japan, which culminated in an agreement to fix the price of thermal fax paper throughout North America. NPI and other manufacturers who were involved in the scheme purportedly accomplished their objective by selling the paper in Japan to unaffiliated trading houses on condition that the latter charge specified (inflated) prices for the paper when they resold it in North America. The trading houses then shipped and sold the paper to their U.S. subsidiaries, who in turn sold it to U.S. consumers at inflated prices. The indictment further states that, to ensure the success of the venture, NPI monitored the paper trail and confirmed that the prices charged to end users were those that it had arranged. The indictment maintains that these activities had a substantial adverse effect on commerce in the United States and unreasonably restrained trade in violation of the Sherman Act. Does the Sherman Act apply to this conduct? Explain.

Answer: Yes. In the United States Supreme Court’s most recent exploration of the Sherman Act’s extraterritorial reach, the Justices permitted civil antitrust claims under Section One to go forward despite the fact that the actions which allegedly violated Section One occurred entirely on British soil. It is “well established by now that the Sherman Act applies to foreign conduct that was meant to produce and did in fact produce some substantial effect in the United States.” United States v. Nippon Paper Industries Co., Ltd., 109 F. 3d 1 (1997).

12. American Rice, Inc. (“ARI”), is a Houston-based company that exports rice to foreign countries, including Haiti. Rice Corporation of Haiti (“RCH”), a wholly owned subsidiary of ARI, was incorporated in Haiti to represent ARI’s interests and deal with third parties there. As an aspect of Haiti’s standard importation procedure, its customs officials assess duties based on the quantity and value of rice imported into the country. Haiti also requires businesses that deliver rice there to remit an advance deposit against Haitian sales taxes, based on the value of that rice, for which deposit a credit is eventually allowed on Haitian sales tax returns when filed. The United States indicted David Kay and Douglas Murphy, both officers of ARI, for violation of the Foreign Corrupt Practices Act (FCPA). The indictment detailed how Kay and Murphy allegedly orchestrated the bribing of Haitian customs officials to accept false bills of lading and other documentation that intentionally understated by one-third the quantity of rice shipped to Haiti, thereby significantly reducing ARI’s customs duties and sales taxes. The defendants argue that

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bribes paid to obtain favorable tax treatment are not payments made to “obtain or retain business” within the FCPA and thus are not within the scope of that statute’s proscription of foreign bribery. Does the FCPA apply to this conduct? Explain.

Answer: Payments allegedly made to Haitian government officials for purpose of reducing corporation’s customs duties and taxes were potentially within FCPA’s prohibition against payments to foreign officials to “obtain or retain” business. U.S. v.

Kay, 359 F. 3d 738 (U.S. Court of Appeals, Fifth Circuit, 2004).

The Foreign Corrupt Practices Act (FCPA) did not criminalize every payment to foreign official, but only those payments intended to (1) influence foreign official to act or make decision in his official capacity, or (2) induce such official to perform or refrain from performing some act in violation of his duty, or (3) secure some wrongful advantage to payor, and Act criminalized such payments only if result they are intended to produce will assist, or is intended to assist, payor in efforts to get or keep some business.

We hold that Congress intended for the FCPA to apply broadly to payments intended to assist the payor, either directly or indirectly, in obtaining or retaining business for some person, and that bribes paid to foreign tax officials to secure illegally reduced customs and tax liability constitute a type of payment that can fall within this broad coverage. In 1977, Congress was motivated to prohibit rampant foreign bribery by domestic business entities, but nevertheless understood the pragmatic need to exclude innocuous grease payments from the scope of its proposals. Congress was concerned about both the kind of bribery that leads to discrete contractual arrangements and the kind that more generally helps a domestic payor obtain or retain business for some person in a foreign country; and that Congress was aware that this type includes illicit payments made to officials to obtain favorable but unlawful tax treatment.

Furthermore, by narrowly defining exceptions and affirmative defenses against a backdrop of broad applicability, Congress reaffirmed its intention for the statute to apply to payments that even indirectly assist in obtaining business or maintaining existing business operations in a foreign country. Finally, Congress’s intention to implement the [OECD] Convention, a treaty that indisputably prohibits any bribes that give an advantage to which a business entity is not fully entitled, further supports our determination of the extent of the FCPA’s scope. *** [W]e conclude that bribes paid to foreign officials in consideration for unlawful evasion of customs duties and sales taxes could fall within the purview of the FCPA’s proscription. We hasten to add, however, that this conduct does not automatically constitute a violation of the FCPA: It still must be shown that the bribery was intended to produce an effect—here, through tax savings—that would “assist in obtaining or retaining business.” *** Although we recognize that lowering tax and customs payments presumptively increases a company’s profit margin by reducing its cost of doing business, it does not follow, ipso facto,—as the government contends—that such a result satisfies the statutory business nexus element. Even a modest imagination can hypothesize myriad ways that an unwarranted reduction in duties and taxes in a large-volume rice import operation could assist in obtaining or retaining business. For example, it could, as already indicated, so reduce the beneficiary’s cost of doing business as to allow the beneficiary to underbid competitors for private commercial contracts, government

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allocations, and the like; or it could provide the margin of profit needed to fend off potential competition seeking to take business away from the beneficiary; or, it could make the difference between an operating loss and an operating profit, without which the beneficiary could not even stay in business; or it could free up funds to expend on legitimate lobbying or other influence-currying activities to favor the beneficiary’s efforts to get, keep, or expand its share of the foreign business. Presumably, there are innumerable other hypothetical examples of how a significant diminution in duties and taxes could assist in getting or keeping particular business in Haiti; but that is not to say that such a diminution always assists in obtaining or retaining business. There are bound to be circumstances in which such a cost reduction does nothing other than increase the profitability of an already-profitable venture or ensure profitability of some start-up venture. *** *** *** We are satisfied that—for purposes of the statutory provisions criminalizing payments designed to induce foreign officials unlawfully to perform their official duties in administering the laws and regulations of their country to produce a result intended to assist in obtaining or retaining business in that country—an unjustified reduction in duties and taxes can, under appropriate circumstances, come within the scope of the statute.

ANSWERS TO “TAKING SIDES” PROBLEMS The Commercial Office of Spain hired Enrique Segni to develop a market for Spanish wines in the U.S. Midwest. The Commercial Office is an arm of the Spanish government. Seven months later, Segni was fired, whereupon he filed a lawsuit in a U.S. district court charging that the Commercial Office had breached the contract and seeking payment for the remainder of the contract term as damages. The Commercial Office moved for dismissal, claiming immunity from suit under the terms of the Foreign Sovereign Immunities Act (FSIA). a. What are the arguments that Spain is immune from suit under the FSIA? b. What are the arguments that Spain is not immune from suit under the FSIA? c. Explain which party should prevail.

Answer: (a) The Commercial Office could argue that Segni had been hired to execute the policy of the Spanish government, that is, the fostering of exports of Spanish wines to the U.S. Midwest, and that his employment by the Commercial Office was a public act for which the Office, as an arm of the Spanish government, was entitled to sovereign immunity under the Foreign Sovereign Immunities Act (FSIA). (b) Segni could argue that his hiring is commercial in nature and therefore subject to the “commercial activity” exception to the FSIA. It could be argued that Segni’s employment was not governmental in any way and was merely to act as a commercial representative of Spanish wines. Segni should prevail. Segni v.

Commercial Office of Spain, 835 F. 2d 160, Court of Appeals, 7th Circuit (1987). (c) The FSIA provides immunity to foreign states as a general matter, but subject to enumerated exceptions. The exception most frequently invoked, is the “commercial activity” exception: “A commercial activity means either a regular course of commercial conduct or a particular commercial transaction or act. The commercial character of an activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its

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purpose.” The nature of a transaction for FSIA purposes may be determined by asking whether a similar agreement could have been entered into with a private party. For purposes of this case, Segni’s employment by the Commercial Office is best described as a contract under which he would provide services in the area of product marketing. This characterization reveals the nature of his activity without relying on its underlying government purpose. The hiring of a marketing agent is certainly an “activity…in which a private person could engage,” and many do, including individual businesses as well as associations of like business entities.

Accordingly, we conclude that the district court correctly determined that the Commercial Office is not entitled to immunity from Segni’s breach-of-contract claim.

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Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 47: Introduction to Property, Property Insurance, Bailments, and Documents of Title

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ..............................................................................17

ANSWERS TO ETHICAL DILEMMA Who Is Responsible for the Operation of Rental Property?

1.

Could the boat rental company (and manager) have done more to prevent the accident that resulted in the children’s deaths? Should the manager have done more?

2. Much rental property, including boats, cars, and power tools such as mowers and saws, is either potentially or inherently dangerous. What is the responsibility of the owner of such equipment to the renter of it? What, if anything, is the responsibility of the renter to the owner? Should the owner be held strictly liable for the renter’s accidents with the property, regardless of fault? Why or why not? Who do you think was at fault in this accident?

3. Jones’s neighbors, the Corcorans and Duvals, are the parents of four of the drowned children. Together, in their anger, they consult a lawyer to explore the idea of suing either Jones or Riverside Canoe and Boat Rentals or both. What cause might their lawyer try to make against Jones? Against Riverside Canoe and Boat Rentals? Do you think they should sue? Why or why not?

4. Are some items of equipment so dangerous that state legislatures should pass laws forbidding their rental? If so, what items?

Answer: 1. Although not legally required to do so, the boat rental company could, at relatively little cost, erect a sign at the boat launch mapping hazards up- and downstream from the rental site, including dams and rapids. The manager could, as standard procedure, call renters' attention to the warning sign. In this case, the key factor was Jones's drunkenness while operating the boat (but not when he took possession of it), which probably could not have been prevented by the manager. However, research into boating accidents has established that drinking is involved in a high percentage of boating fatalities. Thus, the boat rental manager should, as standard procedure, expressly reiterate the prohibition against operating a boat while drinking, as stated in "Boating Safety Rules," which he hands out to renters. It goes without saying that the manager should absolutely refuse to rent a boat to anyone whom he suspects has been drinking.

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2. The responsibility of the owner is to keep rental equipment in safe operating condition, to make sure the renter knows how to operate it safely, and to refuse rental to a person not in fit condition to operate the equipment. The renter's duty is to return the equipment undamaged to the owner at the specified time, to pay the specified rent for it, and to operate the equipment in a specified manner if so required by the rental contract. As a matter of policy, strict liability would severely curtail the rental industry, which now makes available almost every conceivable type of equipment at affordable rental fees. Jones is at fault for operating the boat while drunk.

3. The case against Jones could be based on his negligence in operating the boat while intoxicated. The case of against the boat rental company would hinge on whether the manager fulfilled his duty of care to provide serviceable equipment, to ensure that Jones was fully aware of how to operate the boat safely, and to warn of hazards that Jones could not be expected to see for himself. It is very likely and reasonable for the parents to bring suit against both potential defendants. The parents’ loss is extraordinary, and they are entitled to seek compensation for it. Moreover, a recovery would make the defendants bear the consequences of their actions.

4. Probably not. Any item of equipment which may legally be operated by someone with the proper qualifications or license, can be rented for use by a qualified or licensed person.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

In January, Roger Burke loaned his favorite nephew, Jimmy White, his valuable Picasso painting. Knowing that Jimmy would celebrate his twenty-first birthday on May 15, Burke sent a letter to Jimmy on April 14 stating: Dear Jimmy, Tomorrow I leave on my annual trip to Europe, and I want to make you a fitting birthday gift, which I do by sending you my enclosed promissory note. Also I want you to keep the Picasso, which I loaned you last January, and you may now consider it yours. Happy birthday!

Affectionately, Uncle Roger The negotiable promissory note for $5,000 sent with the letter was signed by Roger Burke, payable to Jimmy White or bearer, and dated May 15. On May 21, Burke was killed in an automobile accident while motoring in France.

First Bank was appointed administrator of Burke’s estate. Jimmy presented the note to the administrator and demanded payment, which was refused. Jimmy brought an action against First Bank as administrator, seeking recovery on the note. The administrator in turn brought an action against Jimmy, seeking the return of the Picasso. a. What should the decision be in the action on the note? Explain. b. What should the decision be in the action to recover the painting? Explain.

Answer: (a) Jimmy should not prevail in his action on the note. Professor Graves, “Summary of Title to Personal Property,” page 25, says:

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“In concluding the subject of the execution of gifts inter vivos, it may be well to say that when the donor signs and delivers a note to the donee in which he promises to pay money, this is no delivery of the money, but a mere unenforceable promise for lack of consideration.”

Accord, UCC, Section 3-303. (b) The administrator should not prevail on its counterclaim. As stated by Prof. Graves, page 17: It is held, * * *, that if a chattel be already in the possession of the donee, as the donor’s bailee or agent, a gift inter vivos may be made of such chattel to the bailee or agent, by suitable word of gift, and retention of possession by the custodian as owner, without a return to the donor and redelivery by him.

2. Several years ago, Pierce purchased a tract of land on which stood an old, vacant house.

Recently, Pierce employed Fried, a carpenter, to repair and remodel the house. While Fried was tearing out a partition to enlarge one of the rooms, he found a metal box hidden in the wall. After breaking open the box and discovering that it contained $2,000 in gold and silver coins and old-style bills, Fried took the box and its contents to Pierce and told her where he had found it. When Fried handed the box and the money over to Pierce, he said, “If you do not find the owner, I claim the money.” Pierce placed the money in an envelope and deposited it in her safe deposit box, where it presently remains. No one has ever claimed the money, but Pierce refuses to give it to Fried. Will Fried be able to recover the money from Pierce? Why or why not?

Answer: Judgment will vary from jurisdiction to jurisdiction between Fried and Pierce.

There are three persons involved in the problem, the owner of the money, Fried the finder, and Pierce the landowner, all of whom have possible claims to the money. The owner, who has the first claim, has not been located and the facts indicate he is not likely to be found. This leaves the conflict between Fried and Pierce. The basic rule favors Fried, the finder, and many of the factors which courts consider in such cases also favor him. Thus, he is likely to win. However, it is equally conceivable that some courts might stress the fact that Fried was an employee of Pierce and also that the money was imbedded in the land belonging to Pierce, and thus justify giving it to Pierce.

The basic rule is that the finder is entitled to the lost property as against all persons except the true owner, and that the place of finding is of no consequence. Armory v.

Delamirie, 1 Strange 505, 93 Eng. Rep. 664 (1722). However, there have been deviations from the basic rule and various factors have influenced the courts.

One of the distinctions which courts frequently make is between lost property and mislaid property, lost property being awarded to the finder while mislaid property is awarded to the landowner.

An important factor which the courts often stress is whether the lost property was imbedded in the ground. Here, the money was hidden in a wall of a building which is considered as part of the realty. The justification for stressing this factor is that the owner of the land has more control over the property and should be considered as having possession of it prior to discovery by the finder.

The fact that the finder is an employee has sometimes been thought important by the courts in determining who is entitled to lost property where the conflict is between the finder and his employer who is also the owner of the land upon which the property

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 47: Introduction to Property, Property Insurance, Bailments, and Documents of Title

was found. If the duties of the finder expressly or by implication include the obligation to turn such property over to the employer, then the relationship is of importance.

Otherwise, not.

3. Gable, the owner of a lumber company, was cutting trees over the boundary line between his property and property owned by Lane. Although he realized he had crossed onto Lane’s property, Gable continued to cut trees of the same kind as those he had cut on his own land. While on Lane’s property, he found a diamond ring on the ground, which he took home. All of the timber Gable cut that day was commingled. Explain what Lane’s rights are, if any, (a) in the timber and (b) in the ring.

Answer: (a) Lane is entitled to all of the lumber. Here, Gable loses his interest in his own timber within the pile because he fraudulently cut and collected the timber and commingled it with his own, unless he is able to identify specifically and satisfactorily his timber. If he can, then he will retain his interest in the commingled timber. (b) Lane is also entitled to the ring because it was discovered by a trespasser upon his land.

4. Decide and explain your decision for each of the following problems. a. A chimney sweep found a jewel and took it to a goldsmith, whose apprentice removed the stone and refused to return it. The chimney sweep sues the goldsmith. b. One of several boys walking along a railroad track found an old stocking. All started playing with it until it burst in the hands of its discoverer, revealing several hundred dollars. The original discoverer claims all of the money; the other boys claim it should be divided equally. c. A traveling salesperson leaving a store notices a parcel of bank notes on the floor. He picks them up and gives them to the owner of the store to keep for the true owner.

After three years, they have not been reclaimed, and the salesperson sues the storekeeper. d. Frank is hired to clean the swimming pool at the country club. He finds a diamond ring on the bottom of the pool. The true owner cannot be found. The country club sues Frank for possession of the ring. e. A customer found a pocketbook lying on a barber’s table. He gave it to the barber to hold for the true owner, who failed to appear. The customer sues the barber.

Answer: (a) For the chimney sweep. Although he was not the owner, he has title against all but the true owner. (b) Divide it equally. There was no intent to control the contents of the stocking until it burst open in joint play. (c) For the salesman. The finder is the owner against all the world except the true owner. The storekeeper never obtained possession. The finding was in a public place. (d) Frank wins. The finding was in a semi-public place and the club never gained exclusive possession of the ring. (e) For the barber. This is not lost property but merely mislaid and the true owner will have a better chance to recover if the decision is for the barber.

5. Jones had fifty crates of oranges equally divided between grades A, B, and C, grade A being the highest quality and C being the lowest. Smith had one thousand crates of oranges, about 90 percent of which were grade A, but some of which were grades B and C, the exact percentage of each being unknown. Smith willfully mixed Jones’s crates with his

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 47: Introduction to Property, Property Insurance, Bailments, and Documents of Title

own so that it was impossible to identify any particular crate. Jones seized the whole lot.

Smith demanded 900 crates of grade A and fifty crates each of grades B and C. Jones refused to give them up unless Smith could identify particular crates. This Smith could not do. Smith brought an action against Jones to recover what he demanded or its value.

Judgment for whom, and why?

Answer: Judgment for Smith. While the goods have been wrongfully confused by Smith, and if any loss ensues the loss must fall upon Smith, Jones is not entitled to any more than his fifty crates of oranges. Jones will, therefore, be entitled to select any fifty crates, equally divided among grades A, B, and C, and the remainder must be returned to Smith, or Jones must account for their value to Smith.

6. Barnes, the owner and operator of Blackacre, decided to cease farming operations and liquidate his holdings. Barnes sold fifty head of yearling Merino sheep to Billing and then sold Blackacre to Clifton. He executed and delivered to Billing a bill of sale for the sheep and was paid for them. It was understood that Billing would send a truck for the sheep within a few days. At the same time, Barnes executed a warranty deed conveying Blackacre to Clifton. Clifton took possession of the farm and brought along one-hundred head of his yearling Merino sheep and turned them into the pasture, not knowing the sheep Barnes sold Billing were still in the pasture. After the sheep were mixed, it was impossible to identify the fifty head belonging to Billing. Explain whether Billing will recover the fifty head of sheep from Clifton.

