BLAW Final - DHitch

In 1995, Mark Denton cosigned a $101,250 loan issued by the First Interstate Bank (FIB) in Missoula, Montana, to Denton's friend Eric Anderson. Denton's business assets—a mini-warehouse operation—secured the loan. On his own, Anderson obtained a $260,000 U.S. Small Business Administration (SBA) loan from FIB at the same time. The purpose of both loans was to buy logging equipment so that Anderson could start a business. In 1997, the business failed. As a consequence, FIB repossessed and sold the equipment and applied the proceeds to the SBA loan. FIB then asked Denton to pay the other loan's outstanding balance ($98,460), plus interest. When Denton refused, FIB initiated proceedings to obtain his business assets. Denton filed a suit in a Montana state court against FIB, claiming, in part, that Anderson's equipment was the collateral for the loan that FIB was attempting to collect from Denton. (a) Denton's assets served as the security for Anderson's loan because Anderson had nothing to offer. When the loan was obtained, Dean Gillmore, FIB's loan officer, explained to them that if Anderson defaulted, the proceeds from the sale of the logging equipment would be applied to the SBA loan first. Under these circumstances, is it fair to hold Denton liable for the unpaid balance of Anderson's loan? Why or why not? (b) Denton argued that the loan contract was unconscionable and constituted a "contract of adhesion." What makes a contract unconscionable? Did the transaction between the parties in this case qualify? What is a "contract of adhesion"? Was this deal unenforceable on that basis? Explain.

(a) The court found that Denton knew when he signed the note for Anderson's loan that if Anderson defaulted and FIB repossessed the collateral, the sale proceeds would be applied first to the SBA loan. The court ruled in FIB's favor. Denton appealed to the Montana Supreme Court, which affirmed the lower court's decision. "Our review of the record confirms that significant evidence was presented that would allow the . . . Court to conclude that Denton knew his loan would hold a second position lien to the SBA loan." (b) Denton contended among other things that the note and security agreement constituted a contract of adhesion because FIB prepared the note and the borrowers had no opportunity to negotiate its terms, some of which were unconscionable. The court concluded that the loan contract was not unenforceable as a contract of adhesion, and the state supreme court affirmed this conclusion.

Peaslee is not known for his business sense. He started a greenhouse and nursery business two years ago, and because of his lack of experience, he soon was in debt to a number of creditors. On February 1, Peaslee borrowed $5,000 from his father to pay some of these creditors. On May 1, Peaslee paid back the $5,000, depleting his working capital. One creditor, the Cool Springs Nursery Supply Corp., had extended credit to Peaslee on numerous purchases. Cool Springs pressured Peaslee for payment, and on July 1, Peaslee paid Cool Springs half the amount owed. On September 1, Peaslee voluntarily petitioned himself into bankruptcy. The trustee in bankruptcy claims that both Peaslee's father and Cool Springs must turn over to the debtor's estate the amounts Peaslee paid to them. Discuss fully the trustee's claims.

A trustee is given avoidance powers by the Bankruptcy Code. One situation in which the trustee can avoid transfers of property or payments by a debtor to a creditor is when such transfer constitutes a preference. A preference is a transfer of property or payment that favors one creditor over another. For a preference to exist, the debtor must be insolvent and must have made payment for a preexisting debt within ninety days of the filing of the petition in bankruptcy. The Code provides that the debtor is presumed to be insolvent during this ninety-day period. If the payment is made to an insider (and in this case payment was made to a close relative), the preference period is extended to one year, but the presumption of insolvency still applies only to the ninety-day period. In this case, the trustee has an excellent chance of having both payments declared preferences. The payment to Cool Springs was within ninety days of the filing of the petition, and it is doubtful that Cool Springs could overcome the presumption that Peaslee was insolvent at the time the payment was made. The $5,000 payment was made to an insider, Peaslee's father, and any payment made to an insider within one year of the petition of bankruptcy is a preference—as long as the debtor was insolvent at the time of payment. The facts indicate that Peaslee probably was insolvent at the time he paid his father. If he was not, the payment is not a preference, and the trustee's avoidance of the transfer would be improper.

ABC Tire Corp. hires Arnez as a traveling salesperson and assigns him a geographic area and time schedule in which to solicit orders and service customers. Arnez is given a company car to use in covering the territory. One day, Arnez decides to take his personal car to cover part of his territory. It is 11:00 A.M., and Arnez has just finished calling on all customers in the city of Tarrytown. His next appointment is at 2:00 P.M. in the city of Austex, twenty miles down the road. Arnez starts out for Austex, but halfway there he decides to visit a former college roommate who runs a farm ten miles off the main highway. Arnez is enjoying his visit with his former roommate when he realizes that it is 1:45 P.M. and that he will be late for the appointment in Austex. Driving at a high speed down the country road to reach the main highway, Arnez crashes his car into a tractor, severely injuring Thomas, the driver of the tractor. Thomas claims that he can hold ABC Tire Corp. liable for his injuries. Discuss fully ABC's liability in this situation.

As a general rule, an employer (principal) is liable for the negligent actions of the employee (agent), if such acts are committed while the employee (agent) is acting within the scope of employment. Certainly, Arnez is an employee, hired by ABC, which controls Arnez's physical conduct in soliciting orders and servicing customers. The only issue in this case is whether Arnez was acting within the scope of his employment at the time the tort was committed or whether he was on a frolic of his own. The use of his personal car has no effect on this decision. The question to be decided is whether Arnez's visit to his friend constituted a substantial departure from the performance of his employer's business. Points that should be discussed are: (a) All travel time of a traveling salesperson on a business trip is usually considered within the scope of employment. (b) At the time the tort was committed, Arnez was on his way to an appointment on behalf of ABC (whereas the negligent act could have taken place on the way to visit his friend). (c) Because of the time between appointments and the distance, this is probably not a substantial departure from ABC's business. On the basis of these factors, ABC is liable for Arnez's tort of negligence and the resulting injuries to Thomas. If Arnez had been on a frolic of his own, only Arnez would have been liable to Thomas.

Adam's checks are imprinted with the words "Pay to the order of" followed by a blank. Adam fills in an amount on one of the checks and signs it, but he does not write anything in the blank following the "Pay to the order of" language. Adam gives this check to Beth. On another check, Adam writes in the blank "Carl or bearer." Which, if either, of these checks is a bearer instrument, and why?

Both of these instruments are bearer instruments. If a drawer signs a check printed "Pay to the order of" followed by a blank in which the drawer does not write anything, the check is a bearer instrument. A check printed "Pay to the order of" and on which the drawer inserts in the blank "Carl or bearer"‖ and signs, is also a bearer instrument. The check that Adam gave to Beth was negotiated. All that is necessary for the negotiation of a bearer instrument is its delivery.

Waldo makes out a negotiable promissory note payable to the order of Grace. Grace indorses the note by writing on it "Without recourse, Grace" and transfers the note for value to Adam. Adam, in need of cash, negotiates the note to Keith by indorsing it with the words "Pay to Keith, Adam." On the due date, Keith presents the note to Waldo for payment, only to learn that Waldo has filed for bankruptcy and will have all debts (including the note) discharged. Discuss fully whether Keith can hold Waldo, Grace, or Adam liable on the note.

From all the facts given, Keith qualifies as an HIDC. Only real defenses claimed by a party are good as against an HDC. One such defense is a party's discharge in bankruptcy. Assuming that Waldo will be discharged in bankruptcy from payment of the note, Keith cannot hold Waldo liable. Unqualified indorsers are liable on their signatures, providing the holder has made proper presentment, the instrument has been dishonored, and proper notice of dishonor has been received. Keith made a proper presentment (presented the note to Waldo for payment on the due date); the instrument was not paid (it was dishonored); and if Keith gives Adam notice of this dishonor within thirty business days of dishonor (three business days under the unrevised Article 3), Adam is liable on his unqualified special indorsement. A qualified indorser, "without recourse," is not liable on his or her signature. Thus, Grace cannot be held liable on her indorsement. Both qualified and unqualified indorsers who receive consideration on transfer make certain warranties to all subsequent holders. Since Grace has no knowledge of any defense or (apparently) of the insolvency petition at the time of transfer, Grace cannot be held liable on the instrument for breach of warranty (or on her signature). Since Adam is held liable on his signature, there is no need to prove a defense was good against Adam at the time of transfer.

Estrada Hermanos, Inc., a corporation incorporated and doing business in Florida, decides to sell $1 million worth of its common stock to the public. The stock will be sold only within the state of Florida. José Estrada, the chair of the board, says the offering need not be registered with the Securities and Exchange Commission. His brother, Gustavo, disagrees. Who is right? Explain.

Jose is right. Under Section 3(a)(11) of the Securities Act of 1933, stock offerings that are restricted to residents of the state in which the issuing company is organized and doing business are exempt from registration requirements. Therefore, the Estrada Hermanos offering need not be registered with the SEC. The offering will, however, be subject to state securities legislation.

Huron Corp. has 300,000 common shares outstanding. The owners of these outstanding shares live in several different states. Huron has decided to split the 300,000 shares two for one. Will Huron Corp. have to file a registration statement and prospectus on the 300,000 new shares to be issued as a result of the split? Explain.

No. Under federal securities law, a stock split is exempt from registration requirements. This is because no sale of stock is involved.

On January 1, Damon, for consideration, orally promised to pay Gary $300 a month for as long as Gary lived, with the payments to be made on the first day of every month. Damon made the payments regularly for nine months and then made no further payments. Gary claimed that Damon had breached the oral contract and sued Damon for damages. Damon contended that the contract was unenforceable because, under the Statute of Frauds, contracts that cannot be performed within one year must be in writing. Discuss whether Damon will succeed in this defense.

Only oral contracts that are impossible to perform within one year fall under the Statute of Frauds. However unlikely it may be that Gary will die within a year, the possibility does exist. Therefore the contract does not fall under the Statute of Frauds and is enforceable.

In this chapter, we stated that the doctrine of stare decisis "became a cornerstone of the English and American judicial systems." What does stare decisis mean, and why has this doctrine been so fundamental to the development of our legal tradition?

Stare decisis is a Latin phrase meaning "to stand on decided cases." The doctrine of stare decisis is fundamental to the development of our legal tradition because without the acceptance and application of this doctrine, the evolution of any objective legal concepts—and thus a legal "tradition"—would have been impossible.

Montoro petitioned himself into voluntary bankruptcy. There were three major claims against his estate. One was made by Carlton, a friend who held Montoro's negotiable promissory note for $2,500; one was made by Elmer, an employee who was owed three months' back wages of $4,500; and one was made by the United Bank of the Rockies on an unsecured loan of $5,000. In addition, Dietrich, an accountant retained by the trustee, was owed $500, and property taxes of $1,000 were owed to Rock County. Montoro's nonexempt property was liquidated, with proceeds of $5,000. Discuss fully what amount each party will receive, and why.