Answer: Yes. The sheep were commingled through no fault of Barnes, and where they are of like kind and value, an action will lie although it is impossible to identify the actual sheep sold. If the goods can be apportioned (and in this case, they can), each owner who can prove his proportion of the whole is entitled to receive his share.

Billing will receive fifty sheep, while Clifton will retain one-hundred.

7. Susan permitted Kevin to take her very old grandfather clock on the basis of Kevin’s representations that he was skilled at repairing such clocks and restoring them to their original condition and could do the job for $60. The clock had been badly damaged for years. Kevin immediately sold the clock to Fixit Shop for $30. Fixit Shop was in the business of repairing a large variety of items and also sold used articles. Three months later, Susan was in the Fixit Shop and clearly identified a grandfather clock Fixit Shop had for sale as the one she had given Kevin to repair. Fixit Shop had replaced more than half of the moving parts by having exact duplicates custom-made; the clock’s exterior had been restored by a skilled cabinetmaker; and the clock’s face had been replaced by a duplicate. All materials belonged to Fixit Shop, and its employees accomplished the work.

Fixit Shop asserts it bought the clock in the normal course of business from Kevin, who represented that it belonged to him. The fair market value of the clock in its damaged condition was $30, and the value of repairs made is $220.

Susan sued Fixit Shop for return of the clock. Fixit Shop defended that it then had title to the clock and, in the alternative, that Susan must pay the value of the repairs if she is entitled to regain possession. Who will prevail? Why? Answer: If Section 2-403 of the UCC applies (i.e., if Kevin was a merchant who deals in goods of that kind—which it appears he is), Fixit Shop would prevail. If not, the Fixit Shop would not acquire a title superior to Susan’s solely by reason of its purchase from Kevin. Susan may have a claim to the property. The only basis for finding title in the Fixit Shop is by application of the doctrine of accession.

This doctrine generally holds that when the goods of two different persons are incorporated, title to the resulting product is in the owner of the principal goods. Some

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 47: Introduction to Property, Property Insurance, Bailments, and Documents of Title

courts have recognized the general rule that an original owner is entitled to regain possession of his property even from an innocent trespasser except when it appears that materials and labor expended upon the property by the trespasser are such that it would be grossly unjust to allow the original owner to benefit by such improvement.

Other courts have emphasized the change in value of the goods. It would appear here, that it could well be concluded that it would be unjust to allow Susan the benefit of the increased value of the clock.

If Susan is entitled to possession of the clock, must she pay the value of the repairs?

While it would seem that this results in an injustice, the history of the common law clearly indicates that an owner of property cannot be compelled to pay for improvements which were not authorized by him.

8. Under an oral agreement, Hyer rented from Bateman a vacant lot for a filling station. Hyer placed on the lot a lightly constructed building bolted to a concrete slab and several storage tanks laid on the ground in a shallow excavation. Later, Hyer prepared a lease which contained a provision allowing him to remove the equipment at the termination of the lease. This lease was not executed, having been rejected by Bateman due to a renewal clause it contained. Several years later, another lease was prepared, which both Hyer and Bateman did sign. This lease did not mention removal of the equipment. At the termination of this lease, Hyer removed the equipment, and Bateman brought an action to recover possession of the equipment. What judgment? Explain.

Answer: Judgment for Hyer, who is entitled to remove the equipment. The building and storage tanks constitute trade fixtures, which the lessee may remove without material injury to the landlord’s property.

9. Elvers sold a parcel of real estate, describing it by its legal description and making no mention of any improvements or fixtures on it. The land had upon it a residence, a barn, a rail fence, a stack of hay, some growing corn, and a windmill. The residence had a mirror built into the west wall of the living room and a heating system consisting of a furnace, steam pipes, and coils. In the house were chairs, beds, tables, and other furniture. On the house was a lightning rod. In the basement were screens for the windows. Which of these things passed by the deed and which did not?

Answer: The residence, barn, fence, windmill, panel mirror, entire heating system and parts, and lightning rod constitute permanent improvements to the real estate which, when made, became part of the real estate and would pass to any subsequent purchaser. The window screens, being specifically fitted for the particular building, also become part of the real estate and would pass by the deed. The stack of hay constitutes personal property, not attached to the real estate, and would not pass by deed. As between grantor and grantee of the land, growing crops are considered real property and pass by the deed. The growing corn passed by the deed. The items of furniture are all items of personal property which do not pass by the deed.

10. John Swan rented a safe deposit box at the Tenth Citizens Bank of Emanon, State of X. On December 17, 2023, Swan went to the bank with stock certificates to place in the safety deposit box. After he was admitted to the vault and had placed the stock certificates in the box, Swan found lying on a chair in the privacy booth of the vault a $5,000 negotiable bearer bond issued by the State of Wisconsin with coupons attached, due June 30, 2028.

Swan picked up the bond and, observing that it did not carry the name of the owner, left the vault and went to the office of the president of the bank. He told the president what had occurred and delivered the bond to the president only after obtaining his promise that, should the owner not call for the bond or become known to the bank by June 30,

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 47: Introduction to Property, Property Insurance, Bailments, and Documents of Title

2024, the bank would redeliver the bond to Swan. On July 1, 2024, Swan learned that the owner of the bond had not called for it, nor was his identity known to the bank. Swan then asked that the bond be returned to him. The bank refused, stating that it would continue to hold the bond until the owner claimed it. Explain whether Swan will prevail in his action to recover possession of the bond.

Answer: The Bank may retain possession of the bond. The bond was not lost property, but was mislaid property, it having been found in a nonpublic place (although one can debate the public versus nonpublic location) where the proprietor had a right of possession superior to that of a finder.

11. Lile, an insurance broker who handled all insurance for Tempo Co., purchased a fire policy from Insurance Company insuring Tempo Co.’s factory against fire in the amount of $750,000. Before the policy was delivered to Tempo and while it was still in Lile’s hands, Tempo advised Lile to cancel the policy. Prior to cancellation, however, Tempo suffered a loss. Tempo now makes a claim against Insurance Company on the policy. The premium had been billed to Lile but was unpaid at the time of loss. In an action by Tempo Co. against Insurance Company, what judgment? Explain.

Answer: Judgment for Tempo Company. A fire insurance policy is effective from its issuance until it has been canceled or until it has expired. An insured has a right to cancel the policy at any time and the premium which is due for the time the policy is in effect will be computed on the customary short rates. This right is specified in the standard fire policy. It is immaterial whether the broker has in fact paid the premium to the company at the time the loss occurs.

12. On July 15, Adler purchased in Chicago a Buick sedan, intending to drive it that day to St. Louis, Missouri. He telephoned a friend, Maruchek, who was in the insurance business, and told him that he wanted liability insurance on the automobile, limited in amount to $50,000 for injuries to one person and to $100,000 for any one accident. Maruchek took the order and told Adler over the telephone that he was covered and that his policy would be written by the Young Insurance Company. Later that same day and before Maruchek had informed the Young Insurance Company of Adler’s application, Adler negligently operated the automobile and seriously injured Brown, who brings suit against Adler. Is Adler covered by liability insurance? Explain.

Answer: Yes. Adler is protected by public liability insurance in these circumstances because agents of casualty insurance companies are normally authorized to issue a temporary binder and to cover an insured immediately upon request, without notice to or acceptance by the insurance company of the risk.

13. Graham owns a building having a fair market value of $120,000. She takes out a fire insurance policy from the Bentley Insurance Company for $72,000; the policy contains an 80 percent co-insurance clause. The building is damaged by fire to the extent of $48,000.

How much insurance is Graham entitled to collect? Explain.

Answer: Graham is entitled to collect $36,000. The formula is Face Value of Policy, $72,000, divided by the Fair Market Value of the Property ($120,000), times the coinsurance percentage (80%), times the loss ($48,000), or $72,000/$96,000 X 48,000 = $36,000.

14. Phil was the owner of a herd of twenty highly bred dairy cows. He was a prosperous farmer, but his health was very poor. On the advice of his doctor, Phil decided to winter in Arizona. Before he left, he made an agreement with Freya under which Freya was to keep the cows on Freya’s farm through the winter, be paid the sum of $800 by Phil, and return

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 47: Introduction to Property, Property Insurance, Bailments, and Documents of Title

to Phil the twenty cows at the close of the winter. For reasons that Freya thought made good farming sense, Freya sold six of the cows and replaced them with six other cows.

After winter was over, Phil returned from Arizona. Is Freya liable for conversion of the original six cows? Why or why not?

Answer: Yes, the transaction was a bailment, with a duty resting upon Freya to return Phil’s twenty cows to him at the close of the winter. Freya was without authority to sell six of the cows and replace them with six other cows. In so doing she converted the six sold to her own use. Freya’s obligation was to return the identical twenty cows owned by Phil to Phil upon his return from Arizona at the close of the winter. This she did not do, and she is therefore liable to Phil for the conversion of the original six cows.

15. Hines stored her furniture, including a grand piano, in Arnett’s warehouse. Needing more space, Arnett stored Hines’s piano in Butler’s warehouse next door. As a result of a fire, which occurred without any fault of Arnett or Butler, both warehouses and their contents were destroyed. Is Arnett liable to Hines for the value of her piano and furniture? Explain.

Answer: Decision for Hines for the value of her piano. Decision in favor of Arnett on Hines’s claim for the value of her furniture.

Arnett, a warehouseman, is an ordinary bailee, with the duty to exercise reasonable care as to the safety of the goods stored with him, and he is liable for loss or injury to the goods only where caused by his failure to exercise such care. Section 7-204, UCC provides: “A warehouseman is liable for damages for loss or injury to the goods caused by his failure to exercise such care in regard to them as a reasonably careful man would exercise under like circumstances but unless otherwise agreed he is not liable for damages which could not have been avoided by the exercise of such care.” Since Hines’s furniture was stored in Arnett’s warehouse, conformably to the agreement between Arnett and Hines, and the fire occurred without any fault on the part of Arnett he is not liable to Hines for the value of the furniture.

“Where goods, which have been removed by the bailee from an agreed to another place of storage without notice to or consent of the bailor, are destroyed by fire, the bailee is liable in an action at law for the reasonable market value of the goods.”

Schouler, Bail, sec. 106. “The bailee may not, to suit his own whim or interest change his place of business and move the goods to a new place, and, if the goods be destroyed, refuse the bailor both his property and its value.” McCurdy v. Wallblom Furniture & Carpet Co., 94 Minn. 326, 102 N.W. 873. Since Hines’s piano was stored in violation of the bailment agreement, Arnett is liable for the value of the piano.

16. Curtis rented a safe deposit box from Reliable Safe Deposit Company, in which he deposited valuable securities and $4,000 in cash. Later, after opening the box and discovering $1,000 missing, Curtis brought an action against Reliable. At the trial, the company showed that its customary procedure was as follows: that there were two keys for each box furnished to each renter; that if a key was lost, the lock was changed; that new keys were provided for each lock each time a box was rented; that there were two clerks in charge of the vault; and that one of the clerks was always present to open the box. Reliable Safe Deposit Company also proved that two keys were given to Curtis at the time he rented his box; that his box could not be opened without the use of one of the keys in his possession; and that the company had issued no other keys to Curtis’s box.

Explain whether Reliable is obligated to pay Curtis for the missing $1,000.

Answer: Decision in favor of Reliable Safe Deposit Company. The relationship of a bailor-bailee existed, and the evidence on behalf of Reliable Safe Deposit Company

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 47: Introduction to Property, Property Insurance, Bailments, and Documents of Title

was not an insurer. Curtis made a prima facie case in his showing that the money was missing; the burden was then on Reliable Safe Deposit Company to show that it was not negligent. There was a showing that the safe deposit company was exercising ordinary care.

17. A, B, and C each stored 5,000 bushels of yellow corn in the same bin in X’s warehouse. X wrongfully sold ten thousand bushels of this corn to Y. A contends that inasmuch as his five thousand bushels of corn were placed in the bin first, the remaining five thousand bushels belong to him. Explain what the rights of the parties are.

Answer: A, B, and C are each entitled to one third of the remaining 5,000 bushels. The corn was fungible goods, defined by Section 1-201(17) of the UCC as “goods * * * of which any unit is, by nature or usage of trade, the equivalent of any other like unit.”

Because the corn is considered fungible goods, it becomes immaterial that A placed his corn in the bin first. Each of the three A, B, and C must share the loss equally.

18. a. On April 1, Mary Rich, at the solicitation of Super Fur Company, delivered a $3,000 mink coat to the company at its place of business for storage in its vaults until November 1. On the same day, she paid the company its customary charge of $20 for such storage. After Mary left the store, the general manager of the company, on finding that its storage vaults were already filled to capacity, delivered Mary’s coat to Swift Trucking Company for shipment to Fur Storage Company. En route, the truck in which Mary’s coat was being transported was badly damaged by fire caused by the driver’s negligence, and Mary’s coat was totally destroyed. Is Super Fur Company liable to Mary for the value of her coat? Why? b. Would your answer be the same if Mary’s coat had been safely delivered to Fur Storage Company and had been stolen from the company’s storage vaults without negligence on its part? Why or why not?

Answer: (a) Yes. Super Fur Company is liable for the value of Mary’s coat. One of the duties of the bailee is not to exceed the contract of bailment. Super Fur Company had no right to deliver the coat to either Swift Trucking Company or Fur Storage Company without Mary Rich’s consent. If the bailee entrusted with goods for a particular purpose puts them into the hands of a third person without authority, it is a conversion. (b) Yes. An unauthorized use constitutes a conversion of the chattel, rendering the bailee liable even for a loss which due care could not have prevented.

19. Rich, a club member, left his golf clubs with Bogan, the pro at the Happy Hours Country Club, to be refinished at Bogan’s pro shop. The refinisher employed by Bogan suddenly left town, taking Rich’s clubs with him. The refinisher had previously been above suspicion, although Bogan had never checked on the man’s character references. A valuable sand wedge that Bogan had borrowed from another member, Smith, for his own use in an important tournament was also stolen by the refinisher, as well as several pairs of golf shoes that Bogan had checked for members without charge as an accommodation. The club members concerned each made claims against Bogan for their losses. Can (a) Rich, (b) Smith, and (c) the other members compel Bogan to make good their respective losses?

Explain.

Answer: Bogan must only pay damages to Smith for loss of his sand wedge. The delivery of the golf clubs, sand wedge, and shoes each constituted a bailment.

Bailments may be divided into three classifications: (1) bailments for mutual benefit (in

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 47: Introduction to Property, Property Insurance, Bailments, and Documents of Title

which bailments for compensation or hire are included); (2) bailments for the sole benefit of the bailee; and (3) bailments for the sole benefit of the bailor. (a) In the case of the clubs to be refinished, the bailment is one for mutual benefit with the bailee to receive compensation. The bailee and his employees, while acting in the course of their employment, are held to the exercise of ordinary care, which is the same degree of care and diligence as a person of ordinary caution would exercise with respect to his own property. A bailee is not liable for the theft of property by his employee where he has not been negligent in selecting and keeping the employee. The most that can be said against Bogan selecting and keeping the refinisher in his employ was that Bogan had failed to check the man’s character references. (b) The sand wedge was for the sole benefit of the bailee, Bogan, and he is bound to exercise great care or extraordinary diligence and is responsible for slight neglect with respect to the goods bailed. It appears that Bogan was guilty of such neglect when he permitted an employee to have access to such valuable property when it was not at all necessary. Bogan must make good the loss of the sand wedge. (c) In the case of the shoes, there is a bailment for the sole benefit of the bailors, namely, the club members. The bailee is bound to take only slight care of the goods bailed in order to protect the bailor from loss and is liable only for gross negligence. Since the bailment was said to be an accommodation, Bogan would appear to have exercised sufficient care under the circumstances, and therefore, was not liable for their loss.

20. Donna drove an automobile into Terry’s garage and requested him to make repairs for which the charge would be $125. Donna, however, never returned to get the automobile.

Two months later, Carla saw the automobile in Terry’s garage and claimed it as her own, asserting that it had been stolen from her. Terry told Carla that she could have the automobile if she paid for the repairs and storage, which Carla did. One week later, Molly appeared and proved that the automobile was hers, that it had been stolen from her, and that neither Donna nor Carla had any rights in it. Discuss whether Terry is liable for conversion of the automobile.

Answer: Molly will recover in the action against Terry. The question is whether the bailee from a thief is liable for conversion for delivering the car in good faith to one who is neither the bailor nor the true owner. If she had redelivered the automobile in good faith to the bailor, Donna, she would not be liable for conversion to Molly. But she did not do this. She delivered it to Carla, a person to whom she was not bound by her bailment contract. Hence, she was liable for conversion as her delivery was without the consent of either the bailor or the owner.

The bailee’s obligation to deliver or account for the property can be satisfied only by a delivery to the person entitled to the property, who is ordinarily the bailor herself, someone claiming to be her, or one duly authorized on her behalf to receive it. The bailee is bound at his peril in case he delivers the property to one other than the bailor, to determine the right of such person to receive it, and as a general rule the only surrender he can rightfully make of the property is on the order of the bailor, express or reasonably implied.

21. On June 1, Cain delivered his automobile to Barr, the operator of a repair shop, for necessary repairs. Barr put the car in his lot on Main Street. The lot, which is fenced on all sides except along Main Street, holds one hundred cars and is unguarded at night, although the police make periodic checks. The lot is well lit. The cars do not have the keys

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 47: Introduction to Property, Property Insurance, Bailments, and Documents of Title

in them when left out overnight. At some time during the night of June 4, the hood, starter, alternator, and gearshift were stolen from Cain’s car. The car remained on the lot, and during the evening of June 5, the transmission was stolen from the car. Discuss whether Barr exercised due care in taking care of the automobile.

Answer: The situation created by the delivery of the car by Cain to Barr was a bailment for hire. Under such circumstances, a bailee for hire is bound only to use ordinary care, and it is neither an insurer of the chattel entrusted to his care nor responsible for failure to return the chattel where it has been lost or destroyed without fault on his part. Where, as in the problem, a bailor has shown a receipt of the goods by the bailee and the failure to return the same on demand, he has made a prima facie case of negligence against the bailee and the bailee must show that the loss or damage was caused without his fault. In order to rebut the presumption of negligence which arises on proof of delivery and failure to return, the defendant bailee must not only show a theft or loss by fire, but must further show that the theft or loss by fire was not due to circumstances created by his negligence. The problem presents a fact situation which would probably warrant the trier of facts in favor of Cain. However, one may argue that the first loss was not Barr’s fault and that he did exercise due care, the second theft is more arguable the fault of Barr.

22. Seton in Phoenix, according to a contract with Rider in New York, ships to Rider goods conforming to the contract and takes from the carrier a shipper’s order bill of lading that Seton indorses in blank and forwards by mail to Clemson, his agent in New York, with instructions to deliver the bill of lading to Rider on receipt of payment of the price for the goods. Forest, a thief, steals the bill of lading from Clemson and transfers it for value to Pace, a bona fide purchaser. Before the goods arrive in New York, Rider is insolvent.

Explain what the rights of the parties are.

Answer: When Seton indorsed in blank the shipper’s order bill of lading, namely, one to the order of himself, it became negotiable by delivery.

Section 7-501(1) of the UCC provides: “A negotiable document of title running to the order of the named person is negotiated by his indorsement and delivery. After his indorsement in blank or to bearer any person can negotiate it by delivery alone.”

When the thief, Forest, delivered the bill of lading to Pace, a bona fide purchaser for value, Pace, upon his negotiation of the document of title, acquired all of the rights provided in Section 7-502 of the UCC. These rights are much greater than those which his transferor, the thief Forest, possessed.

23. Scarola purchased an automobile for value and without knowledge that it was stolen.

After he insured the car with Insurance Company of North America (INA), the car was stolen once again. When INA refused to reimburse Scarola for the loss, contending that he did not have an insurable interest in the car, Scarola brought an action. Did Scarola have an insurable interest in the automobile? Why or why not?

Answer: Yes. Decision for Scarola. Scarola had a right to possession of the car against any contrary assertion except that of the true owner. This right ought to be regarded as an insurable interest. Scarola v. Insurance Co. of North America, 31 N.Y. 2d 411, 340 N.Y.S. 2d 630, 292 N.E. 2d 776 (1972).

24. Sears had sold to and installed in the Seven Palms Motor Inn a number of furnishings, including drapes and bedspreads, in connection with the construction of a motel on land Seven Palms owned. Sears did not receive payment in full for the materials and labor and brought suit to recover $8,357.49, with interest, and to establish a mechanic’s lien on the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 47: Introduction to Property, Property Insurance, Bailments, and Documents of Title

motel and land for the unpaid portion of the furnishings. Seven Palms asserted that neither the drapes nor bedspreads were fixtures and that, thus, Sears could not obtain a mechanic’s lien on them. Explain whether the drapes and bedspreads are fixtures.

Answer: Judgment for Sears, granting a mechanic’s lien for the draperies but not the bedspreads. The characterization of an otherwise personal item as a fixture depends on (1) the item’s annexation to the realty, (2) adaptation of the item to the use to which the realty is devoted, and (3) the annexor’s intent that the object become a permanent accession to the realty. Here, the draperies were hung from traverse rods that were attached to the walls. The purpose of hanging the drapes was to grant the motel’s guest the control of privacy and amount of light in his room. The traverse rod, by itself, did not accomplish this purpose. Rather, the rod and drapes, as a unit, were adapted to this particular use for the motel rooms. They were placed in the rooms with the intent that they would form a part of the special purpose for which the building was designed. Thus, the draperies are fixtures.

On the other hand, the bedspreads were not physically attached to the realty in any way. They cannot be “constructively annexed” merely because they match the drapes.

The bedspreads were not essential to the use of a fixture (e.g., the drapes). In addition, it was not shown that they could not readily be used independently elsewhere. The bedspreads, therefore, are not fixtures. Sears, Roebuck & Co. v. Seven Palms Motor Inn, Inc. 25. David E. Ross, his two brothers, and their families operated and owned the entire stock of five businesses. Ross had three children: Rod, David II, and Betsy. David II and Betsy were not involved in the operation of the companies, but Rod began working for one of the firms, Equitable Life and Casualty Insurance Company, in 2017. Between 2019 and 2023, the elder Ross informed a number of persons of his desire to reward Rod for his work with Equitable Life by giving him stock in addition to the stock he would inherit. He subsequently executed several stock transfers to Rod, representing shares in various family businesses, which were reflected by appropriate entries on the corporate books.

Certificates were issued in Rod’s name and placed in an envelope identified with the name Rod Ross, but they were kept with the other family stock certificates in an office safe to which Rod did not have access. In all, one-fourth of the stock holdings of David E. Ross were transferred to Rod in this manner. This fact is consistent with the elder Ross’s expressed intention that Rod should ultimately receive a total of one-half of the stock upon his father’s death. David E. died in April 2023. His will divided the estate equally among the three children and made no reference to prior gifts of stock to Rod. David II and Betsy brought an action contesting the validity of the stock transfers. Are the inter vivos gifts of the stock valid? Explain.

Answer: Judgment for Rod Ross affirmed. A donee must prove the existence of a gift by “clear and convincing” evidence. The three essential elements are a clear intention on the part of the donor to pass immediate ownership, an irrevocable delivery, and acceptance. David II and Betsy contend that the element of irrevocable delivery was not adequately established. They claim that their father should have physically conveyed the stock certificates to Rod and that the transfer of ownership on the corporate books did not effect a delivery. But “transferring the shares…upon the books of the company…stands in the place of a delivery” and [t]he best evidence of [the donee’s] ownership is the transfer on the books of the company.” Other opinions support this position. David II and Betsy cite the Utah Uniform Commercial Code requirement that a donor must make actual manual delivery of stock certificates to his donee to effect a valid gift. Courts have generally concluded, however, that rigid application of this provision to stock gifts is inappropriate. Rather, the transfer of

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ownership on the corporate records, plus evidence of donative intent, may constitute a sufficient constructive delivery.

In this case, manual delivery of the certificates to Rod was not essential to a valid gift.

The elder Ross clearly intended that Rod be made the owner of the stock. The change in ownership was recorded on the books, and new certificates were issued in Rod’s name. While Rod’s father may have maintained physical custody of the certificates, he did not exercise control or possessory rights over any of that stock.

26. Mrs. Laval was a patient of Dr. Leopold, a practicing psychiatrist. Dr. Leopold shared an office with two associates practicing in the same field. No receptionist or other employee attended the office. Mrs. Laval placed her coat in the clothes closet in the office which was placed in the reception area for the use of the patients. Later, when she returned to retrieve the coat to leave, she found it missing. Is Dr. Leopold liable to Mrs. Laval for the value of her coat? Explain.

Answer: Judgment for Mrs. Laval. The maintenance of the closet in Dr. Leopold’s office created an implied invitation to Mrs. Laval to deposit her coat there. It is customary for a patient to remove her fur coat when undergoing treatment in a psychiatrist’s office.

Therefore, Mrs. Laval cannot be said to be contributorily negligent in placing her coat in the closet in Dr. Leopold’s reception room. It can be implied from the physicianpatient relationship between the parties that Dr. Leopold became a bailee of Mrs. Laval’s coat. Laval v. Leopold, 47 Misc. 2d 624, 262 N.Y.S. 2d 820 (1965).

27. Sewall left his car in a parking lot owned by Fitz-Inn Auto Parks, Inc. The lot was approximately one hundred by two hundred feet in size and had a chain link fence along the rear boundary to separate the lot from a facility of the Massachusetts Bay Transportation Authority. Although the normal entrance and exit were located at the front of the lot, it was also possible to leave by way of small side streets on either side of the lot. Upon entering the lot, the driver would pay the attendant on duty a fee of $5 to park.

The attendant’s duties were limited to collecting money from patrons and directing them to parking spaces. Ordinarily, the attendant remained on duty until 11:00 a.m., after which time the lot was left unattended. Furthermore, a patron could remove his car from the lot at any time without interference by any employee of the parking lot.

On the morning of April 15, Sewall entered the lot, paid the $5 fee, parked his car in a space designated by the attendant, locked it, and took the keys with him. This was a routine he had followed for several years. When he returned to the unattended lot that evening, however, he found that his car was gone, apparently having been stolen by an unidentified third person. Is Fitz-Inn, the owner of the lot, liable for the value of the car?

Why or why not?

Answer: No, Fitz-Inn is not liable. The existence of a bailment is a prerequisite to Sewall’s right to recover because, in the absence of such a relationship, Fitz-Inn had no duty to safeguard the car against theft. A bailment arises only upon delivery of possession of the property sought to be bailed and at least some degree of control over that property. If there has been no delivery of either possession or control, however, the intended bailee cannot be regarded as having undertaken to protect the property and owes the owner no duty to do so.

If Sewall had been required to surrender his keys to the parking lot parking facility and the sole means of exit had been staffed by an attendant responsible for checking each car leaving the facility, then a sufficient delivery of possession and control would have been present to create a bailment. Here, however, Sewall retained possession of the keys, and the attendant did not control egress from the lot. Accordingly, neither type

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of control over Sewall’s car was exercised by the parking lot, and thus, no bailment and its accompanying duty can be found. Rather, Sewall bore the responsibility for the theft of his car. Sewall v. Fitz-Inn Auto Parks, Inc., 330 N.E. 2d 853 (Mass. App. Ct. 1975).

28. Mrs. Mieske delivered thirty-two 50-foot reels of developed movie film to the Bartell Drug Company to be spliced together into four reels for viewing convenience. She placed the films, which contained irreplaceable pictures of her family’s activities over a period of years, into the order in which they were to be spliced and then delivered them to the manager of Bartell. The manager placed a film processing packet on the bag of films and gave Mrs. Mieske a receipt that stated, “We assume no responsibility beyond retail cost of film unless otherwise agreed to in writing.” Although the disclaimer was not discussed, Mrs. Mieske’s parting words to the store manager were, “Don’t lose these. They are my life.”

Bartell sent the film to its processing agent, GAF Corporation, which intended to send them to another processing lab for splicing. While at the GAF laboratory, however, the film was accidentally placed in the garbage dumpster and was never recovered. Upon learning of the loss of their film, the Mieskes brought action to recover damages from Bartell and GAF. The defendants argued that their liability was limited to the cost of the unexposed film. Are GAF or Bartell liable to the Mieskes? If so, for how much? Explain.

Answer: Judgment for the Mieskes affirmed. Because the negligence of both Bartell and GAF contributed to the loss of the film, both are liable as bailees to the Mieskes.

The real question, however, is the proper measure of the Mieskes’ damages.

The general rule of recovery for destruction of personal property is as follows: (1) if the personal property that is destroyed has a market value, then the market value is the measure of damages; (2) if the property has no market value but it can be replaced or reproduced, then the measure of damages is the cost of replacement or reproduction; and (3) if the destroyed property has no market value and cannot be replaced or reproduced, then the value to the owner is to be the proper measure of damages. In the last situation, however, damages are not recoverable for the sentimental value that the owner places on the property.

Here, the property lost was thirty-two reels of film with images that had no market value and that cannot be replaced or reproduced by thirty-two reels of blank film.

Therefore, the proper measure of damages is the value of the film to the Mieskes. This type of damage is difficult to ascertain and contains a subjective element, but it must be remembered that compensation for sentimental value is not allowed. With these constraints in mind, the award of $7,500 returned by the jury appears to be appropriate. Mieske v. Bartell Drug Co. 92 Wash. 2d 40, 593 P. 2d 1308 (1979).

29. Plaintiff, Heath Benjamin (Benjamin), found more than $18,000 in currency inside the wing of an airplane. At the time of this discovery, State Central Bank (State) owned the plane and it was being serviced by Lindner Aviation, Inc. (Lindner). Benjamin at the time was employed by Lindner and was conducting a routine annual inspection of the plane.

As part of the inspection, Benjamin removed panels from the underside of the wings.

Although these panels were to be removed annually as part of the routine inspection, a couple of the screws holding the panel on the left wing were so rusty that Benjamin had to use a drill to remove them. Benjamin testified that the panel probably had not been removed for several years. Inside the left wing Benjamin discovered two packets approximately four inches high and wrapped in aluminum foil. He removed the packets from the wing and took off the foil wrapping. Inside the foil was approximately $18,000,

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tied in string and wrapped in handkerchiefs. The money was eventually turned over to the Keokuk police department. No one came forward within twelve months thereafter claiming to be the true owner of the money. Explain who is entitled to the currency.

Answer: Judgment reversed on the bank’s cross-appeal and affirmed on the remainder of the judgment of the district court. Benjamin argues that lost property statutes are intended “to encourage and facilitate the return of property to the true owner, and then to reward a finder for his honesty if the property remains unclaimed.” According to Iowa law, however, “[t]he rights of finders of property vary according to the characterization of the property found.”

We think there was substantial evidence to find that the currency discovered by Benjamin was mislaid property. The bills were carefully tied and wrapped and then concealed in a location that was accessible only by removing screws and a panel.

These circumstances support an inference that the money was placed there intentionally. Both logic and common sense suggest that it is unlikely someone would voluntarily part with over $18,000 with the intention of terminating his ownership. The location where this money was found is much more consistent with the conclusion that the owner of the property was placing the money there for safekeeping. A degree of unintentionality must be present in order for a court to rule as a matter of law that the item was stolen, then lost. This money was not a treasure trove, since, based on the dates of the currency, the money was no older than thirty-five years. These conclusions support the judgment that the money was mislaid.

The finder of mislaid property acquires no rights to the property. The right of possession of mislaid property belongs to the owner of the premises upon which the property is found, as against all persons other than the true owner.

Because the money discovered by Benjamin was properly found to be mislaid property, it belongs to the owner of the premises where it was found. But is the premises considered to be the airplane or the hangar?

We think that the premises where the money was found is the airplane, not Lindner Aviation’s hangar where the airplane happened to be parked when the money was discovered. The policy behind giving ownership of mislaid property to the owner of the premises where the property was mislaid supports this conclusion. If the true owner of the money attempts to locate it, he would initially look for the plane; it is unlikely he would begin his search by contacting businesses where the airplane might have been inspected. Therefore, we affirm the trial court’s judgment that the bank, as the owner of the plane, has the right to possession of the property as against all but the true owner.

30. Calvin Klein, Ltd. (Calvin Klein), a New York clothing company, had used the services of Trylon Trucking Corporation (Trylon) for more than three years, involving hundreds of shipments. After completing each carriage, Trylon would forward to Calvin Klein an invoice that contained a limitation of liability provision. The provision stated, In consideration of the rate charged, the shipper agrees that the carrier shall not be liable for more than $50 on any shipment accepted for delivery to one consignee unless a greater value is declared, in writing, upon receipt at time of shipment and charge for such greater value paid, or agreed to be paid, by shipper.

On April 2, Trylon dispatched its driver Jamahl Jefferson to the John F. Kennedy International Airport to pick up 2,833 blouses sent from Hong Kong to Calvin Klein. The driver disappeared, stealing both the truck and the blouses. Calvin Klein sued Trylon for

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the full value of the blouses. Does the limitation of liability provision extend to the shipment? Explain.

Answer: Yes. According to the UCC, a shipper and a common carrier may contract to limit the carrier’s liability in cases of loss to an amount agreed to by the parties, so long as the language of limitation is clear, the shipper is aware of the terms of the limitation, and the shipper can change the terms by indicating the true value of the goods being shipped. Such a limitation agreement is generally valid and enforceable despite carrier negligence. The shipper can calculate the specific amount of its potential damages in advance, declare the value of the shipment based on that calculation, and pay a commensurably higher rate for carriage of the goods. In effect, the shipper can thus buy additional insurance from the common carrier.

Here, Calvin Klein and Trylon were business entities with an ongoing commercial relationship spanning over three years and numerous transactions. In this commercial setting, the clear limitation agreement between Calvin Klein and Trylon will be enforced. This is not a case where the shipper was dealing with the carrier for the first time, or under new or changed terms. Calvin Klein was aware of the terms and was free to adjust the limitation upon a written declaration of the value of a given shipment, but failed to do so with the shipment at issue. The terms of the unmodified liability limitation provision must be enforced. Therefore, Trylon must pay Calvin Klein $50 for the lost shipment 31. Francis B. Freeman, Jr., purchased a cattle scale for $11,000. The scale, which weighs approximately six thousand five hundred pounds, was sold as a portable model. The manufacturer sold additional items that permitted the scale to be moved. Freeman did not buy that equipment. Freeman placed the scale in a barn on a concrete pad poured for the scale, then poured concrete ramps that would allow cattle to enter and exit the scale.

Freeman further welded an iron fence into place to help funnel the cattle through the scale area. Although the scale was designed to be portable, 70 percent of the scales sold were installed the same way as Freeman installed it. The scale has remained in place since its installation. The scale could be moved by cutting away a welded metal fence and lifting the scale with heavy machinery. The removal of the fence would take approximately one hour with use of a cutting torch, after which the scale could be moved within fifteen minutes. Mary Ann Barrs purchased the land—including the barn that housed the cattle scale—from Freeman for $3.5 million. Barrs claims that the cattle scale was a fixture that was part of the land and passed to her in the sale. Explain whether the cattle scale is a fixture.

Answer: The scale is a fixture. A fixture is an article of personal property that has been so annexed to the realty that it is regarded as part of the land and belongs to the person owning the land. The test for determining whether property has become a fixture is threefold, consisting of (1) the annexation to the realty, (2) the adaptation to the use to which the realty is devoted, and (3) the intent that the object become a permanent accession to the land. The latter two elements, adaptation and intent, are more important in determining whether a chattel became a fixture than the method by which the chattel is affixed to a freehold.

Annexation. The scale weighs approximately six thousand five hundred pounds. A fence and gates within the structure had to be cut off in order to install the scale. A concrete slab was poured in the structure for placement of the scale. The size and shape of the slab were designed to accommodate the scale. Concrete ramps were installed on two sides of the scale and fencing was constructed to direct cattle onto the scale. The concrete construction (other than the slab) and the metal pipe fencing

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were completed after the scale was placed on the slab in the pole barn. The metal posts for the fence were set in the concrete. The scale has remained in place since its installation.

Adaptation. Ray Stone had been ranch manager for plaintiff. *** He told the trial court that the scale was integral to a cattle-working facility. The scale was used to weigh cattle for sale and to determine required dosages of medicine administered to cattle.

Intent. The scale was described as portable by its manufacturer. The manufacturer sold peripheral items that permitted the scale to be moved. This included a trailer and an inverter. Plaintiff did not buy that equipment. Ray Stone told the trial court that the scale was purchased “to be stationary whether it was portable or not.”

A six-thousand-five-hundred-pound scale placed on a specially sized concrete pad and surrounded by metal pole fencing set in the concrete is annexed to the real estate on which the concrete pad is poured. *** The scale was put in place to facilitate the cattle operation on the premises. Its adaptation for that purpose enhanced the operation of the cattle ranch.