The Bankruptcy Code establishes a payment priority of claims from the debtor's estate. Each class of debt in this priority list must be fully paid before the next class in priority is entitled to any of the proceeds. If insufficient funds remain to pay an entire class, the proceeds are distributed on a pro rata basis to each creditor within that class. The order of priority for claims listed in this problem is as follows: (a) $ 500—Administrative bankruptcy costs (Dietrich). (b) $ 2,000—Claims for back wages (Elmer), limited to $2,000 per claimant, provided the wages were earned within ninety days of the petition. (c) $ 1,000—Taxes and penalties due and owing (Rock County). (d) $10,000—General creditors: Carlton $ 2,500 Elmer 2,500 (balance of wages owed) United Bank 5,000 Because the amount remaining is only $1,500, these creditors share on a pro rata basis. For example, for United Bank it is: (5,000 / 10,000) * 1,500 = $750

Robert Triffin bought a number of dishonored checks from McCall's Liquor Corp., Community Check Cashing II, LLC (CCC), and other licensed check-cashing businesses in New Jersey. Seventeen of the checks had been dishonored as counterfeit. In an attempt to recover on the items, Triffin met with the drawer, Automatic Data Processing, Inc. (ADP). At the meeting, Triffin said that he knew the checks were counterfeit. When ADP refused to pay, Triffin filed suits in New Jersey state courts to collect, asserting claims totaling $11,021.33. With each complaint were copies of assignment agreements corresponding to each check. Each agreement stated, among other things, that the seller was a holder in due course (HDC) and had assigned its rights in the check to Triffin. ADP had not previously seen these agreements. A private investigator determined that the forms attached to the McCall's and CCC checks had not been signed by their sellers but that Triffin had scanned the signatures into his computer and pasted them onto the agreements. ADP claimed fraud. Does Triffin qualify as an HDC? If not, did he acquire the rights of an HDC under the shelter principle? As for the fraud claim, which element of fraud would ADP be least likely to prove?

The court issued a judgment in ADP's favor and awarded the defendant $5,919.80 in compensatory damages, representing the private investigator's fee, and $17,759.40 in punitive damages. Both parties appealed to a state intermediate appellate court. This court concluded that Triffin did not qualify as a holder in due course (HIDC). He bought the checks, but he was not authorized to scan the sellers' signatures into his computer to reproduce them on the assignment forms. For Triffin to pursue his claims on the checks on the basis of HIDC status, "a valid assignment of the instruments is required. Plaintiff could not, by endorsement and after dishonor, be a holder in due course." Triffin "knew that sellers did not agree to some of the representations and warranties contained in the assignment agreements, and that the signatures on the assignments were not affixed by sellers' representatives or with their knowledge and informed consent." ADP failed to satisfy the reliance requirement to succeed on its fraud claim. The court reversed the lower court's award of damages and remanded the case for the possible imposition of sanctions on the plaintiff.

In September 2001, Cory Babcock and Honest Air Conditioning & Heating, Inc., bought a new 2001 Chevrolet Corvette from Cox Chevrolet in Sarasota, Florida. Their retail installment sales contract (RISC) required monthly payments until $52,516.20 was paid. The RISC imposed many other conditions on the buyers and seller with respect to the payment for, and handling of, the Corvette. Cox assigned the RISC to General Motors Acceptance Corp. (GMAC). In August 2002, the buyers sold the car to Florida Auto Brokers, which agreed to pay the balance due on the RISC. The check to GMAC for this amount was dishonored for insufficient funds, however, after the vehicle's title had been forwarded. GMAC filed a suit in a Florida state court against Honest Air and Babcock, seeking $35,815.26 as damages for breach of contract. The defendants argued that the RISC was a negotiable instrument. A ruling in their favor on this point would reduce any damages due GMAC to less than the Corvette's current value. What are the requirements for an instrument to be negotiable? Does the RISC qualify? Explain.

The court issued a judgment in favor of Babcock and Honest Air, based in part on a determination that the RISC was a negotiable instrument. GMAC appealed to a state intermediate appellate court, which concluded that the RISC was not a negotiable instrument. The appellate court pointed out that under the UCC, to be negotiable an instrument must contain "an unconditional promise or order to pay." Its payment cannot be conditioned on the occurrence or nonoccurrence of some other event or agreement. In this case, the RISC imposed a series of obligations on the buyers and the seller. The court affirmed the judgment in the defendants' favor on other grounds, however, principally GMAC's "improvident" release of the title to the car before Florida Auto Brokers's check was honored. The court also noted that the current value of the Corvette in fact exceeded the amount that remained unpaid under the RISC.

On July 7, 2000, Frances Morelli agreed to sell to Judith Bucklin a house at 126 Lakedell Drive in Warwick, Rhode Island, for $77,000. Bucklin made a deposit on the house. The closing at which the parties would exchange the deed for the price was scheduled for September 1. The agreement did not state that "time is of the essence," but it did provide, in "Paragraph 10," that "[i]f Seller is unable to [convey good, clear, insurable, and marketable title], Buyer shall have the option to: (a) accept such title as Seller is able to convey without abatement or reduction of the Purchase Price, or (b) cancel this Agreement and receive a return of all Deposits." An examination of the public records revealed that the house did not have marketable title. Wishing to be flexible, Bucklin offered Morelli time to resolve the problem, and the closing did not occur as scheduled. Morelli decided "the deal is over" and offered to return the deposit. Bucklin refused and, in mid-October, decided to exercise her option under Paragraph 10(a). She notified Morelli, who did not respond. Bucklin filed a suit in a Rhode Island state court against Morelli. In whose favor should the court rule? Should damages be awarded? If not, what is the appropriate remedy? Why?

The court ruled in Bucklin's favor and ordered the remedy of specific performance: Morelli was to convey the house with whatever title she had. Morelli appealed to the Rhode Island Supreme Court, which affirmed the lower court's ruling. In this case, a valid agreement existed and Bucklin was "ready, willing, and able to pay the agreed-upon consideration and accept the encumbered title to the property." The parties never expressly agreed to extend the closing date, but the "existence of such an extension could be inferred from the conduct of the parties." The court rejected Morelli's contention that the deal should be canceled because she made an effort to return Bucklin's deposit.

Juan Sanchez writes the following note on the back of an envelope: "I, Juan Sanchez, promise to pay Kathy Martin or bearer $500 on demand." Is this a negotiable instrument? Discuss fully.

The instrument in this case meets the writing requirement in that it is handwritten and on something with a degree of permanence that is transferable. The instrument meets the requirement of being signed by the maker, as Juan Sanchez's signature (his name in his handwriting) appears in the body of the instrument. The instrument's payment is not conditional and contains Juan Sanchez's definite promise to pay. In addition, the sum of $100 is both a fixed amount and payable in money (U.S. currency). Because the instrument is payable on demand and to bearer (Kathy Martin or any holder), it is negotiable.

Erica Bishop lived in public housing with her children. Her lease stated that only she and her children, who were listed on the lease, could live in the apartment, and that she was responsible for the actions of all household members. Any violations of the lease by any household member, including criminal activity, would be grounds for eviction. Bishop's son Derek committed an armed robbery at a store next to the apartment building. Bishop was given thirty days to vacate the apartment due to breach of the lease. She sued, arguing that Derek had moved out of the apartment months before the robbery, but she admitted he had been in the apartment right before the robbery. The trial court held that since Derek had visited the apartment right before the robbery, he was a household member and Bishop had to vacate. She appealed, contending that the lease was invalid because it was substantively unconscionable. Does Erica have grounds for a reversal in her favor? Discuss.

The terms of the lease are not unconscionable. The contract clause was not unusual and does not violate notions of basic fairness. It was also noted that Bishop failed to inform the landlord that Derek had vacated the apartment, which was also required by the terms of the lease, so as far as the landlord knew, Derek was still on the lease.

In 1997, WTS Transnational, Inc., required financing to develop a prototype of an unpatented fingerprint-verification system. At the time, WTS had no revenue, $655,000 in liabilities, and only $10,000 in assets. Thomas Cavanagh and Frank Nicolois, who operated an investment banking company called U.S. Milestone (USM), arranged the financing using Curbstone Acquisition Corp. Curbstone had no assets but had registered approximately 3.5 million shares of stock with the Securities and Exchange Commission (SEC). Under the terms of the deal, Curbstone acquired WTS, and the resulting entity was named Electro-Optical Systems Corp. (EOSC). New EOSC shares were issued to all of the WTS shareholders. Only Cavanagh and others affiliated with USM could sell EOSC stock to the public, however. Over the next few months, these individuals issued false press releases, made small deceptive purchases of EOSC shares at high prices, distributed hundreds of thousands of shares to friends and relatives, and sold their own shares at inflated prices through third party companies they owned. When the SEC began to investigate, the share price fell to its actual value, and innocent investors lost more than $15 million. Were any securities laws violated in this case? If so, what might be an appropriate remedy?

This case involved a "pump-and-dump" securities fraud scheme through which its perpetrators artificially inflated EOSC's stock price, sold their shares at that high price, and left investors holding nearly worthless shares when the price plummeted to a realistic value. The SEC filed a civil action in a federal district court against Cavanagh and others, alleging that they violated federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934, by, among other things, committing fraud. The court issued a summary judgment against the defendants, ordering them in part to pay civil fines of $1 million each, to disgorge their "illgotten profits" (which amounted to more than $15.5 million), and to remit the remaining shares of their EOSC stock. On appeal, the U.S. Court of Appeals for the Second Circuit affirmed this judgment and the order.

Jeremy took his mother on a special holiday to Mountain Air Resort. Jeremy was a frequent patron of the resort and was well known by its manager. The resort required each of its patrons to make a large deposit to ensure payment of the room rental. Jeremy asked the manager to waive the requirement for his mother and told the manager that if his mother for any reason failed to pay the resort for her stay there, he would cover the bill. Relying on Jeremy's promise, the manager waived the deposit requirement for Jeremy's mother. After she returned home from her holiday, Jeremy's mother refused to pay the resort bill. The resort manager tried to collect the sum from Jeremy, but Jeremy also refused to pay, stating that his promise was not enforceable under the Statute of Frauds. Is Jeremy correct? Explain.

Yes, Jeremy is correct. Under the Statute of Frauds, a promise to pay the debt of another, if the other person fails to pay it, must be in writing to be enforceable. Note that Jeremy did not promise the resort to be primarily responsible for the deposit. If Jeremy had asked the resort to bill him directly for the deposit or if he had promised to pay it for his mother, the promise would be enforceable. But Jeremy promised to pay the deposit only if his mother failed to pay it; thus his obligation was secondary and fell under the Statute of Frauds.

What is the difference between a concurring opinion and a majority opinion? Between a concurring opinion and a dissenting opinion? Why do judges and justices write concurring and dissenting opinions, given that these opinions will not affect the outcome of the case at hand, which has already been decided by majority vote?

A majority opinion is a written opinion outlining the views of the majority of the judges or justices deciding a particular case. A concurring opinion is a written opinion by a judge or justice who agrees with the conclusion reached by the majority of the court but not necessarily with the legal reasoning that led the conclusion. A concurring opinion will voice alternative or additional reasons as to why the conclusion is warranted or clarify certain legal points concerning the issue. A dissenting opinion is a written opinion in which a judge or justice, who does not agree with the conclusion reached by the majority of the court, expounds his or her views on the case. Such opinions may be used by another court later to support its position on a similar issue.