The evidence demonstrates the plaintiff’s intent for the scale to be a permanent installation. Therefore, the scale is a fixture and, accordingly, the sale of the real estate on which the scale was situated included the sale of the scale. Freeman v.

Barrs, Missouri Court of Appeals, Southern District, Division One, 237 S.W.3d 285 (2007).

ANSWERS TO “TAKING SIDES” PROBLEMS The plaintiffs are public utilities providing telecommunications services in New Hampshire.

The plaintiffs commenced separate actions for abatement of real estate taxes against sixteen municipalities. The plaintiffs disputed the defendants’ treatment of its communications equipment as real estate, thereby challenging their authority to tax its equipment. The communications equipment at issue involves two basic categories: (1) distribution plant, which includes telephone poles, wires, and underground conduits; and (2) central office equipment, consisting of frames, switches, and other power equipment.

The plaintiffs submitted affidavits setting forth the following facts. All of the plaintiffs’ poles, wires, and underground conduits located in the municipalities are placed either on public rights of way or on private property owned by third parties. Approximately 90 percent of the poles are located on public rights of way pursuant to licenses issued by the state or the municipalities.

The remaining 10 percent of the poles are placed on private property either by consent of the property owner or pursuant to an easement. The poles, wires, and underground conduits are installed in a manner that permits and facilitates their removal and relocation. Consequently, removal of that equipment is neither complicated nor time consuming, and does not harm the underlying land or change its usefulness. The plaintiffs remove and relocate their poles, wires, and underground conduits at the request of the state or the applicable private landowner or municipality. In obtaining the licenses, consents, or easements for their poles, wires, and underground conduits, the plaintiffs insist on maintaining ownership of that equipment and refuse any requests to make the equipment a permanent part of the realty. The plaintiffs’ central office equipment, most of which is located in buildings owned by the plaintiffs, is both portable and designed to permit removal and relocation. The plaintiffs’ practice and policy is to move pieces of central office equipment among buildings in response to changes in technology or system use. Although certain frames are bolted to the buildings, their removal is achieved without affecting the usefulness of the buildings or the frames themselves. When the plaintiffs

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ultimately vacate a building used as a central office, they remove all of their equipment and merely transfer the building “as a shell.” The vacated building, though devoid of central office equipment, retains utility for other commercial or professional uses. The defendants did not dispute the specific facts set forth by the plaintiffs. a. What are the arguments that the property is not real property and therefore not subject to taxation by the municipalities? b. What are the arguments that the property is real property and can be taxed by the municipalities? c. Who is correct? Explain.

Answer: (a) The plaintiffs would argue that the property is personal property—that it can easily be moved and used elsewhere. The parties did not intend the property to be fixtures and their nature and use clearly indicated such. (b) The argument that the property is real property is that it is placed in the ground and placed in such a way as to be safe from storms and accident. The telephone poles and related equipment have long useful lives and are fairly permanent. The exclusive use of the communications equipment is intimately intertwined with the primary use of the real property. It is only fair to allow the municipalities the right to tax the plaintiffs. (c) Whether an item of property is properly classified as either personal or a fixture turns on several factors, including the item’s nature and use, the intent of the party making the annexation, the degree and extent to which the item is specially adapted to the realty, the degree and extent of the item’s annexation to the realty, and the relationship between the realty’s owner and the person claiming the item.

In this case, the items of communications equipment did not constitute fixtures. Each of the relevant factors supports the superior court’s holding that the property remained personal. The poles, wires, and central office equipment, though placed in the ground or bolted to the buildings, were readily removable and transportable without affecting the utility of the underlying land, the buildings, or the equipment itself. Because removal of the equipment would not render the land or buildings “incomplete and unfit for use,” and because the equipment could be “equally useful and adapted for general use elsewhere,” the communications equipment did not constitute fixtures.

Furthermore, the statute governing the licensing of telephone poles and wires on public ways specifically provides for their removal on ten days’ notice and therefore establishes, as a matter of law, their impermanence. Finally, the defendants never challenged the plaintiffs’ asserted intent to maintain the communications equipment as personal property. New England Telephone and Telegraph Co. v. City of Franklin, Supreme Court of New Hampshire, 1996 141 N.H. 449, 685 A. 2d 913.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 48: Interests in Real Property

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 48: Interests in Real Property

TABLE OF CONTENTS Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems ............................................................................. 10

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

Kirkland conveyed a farm to Sandler to have and to hold for and during his life and on Sandler’s death to Rubin. Some years thereafter, oil was discovered in the vicinity. Sandler thereupon made an oil and gas lease, and the oil company set up its machinery to begin drilling operations. Rubin then filed suit to enjoin the operations. Assuming an injunction to be the proper form of remedy, what decision? Explain.

Answer: For Rubin. While a life tenant may use the land during his lifetime he cannot commit waste. An attempt by the life tenant to extract all or an unreasonable amount of the mineral wealth is a use not intended by the grantor. As it is a use which would damage the remainderman, it is one which he can enjoin.

2. Smith owned Blackacre in fee simple absolute. In section 3 of a properly executed will, Smith devised Blackacre as follows: “I devise my farm Blackacre to my son Darwin so long as it is used as a farm.” Sections 5 and 6 of the will made gifts to persons other than Darwin. The last clause of Smith’s will provided: “All the residue of my real and personal property not disposed of heretofore in this will, I devise and bequeath to Stanford University.”

Explain what interests in Blackacre were created by Smith’s will.

Answer: Darwin received only a qualified fee title and therefore has no power to convey title in fee simple absolute. The words so long as it is used as a farm purports to create a possibility of reverter in Stanford University. The answer is based upon common law rules rather than statutory provisions.

3. Panessi leased to Barnes, for a term of ten years beginning May 1, certain premises located at 527–529 Main Street in Cleveland. The premises were improved with a three-story building, the first floor being occupied by stores and the upper stories by apartments. On May 1 of the following year, Barnes leased one of the apartments to Clinton for one year.

On July 5, a fire destroyed the second and third floors of the building. The first floor was not burned but was rendered unusable. Neither the lease from Panessi to Barnes nor the lease from Barnes to Clinton contained any provision regarding loss by fire. Discuss the liability of Barnes and Clinton to continue to pay rent.

Answer: Barnes is liable for rental after the destruction of the premises, but Clinton is not liable. The lessee of an entire building is deemed to have leased the real estate, consisting of the land and the improvements. Since after the destruction of the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 48: Interests in Real Property

building, Barnes is still in a position to make use of the land, he is deemed liable for the payment of the rent. The lease of an apartment, however, is not considered to carry with it a lease of the land; consequently, such a lessee is not liable after the destruction of his apartment.

4. Ames leased an apartment to Boor for $600 a month, payable the last day of each month.

The term of the written lease was from January 1, 2022, through April 30, 2023. On March 15, 2022, Boor moved out, telling Ames that he disliked all the other tenants. Ames replied, “Well, you’re no prize as a tenant; I can probably get more rent from someone more agreeable.” Ames and Boor then had a minor physical altercation in which neither was injured. Boor sent the apartment keys to Ames by mail. Ames wrote Boor, “It will be my pleasure to hold you for every penny you owe me. I am renting the apartment on your behalf to Clay until April 30, 2023, at $425 a month.” Boor had paid his rent through February 28, 2022. Clay entered the premises on April 1, 2022. How much rent, if any, may Ames recover from Boor? Explain.

Answer: Boor is liable to Ames for the rent ($600) that accrued on March 31, 2022, and for $175 a month thereafter until April 30, 2023. A lease vests in the lessee’s exclusive possession of the premises for its duration. He gains an estate in the land. He cannot relieve himself of his rent obligation by abandoning the premises. His promise to pay rent is an independent covenant, and he continues to be liable on it even though he abandons the premises.

Surrender is the technical term for transfer of a leasehold from the lessee back to the lessor. Ordinarily, a surrender of a leasehold of more than a year’s duration must be accomplished in a writing delivered to the lessor. But in some circumstances surrender occurs by operation of law. When surrender occurs, the covenant to pay rent is dissolved, although the lessee continues to be liable for rent that has already accrued.

A surrender cannot be forced upon a lessor. Rejection of it preserves the lessee’s obligation on his covenants.

Boor has a leasehold for one year and four months. By his unilateral act of moving out he cannot force a surrender on Ames. He continues to be liable on his covenant to pay rent.

Surrender by operation of law may occur in different ways. In general, if a lessee abandons a leasehold and the lessor manifests an intention to accept the abandonment and takes possession of the premises, surrender occurs by operation of law. On the facts stated, a finding that Ames accepted Boor’s abandonment of the leased property is not warranted. The words between the parties and their fight do not appear to add up to an acceptance of abandonment on Ames’ part. If there was acceptance, then the lease ended, and Boor never became liable for rent accruing subsequent to March 31, 2022.

By the majority rule, leasing of the premises after the lessee abandons them is not an acceptance of the abandonment if the lessor notifies the lessee that the premises will be leased in his behalf. In these circumstances the lessor mitigates the damages for the breach of the rent covenant by the lessee. If this notice is not given, then surrender occurs by operation of law. In the problem presented Ames protected himself by notifying Boor that he (Ames) intended to re-lease the premises on behalf of Boor.

5. Jay signed a two-year lease containing a clause that expressly prohibited subletting. After six months, Jay asked the landlord for permission to sublet the apartment for one year.

The landlord refused. This angered Jay, and he immediately assigned his right under the

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lease to Kay. Kay was a distinguished gentleman, and Jay knew that everyone would consider him a desirable tenant. Explain whether Jay’s assignment of his lease to Kay is valid?

Answer: Jay’s assignment of his lease to Kay is valid. The lease prohibited subletting but contained no provision forbidding an assignment. The law recognizes a distinction between a sublease and an assignment. A sublease involves the transfer by the tenant (Jay) of less than all of his rights in the lease.

Since the lease to Jay contains no restrictions, specific or otherwise, against assignment, the lease is freely assignable. The assignee became liable to the landlord to pay rent. In the event the assignee Kay fails to pay the agreed rent, the tenant Jay will be liable for the rent and upon paying it has the right to be reimbursed by the assignee Kay. 6. In 2011, Roy Martin and his wife, Alice; their son, Hiram; and Hiram’s wife, Myrna, acquired title to a 240-acre farm. The deed ran to Roy Martin and Alice Martin, the father and mother, as joint tenants with the right of survivorship, and to Hiram Martin and Myrna Martin, the son and his wife, as joint tenants with the right of survivorship. Alice Martin died in 2019, and in 2022, Roy Martin married Agnes Martin. By his will, Roy Martin bequeathed and devised his entire estate to Agnes Martin. When Roy Martin died in 2024, Hiram and Myrna Martin assumed complete control of the farm. Explain what interest in the farm, if any, of Agnes, Hiram, and Myrna Martin on the death of Roy Martin.

Answer: When Alice Martin died, Roy Martin, her husband, as surviving joining tenant in one-half of the farm, became sole owner of that half of the title. Roy Martin’s death did not cast his half of the title upon his son, Hiram Martin, and his wife, Myrna Martin.

When Roy Martin dies, his second wife, Agnes Martin, could correctly assert a claim to one-half of the farm, as sole beneficiary under her husband’s will. Hiram and Myrna Martin continued to own one-half of the farm in joint tenancy upon the death of Hiram’s father, Roy Martin.

This deed did not create a simple four-party joint tenancy in the entire title. Instead, two separate and distinct two-party joint tenancies were created, one in each half of the title. Another incident of his deed is that it created a tenancy in common between the first set of grantees (father and mother) on the one hand as to half of the title, and the second set of grantees (son and son’s wife) on the other hand, as to the other half. In short, the right of survivorship did not extend from the owners of one half onto the owners of the other half, as the son and his wife evidently supposed and claimed.

Agnes Martin’s position would be, and correctly so, that the deed did not create a joining tenancy among all four parties, but rather two joint tenancies in undivided halves, one between the father and his first wife, Alice; the other between the son and the son’s wife. Accordingly, when Alice Martin, the mother died, the father, as surviving joint tenant (in one-half), became sole owner of that half of the title. It follows that when the father died testate, his one-half of the title became vested in his second wife, Agnes, the sole beneficiary under his will.

7. In her will, Teressa granted a life estate to Amos in certain real estate, with remainder to Brenda and Clive in joint tenancy. All the rest of Teressa’s estate was left to Hillman College. While going to Teressa’s funeral, the car in which Amos, Brenda, and Clive were riding was wrecked. Brenda was killed, Clive died a few minutes later, and Amos died on his way to the hospital. Discuss who is entitled to the real estate in question and why.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 48: Interests in Real Property

Answer: Clive's heirs-at-law. This question involves the application of basic rules with respect to life estates, remainders, and joint tenancies. Upon Teressa’s death, Brenda and Clive became the owners of the real estate as joint tenants, subject to the life estate of Amos. Upon Brenda’s death, the surviving joint tenant, Clive, owned the real estate subject to the life estate of Amos. Upon Clive’s death, in the absence of a will, his heirs-at-law became the owners in fee of the real estate, subject to Amos’s life estate. Upon Amos’s death, Clive’s heirs-at-law became the outright owners of the real estate.

8. Otis Olson, the owner of two adjoining city lots, A and B, built a house on each. He laid a drainpipe from lot B across lot A to the main sewer pipe under the alley beyond lot A. Olson then sold and conveyed lot A to Fred Ford. The deed, which made no mention of the drainpipe, was promptly recorded. Ford had no actual knowledge or notice of the drainpipe, although it would have been apparent to anyone inspecting the premises because it was only partially buried. Later, Olson sold and conveyed lot B to Luke Lane.

This deed also made no reference to the drainpipe and was promptly recorded. A few weeks later, Ford discovered the drainpipe across lot A and removed it. Did he have the right to do so? Explain.

Answer: No. Lot A became subject to an easement in favor of Lot B. Although one cannot truly have an easement over his own land, an easement may be created by implication when a grantor has used one portion of his land for the benefit of another in a manner similar to that of an easement and then conveys one of such portions.

This result is reached by calling the original use by the owner of the severed estates a quasi-easement. It is based upon the presumed intent of the parties that they have dealt with the land in the condition in which it exists, i.e., subject to an “easement.”

In order to have an easement arise thus by implication, the quasi-easement must be apparent, reasonably necessary for the enjoyment of the land conveyed or retained, and continuous. The element of continuity is satisfied by a condition that is permanent or non-temporary or, as it is sometimes said, there must be a permanent adaptation of the servient tenement to the use. All of these elements exist, so that a quasieasement may be implied here, subject to the problem of doing so by reservation.

With respect to easements not appearing of record, the acts of user to charge a purchaser with notice must be sufficiently open, continuous and unambiguous in character to indicate to a prospective purchaser, if he should view the property, that some person other than the vendor claims an easement therein as indicated by structures or improvements visible on the land adapting it for the exercise of the easement. The fact that the drain is actually visible on the servient tenement would therefore be sufficient to charge the purchaser with notice of an easement therein.

9. At the time of his marriage to Ann, Robert owned several parcels of real estate in joint tenancy with his brother, Sam. During his marriage, Robert purchased a house and put the title in his name and his wife’s name as joint tenants, not as tenants in common. Robert died; within a month of his death, Smith obtained a judgment against Robert’s estate.

Discuss the relative rights of Sam, Smith, and Ann. Explain.

Answer: Upon Robert’s death, his brother Sam, as surviving joint tenant, became the sole owner of the property owned by Robert and Sam in joint tenancy prior to Robert’s marriage to Ann. Upon the death of Robert, title to the house being in Robert and Ann as joint tenants, title passed by operation of law to the surviving joint tenant Ann.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 48: Interests in Real Property

The judgment creditor, Smith, acquired no rights in any of the property jointly owned

by Robert and Sam and by Robert and Ann. At the time Smith obtained a judgment against Robert’s estate, all of the joining property of which Robert was co-owner was then owned by Sam and Ann, respectively, as surviving joint tenants, in fee simple absolute.

10. In 1997, Ogle owned two adjoining lots numbered 6 and 7 fronting at the north on a city street. In that year, she laid out and built a concrete driveway along and two feet in front of what she erroneously believed to be the west boundary of lot 7. Ogle used the driveway for access to buildings situated at the southern end of both lots. Later in the same year, she conveyed lot 7 to Dale, and thereafter in the same year, she conveyed lot 6 to Pace.

Neither deed made any reference to the driveway, and after the conveyance, Dale used it exclusively for access to lot 7. In 2024, a survey by Pace established that the driveway overlapped six inches on lot 6, and he brought an appropriate action to establish his lawful ownership of the strip on which the driveway approaches, to enjoin its use by Dale, and to require Dale to remove the overlap. Will Pace prevail? Why or why not?

Answer: Decree in favor of Dale. Dale had effective and actual possession of the strip in question, and the statute of limitations had run against Pace. Whether Dale has acquired title to the strip by easement by prescription (adverse possession) and the running of the statute of limitations against Pace depends upon the language of the statute. The typical statute prescribes that no one may bring an action for the recovery of land unless he or those under whom he claims have been seized or possessed of the premises within a stated period prior to the date of commencement of the action. The time period varies widely from state to state. Since Dale’s possession or use began in 1988, and since Pace had a cause of action against him beginning in that year, the time period in most states has elapsed and the statute has run against Pace.

Judicial construction of the statute has developed that the possession of one claiming the benefits of the statute shall be open, continuous, actual, exclusive, notorious, and hostile. The establishment of a driveway on the land of another is clearly actual and is an effective means of taking possession. The facts show that Dale’s possession was exclusive and continuous; it was open and notorious in the sense that the existence of the driveway was apparent not only to the public generally but to Pace in particular.

Although Pace did not in fact know that Dale possessed his land, he was in a position to discover it from 1992-2019, for there was nothing secret or hidden about the acts of user. The purposes of the statute, to quiet title and penalize those who sleep on their rights, have been satisfied.

11. Temco, Inc., conveyed to the Wynns certain property adjoining an apartment complex being developed by Sonnett Realty Company. Although nothing to this effect was contained in the deed, the sales contract gave the purchaser of the property use of the apartment’s swimming pool. Temco’s sales agent also emphasized that use of the pool would be a desirable feature in the event that the Wynns decided to sell the property.

Seven years later, the Bunns contracted to buy the property from the Wynns through the latter’s agent, Sonnett Realty. Although both the Wynns and Sonnett Realty’s agent told the Bunns that use of the apartment’s pool went with the purchased property, neither the contract nor the deed subsequently conveyed to the Bunns so provided. When the Bunns requested pool passes from Temco and Offutt, the company that owned the apartments, their request was refused. Discuss whether the Bunns have a right to use the apartment’s pool.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 48: Interests in Real Property

Answer: Whether the Bunns have a right to use the apartment’s pool depends on whether the Wynns were granted a license or an easement to use it in the sales contract between the Wynns and Temco. A license is a right given by some competent authority to do some act that otherwise would be a trespass. Because a license is personal between the licensor and the licensee, it cannot be assigned. On the other hand, an appurtenant easement usually runs with the land. Bunn v. Offutt, 216 Va. 681, 222 S.E. 2d 522 (1976).

12. In 1981, a deed for land in Pitt County, North Carolina, was executed and delivered by Joel and Louisa Tyson unto M. H. Jackson and wife Maggie Jackson, for and during the term of their natural lives and after their death to the children of the said M. H. Jackson and Maggie Jackson that shall be born to their intermarriage as shall survive them to them and their heirs and assigns in fee simple forever.

Thelma Jackson Vester, a daughter of M. H. and Maggie Jackson, died in 2023, survived by three children. M. H. Jackson, who survived his wife, Maggie Jackson, died in 2024, survived by four sons. The children of Thelma Jackson Vester brought this action against M. P. Jackson, a son of and executor of the will of M. H. Jackson. The children of Vester contended that through their deceased mother they were entitled to a one-fifth interest in the land conveyed by the deed of 1981. The executor contended that the deed conveyed a contingent remainder and that only those children who survived the parents took an interest in the land. Discuss the contentions of both of the parties.

Answer: Judgment for executor affirmed. The distinction between a vested and a contingent remainder is the capacity to take upon the termination of the preceding estate. Where those who are to take in remainder cannot be determined until the happening of a stated event, the remainder is contingent. Only those who can answer the roll immediately upon the happening of the event acquire any estate in the properties granted.

Here the estate in remainder was not given to the children of M. H. Jackson and Maggie Jackson, but by clear and express language to those children and only those who survived their parents. Since Mrs. Vester did not survive her parents, there was nothing for her children, plaintiffs, to inherit. It affirmatively appears from the complaint that plaintiffs acquired no interest in the land by virtue of the deed from Tyson and wife to M. H. Jackson and others. Strickland v. Jackson, 130 S.E. 2d 22 (N.C. 1963).

13. Robert and Marjorie Wake owned land that they used as both a cattle ranch and a farm.

Each spring and autumn, the Wakes would drive their cattle from the ranch portion of the operation across an access road on the farmland to Butler Springs, which was also on the farmland.

In December 2001, the Wakes sold the farm to Jesse and Maud Hess but retained for themselves a right-of-way over the farm access road and the right to use Butler Springs for watering their livestock. In 2008, the Hesses sold the farm to the Johnsons, granting them uninterrupted possession of the property “excepting only that permissive use of the premises” owned by the Wakes.

The Wakes continued to use the access road and Butler Springs until 2009, when they sold their ranch and granted the new owners “their rights to the water of Butler Springs,” but they said nothing about the access road. The ranch was subsequently sold several times, and all the owners used the access road and watering hole. In 2022, the Nelsons purchased the ranch. Shortly thereafter, the Johnsons notified the Nelsons that they had revoked the Nelsons’ right to use the access road and Butler Springs. In 2024, the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 48: Interests in Real Property

Johnsons closed the access road by locking the gates across the road. The Nelsons brought this action, claiming easements to both the access road and Butler Springs. The trial court ruled in favor of the Nelsons, and the Johnsons appealed. Does an easement in favor of the Nelsons exist? Why or why not?

Answer: Judgment for the Nelsons affirmed. The Johnsons allege that the Butler Springs easement was “in gross,” and therefore personal to the Wakes. An easement in gross is merely a personal interest in the land of another. However, an easement appurtenant is an interest which is annexed to the possession of the dominant tenement and passes with the land to subsequent owners. An instrument granting an easement is to be interpreted in connection with the intention of the parties and the circumstances in existence at the time of the easement’s creation. The trial court determined that the Butler Springs easement created in the 1989 Wake-Hess contract was appurtenant in nature, with a dominant estate in the cattle ranch and a servient estate in the farmland. The Butler Springs easement consequently has passed with the cattle ranch (dominant estate) upon each transfer of title. The evidence presented at trial fully supports this interpretation. Nelson v. Johnson.

14. Clayton and Margie Gulledge owned a house at 532 Somerset Place, N.W. (the Somerset property) as tenants by the entirety. They had three children: Bernis Gulledge, Johnsie Walker, and Marion Watkins. When Margie Gulledge died in 1996, Clayton became the sole owner of the Somerset property. The following year, Clayton remarried, but the marriage was unsuccessful. To avoid a possible loss of the Somerset property, Bernis forwarded Clayton funds to satisfy the second wife’s financial demands. In exchange, Clayton conveyed the property to Bernis and himself as joint tenants. In 2017, Clayton conveyed his interest in the Somerset property to his daughter, Marion Watkins. Clayton died later that same year. Bernis Gulledge and Johnsie Walker both died in 2023. Marion Watkins claims to be a tenant in common with the estate of Bernis Gulledge. The estate claims that when Clayton died, Watkins’ interest was extinguished, and Bernis became the sole owner of the Somerset property. Who is correct? Why? Answer: Watkins is correct. The applicable rule in a large majority of jurisdictions is that either party to a joint tenancy may sever that tenancy by unilaterally disposing of his interest, that the consent of the other tenant is not required, and that the transfer converts the estate into a tenancy in common. This position is supported by the nature of a joint tenancy. It is established that “[j]oint tenancy cannot exist unless there be present unity of interest, title, time and possession; that is to say, the interests must be identical, they must accrue by the same conveyance, they must commence at the same time and the estate must be held by the same undivided possession.” The interests held by Marion Watkins and Bernis Gulledge were not created by the same conveyance and were not created at the same time. Therefore, the unities of title and time did not exist between these interests and no joint tenancy could have existed. When Clayton conveyed his interest to Marion, he unilaterally severed the joint tenancy held by himself and Bernis and created a tenancy in common between Bernis and Marion.

15. By separate leases, Javins and a few others rented an apartment at the Clifton Terrace apartment complex. When they defaulted on their rent payments, the landlord, First National Realty, brought an action to evict them. The tenants admitted to the default but defended on the ground that the landlord had failed to maintain the premises in compliance with the Washington, D.C., Housing Code. They alleged that approximately 1,500 violations of this code had arisen since the term of their lease began. Discuss the merits of this case.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 48: Interests in Real Property

Answer: Traditionally, a lease conveyed an interest in land. Consequently, courts applied the general rules governing real property transactions to lease controversies.

The rigid doctrines of real property law have inhibited the application of implied warranties to real estate transactions. Today’s tenant is not interested in land, however, but in a suitable place for occupation. The value of the lease for a modern apartment dweller is that it gives him a place to live that includes adequate heat, light, ventilation, serviceable plumbing facilities, secure doors and windows, proper sanitation, and proper maintenance. A tenant’s tenure in a specific place is often not sufficient to justify efforts at repairs. Since the lease specifies a particular period of time for the tenant to use the apartment, he may legitimately expect that it will be fit for habitation during this rental period. The landlord should then be obligated to keep the premises in a habitable condition. This court, therefore, holds that a warranty of habitability, measured by housing standards regulations, is implied in leases of units covered by those regulations. In this case, the tenants’ obligation to pay rent was dependent upon the landlord’s performance of its obligations, which now includes the warranty to maintain the premises in a habitable condition. First National has not fulfilled its implied warranty of habitability; therefore, it cannot sue for possession due to the tenants’ default.

16. On January 1, Mrs. Irene Kern leased an apartment from Colonial Court Apartments, Inc., for a one-year term. When the lease was entered into, Mrs. Kern asked for a quiet apartment, and Colonial assured her that the assigned apartment was in a quiet, wellinsulated building. In fact, however, the apartment above Mrs. Kern’s was occupied by a young couple, the Lindgrens. From the start of her occupancy, Mrs. Kern complained of their twice-weekly parties and other actions that so disturbed her sleep that she had to go elsewhere for rest. After Mrs. Kern had lodged several complaints, Colonial terminated the Lindgrens’ lease effective February 28. The termination of the lease was prolonged, however, and Mrs. Kern vacated her apartment, claiming that she was no longer able to endure the continued disturbances. Colonial then brought this action to recover rent owed

by Mrs. Kern. Will Colonial prevail? Has Mrs. Kern been constructively evicted? Explain.

Answer: Yes, she has been constructively evicted. A constructive eviction is said to occur when the beneficial enjoyment of an apartment by the lessee is so interfered with by the landlord as to justify an abandonment. It does not suppose an actual ouster or dispossession by the landlord. Colonial Court Apartments, Inc. v. Kern, 163 N.W. 2d 770 (Minn. 1968).

17. On January 14, 2020, Eura Mae Redmon deeded land to her daughter, Melba Taylor, and two sons, W. C. Sewell and Billy Sewell, “jointly and severally, and unto their heirs, assigns and successors forever,” with the grantor retaining a life estate. W. C. Sewell died on November 18, 2020, and Billy Sewell died on May 11, 2022. Mrs. Redmon died on February 17, 2024. Melba Taylor then sought a declaration that her mother had intended to convey the property to the grantees as joint tenants, thereby making her, by virtue of her brothers’ deaths, sole owner of the property. Descendants of W. C. and Billy Sewell opposed the complaint on the ground that the deed created a tenancy in common among the grantees. Who is correct? Explain.

Answer: At common law, joint tenancy was favored in cases in which the wording in the deed was ambiguous. However, in Arkansas, and in many other states, statutes have been adopted which presumptively construe an instrument to create a tenancy in common rather than a joint tenancy. The Arkansas statute reads as follows: “Every interest in real estate granted or devised to two (2) or more persons, other than executors and trustees as such, shall be in tenancy in common unless expressly declared in the grant or devise to be a joint tenancy.”

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 48: Interests in Real Property

Nothing appears from the deed itself in this case to indicate Mrs. Redmon’s intent to convey a survivorship interest, unless that intention is to be found in the term “jointly and severally.” The problem, however, is that “jointly and severally” are words of tort, not property. They have no meaning in the world of estates. In the context of an ownership interest, such a term is a legal anomaly; several ownership is, by definition, a denial of joint ownership. However, two cases from other jurisdictions have shown that the use of the word “jointly” is not sufficient to create a joint tenancy, and therefore, the term “jointly and severally,” with its elusive connotation, cannot do so either. James v. Taylor, Court of Appeals of Arkansas, Division III, 1998, 62 Ark. App. 130, 969 S.W. 2d 672 http://caselaw.lp.findlaw.com/scripts/getcase.pl?court =ar&vol=1998a/980520/ca971404&invol=2 18. Fay and Loretta O’Connell were married and owned several bank accounts as joint tenants with rights of survivorship. While accompanied by Loretta’s sister, Mary Ann, Fay went to the banks where Fay and Loretta had joint accounts and withdrew all the funds from those accounts. Fay deposited the funds into new accounts in his name alone and designated all but the money market account as payable-on-death to Mary Ann. Did Fay sever and destroy the joint tenancy? What rights, if any, does Loretta have to the withdrawn funds? Explain.

Answer: Yes, Fay severed and destroyed the joint tenancy, but Loretta is entitled to recover her proportional interest (50 percent) of the withdrawn funds. Kettler v.

Security Nat. Bank of Sioux City, Court of Appeals of Iowa, 2011, 805 N.W. 2d 817.

“Joint tenancy property is property held by two or more parties jointly, with equal rights to share in the enjoyment of the whole property during their lives, and a right of survivorship which allows the surviving party to enjoy the entire estate.” A joint tenant’s right to the joint tenancy property can be described as “an undivided interest in the entire estate to which is attached the right of survivorship.” There are two separate features of joint tenancy: the “proportional interest” in the undivided interest in the property and the “accretive interest” in the right of survivorship.

A joint tenancy may be severed by the actions of one or both of the joint tenants. Any severance of joint tenancy creates a tenancy in common. Traditionally, Iowa followed the four unities of title test: to create a joint tenancy the four unities had to be present—interest, title, time, and possession. “To sever or terminate a joint tenancy, a joint tenant simply had to destroy one of the unities.” That changed and Iowa adopted an “intent-based approach” in determining whether a joint tenancy had been created, severed, or terminated. Under the intent-based test, a court is not permitted “to determine the intent of a party under the facts and then fulfill it.” “Instead, it seems fundamental that intent must be derived from an instrument effectuating the intent to sever the joint tenancy.”

In the present case, the bank accounts were held in joint tenancy, with both Fay and Loretta having an undivided interest in the entire estate. Each joint tenant was permitted to make withdrawals from the account, as was specified in the account agreement. Ultimately, one joint tenant was permitted to deplete the account.

Consequently, the withdrawals of funds was valid and could support the termination of the joint tenancy. Fay clearly demonstrated his intent that the funds no longer be held in the joint tenancies. First, he withdrew all of the funds. He then deposited both his and Loretta’s proportional interests into accounts in his name only and payableon-death to Mary Ann.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 48: Interests in Real Property

In a case where a joint tenant makes a valid withdrawal of more than his proportional share, the remedy is not to invalidate the entire transaction. Rather, the remedy is a suit between the joint tenants to recover the funds taken in excess of the withdrawing joint tenant’s proportional share.

Even though the withdrawals from the joint tenancy accounts were valid transactions, this does not determine nor destroy the proportional interests as between Fay and Loretta. Fay had a right to withdraw all of the funds and even to take control of all of the funds. However, he did so at the risk of Loretta claiming her proportionate share.

The presumption is that each party has an interest in one-half of the funds in a joint tenancy account.

ANSWERS TO “TAKING SIDES” PROBLEMS On June 30, 2015, Martin Hendrickson and Solveig Hendrickson were married, and on January 3, 2016, a home previously owned by Martin was conveyed to them as joint tenants and not as tenants in common. Solveig Hendrickson paid no part of the consideration for the premises.

On August 3, 2023, Martin Hendrickson duly executed a Declaration of Election to Sever Survivorship of Joint Tenancy by which he endeavored to preserve an interest in the premises for Ruth Halbert, his daughter by a previous marriage. On the same day, he executed his last will and testament, by the terms of which he directed that his wife, Solveig Hendrickson, receive the minimum amount to which she was entitled under the laws of the State of Minnesota. Martin Hendrickson died with a valid will on October 9, 2023. a. What are the arguments that the joint ownership was severed by Martin Hendrickson’s declaration thus creating a tenancy in common? b. What are the arguments that the joint tenancy was not severed by Martin Hendrickson’s declaration and thus the property passed to Solveig Hendrickson by survivorship upon Martin Hendrickson’s death? c. Which argument should prevail? Explain.

Answer: (a) The joint tenancy was terminated by declaration of Martin Hendrickson because he had the legal right to unilaterally terminate his joint ownership and create a tenancy in common. (b) The arguments against the termination of the joint tenancy are that Mrs. Hendrickson did not agree to the termination and that it is not fair to permit unilateral termination of a joint tenancy. (c) The existence of a joint tenancy requires unity of time, title, interest, and possession. In the past, one joint tenant could unilaterally convert the joint tenancy to a tenancy in common by conveying his interest to a third party who immediately reconveyed the property to the original owner. In the process, the unities of time and interest would be destroyed. Recently, the courts have permitted joint tenants to agree mutually to sever the joint tenancy.

In this case, Martin Hendrickson attempted to sever the joint tenancy unilaterally. The method chosen by him was sufficient. Under Minnesota law, a wife is guaranteed the continued occupancy of the place of joint abode upon her husband’s death. This public policy, however, does not necessarily apply to the remainder interest in the home, which can be disposed of without adversely affecting the wife’s rights. Moreover, Martin’s wife took no irrevocable action in reliance upon the existence of the joint tenancy, and no consideration was given or received when the joint tenancy was created. Therefore, the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 48: Interests in Real Property

unilateral action taken by Martin was effective to destroy the joint tenancy and create a tenancy in common. Hendrickson v. Minneapolis Federal Savings & Loan Association, 281 Minn. 462, 161 N.W. 2d 688 (1968).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 49: Transfer and Control of Real Property

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 49: Transfer and Control of Real Property

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ....................................................................... 2 Answers to “Taking Sides” Problems ............................................................................. 10

ANSWERS TO ETHICAL DILEMMA Where Should Cities House the Disadvantaged?

1. What are the goals of zoning classifications?

2. Is there any justification for requiring a special permit under the circumstances? What are the community’s concerns? Are these concerns justified?

3. What is the social policy behind placing rehabilitative group homes in the heart of a thriving community rather than in an isolated neighborhood?

4. Should a permit be refused for the purpose of preserving property values?

Answer: 1. The goal of zoning classification is to provide a tool for the regulation of community development.

2. The justification for requiring the special permit probably arises out of a concern for public safety. However, the requirement may also grow out of deeply rooted prejudices against the mentally ill.

3. The social policy behind placing such groups in the heart of a thriving community is to foster the integration of the individuals into the community at large.

4. In recent years there has been significant community involvement in zoning matters.

(See Patrich G. Marshall “Not in My Back Yard,” Editorial Reports, June 9, 1989, pg.

306). Planners and developers have called this community opposition NIMBY, an acronym for Not In My Back Yard.

A nationwide survey of attitudes on mental illness was recently conducted and widespread opposition to any type of facility or housing for the mentally ill in neighborhoods was expressed. Opposition was particularly common among white, married men living in large cities. Those with incomes over $50,000 were twice as likely as others to hold strong “NIMBY” views. (See Somerville, Many Oppose Nearby Housing For Mentally Ill, American Medical News, vol. 33, pg. 8, April 27, 1990.)

5. Each special use presents specific community concerns. While some of these concerns may be legitimate, some may grow out of cultural prejudices and unfair generalizations. Market values of real estate, of course, tend to reflect the expression of such cultural prejudices. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 49: Transfer and Control of Real Property

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Arthur was the father of Bridgette, Clay, and Dana and the owner of Redacre, Blackacre, and Greenacre.

Arthur made and executed a warranty deed conveying Redacre to Bridgette. The deed provided that “this deed shall become effective only on the death of the grantor.” Arthur retained possession of the deed and died, leaving the deed in his safe deposit box.

Arthur made and executed a warranty deed conveying Blackacre to Clay. This deed also provided that “this deed shall become effective only on the death of the grantor.” Arthur delivered the deed to Clay. After Arthur died, Clay recorded the deed.

Arthur made and executed a warranty deed conveying Greenacre to Dana. Arthur delivered the deed to Lesley with specific instructions to deliver the deed to Dana on Arthur’s death. Lesley duly delivered the deed to Dana when Arthur died. a. What is the interest of Bridgette in Redacre, if any? b. What is the interest of Clay in Blackacre, if any? c. What is the interest of Dana in Greenacre, if any?