A check drawn by Cullen for $500 is made payable to the order of Jordan and issued to Jordan. Jordan owes his landlord $500 in rent and transfers the check to his landlord with the following indorsement: "For rent paid, [signed] Jordan." Jordan's landlord has contracted to have Deborah do some landscaping on the property. When Deborah insists on immediate payment, the landlord transfers the check to Deborah without indorsement. Later, to pay for some palm trees purchased from Better-Garden Nursery, Deborah transfers the check with the following indorsement: "Pay to Better-Garden Nursery, without recourse, [signed] Deborah." Better-Garden Nursery sends the check to its bank indorsed "For deposit only, [signed] Better-Garden Nursery." (a) Classify each of these indorsements. (b) Was the transfer from Jordan's landlord to Deborah, without indorsement, an assignment or a negotiation? Explain.

(a) "For rent paid. [Signed] Jordan" is a blank indorsement. The words for rent paid have nothing to do with the proper means of transfer and negotiation of the instrument. "Pay to Better-Garden Nursery, without recourse. [Signed] Deborah" is a special qualified indorsement. To properly negotiate this check, Deborah has to deliver and indorse the instrument. "For deposit only. [Signed] Better-Garden Nursery" is a restrictive indorsement. It does not prohibit the further transfer or negotiation of the instrument. (b) Negotiation is the transfer of an instrument in such form that the transferee becomes a holder. If the instrument is order paper, the transfer requires an indorsement plus delivery for negotiation. If the instrument is bearer paper, the transfer requires only a delivery for negotiation. The method used for negotiation depends on the character of the instrument (order or bearer) at the time of the negotiation. The check issued to Jordan was order paper. For negotiation, Jordan was required to indorse and deliver the check to his landlord. One type of indorsement is a blank indorsement (indorser's signature only); this indorsement changes the character of the instrument from order to bearer. Because a bearer instrument can be negotiated by delivery only, without indorsement, Jordan's landlord did effectively negotiate the check to Deborah.

Burke has been a rancher all her life, raising cattle and crops. Her ranch is valued at $500,000, almost all of which is exempt under state law. Burke has eight creditors and a total indebtedness of $70,000. Two of her largest creditors are Oman ($30,000 owed) and Sneed ($25,000 owed). The other six creditors have claims of less than $5,000 each. A drought has ruined all of Burke's crops and forced her to sell many of her cattle at a loss. She cannot pay off her creditors. (a) Under the Bankruptcy Code, can Burke, with a $500,000 ranch, voluntarily petition herself into bankruptcy? Explain. (b) Could either Oman or Sneed force Burke into involuntary bankruptcy? Explain.

(a) Any person, including a rancher or farmer, can voluntarily petition himself or herself into bankruptcy. The person has only to be a debtor. This includes partnerships and corporations that are liable on a claim held by a creditor, as well as individuals. The debtor does not have to be insolvent to file a petition. Under the Code, a debtor is presumed to be insolvent when his or her debts exceed the fair market value of nonexempt assets. Thus, even though Burke owns a $500,000 ranch and has debts of only $70,000, she can voluntarily petition herself into bankruptcy. (b) Neither Oman nor Sneed—nor any combination of Burke's creditors—can involuntarily petition Burke into bankruptcy. The Code provides that involuntary bankruptcy proceedings cannot be commenced against a farmer. The definition of a farmer includes persons who receive 50 percent of their gross income from farming operations such as tilling the soil, ranching, or the production or raising of crops or livestock. Because Burke obviously fits the definition of a farmer, no creditor can force her into bankruptcy.

Schmidt, operating a sole proprietorship, has a large piece of used farm equipment for sale. He offers to sell the equipment to Barry for $10,000. Discuss the legal effects of the following events on the offer: (a) Schmidt dies prior to Barry's acceptance, and at the time he accepts, Barry is unaware of Schmidt's death. (b) The night before Barry accepts, fire destroys the equipment. (c) Barry pays $100 for a thirty-day option to purchase the equipment. During this period, Schmidt dies, and later Barry accepts the offer, knowing of Schmidt's death. (d) Barry pays $100 for a thirty-day option to purchase the equipment. During this period, Barry dies, and Barry's estate accepts Schmidt's offer within the stipulated time period.

(a) Death of either the offeror or the offeree prior to acceptance automatically terminates a revocable offer. The basic legal reason is that the offer is personal to the parties and cannot be passed on to others, not even to the estate of the deceased. This rule applies even if the other party is unaware of the death. Thus, Schmidt's offer terminates on Schmidt's death, and Barry's later acceptance does not constitute a contract. (b) An offer is automatically terminated by the destruction of the specific subject matter of the offer prior to acceptance. Thus, Barry's acceptance after the fire does not constitute a contract. (c) When the offer is irrevocable, under an option contract, death of the offeror does not terminate the option contract, and the offeree can accept the offer to sell the equipment, binding the offeror's estate to performance. Performance is not personal to Schmidt, as the estate can transfer title to the equipment. Knowledge of the death is immaterial to the offeree's right of acceptance. Thus, Barry can hold Schmidt's estate to a contract for the purchase of the equipment. (d) When the offer is irrevocable, under an option contract, death of the offeree also does not terminate the offer. Because the option is a separate contract, the contract survives and passes to the offeree's estate, which can exercise the option by acceptance within the option period. Thus, acceptance by Barry's estate binds Schmidt to a contract for the sale of the equipment.

Assume that Arthur Rabe is suing Xavier Sanchez for breaching a contract in which Sanchez promised to sell Rabe a painting by Vincent van Gogh for $3 million. (a) In this lawsuit, who is the plaintiff and who is the defendant? (b) Suppose that Rabe wants Sanchez to perform the contract as promised. What remedy would Rabe seek from the court? (c) Now suppose that Rabe wants to cancel the contract because Sanchez fraudulently misrepresented the painting as an original Van Gogh when in fact it is a copy. What remedy would Rabe seek? (d) Will the remedy Rabe seeks in either situation be a remedy at law or a remedy in equity? What is the difference between legal and equitable remedies? (e) Suppose that the trial court finds in Rabe's favor and grants one of these remedies. Sanchez then appeals the decision to a higher court. On appeal, which party will be the appellant (or petitioner), and which party will be the appellee (or respondent)?

(a) In a suit by Arthur Rabe against Xavier Sanchez, Rabe is the plaintiff and Sanchez is the defendant. (b) Specific performance is the remedy that includes an order to a party to perform a contract as promised. (c) Rescission is a remedy that includes an order to cancel a contract. (d) In both cases, these remedies are remedies in equity. (e) If Sanchez appeals your decision, Sanchez would be the appellant (or petitioner) and Rabe would be the appellee (or respondent).

Donald and Gloria Bowden hosted a late afternoon cookout at their home in South Carolina, inviting mostly business acquaintances. Justin Parks, who was nineteen years old, attended the party. Alcoholic beverages were available to all of the guests, even those who, like Parks, were not minors but were underage. Parks consumed alcohol at the party and left with other guests. One of these guests detained Parks at the guest's home to give Parks time to "sober up." Parks then drove himself from this guest's home and was killed in a one-car accident. At the time of death, he had a blood alcohol content of 0.291 percent, which exceeded the state's limit for driving a motor vehicle. Linda Marcum, Parks's mother, filed a suit in a South Carolina state court against the Bowdens and others, alleging that they were negligent. (a) Considering the principles discussed in this chapter, what are arguments in favor of, and against, holding social hosts liable in this situation? Explain. (b) The states vary widely in assessing liability and imposing sanctions in the circumstances described in this problem. In other words, justice is not equal for parents and other social hosts who serve alcoholic beverages to underage individuals. Why is that?

(a) In any situation, it might be argued that underage drinkers who are not minors should be considered the same as other adults, with no liability imposed on their social hosts for torts committed by intoxicated guests. The court recognized in the Marcum case, however, that "the public policy of this State treats these [underage] individuals as lacking full adult capacity to make informed decisions concerning the ingestion of alcoholic beverages. Accordingly, we hold that adult social hosts who knowingly and intentionally serve, or cause to be served, alcoholic beverages to persons they know or should know to be between the ages of 18 and 20 may incur liability where, under the same circumstances, they are immune for service to persons aged at least 21 years old." (b) The Marcum court acknowledged "exceptions [that] allow a parent or spouse over the age of twenty-one to serve their underage child or spouse; permit the giving of alcohol in conjunction with a religious ceremony or purpose; and permit a student to taste‟ an alcoholic beverage in conjunction with academic instruction." Even parents who might allow their children to drink in their presence might object strongly to other adults making that choice for them.

Bertram writes a check for $200 payable to "cash." He puts the check in his pocket and drives to the bank to cash the check. As he gets out of his car in the bank's parking lot, the check slips out of his pocket and falls to the pavement. Jerrod walks by moments later, picks up the check, and later that day delivers it to Amber, to whom he owes $200. Amber indorses the check "For deposit only, [signed] Amber Dowel" and deposits it into her checking account. In light of these circumstances, answer the following questions: (a) Is the check a bearer instrument or an order instrument? (b) Did Jerrod's delivery of the check to Amber constitute a valid negotiation? Why or why not? (c) What type of indorsement did Amber make? (d) Does Bertram have a right to recover the $200 from Amber? Explain.

(a) On its issue, this check was a bearer instrument. Any instrument that does not designate a specific payee—such as an instrument "Payable to the order of cash"—is a bearer instrument. Once the check was indorsed by Amber, however, it was no longer a bearer instrument because it was locked in to the banking system for collection. (b) The finder's delivery of the check to the creditor was a valid negotiation. All that is required for the negotiation of a bearer instrument is voluntary delivery. (c) This indorsement is a restrictive indorsement. In this case, it makes the bank a collecting agent for the indorser. (d) No. The drawer cannot recover the proceeds from the person to whom the finder delivered the check. When the finder delivered the check—a bearer instrument—to the creditor, all rights in the check passed to the creditor. The drawer can recover, how- ever, from the finder, if the finder can be found.

Discuss whether either of the following contracts will be unenforceable on the ground that voluntary consent is lacking: (a) Simmons finds a stone in his pasture that he believes to be quartz. Jenson, who also believes that the stone is quartz, contracts to purchase it for $10. Just before delivery, the stone is discovered to be a diamond worth $1,000. (b) Jacoby's barn is burned to the ground. He accuses Goldman's son of arson and threatens to have the prosecutor bring a criminal action unless Goldman agrees to pay him $5,000. Goldman agrees to pay.

(a) Simmons and Jenson have made a bilateral mistake. The issue is whether the mistake involves the identity of the stone (quartz versus diamond) or the value of the stone ($10 versus $1,000). Because both parties were mistaken as to the true character of the subject matter, the contract can be rescinded by either. Had either party known that the stone was some type of gem, then even though its exact nature was unknown (diamond), the mistake would be one of value, not fact, and the contract would not be rescindable. (b) A contract entered into through a threat of criminal prosecution is generally held to be made under duress and is voidable, regardless of whether Goldman's son is guilty of arson. Such is the case here.

This chapter discussed a number of sources of American law. Which source of law takes priority in the following situations, and why? (a) A federal statute conflicts with the U.S. Constitution. (b) A federal statute conflicts with a state constitutional provision. (c) A state statute conflicts with the common law of that state. (d) A state constitutional amendment conflicts with the U.S. Constitution.

(a) The U.S. Constitution—The U.S. Constitution is the supreme law of the land. A law in violation of the Constitution, no matter what its source, will be declared unconsti- tutional and will not be enforced. (b) The federal statute—Under the U.S. Constitution, when there is a conflict be- tween a federal law and a state law, the state law is rendered invalid. (c) The state statute—State statutes are enacted by state legislatures. Areas not covered by state statutory law are governed by state case law. (d) The U.S. Constitution—State constitutions are supreme within their respec- tive borders unless they conflict with the U.S. Constitution, which is the supreme law of the land.

Celine issues a ninety-day negotiable promissory note payable to the order of Hayden. The amount of the note is left blank, pending a determination of the amount that Hayden will need to purchase a used car for Celine. Celine authorizes any amount not to exceed $2,000. Hayden, without authority, fills in the note in the amount of $5,000 and thirty days later sells the note to First National Bank of Oklahoma for $4,850. Hayden does not buy the car and leaves the state. First National Bank has no knowledge that the instrument was incomplete when issued or that Hayden had no authority to complete the instrument in the amount of $5,000. (a) Does the bank qualify as a holder in due course? If so, for what amount? Explain. (b) If Hayden had sold the note to a stranger in a bar for $500, would the stranger qualify as a holder in due course? Explain.

(a) The bank does qualify as a holder in due course (HIDC) for the amount of $5,000. In this situation the bank has given full value for the instrument—$4,850 ($5,000 - $150 discount). Therefore, the bank is entitled to be an HIDC for the face value of the instrument ($5,000). In addition, the bank took the instrument in good faith and without notice of the original incompleteness of the instrument (completed when purchased by the bank) or the lack of authority of Hayden to complete the instrument in an amount over $2,000. The instrument was also taken before overdue (before the maturity date). Thus, First National Bank is an HIDC. (b) The sale to a stranger in a bar for $500 creates an entirely different situation. One of the requirements for the status of an HIDC is that a holder take the instrument in good faith. Although the UCC does not provide clear guidelines to determine what is or is not good faith, both the amount paid (as compared to the face value of the instrument) and the circumstances under which the instrument is taken (as interpreted by a reasonable person) dictate whether the holder honestly believed the instrument was not defective when taken. In this case, taking a $5,000 note for $500 in a bar would raise a serious question of the stranger's good faith. Thus, the stranger would not qualify as a holder in due course.

John Sasson and Emily Springer met in January 2002. John worked for the U.S. Army as an engineer. Emily was an attorney with a law firm. Six months later, John bought a townhouse in Randolph, New Jersey, and asked Emily to live with him. She agreed but retained the ownership of her home in Monmouth Beach. John paid the mortgage and the other expenses on the townhouse. He urged Emily to quit her job and work from "our house." In May 2003, Emily took John's advice and started her own law practice. In December, John made her the beneficiary of his $150,000 individual retirement account (IRA) and said that he would give her his 2002 BMW M3 car before the end of the next year. He proposed to her in September 2004, giving her a diamond engagement ring and promising to "take care of her" for the rest of her life. Less than a month later, John was critically injured by an accidental blow to his head during a basketball game and died. On behalf of John's estate, which was valued at $1.1 million, his brother Steven filed a complaint in a New Jersey state court to have Emily evicted from the townhouse. Given these facts, consider the following questions. (a) Based on John's promise to "take care of her" for the rest of her life, Emily claimed that she was entitled to the townhouse, the BMW, and an additional portion of John's estate. Under what circumstances would such a promise constitute a valid, enforceable contract? Does John's promise meet these requirements? Why or why not? (b) Whether or not John's promise is legally binding, is there an ethical basis on which it should be enforced? Is there an ethical basis for not enforcing it? Are there any circumstances under which a promise of support should be—or should not be—enforced? Discuss.

(a) The court issued a summary judgment against Emily's claim, noting that in cases in which promises of support had been enforced the parties had lived together "functioning as a family unit for a considerably longer period of time and . . . the claimant[s] suffered harm because of reliance on . . . broken or unfulfilled promise[s]." On appeal, a state intermediate appellate court affirmed the judgment of the lower court. In any case, "[w]hether there was either an express or implied contract requires analysis of both the words and the actions of the parties to determine whether the promise was made and some form of consideration given by the one seeking to enforce the promise. . . . Here Emily and John lived together for only two and one-half years. Their relationship ended not because of a broken promise but by John's sudden and unanticipated death. Emily argues that the relatively short length of their cohabitation should not be a determinative factor when it was clearly demonstrated they intended to share their lives together including marriage. But life is composed of sudden changes of mind or heart as well as changed circumstances including unexpected tragedies. Accordingly, the period of cohabitation was an appropriate factor. (b) An ethical basis for enforcing a promise of support might arise if a broken promise caused the claimant to suffer but its terms were not otherwise legally enforceable. "Of greater significance" than the period of cohabitation in cases such as Emily's, said the court, "is the issue of detrimental reliance on the promise. In [cases in which promises of support were enforced] the plaintiffs left the relationship and were induced to return by a promise of future support. Here Emily was not induced to live with John by a promise of support but chose to do so based on her feelings for him. Moreover, unlike other cases . . . , Emily was not left destitute nor did she suffer severe economic dislocation by a failure to enforce the promise." The court noted that Emily had John's $150,000 IRA and that she still owned her home in Monmouth Beach. She was also "a practicing lawyer, which enables her to support herself. . . . There was no significant detrimental reliance by Emily on John's promise of lifelong support. Although she suffered a severe loss when John died, that loss cannot be remedied by an award" of a portion of his estate.

International Business Machines Corp. (IBM) hired Niels Jensen in 2000 as a software sales representative. In 2001, IBM presented a new "Software Sales Incentive Plan" (SIP) at a conference for its sales employees. A brochure given to the attendees stated, "There are no caps to your earnings; the more you sell, . . . the more earnings for you." The brochure outlined how the plan worked and referred the employees to the "Sales Incentives" section of IBM's corporate intranet for more details. Jensen was given a "quota letter" that said he would be paid $75,000 as a base salary and, if he attained his quota, an additional $75,000 as incentive pay. In September, Jensen closed a deal with the Internal Revenue Service that was worth more than $24 million to IBM. Relying on the SIP brochure, Jensen estimated his commission to be $2.6 million. IBM paid him less than $500,000, however. Jensen filed a suit in a federal district court, contending that the SIP brochure and quota letter constituted a unilateral offer that became a binding contract when Jensen closed the sale. In view of these facts, consider the following questions. (a) Would it be fair to the employer in this case to hold that the SIP brochure and the quota letter created a unilateral contract if IBM did not intend to create such a contract? Would it be fair to the employee to hold that no contract was created? Explain. (b) The "Sales Incentives" section of IBM's intranet included a clause providing that "management will decide if an adjustment to the payment is appropriate" when an employee closes a large transaction. Jensen's quota letter stated, "[The SIP] program does not constitute a promise by IBM to make any distributions under it. IBM reserves the right to adjust the program terms or to cancel or otherwise modify the program at any time." How do these statements affect your answers to the above questions? From an ethical perspective, would it be fair to hold that a contract exists despite these statements?

(a) The court issued a summary judgment in favor of IBM, holding that there was no contract between the parties because they had not agreed on the commission arrangement. Jensen appealed to the U.S. Court of Appeals for the Fourth Circuit, which affirmed the judgment of the lower court. The appellate court acknowledged that "[a]n employer can make a unilateral offer to its employees, and the offer becomes a contract when its conditions are fulfilled." Jensen failed to show that IBM made an offer here, however, "because the documents on which he relies do not manifest IBM's willingness to extend any offer to enter into a contract. The terms of IBM's Sales Incentive Plan make clear that they are not to be construed as an offer that can be accepted to form a contract. (b) Citing the quota letter, the court concluded that "IBM did not invite a bargain or manifest a willingness to enter into a bargain. To the contrary, it manifested its clear intent to preclude the formation of a contract."

Nellie Lumpkin, who suffered from various illnesses, including dementia, was admitted to the Picayune Convalescent Center, a nursing home. Because of her mental condition, her daughter, Beverly McDaniel, filled out the admissions paperwork and signed the admissions agreement. It included a clause requiring parties to submit to arbitration any disputes that arose. After Lumpkin left the center two years later, she sued, through her husband, for negligent treatment and malpractice during her stay. The center moved to force the matter to arbitration. The trial court held that the arbitration agreement was not enforceable. The center appealed. (a) Should a dispute involving medical malpractice be forced into arbitration? This is a claim of negligent care, not a breach of a commercial contract. Is it ethical for medical facilities to impose such a requirement? Is there really any bargaining over such terms? (b) Should a person with limited mental capacity be held to the arbitration clause agreed to by the nextof-kin who signed on behalf of that person?

(a) This is very common, as many hospitals and other health-care provides have arbitration agreements in their contracts for services. There was a valid contract here. It is presumed in valid contracts that arbitration clauses will be upheld unless there is a violation of public policy. The provision of medical care is much like the provision of other services in this regard. There was not evidence of fraud or pressure in the inclusion of the arbitration agreement. Of course there is concern about mistreatment of patients, but there is no reason to believe that arbitration will not provide a professional review of the evidence of what transpired in this situation. Arbitration is a less of a lottery than litigation can be, as there are very few gigantic arbitration awards, but there is no evidence of systematic discrimination against plaintiffs in arbitration compared to litigation, so there may not be a major ethical issue. (b) McDaniel had the legal capacity to sign on behalf of her mother. Someone had to do that because she lacked mental capacity. So long as in such situations the contracts do not contain terms that place the patient at a greater disadvantage than would be the case if the patient had mental capacity, there is not particular reason to treat the matter any differently.

Su Ru Chen owned the Lucky Duck Fortune Cookie Factory in Everett, Massachusetts, which made Chinese-style fortune cookies for restaurants. In November 2001, Chen listed the business for sale with Bob Sun, a real estate broker, for $35,000. Sun's daughter Frances and her fiancé, Chiu Chung Chan, decided that Chan would buy the business. Acting as a broker on Chen's (the seller's) behalf, Frances asked about the Lucky Duck's finances. Chen said that each month the business sold at least 1,000 boxes of cookies at a $2,000 profit. Frances negotiated a price of $23,000, which Chan (her fiancé) paid. When Chan began to operate the Lucky Duck, it became clear that the demand for the cookies was actually about 500 boxes per month—a rate at which the business would suffer losses. Less than two months later, the factory closed. Chan filed a suit in a Massachusetts state court against Chen, alleging fraud, among other things. Chan's proof included Frances's testimony as to what Chen had said to her. Chen objected to the admission of this testimony. What is the basis for this objection? Should the court admit the testimony? Why or why not?