Answer: (a) Bridgette has no interest in Redacre. There has been no delivery of the deed. “To constitute the valid delivery of a deed the grantor must absolutely divest himself of all control over the same, and if he retains any custody or control over it, if it is not actually delivered but is to become effective only upon the grantor’s death, there is no valid delivery. A deed must take effect upon its execution and delivery or not at all. A deed of land which is not to take effect until the death of the grantor is void, as being an attempt to make a testamentary disposition of property without complying with the Statute of Wills.” Benner v. Bailey, 234 Ill. 79. (b) Clay is the owner of Blackacre. There has been a good delivery here of the deed.

The provision in the deed does not prevent good delivery. “Where a deed has been actually delivered to a grantee in the life of the grantor, even though it contains a provision that it is not to take effect until the grantor’s death, it will be sustained as a present grant of a future interest. The delivery of a deed in the grantor’s lifetime changes the effect of an instrument which might but for the delivery be of a testamentary character.” Shipley v. Shipley, 174 Ill. 506. (c) Dana is the owner of Greenacre. The delivery to the escrow agent was valid where the grantor parted with all control over the deed. “The unconditional delivery of a deed by the grantor to a third party, to be delivered to the grantee after the grantor’s death, is a good delivery. The question of delivery is to a great degree a question of intention, and the presumption of delivery in the case of a voluntary settlement, such as here, is stronger than in an ordinary case of bargain and sale.

The deed was delivered to Lesley to keep until the grantor’s death and then to deliver to Dana. No condition was attached to the delivery. It was effectual to pass the title and was not testamentary.” Newman v. Workman, 284 Ill. 77, 81-82.

2. Arkin, the owner of Redacre, executed a real estate mortgage to the Shawnee Bank and Trust Company for $100,000. After the mortgage was executed and recorded, Arkin constructed a dwelling on the premises and planted a corn crop. After Arkin defaulted in the payment of the mortgage debt, the bank proceeded to foreclose the mortgage. At the time of the foreclosure sale, the corn crop was mature and unharvested. Arkin contends (a) that the value of the dwelling should be credited to him and (b) that he is entitled to the corn crop. Explain whether Arkin is correct.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 49: Transfer and Control of Real Property

Answer: (a) The dwelling became a part of the realty and passed to the purchaser. Arkin would not be entitled to the value of the improvement. The mortgagee had an estate in the premises, and when the house was erected, in the absence of a contract that Arkin might sever and remove the house, it became a part and parcel of the premises. (b) Arkin is not entitled to the corn crop. Until the crop is severed from the land, it passes with the land. Crops growing upon mortgaged lands are covered by the mortgage, whether planted before or after its execution, and until they are severed the mortgage attaches as well to the crops as to the land.

3. Robert and Stanley held legal title of record to adjacent tracts of land, each consisting of a number of five acres. Stanley fenced his five acres in 1996, placing his east fence 15 feet onto Robert’s property. Thereafter, he was in possession of this 15-foot strip of land and kept it fenced and cultivated continuously until he sold his tract of land to Nathan on March 1, 2005. Nathan took possession under deed from Stanley, and continued possession and cultivation of the fifteen-foot strip that was on Robert’s land until May 27, 2024, when Robert, having on several occasions strenuously objected to Nathan’s possession, brought suit against Nathan for trespass. Explain whether Nathan has gained title by adverse possession.

Answer: Decision for Robert. In order to gain title by adverse possession of the 15-foot strip there would have to be an open and notorious use of the strip for the statutory period of 20 years (although this varies from state to state), either by the occupier or those in privity of contract with him. In order for Nathan to tack on to this use the prior use, the fifteen-foot strip would have had to be described in Nathan’s deed which it was not. Nathan’s adverse use of the strip commenced on March 1, 1998, and only ran for a little over 19 years.

4. Marcia executed a mortgage of Blackacre to secure her indebtedness to Ajax Savings and Loan Association in the amount of $125,000. Later, Marcia sold Blackacre to Morton. The deed contained the following provision: “This deed is subject to the mortgage executed by the Grantor herein to Ajax Savings and Loan Association.”

The sale price of Blackacre to Morton was $150,000. Morton paid $25,000 in cash, deducting the $125,000 mortgage debt from the purchase price. On default in the payment of the mortgage debt, Ajax brings an action against Marcia and Morton to recover a judgment for the amount of the mortgage debt and to foreclose the mortgage. Can Ajax recover from Marcia and Morton? Explain.

Answer: Ajax can recover against both Marcia and Morton. When Morton purchased the property and deducted the amount of the existing principal indebtedness from the purchase price, he thereby impliedly assumed payment of such indebtedness for which he was personally liable.

“Where, in purchasing premises which are encumbered, the amount of the encumbrance is taken into account in fixing the consideration and becomes part of the consideration, the purchaser thereby becomes liable for the amount of the encumbrance.” Metzger v. Emmel, 290 Ill. 61.

Where a grantee of a mortgagor assumes payment of a mortgage, the mortgagor is not released from liability to pay the mortgage debt.

Ordinarily, the provision in a deed, “subject” to the mortgage, would not impose a personal obligation on the grantee to pay the mortgage debt. Here, the situation is

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 49: Transfer and Control of Real Property

changed by the buyer taking as a credit upon the purchase the amount of the mortgage debt thereby obligating him to pay it.

5. On January 1, 2023, Davis and Hershey owned Blackacre as tenants in common. On July 1, 2023, Davis made a written contract to sell Blackacre to Dibbert for $125,000. Pursuant to this contract, Dibbert paid Davis $125,000 on August 1, 2023, and Davis executed and delivered to Dibbert a warranty deed to Blackacre. On May 1, 2024, Hershey quitclaimed his interest in Blackacre to Davis. Dibbert brings an action against Davis for breach of warranty of title. Explain what judgment should be rendered.

Answer: Judgment for Dibbert. Since the deed of conveyance from Davis to Dibbert was by warranty deed, that deed operated to convey after acquired title to Dibbert.

Accordingly, when Davis acquired Hershey’s interest in Blackacre on May 1, 2019, title immediately vested in Davis’s grantee, Dibbert, pursuant to the earlier warranty deed.

6. In adjoining locations along one side of a single suburban village block, Barker operated a retail bakery; Davidson, a drugstore; Farrell, a food store; Gibson, a gift shop; and Harper, a hardware store. As the population grew, the business section developed at the other end of the village, and the establishments of Barker, Davidson, Farrell, Gibson, and Harper were surrounded for at least a mile in each direction solely by residences. A zoning ordinance with the usual provisions was adopted by the village, and the area including the five stores was declared to be a “residential district for single-family dwellings.”

Thereafter, Barker tore down the frame building that housed the bakery and began to construct a modern brick bakery. Davidson found her business increasing to such an extent that she began to build an addition on the drugstore to extend it to the rear alley.

Farrell’s building was destroyed by fire, and he started to reconstruct it to restore it to its former condition. Gibson changed the gift shop into a sporting goods store and after six months of operation decided to go back into the gift shop business. Harper sold his hardware store to Hempstead.

The village building commission brings an action under the zoning ordinance to enjoin the construction work of Barker, Davidson, and Farrell and to enjoin the carrying on of any business by Gibson and Hempstead. Assume the ordinance is valid. Explain the result.

Answer: Injunction granted against Barker, Davidson, Farrell, and Gibson; no injunction against Hampstead. Nonconforming uses existing at the time of the adoption of a zoning ordinance are generally permitted to remain and constitute a property right, but the nonconforming user may not change the structure or use upon the theory that nonconforming uses should be gradually eliminated.

Barker–Although repairs are allowed on nonconforming structures, rebuilding and structural alterations are prohibited.

Davidson–Additions to nonconforming building are prohibited.

Farrell–Rebuilding after destruction by fire is prohibited.

Gibson–Abandonment of a nonconforming use results in its permanent loss.

Hampstead–Sale of a nonconforming use for continuance of such use does not destroy it.

7. Alda and Mattingly are residents of Unit I of Chimney Hills Subdivision. The lots owned by Alda and Mattingly are subject to the following restrictive covenant: “Lots shall be for single-family residence purposes only.” Alda intends to convert her carport into a beauty shop, and Mattingly brings suit against Alda to enjoin her from doing so. Alda argues that

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 49: Transfer and Control of Real Property

the covenant restricts only the type of building that can be constructed, not the incidental use to which residential structures are put. Will Alda be able to operate a beauty shop on the property? Why or why not?

Answer: Decree for Alda. Restrictive covenants are generally strictly construed. Doing so, this restrictive covenant only limits the types of buildings that can be constructed on the lots and not the incidental use to which residential structures may be put.

Relevant factors in reaching this decision are the wording of the restrictive covenants and the extensiveness of the business activities conducted within the residential dwelling.

8. The City of Boston sought to condemn land in fee simple for use in constructing an entrance to an underground terminal for a subway. The owners of the land contend that no more than surface and subsurface easements are necessary for the terminal entrance and seek to retain air rights above 36 feet. The city argues that any building using this airspace would require structural supports that would interfere with the city’s plan for the terminal. The city concedes that the properties around the condemned property could be assembled and structures could be designed to span over the condemned property, in which case the air rights would be quite valuable. Explain whether the city can condemn the property.

Answer: No, the city cannot condemn the property, but has the right to an easement.

The fact that the city has authority to condemn in fee simple pursuant to a statutory procedure does not give it authority always to condemn a fee simple interest; the condemnor can take no more property than is reasonably necessary for the public purpose for which the property is being condemned. “Where the attempted condemnation seeks property in excess of public needs, judicial intervention is called for. In this case it is clear that [the city] needs no more for its substation than a permanent, nonexclusive easement for the subsurface, surface, and the first 36 feet above the surface. This would not preclude future development of the air space above the easement area so long as the public use and safety is not threatened or impaired.”

Heirs of W.L. Champion v. City of Atlanta, 254 S.E. 2d 706.

9. For seven years, Desford Potts had owned a 6-acre tract of land within the corporate limits of the city of Franklin. The tract contained a livestock barn in which Potts stored lumber and other building materials. Bricks were also stored in stacks four or five feet high outside and behind the barn. Franklin passed a zoning ordinance by virtue of which Potts’s lot was classified as residential property. Soon afterward, Potts moved some sawn logs onto his back lot, and the city complained that Potts’s use of his property for storage of building materials was a “nonconforming use.” Potts then brought an action to enjoin interference by the city of Franklin. Explain whether Potts will prevail.

Answer: Decision for Potts. Storing logs on the property did not constitute an enlargement of a nonconforming use. Since the bricks were already stored before the passage of the zoning ordinance, placing some logs there did not materially change the use of the property. Therefore, there was no enlargement of the nonconforming use.

Franklin Planning & Zoning Commission v. Simpson County Lumber Company, 394 S.W. 2d 593 (Ky. App. 1965).

10. In May 2013, Fred Parramore executed four deeds, each conveying a life estate in his land to him and his wife and a remainder interest in one-fourth of his land to each of his four children: Alney, Eudell, Bernice, and Iris. Although Fred executed and acknowledged the four deeds as part of his plan to distribute his estate upon his death, he did not deliver them to his children at this time. Instead, he placed the deeds with his will in a safe

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 49: Transfer and Control of Real Property

deposit box and instructed the children to pick up their deeds at his death. Fred later conveyed Alney’s deed to Alney, thereby vesting Alney’s interest in that parcel, but Eudell, Bernice, and Iris’s deeds were never handed over to them during Fred’s lifetime. Fred, however, acted as if the land was beyond his control, and on one occasion told a prospective buyer that the land had already been deeded away. When Fred died in November 2023, Alney brought this action, claiming that the deeds to Eudell, Bernice, and Iris were ineffective because they had never been handed over during Fred’s lifetime.

Accordingly, Alney argued the remaining land should pass in equal shares to each of the four children under the residuary clause of Fred’s will. Who will prevail? Why? Answer: Judgment for Eudell, Bernice, and Iris affirming the validity of their deeds. The appellate court affirmed. Delivery is “the life of a deed;” without it no deed is good, though “the intent to deliver is clear and failure to deliver due to accident.” But a grantor may fully relinquish a deed, signifying a conveyance, otherwise than by placing it in the grantee’s hands. There is substantial competent evidence to support the trial court’s decision that Fred Parramore, during his life, vested remainder interests in his children by conduct recognizable as delivery of the deeds. * * * It is enough that Fred Parramore, unsophisticated in such matters, signed deeds creating remainder interests in his several children and put the deeds beyond his immediate reach in a place which he understandably regarded and verbally identified as the appropriate depository for instruments having practical effect at life’s end. Parramore v. Parramore, 371 So. 2d 123 (Ct. App. Fl. 1978).

11. The Gerwitz family resides on a piece of land known as Lot 24 of the Belleville tract, which they acquired by deed in 2004. Shortly thereafter, the Gerwitzes began to use the adjacent vacant Lot 25. At various times they planted grass seed, flowers, and shrubs on the land and used it for picnics and cookouts. In 2024, Gelsomin acquired Lot 25 and constructed a foundation on it so that he could place a house there. The Gerwitzes then brought this action to stop him, claiming title to Lot 25 by adverse possession. Discuss whether the Gerwitzes have obtained title by adverse possession.

Answer: Judgment for Gelsomin. The appellate court affirmed because the possession was not hostile to the owner and under a claim of right. Before a claimant may acquire land by adverse possession, he must prove by clear and convincing evidence that his possession of the premises has been (1) hostile and under a claim of right, (2) actual, (3) open and notorious, (4) exclusive, and (5) continuous. The reasonable inference to draw from the evidence is that plaintiffs knew in 1999 that they did not own Lot #25 and they never intended to claim ownership of it. They entered the land to remedy an eyesore next to their home and use the land as they could. Thus, the proof establishes that plaintiffs had clear knowledge of the boundaries of their land by map and deed, and because the other lots on the street were the same size. Gerwitz v. Gelsomin, 416 N.Y.S. 2d 127 (1979).

12. Leo owned a one-story, one-family dwelling in a single-family residential zoning district in Detroit. He attempted to sell the house with its adjoining lot for $138,500. Houses in the neighborhood generally sold for $120,000 to $125,000. Immediately to the west of Leo’s property was a gasoline service station. In addition, Leo’s property was located on a corner frequented with heavy traffic. After he received no offers from residence-use buyers during the period of more than a year that the property was listed and offered for sale, Leo applied to the board of zoning appeals for a variance to permit the use of the property as a dental and medical clinic and to use the side yard for off-street parking. The variance would be subject to certain conditions, including the preservation of the building’s exterior as that of a one-family dwelling. Puritan-Greenfield Improvement

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 49: Transfer and Control of Real Property

Association, a nonprofit corporation, filed a complaint against Leo’s variance request.

Discuss whether the variance should be granted.

Answer: Judgment for Puritan-Greenfield. Under the Detroit statute, a board of zoning appeals is authorized to grant a variance only upon a showing of practical difficulties or unnecessary hardship. The unnecessary hardship, however, must be unique or peculiar to the property for which the variance is sought rather than due to general conditions in the neighborhood. Furthermore, one seeking a variance must show that the property cannot reasonably be used in a manner consistent with existing zoning.

Here, Leo’s house would not sell for $138,500 in a neighborhood where houses sell for substantially less. This is not enough to show that the property could not continue reasonably to be used as a single-family residence. The fact that the property would be worth more as a doctor’s clinic is immaterial. The standard is one of reasonable use, not reasonable return. Moreover, the presence of heavy traffic and the gasoline station is not unique to Leo’s property, but common to the entire neighborhood. A zoning district has to end somewhere. Thus, Leo’s property can continue reasonably to be used as a single-family residence. Accordingly, his variance request was denied.

Puritan-Greenfield Improvement Association v. Leo, 153 N.W. 2d 162 (Ct. App. Mich.

1967).

13. The Glendale Church purchased a twenty-one-acre parcel of land in a canyon along the banks of Mill Creek in Angeles National Forest. The church used the twelve flat acres next to the stream to operate a campground for disabled children. This area had a number of improved buildings located on it. In July, a forest fire destroyed all ground cover upstream from the church’s campground, and a subsequent flood destroyed all the buildings. In response, the county of Los Angeles enacted an interim ordinance that temporarily prohibited the church from constructing new buildings. Is the church entitled to compensation for a temporary taking of its property? Why or why not?

Answer: Yes, the church is entitled. The just compensation clause of the Fifth Amendment requires that a landowner be compensated when his property is taken by the government. A “temporary” taking such as the one in this case, is not that different from a permanent taking. The just compensation clause does not suggest that a taking must be permanent in order to qualify the landowner for remuneration. First English Evangelical Lutheran Church of Glendale v. Los Angeles County, Calif., 482 U.S. 304 (1987).

14. Robert V. Gross owned certain land on which he proposed to construct an eighty-threeunit apartment house. The land, however, was subject to a restriction imposed by a 1972 deed to a predecessor in title that provided that no part of the premises could be used for business purposes other than raising, growing, and selling live bait, selling fishing tackle, and selling sporting goods. Explain whether the restriction prohibits the construction and operation of an apartment house.

Answer: Judgment for Gross. The restriction itself gives no significant guidance as to what constitutes a forbidden business purpose other than expressly to permit the retail sale of fishing tackle and sporting goods. The apartment house will be used for residential purposes. That it may be owned for income-producing purposes does not make the use of the premises a use for a business purpose. The restriction is concerned with the physical activity carried on upon the land and not with the presence or absence of a profit-making motive on the part of the landowners.

Construed in this manner—strictly against the party asserting the applicability of the

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 49: Transfer and Control of Real Property

restriction—the resolution does not forbid Gross’s construction and operation of the apartment house. Walker v. Gross, 362 Mass. 703, 290 N.E. 2d 543 (1972).

15. Sam and Eleanor Gaito purchased a home from Howard Frank Auman, Jr., in the spring of 2021. Auman had completed the construction of the house in November 2016. In the interim, three different parties had lived in the house for brief periods, but Auman had retained ownership. The last tenants, the Ashleys, experienced difficulties with the home’s air-conditioning system. Repairs were attempted, but no effort was made to change the capacity of the air-conditioning unit.

When the Gaitos moved into the house in June 2021 they too had problems with the airconditioning. The system created only a ten-degree difference between the outside and inside temperatures. The Gaitos complained to Auman on a number of occasions, but extensive repairs failed to correct the cooling problem. In May 2024, the Gaitos brought an action against Auman, alleging that the purchase price of the home included central airconditioning and that Auman had breached the implied warranty of habitability. At trial, an expert in the field of heating and air-conditioning testified that a four-ton air-conditioning system, rather than the three-and-a-half-ton system originally installed, was appropriate for the Gaitos’s house. The jury returned a verdict in favor of the Gaitos in the amount of $3,655. Explain who should prevail.