A basis for the objection to the admission of the testimony is that at the time of the statements about which Frances would testify she was acting as Chen's agent. As Chen's agent, and without Chen's knowledge of Frances's relationship to Chan or Chen's consent to Frances's acting in a dual capacity, Frances owed her principal a duty of loyalty to act solely for Chen's benefit. But Frances also had an interest in the deal as the fiancée of Chan—the buyer and plaintiff—to secure the Lucky Duck at a reduced price, and this created a conflict of interest, which placed Frances in a position opposed to her principal Chen—the seller and defendant. Despite this conflict, the judge admitted the testimony, a jury found that Chen committed fraud, and the court awarded Chan $17,000 in damages. On Chen's appeal, a state intermediate appellate court reversed this judgment, ruling in part that Frances's statements were inadmissible and thus "there was no evidence upon which a jury might base their finding that the defendant had engaged in acts of fraud." The appellate court explained, "Unless otherwise agreed, an agent is subject to a duty not to deal with his principal as an adverse party in a transaction connected with his agency without the principal's knowledge. Violation of an agent's duty against surreptitious self-dealing, regardless of whether the agent intends to harm the principal, is a breach of the agency relationship." In this case, because Chen had neither known about nor consented to Frances's dual role, Frances was in a conflict of interest, and "she could not be found to be authorized to act on matters about which [she] spoke."

Under California law, a contract to manage a professional boxer must be in writing, and the manager must be licensed by the State Athletic Commission. Marco Antonio Barrera is a professional boxer and two-time world champion. In May 2003, José Castillo, who was not licensed by the state, orally agreed to assume Barrera's management. He "understood" that he would be paid in accord with the "practice in the professional boxing industry, but in no case less than ten percent (10%) of the gross revenue" that Barrera generated as a boxer and through endorsements. Among other accomplishments, Castillo negotiated an exclusive promotion contract for Barrera with Golden Boy Promotions, Inc., which is owned and operated by Oscar De La Hoya. Castillo also helped Barrera settle three lawsuits and resolve unrelated tax problems so that Barrera could continue boxing. Castillo did not train Barrera, pick his opponents, or arrange his fights, however. When Barrera abruptly stopped communicating with Castillo, Castillo filed a suit in a California state court against Barrera and others, alleging breach of contract. Under what circumstances is a contract with an unlicensed practitioner enforceable? Is the alleged contract in this case enforceable? Why or why not?

A contract with an unlicensed practitioner may be enforceable if a state does not expressly provide that the lack of a license prohibits the enforcement of a work-related contract. If the underlying purpose of a licensing statute is to raise revenue, then a contract with an unlicensed practitioner may be enforceable. If the statute‟s underlying purpose is to protect the public from unauthorized practitioners, however, the contract is likely illegal and unenforceable. In this case, the court issued a summary judgment in favor of Barrera and the other defendants. Castillo appealed to a state intermediate appellate court, which affirmed the summary judgment on the basis, in part, that Castillo was not a licensed manager. The court reiterated that under California regulations, a contract to manage a professional boxer must be in writing and the State Athletic Commission must license the manager. Here, the alleged management agreement between Barrera and Castillo was oral, and the state had not licensed Castillo as a boxing manager. Castillo contended that he "agreed to assume responsibility as Barrera's manager" and "played a direct role" in Barrera's boxing career, including "managing his business and personal affairs." He negotiated a contract with Golden Boy Promotions and "played a direct and instrumental role in settlement of three lawsuits," allowing Barrera to continue his boxing career. He "worked with an attorney to extricate Barrera from tax problems" and assisted in other activities, "which could have otherwise hampered or damaged [Barrera‟s] career. In sum, Castillo's complaint alleges that he engaged in conduct falling within the statutory definition of a manager of a professional boxer." Because "he acted as a manager without a written contract and without a license, summary judgment was properly granted."

In 2001, Raul Leal, the owner and operator of Texas Labor Contractors in East Texas, contacted Poverty Point Produce, Inc., which operates a sweet potato farm in West Carroll Parish, Louisiana, and offered to provide field workers. Poverty Point accepted the offer. Jeffrey Brown, an owner of and field manager for the farm, told Leal the number of workers needed and gave him forms for them to fill out and sign. Leal placed an ad in a newspaper in Brownsville, Texas. Job applicants were directed to Leal's car dealership in Weslaco, Texas, where they were told the details of the work. Leal recruited, among others, Elias Moreno, who lives in the Rio Grande Valley in Texas, and transported Moreno and the others to Poverty Point's farm. At the farm, Leal's brother Jesse oversaw the work with instructions from Brown, lived with the workers in the on-site housing, and gave them their paychecks. When the job was done, the workers were returned to Texas. Moreno and others filed a suit in a federal district court against Poverty Point and others, alleging, in part, violations of Texas state law related to the work. Poverty Point filed a motion to dismiss the suit on the ground that the court did not have personal jurisdiction. All of the meetings between Poverty Point and the Leals occurred in Louisiana. All of the farmwork was done in Louisiana. Poverty Point has no offices, bank accounts, or phone listings in Texas. It does not advertise or solicit business in Texas. Despite these facts, can the court exercise personal jurisdiction? Explain.

A court can exercise personal jurisdiction over a non-resident defendant under the authority of a long arm statute. First, however, it must be shown that the defendant had sufficient minimum contacts with the jurisdiction in which the court is attempting to assert its authority. In this case, Texas's long arm statute applied. The court concluded that Poverty Point had sufficient minimum contacts with Texas based on the workers' "recruitment in Texas for work in Louisiana" and "their transportation from Texas to Louisiana." The workers signed their contracts and other employment documents in Texas. The terms of the work were revealed in Texas. Although the Leals had handled the "recruitment" and transportation of the workers in Texas, the Leals had acted on Poverty Point's behalf. Also, "Texas has an interest in protecting its citizens from exploitation by nonresident employers, particularly when its citizens are the targets of recruitment for out-of-state employment."

Lisa and Darrell Miller married in 1983 and had two children, Landon and Spencer. The Millers divorced in 2003 and entered into a joint custody implementation plan (JCIP). Under the JCIP, Darrell agreed to "begin setting funds aside for the minor children to attend post-secondary education necessary to pay tuition, books, supplies, and room and board not to exceed four (4) years." After Landon's eighteenth birthday, Darrell filed a petition to reduce the amount of the child support that he was paying to Lisa. In response, she asked the court to order Darrell to pay the boys' college expenses but offered no evidence to support the request. Darrell contended that the JCIP was not clear on this point. Do the rules of contract interpretation, applied to the phrasing of the Millers' JCIP, support Lisa's request or Darrell's contention? Explain.

A court is bound to give effect to a contract according to the intent of the parties at the time that they entered into it. A divorce settlement is a contract. In this problem, the type of college expenses that the Millers anticipated are specified in the JCIP, as is the length of the obligation. But there is ambiguity in the phrasing. When was Darrell to "begin setting funds aside?" How much was he to set aside? Where was he to deposit or invest the funds? Was he to be responsible for the entire cost of the children's post-secondary education? In other words, what exactly did the parties intend? The provision is ambiguous. Lisa, however, did not offer any evidence to support her asserted interpretation of the provision. Without such evidence, the ambiguity should be interpreted in favor of Darrell. In this case, the court ordered Darrell to pay, but on appeal, a state intermediate appellate court reversed the order.

In St. Louis, Missouri, in August 2000, Richard Miller orally agreed to loan Jeff Miller $35,000 in exchange for a security interest in a 1999 Kodiak dump truck. The Millers did not put anything in writing concerning the loan, its repayment terms, or Richard's security interest or rights in the truck. Jeff used the amount of the loan to buy the truck, which he kept in his possession. In June 2004, Jeff filed a petition to obtain a discharge of his debts in bankruptcy. Richard claimed that he had a security interest in the truck and thus was entitled to any proceeds from its sale. What are a creditor's main concerns on a debtor's default? How does a creditor satisfy these concerns? What are the requirements for a creditor to have an enforceable security interest? Have these requirements been met in this case? Considering these points, what is the court likely to rule with respect to Richard's claim?

A creditor's chief concern on a debtor's default is to obtain payment of the debt. To obtain this payment from certain assets or collateral, a creditor must have priority over other creditors who may also have rights in the collateral. To attain this priority, a creditor must create and perfect a security interest in the collateral. The debtor (Jeff) and the creditor (Richard) engaged in an oral contract to consummate their transaction. Consequently, there was no written agreement setting out Richard's rights in the truck and no agreement between them granting Richard a security interest. Jeff continued to possess the truck. Richard thus had an unsecured claim against Jeff, with no greater priority to its payment than the claim of any other unsecured creditor.

Junior owes creditor Iba $1,000, which is due and payable on June 1. Junior has been in a car accident, has missed a great deal of work, and consequently will not have the funds on June 1. Junior's father, Fred, offers to pay Iba $1,100 in four equal installments if Iba will discharge Junior from any further liability on the debt. Iba accepts. Is this transaction a novation or an accord and satisfaction? Explain.

A novation exists when a new, valid contract expressly or impliedly discharges a prior contract by the substitution of a party. Accord and satisfaction exists when the parties agree that the original obligation can be discharged by a substituted performance. In this case, Fred's agreement with Iba to pay off Junior's debt for $1,100 (as compared to the $1,000 owed) is definitely a valid contract. The terms of the contract substitute Fred as the debtor for Junior, and Junior is definitely discharged from further liability. This agreement is a novation.

Redford is a seller of electric generators. He purchases a large quantity of generators from a manufacturer, Mallon Corp., by making a down payment and signing an agreement to make the balance of payments over a period of time. The agreement gives Mallon Corp. a security interest in the generators and the proceeds. Mallon Corp. properly files a financing statement on its security interest. Redford receives the generators and immediately sells one of them to Garfield on an installment contract, with payment to be made in twelve equal installments. At the time of the sale, Garfield knows of Mallon's security interest. Two months later, Redford goes into default on his payments to Mallon. Discuss Mallon's rights against Garfield in this situation.

A perfected secured party prevails over most third parties having claims to the same collateral of the debtor. An exception, however, is a buyer who, in the ordinary course of business, "takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence." Garfield purchased a generator from Redford, a seller who deals in goods of that kind. Thus, Garfield is a buyer in the ordinary course of business. Mallon's perfection of its security interest in the generators sold to Redford as inventory is not effective against Garfield, even if Garfield knows of Mallon's perfection or security interest. Therefore, Mallon has no rights at all in the generator possessed by Garfield. Mallon is entitled to proceeds (the payments Garfield is making to Redford), however. Proceeds include whatever is received when the collateral subject to the security interest is sold. The right to proceeds is automatic on Mallon's perfection of its security interest in the inventory sold and remains perfected up to twenty-one days after Redford (the debtor) receives the proceeds (Garfield's payment). To extend this period, Mallon would have had to provide for such an extension in the original perfection or perfect such separately within the twenty-one days.

Primesouth Bank issued a loan to Okefenokee Aircraft, Inc. (OAI), to buy a plane. OAI executed a note in favor of Primesouth in the amount of $161,306.25 plus interest. The plane secured the note. When OAI defaulted, Primesouth repossessed the plane. Instead of disposing of the collateral and seeking a deficiency judgment, however, the bank retained possession of the plane and filed a suit in a Georgia state court against OAI to enforce the note. OAI did not deny that it had defaulted on the note or dispute the amount due. Instead, OAI argued that Primesouth Bank was not acting in a commercially reasonable manner. According to OAI, the creditor must sell the collateral and apply the proceeds against the debt. What is a secured creditor's obligation in these circumstances? Can the creditor retain the collateral and seek a judgment for the amount of the underlying debt, or is a sale required? Discuss.

A secured creditor has a variety of different of steps that it can take to satisfy a debt. A secured creditor can repossess and retain a debtor's collateral in full or partial satisfaction of the debt. The collateral does not have to be disposed of first unless the parties have agreed otherwise. If the collateral satisfies the debt only partially, the creditor can seek a judgment for the balance due. Of course, it would not be fair for a creditor to deprive a debtor of the possession of the collateral for an unreasonable length of time and not apply the property, or the proceeds from its sale, against the debt. The creditor must act in a commercially reasonable manner and take steps to sell, lease, retain, or otherwise dispose of the collateral. In this problem, it does not appear that the bank has failed to proceed in a commercially reasonable manner. The bank chose to retain the collateral and seek a judgment on the debt. The amount that OAI owes the bank might be at issue—how does the value of the collateral apply against the amount due on the note?—but the facts state that the debtor did not dispute the amount due. In the case on which this problem is based, the court issued a judgment in the bank's favor, and a state intermediate appellate court affirmed, on the principles stated here.

In 2002, Michael Sabol, doing business in the recording industry as Sound Farm Productions, applied to Morton Community Bank in Bloomington, Illinois, for a $58,000 loan to expand his business. Besides the loan application, Sabol signed a promissory note that referred to the bank's rights in "any collateral." Sabol also signed a letter that stated, "the undersigned does hereby authorize Morton Community Bank to execute, file and record all financing statements, amendments, termination statements and all other statements authorized by Article 9 of the Illinois Uniform Commercial Code, as to any security interest." Sabol did not sign any other documents, including the financing statement, which contained a description of the collateral. Less than three years later, without having repaid the loan, Sabol filed a petition in a federal bankruptcy court to declare bankruptcy. The bank claimed a security interest in Sabol's sound equipment. What are the elements of an enforceable security interest? What are the requirements of each of those elements? Does the bank have a valid security interest in this case? Explain.

A security interest is not enforceable unless it attaches to the collateral. The court acknowledged in this case that "[n]o particular words of grant or 'magic words' are required to be included in a security agreement," but "there must be some language reflecting the debtor's intent to grant a security interest. Accordingly, a financing statement which does not contain any grant language by the debtor creating a security interest in the described collateral, but merely identifies the collateral, cannot substitute for a security agreement." Here, "[n]o language conveying a security interest . . . is found in any of the documents" on which the bank attempted to establish a security interest. "The financing statement, containing the only description of collateral, is not signed by the DEBTOR and, in all likelihood, was never seen by him. What is left? Only boilerplate references in the note to the BANK'S rights in 'any collateral' and in the authorization to 'any security interest.' . . . [W]ithout a description of the collateral in a signed or authenticated document or in a separate document incorporated by reference into a signed or authenticated document, no security interest can be recognized."

James Stout, a professor of economics and business at Cornell College in Iowa City, Iowa, filed a petition in bankruptcy under Chapter 7, seeking to discharge about $95,000 in credit-card debts. At the time, Stout had been divorced for ten years and had custody of his children: Z. S., who attended college, and G. S., who was twelve years old. Stout's ex-wife did not contribute child support. According to Stout, G. S. was an "elite" ice-skater who practiced twenty hours a week and had placed between first and third at more than forty competitive events. He had decided to home school G. S., whose academic achievements were average for her grade level despite her frequent absences from public school. His petition showed monthly income of $4,227 and expenses of $4,806. The expenses included annual home school costs of $8,400 and annual skating expenses of $6,000. They did not include Z. S.'s college costs, such as airfare for his upcoming studies in Europe, and other items. The trustee allowed monthly expenses of $3,227— with nothing for skating—and asked the court to dismiss the petition. Can the court grant this request? Should it? If so, what might it encourage Stout to do? Explain.

A trustee has the power to make a motion to dismiss a bankruptcy petition when the trustee believes that allowing the debtor's petition would be a substantial abuse of the bankruptcy code. Because in this situation the costs related to skating and home schooling are high in proportion to the debtor's income, the court should probably grant the trustee's motion. Even if Stout cannot continue his Chapter 7 case, however, he will be able to file a Chapter 13 bankruptcy petition. Under Section 707(b) of the Bankruptcy Code, a Chapter 7 debtor's ability to fund a Chapter 13 plan is the primary factor in deciding whether to allow the debtor to proceed under that chapter. That ability is subject to a determination of a debtor's "reasonable and necessary expenses" and "disposable income," which must be applied over a certain period to debt payment. In this context, the court would have to determine whether Stout's expenses for G.S.'s home schooling and skating were reasonable and necessary. A likely conclusion, under the circumstances, including G.S's academic achievement despite her absences from public school, would be that the home schooling is unnecessary. The skating expenses would also likely be construed as unnecessary. Under a Chapter 13 plan, these amounts would be made available for payments to creditors.

Janine was hospitalized with severe abdominal pain and placed in an intensive care unit. Her doctor told the hospital personnel to order around-the-clock nursing care for Janine. At the hospital's request, a nursing services firm, Nursing Services Unlimited, provided two weeks of in-hospital care and, after Janine was sent home, an additional two weeks of at-home care. During the at-home period of care, Janine was fully aware that she was receiving the benefit of the nursing services. Nursing Services later billed Janine $4,000 for the nursing care, but Janine refused to pay on the ground that she had never contracted for the services, either orally or in writing. In view of the fact that no express contract was ever formed, can Nursing Services recover the $4,000 from Janine? If so, under what legal theory? Discuss.

According to the question, Janine was apparently unconscious or otherwise unable to agree to a contract for the nursing services she received while she was in the hospital. Sometimes the law will create a fictional contract in order to prevent one party from unjustly receiving a benefit at the expense of another. This is known as a quasi contract and provides a basis for Nursing Services to recover the value of the services it provided while Janine was in the hospital. As for the at-home services that were provided to Janine, because Janine was aware that those services were being provided for her, Nursing Services can recover for those services under an implied-in-fact contract. Under this type of contract, the conduct of the parties creates and defines the terms. Janine's acceptance of the services constitutes her agreement to form a contract, and she will probably be required to pay Nursing Services in full.

As a child, Martha Carr once visited her mother's 108-acre tract of unimproved land in Richland County, South Carolina. In 1968, Betty and Raymond Campbell leased the land. Carr, a resident of New York, was diagnosed as having schizophrenia and depression in 1986, was hospitalized five or six times, and subsequently took prescription drugs for the illnesses. In 1996, Carr inherited the Richland property and, two years later, contacted the Campbells about selling the land. Carr asked Betty about the value of the land, and Betty said that the county tax assessor had determined that the land's agricultural value was $54,000. The Campbells knew at the time that the county had assessed the total property value at $103,700 for tax purposes. A real estate appraiser found that the real market value of the property was $162,000. On August 6, Carr signed a contract to sell the land to the Campbells for $54,000. Believing the price to be unfair, however, Carr did not deliver the deed. The Campbells filed a suit in a South Carolina state court against Carr, seeking specific performance of the contract. At trial, an expert real estate appraiser testified that the real market value of the property was $162,000 at the time of the contract. Under what circumstances will a court examine the adequacy of consideration? Are those circumstances present in this case? Should the court enforce the contract between Carr and the Campbells? Explain.

Adequacy of consideration relates to the fairness of a bargain—"how much" consideration is given. Generally, a court will not question the adequacy of consideration if it is legally sufficient—something of legal value, regardless of "how much" it is. A court may review adequacy, however, if the amount or worth of consideration is so low as to indicate fraud, duress, undue influence, the lack of a bargained-for exchange, or the lack of a party's contractual capacity. In Carr's case, the consideration in the contract was grossly inadequate—the sales price was significantly below the assessor's computed fair market value and the estimated real market value. The Campbells knew the real value of the land, having leased it for thirty years, whereas Carr, a New York resident, had visited the property only once and was unaware of its value. The inadequate consideration combined with Carr's schizophrenia and depression would make it unfair to order specific performance.

Orphan Medical, Inc., was a pharmaceutical company that focused on central nervous system disorders. Its major product was the drug Xyrem. In June 2004, Orphan merged with Jazz Pharmaceuticals, Inc., and Orphan shareholders received $10.75 per share for their stock. Before the merger was final, Orphan completed a phase of testing of Xyrem that indicated that the Food and Drug Administration (FDA) would allow the drug to proceed to the next stage of testing, which was necessary for the drug to be more widely marketed. If that happened, the value of the drug and Orphan would increase, and the stock would have been worth more than $10.75. Little Gem Life Sciences, LLC, was an Orphan shareholder that had received $10.75 per share for its stock. It sued, claiming violations of federal securities laws because shareholders were not told, during the merger process, that the current stage of FDA tests had been successful. Little Gem claimed that if the information had been public, the stock price would have been higher. The federal district court dismissed the suit, holding that it did not meet the standards required by the Private Securities Litigation Reform Act. Little Gem appealed. Did Orphan's directors have a duty to reveal all relevant drug-testing information to shareholders? Why or why not?

Affirmed. There was no negligence by the officers of Orphan. There was no duty to disclose early drug trial data nor was there a duty to give shareholders access to such data. There was no evidence of an intent to mislead investors in Orphan. Federal drug procedure is technical and lengthy. The fact that one stage of FDA testing was successful was no guarantee that further testing would be successful and that the FDA would allow the drug to be widely marketed. Hence, officers had good reason to be careful not to set off speculation by releasing good news that might, in the long run, turn out not to be favorable.

Paul Gett is a well-known, wealthy financial expert living in the city of Torris. Adam Wade, Gett's friend, tells Timothy Brown that he is Gett's agent for the purchase of rare coins. Wade even shows Brown a local newspaper clipping mentioning Gett's interest in coin collecting. Brown, knowing of Wade's friendship with Gett, contracts with Wade to sell a rare coin valued at $25,000 to Gett. Wade takes the coin and disappears with it. On the payment due date, Brown seeks to collect from Gett, claiming that Wade's agency made Gett liable. Gett does not deny that Wade was a friend, but he claims that Wade was never his agent. Discuss fully whether an agency was in existence at the time the contract for the rare coin was made.

Agency is usually a consensual relationship in that the principal and agent agree that the agent will have the authority to act for the principal, binding the principal to any contract with a third party. If no agency in fact exists, the purported agent's contracts with third parties are not binding on the principal. In this case, no agency by agreement was created. Brown may claim that an agency by estoppel was created; however, this argument will fail. In this case, Wade's declarations and allegations alone led Brown to believe that Wade was an agent. Gett's actions were not involved. It is not reasonable to believe that someone is an agent solely because he or she is a friend of the principal. Therefore, Brown cannot hold Gett liable unless Gett ratifies Wade's contract—which is unlikely, as Wade has disappeared with the rare coin.