Answer: Judgment for Gaitos affirmed. The theory of implied warranty of habitability of a recently completed dwelling relaxes the rigid common law rule of caveat emptor.

The theory was originally stated in North Carolina as follows: “[I]n every contract for the sale of a recently completed dwelling, the vendor, if he be in the business of building such dwellings, shall…impliedly warrant to the initial vendee that…the dwelling, together with all its fixtures, is sufficiently free from major structural defects.” Any defect must be latent or not reasonably discoverable at the time of sale or possession. Auman was in the business of building houses, and the Gaitos were the initial vendees. Auman argues, however, that the theory is inapplicable to this case in that the dwelling was not “recently completed” and that any implied warranty that may have arisen was invalidated by the previous occupancy of the house by tenants.

The standard of reasonableness is proper for determining whether a house has been recently completed. Thus, this issue was a question of fact for the jury. The effect of the occupancy by tenants was another factor that was properly allowed consideration by the jury, since many kinds of major structural defects are unaffected by the presence of tenants. Auman also contends that an air conditioning unit is not governed by an implied warranty because it is not “an absolute essential utility to a dwelling house.” The warranty, however, includes “the dwelling, together with all its fixtures.” A defective air conditioning system may properly be considered a major structural defect. Gaito v. Auman, 313 N.C. 243.

16. In 1972, South Carolina enacted a Coastal Zone Management Act requiring any person using land in a “critical area” to obtain a permit for any uses other than those to which the critical area was devoted when the act went into effect on September 28, 1977. In 1986, Lucas paid $975,000 for two residential lots on the Isle of Palms in Charleston County, South Carolina, on which he intended to develop a residential subdivision known as “Beachwood East.” Because no portion of those lots was included in a “critical area” at that time, Lucas was not required to obtain a permit. In 1988, however, South Carolina enacted the Beachfront Management Act, which established a “baseline” for the landward-most points of erosion and in effect barred the erection of any permanent habitable structures on his two parcels. Lucas filed suit in state court, claiming that the new statute violated his Fifth and Fourteenth Amendment rights by taking property without compensation. Is he entitled to just compensation for his property? Explain.

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 49: Transfer and Control of Real Property

Answer: Judgment for Lucas. At the time Lucas acquired his lots, the Coastal Zone Management Act protecting the beaches was already in effect. Under this legislation, Lucas was not limited as to the development of his lots, and the adjacent lots to his had already been built on. However, the Beachfront Management Act drew a new line through the island, on the ocean side of which no permanent habitable structure could be built. The Act permitted no exceptions. Lucas’s lots fell entirely within the proscribed area.

It was first established in 1922, in Pennsylvania Coal Co. v. Mahon, that “while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.” Prior to that case, a taking was considered only to be a direct appropriation of the property, in which the owner lost possession. After the Mahon case, two categories of regulatory action requiring compensation became recognized—that is, situations in which the owner retains possession but is so affected by the state’s regulations as to have a valid claim to compensation. The second category applies to this case: it is the situation in which regulations deny all economically beneficial or productive use of land. From the owner’s point of view, the extinguishment of economic value is the equivalent of physical appropriation.

The Takings Clause of the Fifth Amendment does not require compensation when an owner is barred from putting land to a use that is already proscribed by existing rules.

For South Carolina to prove that its regulation takes nothing from Lucas, it must identify principles of nuisance and property law that prohibit Lucas’s intended uses (building single-family houses) in the circumstances in which the property is presently found. The state has not done that. The effect of its Beachfront Management Act on Lucas’s land is indeed a taking. Lucas v. South Carolina Coastal Council, 505 U.S. 1003.

17. Barba & Barba Construction, Inc., constructed a multilevel addition to a single-family house in Glenview, Illinois. Before the addition, the residence consisted of approximately 2,300 square feet. After the addition, the house consisted of approximately 3,200 square feet. More than eleven years later, John W. VonHoldt purchased the house. Shortly after taking occupancy, VonHoldt noticed a deflection of the wood flooring at the partition wall separating the master bedroom from an adjoining bathroom. This deflection created a depression in the floor plane. VonHoldt maintained that, due to the thickness of the carpet, the depression was nearly concealed. An investigation revealed that the addition had not been constructed in accordance with the architectural plans approved by the Village of Glenview or the Glenview Building Code. This variance resulted in excessive stress on the floor joists and inadequate support for a portion of the roof and ceiling causing a greater-than-expected floor deflection. VonHoldt brought a lawsuit against Barba & Barba for breach of an implied warranty of habitability. Explain who should prevail.

Answer: The implied warranty of habitability is a judicially created doctrine designed to avoid the unjust results of caveat emptor and the doctrine of merger. Initially, Illinois courts applied the doctrine to the sale of new homes to protect innocent purchasers who were not able to determine whether the house they purchased contained latent or hidden defects. The owner needs this protection because he is making a major investment, in many instances the largest single investment of his life. The owner usually relies on the integrity and skill of the builder, who is in the business of building houses, and has a right to expect to receive a house that is reasonably fit for use as a residence.

The implied warranty of habitability does include actions against a builder brought by a subsequent purchaser for latent defects in an addition to a home. When a builder

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 49: Transfer and Control of Real Property

makes a significant addition to a previously built home, an action for damages resulting from latent defects affecting habitability exists under the doctrine of implied warranty of habitability. An owner claiming that latent defects exist in a major addition to a structure should be provided the same protection for the addition as that given to the original owners. The purchaser of both a completed home and an addition places the same trust in the builder that the structure being erected is suitable for living.

Furthermore, the ordinary buyer is not in a position to discover hidden defects in a structure even through the exercise of ordinary and reasonable care.

However, because here the action was time barred, plaintiff’s complaint was properly dismissed. VonHoldt v. Barba & Barba Construction, Inc., Supreme Court of Illinois, 1997, 175 Ill. 2d 426, 677 N.E. 2d 836, 222 Ill. Dec. 302.

ANSWERS TO “TAKING SIDES” PROBLEMS Playtime Theaters and Sea-First Properties purchased two theaters in Renton, Washington, with the intention of exhibiting adult films. About the same time, they filed suit seeking injunctive relief and a declaratory judgment that the First and Fourteenth Amendments were violated by a city of Renton ordinance that prohibits adult motion picture theaters from locating within one thousand feet of any residential zone, single- or multiple-family dwelling, church, park, or school. a. What are the arguments that the city has the right to enforce such an ordinance? b. What are the arguments that the city does not have the right to enforce such an ordinance? c. What result? Explain.

Answer: (a) The city would argue that adult theaters need to controlled and limited as to where they can locate. It is only natural to limit them away from residential areas, schools, places of worship, and areas that are likely to attract children. The city is not preventing adult theaters from existing but merely restricting their location.

The restrictions on speech imposed by the ordinance were no greater than necessary to further the legitimate governmental interests involved. (b) The theater owners would argue that they have the constitutional right to free speech and that these types of regulations substantially restricted their existence and right to free speech. (c) The Supreme Court found in favor of the city. Such an ordinance is a valid government response to the serious problems created by adult theaters and satisfies the dictates of the First Amendment. Since the ordinance does not ban adult theaters altogether, it is properly analyzed as a “form of time, place, and manner regulation.” Such content-neutral regulations are acceptable so long as they are designed to serve a substantial government interest and do not unreasonably limit alternative avenues of communication. The ordinance is designed to serve a substantial government interest while allowing for reasonable alternative avenues of communication. A city’s interest in attempting to preserve the quality of urban life, as in the case at bar, must be accorded high respect. City of Renton v. Playtime Theaters, 475 U.S. 41 (1986).

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 50: Trusts and Wills

Solution and Answer Guide

Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 50: Trusts and Wills

TABLE OF CONTENTS Answers to Ethical Dilemma ...............................................................................................1 Answers to Questions and Case Problems ........................................................................1 Answers to “Taking Sides” Problems ............................................................................. 10

ANSWERS TO ETHICAL DILEMMA When Should Life Support Cease?

1.

Under what circumstances should life-sustaining mechanisms be removed? Who should make the decision?

2. How would your answer change if Andrews were discovered to be six months pregnant?

3. If attending physicians must make the decision, should they be subject to civil or criminal liability arising out of their actions?

Answer: 1. In the absence of a document executed by the incapacitated individual, it has been suggested that close family members, or attending physicians should be allowed to make the decision to withhold medical treatment. The value in preserving life and dignity in life, the role of the family, physician, and court in making life and death decisions are among the issues raised by the sad and disturbing facts presented.

2. The potential of pregnancy illustrates that the abortion issue may be embedded in a case involving the right to die. As noted above, the Pennsylvania law would override Lesley’s directive to die, had she expressed such an intent. If Lesley’s infant were born with a severe defect, (i.e., potentially from medication to alleviate Lesley’s pain) could an action be maintained for a wrongful birth by relatives? Pregnancy adds significant constitutional and ethical questions.

3. If attending physicians are placed in a position of having to make life and death decisions, strong procedural guidance should be provided. The question raises the issue of how society should impose accountability for these difficult decisions.

ANSWERS TO QUESTIONS AND CASE PROBLEMS 1.

State and explain whether or not a trust is created in each of the following situations: a. A declares herself trustee of “the bulk of my securities” in trust for B. b. A, the owner of Blackacre, purports to convey to B in trust for C “a small part” of Blackacre.

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c. A deposits $100,000 in a savings bank. He declares himself trustee of the deposit in trust to pay B $50,000 out of the deposit, reserving the power to withdraw from the deposit any amounts not in excess of $50,000.

Answer: (a) A trust is not created because the description is so indefinite that the property cannot be ascertained. (b) No trust is created because of the indefinite description. (c) A trust of the deposit is created of which B is beneficiary to the extent of $50,000.

It does not fail because the trustee has reserved power to withdraw property from the trust. Restatement of the Law of Trusts, 2d, Section 58.

2. Testator gives property to Timothy in trust for Barney’s benefit, providing that Barney cannot assign or pledge future trust income. Barney borrows money from Linda, assigning his future income under the trust for a stated period. Can Linda obtain any judicial relief to prevent Barney from collecting this income? Explain.

Answer: No. This is called a spendthrift trust. The beneficiary cannot anticipate the income and his creditors occupy no better position. This is a very common provision and is perhaps one of the reasons why the trust was created.

3. Collins was trustee for Indolent under the will of Indolent’s father. Indolent, a middleaged doctor, gave little concern to the management of the trust fund, contenting himself with receiving the income paid to him by the trustee. Among the assets of the trust were 100 shares of ABC Corporation and 100 shares of XYZ Corporation. About two years before the termination of the trust, Collins purchased the ABC stock from the trust at a fair price and after a full explanation to Indolent. At the same time but without saying anything to Indolent, he purchased the XYZ stock at a price higher than its current market value. At the termination of the trust, both stocks had advanced in market value well beyond the prices paid by Collins, and Indolent demanded that Collins either account for this advance in the value of both stocks or replace the stocks. Discuss what Indolent’s rights are.

Explain.

Answer: Collins can probably keep the ABC Corporation stock, although it was unethical of him to deal with the trust property, but he must account for or replace the XYZ Corporation stock.

There is a distinction to be made between transactions occurring directly between a trustee and his beneficiary , and those transactions in which the trustee deals with himself with respect to the trust estate. The latter class of transactions are voidable by the beneficiary at his election without giving any reason or alleging any fraud, or any advantage or inadequacy of price. But where the trustee deals directly with beneficiary the transaction is not by itself voidable at the election of the beneficiary but only presumed to be invalid, which presumption may be rebutted. Owens v. Owens, 196 Va. 960.

4. Joe Brown gave $350,000 to his wife, Mary, with which to buy real property. They orally agreed that title to the real property should be taken in the name of Mary Brown but that she should hold the property in trust for Joe Brown. There were two witnesses to the oral agreement, both of whom are still living. Mary purchased the property on September 2, and a deed to it with Mary Brown as the grantee was delivered.

Mary died ten years later, without a will. The real property is now worth $1 million. Joe Brown is claiming the property as the beneficiary of a trust. Mary’s children are claiming that the property belongs to Mary’s estate and have pleaded the statute of limitations and

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 50: Trusts and Wills

the statute of frauds as defenses to Joe’s claim. There is no evidence to prove whether Mary would or would not have conveyed the property to Joe during her lifetime if she had been requested to do so. Explain what Joe’s ownership rights are to this particular real property.

Answer: Joe Brown is the owner of the real property by virtue of a resulting trust and neither the statute of limitations nor other equitable defenses are a bar to his claim.

The statute of frauds provides that resulting trusts, trusts created by construction, implication or operation of law need not be in writing, and may be proved by parol evidence.

Joe Brown is the beneficiary of a purchase-money resulting trust. It is the duty of the holder of the legal title under a resulting trust to convey the property to the person who paid the purchase price wherever he demands such conveyance. Restatement, Trusts, 2d, Sections 404, 440.

Where a husband pays the purchase price for land that is transferred at his direction to his wife, parol evidence is admissible to show that the payor intended that the transferee should not have the beneficial interest in the property. In this problem the intention of the parties is expressly and clearly manifested by an oral agreement between the husband and wife, to which there are two available witnesses.

Restatement, Trusts, 2d, Section 443; Scott, Trusts, 2d ed., Section 443.

Joe Brown’s claim is not barred by the statute of limitations or laches. The beneficiary of an express trust or resulting trust is not barred by the mere passing of time from enforcing the trust; it is only when the trustee has repudiated the trust to the knowledge of the beneficiary that the statute of limitations begins to run. During the continuance and recognition of the trust, the possession of the trustee is presumed to be the possession of the beneficiary. There is no adverse or hostile holding. The cause of action arises when, and only when, there has been some adverse assertion of adverse ownership, or a refusal to comply upon demand, or a disavowal or repudiation of the trust brought to the attention of the beneficiary. 4 Bogert, 2d, Trusts and Trustees, Sections 951-952; Scott, Trusts, 2d, Section 219.

5. On March 10, John Carver executed his will, which was witnessed by William Hobson and Sam Witt. By his will, Carver devised his farm, Stonecrest, to his nephew, Roy White. The residue of his estate was given to his sister, Florence Carver.

A codicil to his will executed on April 15 of that year provided that $50,000 be given to Carver’s niece, Mary Jordan, and $50,000 to Wanda White, Roy White’s wife. The codicil was witnessed by Roy White and Harold Brown. John Carver died September 1 of that year, and the will and codicil were admitted to probate. Explain how Carver’s estate be should distributed.

Answer: Roy White will take Stonecrest, Mary Jordan will receive $50,000 and Carver’s sister will receive the residue. The bequest of $50,000 to Roy White’s wife is, in many jurisdictions, void because White attested the execution of the codicil. The $50,000 she would have taken becomes a part of the residue.

Many statutes on wills provide that a legacy or interest given in a will to a person attesting its execution or to his spouse is void as to that beneficiary and all persons claiming under him, unless the will is otherwise attested by a sufficient number of witnesses as required by law exclusive of such person, although he is entitled to receive so much of the devise, legacy or interest given him by the will as does not exceed the value of the testator’s estate to which he would be entitled were the will

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not established. The statutes are designed to prevent attesting witnesses from taking gifts under a will for the establishment of which their attestation is necessary.

Under the statutes a testamentary gift is invalidated only where the witness has attested the instrument under which he or his immediate family takes. A beneficiary who was not a witness to the original will is entitled to the interest given thereunder although he was an attesting witness to a codicil under which he takes nothing.

6. Edwin Fuller, a bachelor, prepared his will in his office. The will, which contained no residuary clause, provided that one-third of his estate would go to his nephew, Tom Fuller, one-third to the city of Emanon to be used for park improvements, and one-third to his brother, Kurt.

He signed the will in his office and then went to the office of his nephew, Tom Fuller, who signed the will as a witness at Edwin’s request. No other persons were available in Tom’s office, so Edwin then went to the bank, where Frank Cash, the cashier, also signed as a witness at Edwin’s request. In each instance, Edwin stated that he had signed the document but did not state that it was his will.

Edwin returned to his office and placed the will in his safe. Subsequently, Edwin died, survived by Kurt, his only heir-at-law. Explain how the estate should be distributed.

Answer: Several questions are posed by the problem. First, the question arises as to whether or not the will has been properly executed. Statutes on wills usually contain provisions to the effect that a will must be signed by the testator or some person in his presence by his direction and shall be attested in the presence of the testator by two or more credible witnesses. The will in the problem was properly executed even though the testator signed out of the presence of the two witnesses. It is not indispensable to a proper attestation of a will that the testator sign in the presence of the witnesses, nor is it essential that the witnesses see the signature of the testator on the face of the will, even though they know the instrument to be a will. All that is necessary is that the testator acknowledge the will.

The next question is whether a devisee or legatee can sign as a witness and, if so, what is the effect of doing so. A person who will gain or lose financially as a direct result is generally not a credible witness to attest a will. However, if the incompetence of the witness arises by the act of attesting a will which gives him some interest in the testator’s estate, the statute applies, and, while the witness cannot take under the will, nevertheless the will may be established by his testimony. As a result, the bequest to Tom will fail. However, Tom’s testimony can be used to prove the will.

The third question presented is what is the effect of Tom not being allowed to take under the will. Since the will contained no residuary clause the part which Tom was to have taken cannot pass under the will and must pass as intestate property. Since Kurt was the testator’s only heir-at-law the property passes to him. The real and personal estate of a testator not devised or bequeathed by his will descends and shall be distributed as intestate estate. Accordingly, the city of Erewhon receives one-third of the estate and the balance of two-thirds passes to Edwin’s brother Kurt.

7. Arnold executed a one-page will in which he devised his farm to Burton. Later, after a quarrel with Burton, Arnold wrote the words “I hereby cancel and revoke this will /s/Arnold” in the margin of the will but did not destroy the will. Arnold then executed a deed to the farm, naming Connie as grantee, and placed the deed and will in his safe.

Shortly afterward, Arnold married Donna, with whom he had one child, Ernest. Arnold died

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some time later, and the deed and will were found in his safe. Burton, Connie, and Ernest claim the farm, and Donna claims dower. Discuss the validity of each claim.

Answer: Donna and Ernest share only.

A subsequent marriage in most states is one of the ways in which a will is revoked, unless the will contemplates the marriage.

Connie, as grantee of an undelivered deed, would take nothing.

In most states, Donna, the widow, would be entitled to statutory rights and Ernest, the child, would take the land subject to Donna’s dower (widow’s statutory rights).