Ankir is hired by Jamison as a traveling salesperson. Ankir not only solicits orders but also delivers the goods and collects payments from his customers. Ankir deposits all payments in his private checking account and at the end of each month draws sufficient cash from his bank to cover the payments made. Jamison is totally unaware of this procedure. Because of a slowdown in the economy, Jamison tells all his salespeople to offer 20 percent discounts on orders. Ankir solicits orders, but he offers only 15 percent discounts, pocketing the extra 5 percent paid by customers. Ankir has not lost any orders by this practice, and he is rated as one of Jamison's top salespersons. Jamison learns of Ankir's actions. Discuss fully Jamison's rights in this matter.

An agent owes fiduciary duties to the principal. Because the agent is acting on behalf of the principal, it is only fitting that a duty be imposed on the agent to follow all lawful, clearly stated instructions of the principal. Whenever an agent deviates from these instructions, the agent is usually in breach of the fiduciary duty owed. It is a breach of an agent's fiduciary duty to account to secretly retain benefits or profits that by right belong to the principal. Funds so retained by the agent are held in constructive trust on behalf of the principal. Thus, Peters can recover these funds from Ankir. Also, because Ankir breached his duty of obedience, Peters has grounds for termination of the agency-employment relationship.

Anne is a reporter for Daily Business Journal, a print publication consulted by investors and other businesspersons. She often uses the Internet to perform research for the articles that she writes for the publication. While visiting the Web site of Cyberspace Investments Corp., Anne reads a pop-up window that states, "Our business newsletter, E-Commerce Weekly, is available at a one-year subscription rate of $5 per issue. To subscribe, enter your e-mail address below and click 'SUBSCRIBE.' By subscribing, you agree to the terms of the subscriber's agreement. To read this agreement, click 'AGREEMENT.' " Anne enters her e-mail address, but does not click on "AGREEMENT" to read the terms. Has Anne entered into an enforceable contract to pay for E-Commerce Weekly? Explain.

Anne has entered into an enforceable contract to subscribe to E-Commerce Weekly. In this problem, the offer to deliver, via e-mail, the newsletter was presented by the offeror with a statement of how to accept—by clicking on the "SUBSCRIBE" button. Consideration was in the promise to deliver the newsletter and in the price that the subscriber agreed to pay. The offeree had an opportunity to read the terms of the subscription agreement before making the contract. Whether or not she actually read those terms does not matter.

Janell Arden is a purchasing agent-employee for the A&B Coal Supply partnership. Arden has authority to purchase the coal needed by A&B to satisfy the needs of its customers. While Arden is leaving a coal mine from which she has just purchased a large quantity of coal, her car breaks down. She walks into a small roadside grocery store for help. While there, she encounters Will Wilson, who owns 360 acres back in the mountains with all mineral rights. Wilson, in need of cash, offers to sell Arden the property for $1,500 per acre. On inspection of the property, Arden forms the opinion that the subsurface contains valuable coal deposits. Arden contracts to purchase the property for A&B Coal Supply, signing the contract "A&B Coal Supply, Janell Arden, agent." The closing date is August 1. Arden takes the contract to the partnership. The managing partner is furious, as A&B is not in the property business. Later, just before closing, both Wilson and the partnership learn that the value of the land is at least $15,000 per acre. Discuss the rights of A&B and Wilson concerning the land contract.

As a general rule, a principal and third party are bound only to a contract made by the principal's agent within the scope of the agent's authority. An agent's authority to act can come from actual authority given to the agent (express or implied), apparent authority, or authority derived from an emergency. In this case, no express authority was given, and certainly no implied authority exists for a purchasing agent of goods to acquire realty. Moreover, A & B did nothing to lead Wilson to believe that Arden had authority to purchase land on its behalf. In addition, there was no emergency creating a need for Arden to purchase the land. Therefore, although Arden indicated in the contract that she was an agent, she acted outside the scope of her authority. Because of this, the contract between Arden and Wilson is treated merely as an unaccepted offer. As such, neither Wilson nor A & B is bound unless A & B ratifies (accepts) the contract before Wilson withdraws (revokes) the offer.

Kathleen Lowden sued cellular phone company T-Mobile USA, Inc., contending that its service agreements were not enforceable under Washington state law. Lowden requested that the court allow a class-action suit, in which her claims would extend to similarly affected customers. She contended that T-Mobile had improperly charged her fees beyond the advertised price of service and charged her for roaming calls that should not have been classified as roaming. T-Mobile moved to force arbitration in accordance with the provisions that were clearly set forth in the service agreement. The agreement also specified that no class-action suit could be brought, so T-Mobile also asked the court to dismiss the request for a class-action suit. Was T-Mobile correct that Lowden's only course of action was to file arbitration personally? Why or why not?

Based on a recent holding by the Washington state supreme court, the federal appeals court held that the arbitration provision was invalid as unconscionable. Because it was invalid, the restriction on class action suits was also invalid. The state court held that for consumers to be offered a contract that class action restrictions placed in arbitrations agreements improperly stripped consumers of rights they would normally have to attack certain industry practices. Such suits are often brought in cases of deceptive or unfair industry practices when the losses suffered by the individual consumer are too small to warrant a consumer bringing suit. That is, the supposed added cell phone fees are small, so no one consumer would be likely to litigate or arbitrate the matter due to the expenses involved. Eliminating that cause of action by the arbitration agreement violates public policy and is void and unenforceable.

Through negotiation, Emilio has received from dishonest payees two checks with the following histories: (a) The drawer issued a check to the payee for $9. The payee cleverly altered the numeral amount on the check from $9 to $90 and the written word from "nine" to "ninety." (b) The drawer issued a check to the payee without filling in the amount. The drawer authorized the payee to fill in the amount for no more than $90. The payee filled in the amount of $900. Discuss whether Emilio, by giving value to the payees, can qualify as a holder in due course of these checks.

Because Emilio has the status of a holder (having taken the instrument through due negotiation), has given value, and there is no evidence she took in bad faith, the only issue is whether she took with notice. Although the check was incomplete on issue, the instrument was complete at the time Emilio took it. Because Emilio had no actual knowledge of the payee's unauthorized actions, Emilio is not placed on notice. In addition, the alterations from $7 to $70 were cleverly done, and thus we assume there was "no visible evidence of alteration" that would put Emilio on notice. Thus, Emilio took the checks without notice and qualifies as a holder in due course.

Sylvia takes her car to Caleb's Auto Repair Shop. A sign in the window states that all repairs must be paid for in cash unless credit is approved in advance. Sylvia and Caleb agree that Caleb will repair Sylvia's car engine and put in a new transmission. No mention is made of credit. Because Caleb is not sure how much engine repair will be necessary, he refuses to give Sylvia an estimate. He repairs the engine and puts in a new transmission. When Sylvia comes to pick up her car, she learns that the bill is $2,500. Sylvia is furious, refuses to pay Caleb that amount, and demands possession of her car. Caleb insists on payment. Discuss the rights of both parties in this matter.

Caleb has an artisan's lien on Sylvia's car. Because an artisan's lien is a possessory lien, it cannot be applied unless the lienholder retains possession of the property and did not agree to extend credit at the time the contract for services and parts was made. In this situation, no credit was approved or extended at the time of the contract, nor was it agreed upon thereafter. Because Caleb has a legal right to retain possession, he does not have to turn over the car to Sylvia until the bill is paid. Should Sylvia not pay, Caleb can foreclose on the artisan's lien. (Sylvia could pay Caleb, under protest, to get back her car and then, if the services were not as contracted, proceed with a lawsuit.)

Gary goes grocery shopping and carelessly leaves his checkbook in his shopping cart. His checkbook, with two blank checks remaining, is stolen by Dolores. On May 5, Dolores forges Gary's name on a check for $10 and cashes the check at Gary's bank, Citizens Bank of Middletown. Gary has not reported the loss of his blank checks to his bank. On June 1, Gary receives his monthly bank statement and copies of canceled checks from Citizens Bank, including the forged check, but he does not examine the canceled checks. On June 20, Dolores forges Gary's last check. This check is for $1,000 and is cashed at Eastern City Bank, a bank with which Dolores has previously done business. Eastern City Bank puts the check through the collection process, and Citizens Bank honors it. On July 1, on receipt of his bank statement and canceled checks covering June transactions, Gary discovers both forgeries and immediately notifies Citizens Bank. Dolores cannot be found. Gary claims that Citizens Bank must recredit his account for both checks, as his signature was forged. Discuss fully Gary's claim.

Citizens Bank will not have to recredit Gary's account for the $1,000 check and probably will not have to recredit his account for the first forged check for $100. Generally, a drawee bank is responsible for determining whether the signature of its customer is genuine, and when it pays on a forged customer's signature, the bank must recredit the customer's account. Gary's negligence in allowing his checkbook to be stolen and his failure to report the theft or examine his May statement will preclude his recovery on the $100 check from the Citizens Bank. Under UCC 3-406(b) and 4-406(e), however, the bank could be liable to the extent that its negligence substantially contributes to the loss. Failure to discover and report a forged check releases the drawee bank from liability for all additional forged checks in the series written after the thirty-day period. Therefore, Gary's failure to discover the May forged check by June 30 relieves the bank from liability for the June 20 check of $1,000.

Neal Peterson's entire family skied, and Peterson started skiing at the age of two. In 2000, at the age of eleven, Peterson was in his fourth year as a member of a ski race team. After a race one morning in February, Peterson continued to practice his skills through the afternoon. Coming down a slope very fast, at a point at which his skis were not touching the ground, Peterson collided with David Donahue. Donahue, a forty-three-year old advanced skier, was skating (skiing slowly) across the slope toward the parking lot. Peterson and Donahue knew that falls, collisions, accidents, and injuries were possible with skiing. Donahue saw Peterson "split seconds" before the impact, which knocked Donahue out of his skis and down the slope ten or twelve feet. When Donahue saw Peterson lying motionless nearby, he immediately sought help. To recover for his injuries, Peterson filed a suit in a Minnesota state court against Donahue, alleging negligence. Based on these facts, which defense to a claim of negligence is Donahue most likely to assert? How is the court likely to apply that defense and rule on Peterson's claim? Why?

Donahue's defense to the negligence charge was assumption of risk. The court ruled that this defense precluded Peterson's claim and granted Donahue's motion for summary judgment. On Peterson‟s appeal, a state intermediate appellate court affirmed the dismissal of the suit.

A famous New York City hotel, Hotel Lux, is noted for its food as well as its luxury accommodations. Hotel Lux contracts with a famous chef, Chef Perlee, to become its head chef at $10,000 per month. The contract states that should Perlee leave the employment of Hotel Lux for any reason, he will not work as a chef for any hotel or restaurant in New York, New Jersey, or Pennsylvania for a period of one year. During the first six months of the contract, Hotel Lux heavily advertises Perlee as its head chef, and business at the hotel is excellent. Then a dispute arises between the hotel management and Perlee, and Perlee terminates his employment. One month later, he is hired by a famous New Jersey restaurant just across the New York state line. Hotel Lux learns of Perlee's employment through a large advertisement in a New York City newspaper. It seeks to enjoin (prevent) Perlee from working in that restaurant as a chef for one year. Discuss how successful Hotel Lux will be in its action.