8. The validly executed will of John Dane contained the following provision: “I give and devise to my daughter, Mary, Redacre for and during her natural life and, at her death, the remainder to go to Wilmore College.” The will also provided that the residue of his estate should go to Wilmore College. Thereafter, Dane sold Redacre and then added a validly executed codicil to his will, “Due to the fact that I have sold Redacre, which I previously gave to my daughter, Mary, I now give and devise Blackacre to Mary in place and instead of Redacre.”

Another clause of the codicil provided: “I give my one-half interest in the oil business that I own in common with William Steele to my son, Henry.” Subsequently, Dane acquired all of the interest in the oil business from his partner, Steele, and, at the time of his death, Dane owned the entire oil business. The will and codicil have been admitted to probate. a. Explain what interest, if any, Mary acquires in Blackacre. b. Explain what interest, if any, Henry acquires in the oil business.

Answer: (a) Mary receives a life estate in Blackacre, since the codicil substituted Blackacre for Redacre. An incident, quality or condition which attaches to a bequest or devise by express provision in a will, likewise attaches to an additional or substituted bequest or devise under a codicil except where circumstances present show a contrary intent on the part of the testator. (b) Henry is entitled to one-half of the oil business and no more. A specific legacy cannot be expanded beyond its plain import to include an additional interest later acquired, unless it appears from the will, as a whole, that such was the intent of the testator. The principal object and purpose in construing a will is to ascertain and give effect to the intention of the testator. (c) The language used does not indicate the testator’s intention to give Henry any greater interest in the oil business than the testator had when the codicil was executed.

9. Leonard Wolfe was killed in an automobile accident while driving his Toyota Camry. The car was rendered a total loss, and Wolfe’s insurance carrier paid his estate $17,550 for damage to the vehicle. Under the terms of Wolfe’s will, any car owned at his death was to be given to his brother, David. Wolfe’s daughter, Carol, however, brought an action, claiming that the gift of the car to David was adeemed by its total destruction and that she, as the residuary legatee under the will, was entitled to the insurance proceeds. Who is entitled to the insurance proceeds? Explain.

Answer: Decision for David. Put as briefly as possible, ademption means a taking away.

It occurs when property which has been specifically given under a will is later destroyed or disposed of so that it does not exist as part of the estate at the

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testator’s death. The general rule is that nothing else may be substituted for that which was originally given, and the gift is then said to have adeemed.

There is a split of authority over the part intent should play in resolving ademption problems. The minority view adheres to a rigid “identity” theory, concerning itself solely with the presence of the property in the estate at the time of death. If it is not among the decedent’s assets, there has been an ademption, regardless of the reason for its absence. Intent is immaterial under this view. A critical point in this case is that the car (though totaled) was actually still owned by Wolfe at the time of his death, and therefore was part of his estate, and was not adeemed. So, the totaled car should have been passed to David, who would then receive the benefit of the insurance settlement.

The majority rule gives consideration and effect to circumstances which explain why the property is not among the decedent’s assets at the time of his death. This rule, like the minority, finds there has been an ademption where there has been a voluntary sale or other disposal of specifically devised property by the testator during his lifetime. However, when the property in question is missing from the estate because of some act or event there is no ademption. This is the rule the court followed in this case. In Re Estate of Wolfe, 208 N.W. 2d 923 (Ia. 1973).

10. Grace Peterson, a spinster then aged seventy-four, asked Chester Gustafson, a Minneapolis attorney, to draw a will for her. Gustafson, who had also probated Peterson’s sister’s estate, drew this first will and six subsequent wills and codicils free of charge because he claimed that she had no money to pay for his services. Over the five-year period during which Gustafson redrew Peterson’s will, an increasing amount of property was devised to Gustafson’s children, until, finally, the seventh will so devised Peterson’s entire estate. Peterson, however, hardly knew the children except from several chance encounters ten years before. She died five years later, without ever having changed the seventh will, and Gustafson, who was named as executor, now seeks to have the will admitted to probate. Discuss whether the seventh will should be probated.

Answer: Peterson’s will is apparently the product of Gustafson’s undue influence, and it cannot be admitted to probate. Undue influence substitutes the intent of the person exerting it for that of the person making the will, thereby making the written result express the purpose of the influencing party and not that of the party making the will.

In order to justify the refusal to probate the will, the influence must overpower the intent of the testator at the time the will is made and dominate and control its making.

11. By his last will and testament, Henry Nussbaum made a residual bequest and devise of his estate to his niece, Jane Blair, as trustee, in trust for the education of his grandchildren. If the trust could not be fulfilled, the residue was to revert to the plaintiff, Dorothy Witmer.

After Nussbaum died in 2012, the plaintiff contended that the trustee had breached her fiduciary duty by failing to invest the trust corpus. A considerable portion of the trust funds were held in a checking account from 2015 to 2024. The trustee claimed that the will failed to specify when and what investments were to be made and, hence, such matters were left to her good-faith discretion. She also explained the large checking account balances by the fact that she thought she would need access to the finds to pay for college in the near future. Decision?

Answer: Judgment for Witmers. It is a duty of the trustee to keep trust funds properly invested. A trustee generally cannot excuse a failure to invest funds by saying that she kept the funds to pay beneficiaries on demand. A trustee commits a breach of trust

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when she violates a duty in bad faith, intentionally, or negligently. A trustee may also commit a breach because of a mistake as to the extent of her duties and powers.

When in doubt, a trustee can protect herself by obtaining instructions from the court.

Here, Blair committed a breach of trust by failing to invest a large amount of the trust fund between 2015 and 2024. Her good faith mistake as to her duties is not a defense.

Thus, she is liable for $2,840–the amount the money in the checking account would have earned between 2015 and 2024 in an interest-bearing account. She is not liable for the mishandling of the trust after she transferred a substantial portion from checking to savings in 2015. Witmer v. Blair, 588 S.W. 2d 222 (Mo. Wstrn. Div. 1979).

12. Rodney Sharp was a fifty-six-year-old dairy farmer whose education did not go beyond the eighth grade. Upon the death of his wife of thirty-two years, Sharp developed a very close relationship with Jean Kosmalski, a schoolteacher sixteen years his junior. Sharp eventually proposed to Kosmalski, but when she refused, he continued to make gifts to her in hope of changing her mind. He also gave her access to his bank account, from which she withdrew substantial amounts of money; made a will naming her as sole beneficiary; and executed a deed naming her as a joint owner of his farm. Then, in September 2017, Sharp transferred his remaining joint interest in the farm to Kosmalski. In February 2019, Kosmalski ordered Sharp to move out of his home and to vacate the farm.

She then took possession of both, leaving Sharp with assets of $3,000. Discuss whether a constructive trust should be imposed on the property transferred to Kosmalski.

Answer: Judgment for Sharp. A constructive trust may be imposed when property has been acquired under such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest. Its application requires a finding of (1) a confidential or fiduciary relationship, (2) a promise, (3) a transfer in reliance on that promise, and (4) unjust enrichment.

Here, a relationship of trust and confidence existed between the parties that is highlighted by the disparity in education between them. As such, Kosmalski must be charged with an obligation not to abuse the trust and confidence placed in her by Sharp. Second, an express promise or formal writing is not essential to the application of the doctrine of constructive trust, and it is not likely that Sharp would have conveyed all of his property, including his home, to Kosmalski without at least her tacit consent that he would be allowed to continue to live on and to operate the farm.

Finally, it is clear that the transfer of property resulted in Kosmalski’s unjust enrichment. Sharp v. Kosmalski, 40 N.Y. 2d 119, 386 N.Y. S. 2d 72, 351 N.E. 2d 721 (1976).

13. John Hobelsberger lived alone on his farm near Kranzburg, South Dakota. A grandniece, Phyllis Raml, and her husband, Ralph, lived on and operated a farm about two miles away.

Hobelsberger and the Ramls had a friendly and cordial relationship. The Ramls visited him rather frequently and largely cared for him during his later years. Hobelsberger was hospitalized on October 23, and his condition was diagnosed as intermittent cerebral insufficiency. During his hospitalization, he requested that the Ramls send an attorney to see him about the preparation of a will. Thomas Green, an attorney, interviewed the testator on or about November 10 and prepared a will in compliance with his instructions.

Hobelsberger was transferred to a nursing home on November 19. On November 22, Green and a secretary went to the nursing home and witnessed his signing of the will.

Hobelsberger was then eighty years old. He subscribed the will with a mark because he was having trouble with his hands. Hobelsberger died on July 19, of the following year, survived by twenty-seven nieces and nephews and seven grandnieces and grandnephews.

The will, after providing for the payment of debts and funeral expenses, left

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Hobelsberger’s entire estate to Phyllis Raml. Nine of the nieces and nephews contested the will, claiming lack of testamentary capacity, undue influence by the Ramls, and improper execution. The county court admitted the will to probate, the circuit court affirmed, and the contestants appealed. Decision?

Answer: Decree holding that the will is valid affirmed. Clearly Hobelsberger was aged and infirm when he executed the will. However, one may be physically weak and aged and still possess a sound mind. The testimony concerning Hobelsberger’s state of mind during the period when he executed the will was conflicting. All witnesses (including the doctors and nurses at the hospital), however, testified to his mental competence.

In support of their claim of undue influence the contestants urge that the disposition made by the will is unnatural. The will merely prefers a grandniece and her husband who have been helpful to him during the years when he had need of such concern.

Such recognition is not necessarily improper. What could be more natural in view of his feeling that he did not have enough to remember all of his heirs? Moreover, his nieces, nephews, grandnieces, and grandnephews because of such relationship alone, are not the natural objects of his bounty. Our law does not require that a testator recognize his relatives equally or at all.

Contestants seize on the fact that the Ramls had a motive and the opportunity to exert an undue influence on the testator. To invalidate the will there must be evidence that they did exert such influence. Here there is none.

Finally, the contestants argued that, since the testator knew how to write, he was not authorized to execute the will by a signing with a mark. However, the evidence shows that Hobelsberger could not write at the time of the execution of the will because he was having trouble with his hands. Thus, he was able to avail himself of the privilege of signing with a mark. In Re Estate of Hobelsberger 181 N.W. 2d 455 (1970).

14. Mamie Henry, a widow, died leaving no children but she was survived by several nieces and nephews. At first no will was found, and Joe Barksdale, a nephew, was appointed administrator of Mrs. Henry’s estate. Later, Rita Pendergrass produced a copy of a will allegedly made by Mrs. Henry. The will left all of Mrs. Henry’s property to Mrs. Pendergrass and appointed her as executrix. When Mrs. Pendergrass sought to have the will admitted to probate, Joe Barksdale and Olen Barksdale filed a contest on the grounds that the purported will was never duly executed, or, if executed, was destroyed by Mrs. Henry prior to her death. Should the will be probated? Explain.

Answer: In order to have an alleged lost or destroyed will admitted to probate, the one asserting its effectiveness must first establish that it is a validly executed will and second, rebut the presumption arising from the loss or destruction of the will that it was revoked by its maker. Since Mrs. Pendergrass fulfilled both of these requirements here, she is entitled to submit Mrs. Henry’s will to probate. First, Mrs. Pendergrass established that the document was a validly executed will. It was signed by Mrs. Henry and attested by two witnesses in Mrs. Henry’s presence with her express or implied knowledge or consent. Second, Mrs. Pendergrass also succeeded in rebutting the presumption that Mrs. Henry had revoked her will by showing that Mrs. Henry wanted Mrs. Pendergrass and not her nieces and nephews to receive her property at her death.

Barksdale v. Pendergrass 294 Ala. 526, 319 So. 2d 267 (1975).

15. George Washington Croom died testate. In his will Croom left various bequests of real and personal property to his children and a grandchild. In Item Eight of his will Croom stated “I leave nothing whatsoever to my daughter Kathryn Elizabeth Turner, and my son Ernest

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 50: Trusts and Wills

Edward Croom.” At his death, Croom also left three optional share certificates in Carolina Savings & Loan Association issued to George W. Croom or Kimberly Joyce Croom, the deceased’s minor daughter. Each of these certificates had attached to it an “Agreement Concerning Stock in Carolina Savings and Loan Association” which purported to create a joint account with a right of survivorship. Two of these agreements were signed by George Croom only and the third agreement was not signed at all. None of these certificates were specifically devised by Croom’s will and the will contained no residuary clause. Who is entitled to share in these assets? Explain.

Answer: Judgment for Kathryn and Ernest Croom. The optional share certificates did not satisfy the statutory requirements necessary to pass by joint survivorship, so they become part of the Croom estate. With no residuary clause, the certificates must be distributed by laws of intestate succession. NC statutes direct that such property must pass by intestate succession without regard to the testator’s intent expressed in his will. Under the Intestate Succession Act, each of the testator’s children is entitled to take an equal share of the property not disposed of by his will. Therefore, despite George’s contrary intent, Kathryn and Ernest are entitled to their share of the certificates. Ferguson v. Croom, 326 S.E. 2d 373.

16. Willie Mae Arant executed her Last Will and Testament in her home with two witnesses present. The original will could not be found after Arant’s death, so a copy of the will was filed and admitted in Probate Court. The will left the bulk of the estate to Melvin Bolton, Arant’s nephew, and Kent Sutcliffe, Arant’s grandson. The evidence tended to show the last verifiable location of the will was in Arant’s attorney’s office. Moreover, Arant told the witnesses to the will she intended to have the will left with her attorney. Arant’s only surviving daughter filed a suit challenging the probate of the will on the ground that because the original will could not be found, it had been destroyed with the intent to revoke. What factors should the court consider in deciding whether to probate the will?

Explain.

Answer: All parties agree that Arant properly executed her will. The dispute arises over what happened to the original will after its execution. Golini claims the evidence proves that Arant was the last person to have possession of her will because the will was executed in Arant’s home and the witnesses to it testified they left the will with Arant after it was executed. Bolton claims, and the lower courts agreed, the evidence tended to show the last verifiable location of the will was in Arant’s attorney’s office, and therefore, the presumption of animo revocandi (intent to revoke) did not apply. “A will or any part thereof is revoked…by being burned, torn, canceled, obliterated, or destroyed, with the intent and for the purpose of revoking it by the testator or by another person in his presence and by his direction.” Revocation by an act or by a subsequent instrument must be accompanied by an intention to revoke, and, without the intention, revocation does not take place.

Generally, those contesting a will have the burden of establishing revocation. However, when the testator takes possession of his will and it cannot be found at his death, the law presumes rebuttably that the testator destroyed the will with intent to revoke.

The evidence to rebut the presumption must be clear and convincing.

The evidence reasonably supports the findings of the probate court that Arant was not in possession of her will. Both witnesses to the will’s execution testified they were the only ones present when Arant signed her will and Arant had possession of the will when they left her home. Arant told the witnesses to the will she intended to have the will taken to her attorney’s office.

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Attorney Thomas Culclasure drafted two wills for Arant. He prepared the first will, which also excluded Golini, in 1988. He prepared the second will in 1992 after Arant’s daughter, Sally, died. The second will Culclasure drafted was picked up from his office.

After it was executed, Culclasure testified the will was returned to his office.

“Proof that a testator, whose will cannot be found after his death, entertained a kindly or loving feeling toward the beneficiaries under the will carries weight and tends toward the conclusion of nonrevocation of the will by the testator.” Numerous witnesses testified as to the love and affection that existed between Arant and Bolton and Bolton’s daily visits with Arant as well as his cooking her meals and running her errands. Even Golini testified Bolton was “like a son” to Arant. Before she died, Arant gave Bolton her power of attorney. Numerous witnesses also testified that Arant and Golini did not get along and that Arant stated on numerous occasions she intended to leave Golini out of her will. Golini v. Bolton, Court of Appeals of South Carolina, 1997, 326 S.C. 333, 482 S.E. 2d 784.

ANSWERS TO “TAKING SIDES” PROBLEMS Upon George Welch’s death, he was survived by his third wife, Dorothy Welch, and his daughter by his first marriage, Patricia Fisher. At the time George and Dorothy were married, George was in very poor health and he relied on Dorothy to care for him. George was suicidal and an alcoholic and suffered from severe depression. During the eight months George and Dorothy were married, George became isolated from his family and his health deteriorated.

Prior to his death, George transferred the bulk of his assets to Dorothy. Dorothy assisted in the transfer of George’s assets and often completed checks and other papers for George’s signature. Although George and Dorothy had executed a prenuptial agreement, during the month preceding his death George made a new will that named Dorothy as his sole beneficiary. Patricia had been the sole beneficiary of his prior will. Through the transfers of assets and the new will, Dorothy received $570,000. a. What are the arguments that Patricia is entitled to the $570,000? b. What are the arguments that Dorothy is entitled to the $570,000? c. Who should prevail? Why? Answer: (a) Patricia will argue that a constructive trust should be imposed upon George’s assets. She will contend that (1) Dorothy has abused her confidential position, unfairly taking advantage of George and (2) Dorothy had unduly influenced George. (b) Dorothy would contend that she is George’s legal wife and had taken care of him during his illness. Moreover, George voluntarily and knowingly made the transfer of assets and created the new will. (c) The jury found undue influence and set aside the will. With respect to the transfers of property, the appellate court imposed a constructive trust for the benefit of Patricia. A constructive trust is a remedial device by which the holder of legal title is held to be a trustee for the benefit of another who in good conscience is entitled to the beneficial interest. A court may impose a constructive trust to prevent the unjust enrichment of a person who has abused a confidential relationship with another. The facts of this case indicate that Dorothy abused her relationship with George through undue influence over him in the months prior to his death. Undue influence is unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that the person will not act in a manner inconsistent with his or her

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Solution and Answer Guide: Mann/Roberts, Essentials of Business Law and the Legal Environment, 14e, (c) 2025, 9780357987766; Chapter 50: Trusts and Wills

welfare. There are four elements to sustain a finding of undue influence: (1) the grantor’s susceptibility to undue influence, (2) opportunity to exercise such influence and effect the wrongful purpose, (3) disposition to influence unduly for the purpose of procuring an improper favor, and (4) a result clearly the effect of undue influence. During the last months of George’s life, Dorothy positioned herself as a dominate influence over him. At the same time, George became particularly susceptible to being influenced due to his advancing age, impending death, deteriorating physical condition, and unstable emotional health. Furthermore, Dorothy isolated George from his family and friends, indicating a disposition to influence unduly. Finally, the manner in which George and Dorothy conducted their business, reveal a pattern of unfair persuasion or influence from which Dorothy benefited. The facts clearly indicate that George was susceptible to undue influence, Dorothy had the opportunity to exercise undue influence, Dorothy had the disposition to wrongfully influence George, and Dorothy benefited from the undue influence. In Re Estate of Welch, 534 N.W. 2d 109 (1995).

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