Contracts in restraint of trade are usually illegal and unenforceable. An exception to this rule applies to a covenant not to compete that is ancillary to certain types of business contracts in which some fair protection is deemed appropriate (such as in the sale of a business). The covenant, however, must be reasonable in terms of time and area to be legally enforceable. If either term is excessive, the court can declare that the restraint goes beyond what is necessary for reasonable protection. In this event, the court can either declare the covenant illegal or it can reform the covenant to make the terms of time and area reasonable and then enforce it. In the case of Hotel Lux, the primary contract concerns employment; the covenant is ancillary and desirable for the protection of the hotel. The time period of one year may be considered reasonable for a chef with an international reputation. The reasonableness of the three-state area restriction may be questioned, however. If it is found to be reasonable, the covenant probably will be enforced. If it is not found to be reasonable, the court could declare the entire covenant illegal, allowing Perlee to be employed by any restaurant or hotel, including one in direct competition with Hotel Lux. Alternatively, the court could reform the covenant, making its terms reasonable for protecting Hotel Lux‟s normal customer market area.

Courts can overturn precedents and thus change the common law. Should judges have the same authority to overrule statutory law? Explain.

Courts do not always treat common law with the same deference as statutory law because common law is judge-made law, and therefore the courts feel that it can be changed by judges.

Between 1994 and 1998, Richard Svoboda, a credit officer for NationsBank N.A., in Dallas, Texas, evaluated and approved his employer's extensions of credit to clients. These responsibilities gave Svoboda access to nonpublic information about the clients' earnings, performance, acquisitions, and business plans in confidential memos, e-mail, credit applications, and other sources. Svoboda devised a scheme with Michael Robles, an independent accountant, to use this information to trade securities. Pursuant to their scheme, Robles traded in the securities of more than twenty different companies and profited by more than $1 million. Despite their agreement that Robles would do all of the trading, Svoboda also executed trades on his own and made profits of more than $200,000. Aware that their scheme violated NationsBank's policy, they attempted to conduct their trades so as to avoid suspicion. When NationsBank questioned Svoboda about his actions, he lied, refused to cooperate, and was fired. Did Svoboda or Robles commit any crimes? Is either of them subject to civil liability? If so, who could file a suit, and on what ground? What are the possible sanctions? What might be a defense? How should a court rule? Discuss.

Criminal charges were filed against Svoboda and Robles under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (SEC) Rule 10b- 5. Svoboda pleaded guilty, and was sentenced to a year and a day of incarceration and ordered to pay a $200,000 criminal fine. A jury found Robles guilty, and he was sentenced to forty-one months of incarceration and ordered to pay a $300,000 criminal fine. The SEC filed a civil suit in a federal district court against Svoboda and Robles, alleging insider-trading violations. The court issued a summary judgment against the defendants, permanently enjoined them from violating the securities laws, imposed civil penalties of $150,000 on Svoboda and $250,000 on Robles, and ordered "disgorgement" of their profit, plus interest, with Svoboda jointly and severally liable for Robles's portion. Svoboda's only defense to the civil charges was that he had been "punished enough." In this case, "Svoboda breached fiduciary duties owed to NationsBank and its clients by passing along confidential information . . . to Robles for trading purposes and by personally trading on such information . . . . Robles is liable as a tippee because . . . [of] Robles' awareness of [Svoboda's] breaches. This awareness is demonstrated, among other things, by Robles' agreement to execute all of the trades." The "defendants acted with a high degree of scienter. The scheme involved repeated acts of fraud over almost four years and numerous steps by both defendants to conceal their illegal activity. Finally, the information utilized by Svoboda and Robles was material and nonpublic. Most of the inside information Svoboda misappropriated . . . is quintessentially material. None of this information had been made public when defendants' executed their trades."

Cathy Coleman took out loans to complete her college education. After graduation, Coleman was irregularly employed as a teacher before filing a petition in a federal bankruptcy court under Chapter 13. The court confirmed a five-year plan under which Coleman was required to commit all of her disposable income to paying the student loans. Less than a year later, she was laid off. Still owing more than $100,000 to Educational Credit Management Corp., Coleman asked the court to discharge the debt on the ground that it would be undue hardship for her to pay it. Under Chapter 13, when is a debtor normally entitled to a discharge? Are student loans dischargeable? If not, is "undue hardship" a legitimate ground for an exception? With respect to a debtor, what is the goal of bankruptcy? With these facts and principles in mind, what argument could be made in support of Coleman's request?

Debtors who seek Chapter 13 relief commit to a three-to five-year period of repayment, after which their remaining debts are discharged. Unlike Chapter 7 debtors, who are entitled to a discharge of debt as soon as their estate is liquidated and distributed, Chapter 13 debtors are not entitled to a discharge of debts unless and until they complete payments to creditors under the repayment plan. According to the facts in the question, Coleman is less than one year into a five-year plan. She would not normally be entitled to a discharge of any of her debts until she completed the plan and of course would not be entitled to discharge her student loans unless she could show "undue hardship." Here, the hardship to Coleman arguably consists of the commitment of five years of disposable income to payments without any guarantee that the student loans will be discharged at the end of the period. This suggests that the court might at least agree to a discharge of the student loan debt on the completion of the plan.

Springer was a political candidate running for Congress. He was operating on a tight budget and instructed his campaign staff not to purchase any campaign materials without his explicit authorization. In spite of these instructions, one of his campaign workers ordered Dubychek Printing Co. to print some promotional materials for Springer's campaign. When the printed materials arrived, Springer did not return them but instead used them during his campaign. When Springer failed to pay for the materials, Dubychek sued for recovery of the price. Springer contended that he was not liable on the sales contract because he had not authorized his agent to purchase the printing services. Dubychek argued that the campaign worker was Springer's agent and that the worker had authority to make the printing contract. Additionally, Dubychek claimed that even if the purchase was unauthorized, Springer's use of the materials constituted ratification of his agent's unauthorized purchase. Is Dubychek correct? Explain.

Dubychek may very well be correct in his claim. If Springer knew that the printed materials had been ordered by his campaign workers without his authorization and used the materials in spite of this knowledge, such use would constitute ratification of the unauthorized purchase agreement. In such a case, Dubychek could successfully sue to recover the purchase price of the campaign materials. If Springer was unaware that the materials had been purchased without his authorization, his use of the materials would not constitute ratification. A good point for discussion is whether the campaign worker was impliedly authorized or had apparent authority to contract for the printing of the promotional material. There is no question that there was no express authorization. Springer's prohibition, unknown to Dubychek, may not relieve Springer of liability, however. If the campaign worker is one who is placed in a position of a person who usually orders campaign printing, or if this campaign worker had previously ordered campaign materials from Dubychek, Dubychek can claim that the campaign worker had either implied authority to act or that previous conduct led Dubychek to believe that the worker had (apparent) authority to contract for the printing. If either is applicable, ratification is not necessary, as the worker's contract is authorized, and the principal, Springer, is liable.

Homeowners Jim and Lisa Criss hired Kevin and Cathie Pappas, doing business as Outside Creations, to undertake a landscaping project. Kevin signed the parties' contract as "Outside Creations Rep." The Crisses made payments on the contract with checks payable to Kevin, who deposited them in his personal account—there was no Outside Creations account. Later, alleging breach of contract, the Crisses filed a suit in a Georgia state court against the Pappases. The defendants contended that they could not be liable because the contract was not with them personally. They claimed that they were the agents of Forever Green Landscaping and Irrigation, Inc., which had been operating under the name "Outside Creations" at the time of the contract and had since filed for bankruptcy. The Crisses pointed out that the name "Forever Green" was not in the contract. Can the Pappases be liable on this contract? Why or why not?

Even if Kevin Pappas might arguably have disclosed that he was acting on behalf of a principal named Outside Creations, there is no indication that he was acting on behalf of an entity named Forever Green. He signed the contract as Outside Creations' "rep," but the payments on the contract were by checks payable to him personally, which he deposited in his personal account. There was no Outside Creations account. The contract did not mention Forever Green, the Pappases did not mention Forever Green, the Crisses knew nothing about Forever Green, and there was no Forever Green account. The court in the actual case on which this problem is based issued a summary judgment in the homeowners' favor, finding that the contract was between the homeowners and the Pappases personally, not Kevin Pappas as the agent of Forever Green. A state intermediate appellate court affirmed.

In July 1981, Southeast Bank in Miami, Florida, issued five cashier's checks, totaling $450,000, to five payees, including Roberto Sanchez. Two months later, in Colombia, South America, Sanchez gave the checks to Juan Diaz. In 1991, Southeast failed. Under federal law, notice must be mailed to a failed bank's depositors, who then have eighteen months to file a claim for their funds. Under an "Assistance Agreement," First Union National Bank agreed to assume Southeast's liability for outstanding cashier's checks and other items. First Union received funds to pay these items but was required to return the funds if, within eighteen months after Southeast's closing, payment for any item had not been claimed. In 1996, in Colombia, Diaz gave the five cashier's checks that he had received from Sanchez to John Acevedo in payment of a debt. In 2001, Acevedo tendered these checks to First Union for payment. Does First Union have to pay? Would it make any difference if the required notice had not been mailed? Why or why not?

First Union would most likely have to pay the amount of the cashier's checks to Acevedo. First Union became liable on the checks when it entered into the "Assistance Agreement" with Southeast Bank. According to the facts in the problem, the agreement did not limit First Union's liability to a specific time—the time limit in the agreement designated a period after which First Union was to return certain funds to Southeast. It is possible, however, that First Union could avoid liability on the checks if notice of the eighteen-month claim period had been mailed to the appropriate party, who under the federal requirement should have been a Southeast depositor. But it is not stated whether this notice was mailed or to whom it should have been sent. Thus, to finally assess liability on the cashier's checks, these facts would have to be determined.

Ball writes to Sullivan and inquires how much Sullivan is asking for a specific forty-acre tract of land Sullivan owns. In a letter received by Ball, Sullivan states, "I will not take less than $60,000 for the forty-acre tract as specified." Ball immediately sends Sullivan a fax stating, "I accept your offer for $60,000 for the forty-acre tract as specified." Discuss whether Ball can hold Sullivan to a contract for the sale of the land.

For an offer to exist, the offeror must show a definite intention to make and be bound by the offer. Invitations to trade or negotiate or mere statements of intentions to enter into a contract upon further bargaining do not constitute offers but are instead preliminary negotiations. Thus, any attempted acceptance would not bind the parties to a contract as there is no offer in existence to be accepted. Sullivan stated only a price from which to bargain further, not an intention of a definite commitment to sell at $60,000. There is no contract between Sullivan and Ball.

The law firm of Traystman, Coric and Keramidas represented Andrew Daigle in a divorce in Norwich, Connecticut. Scott McGowan, an attorney with the firm, handled the two-day trial. After the first day of the trial, McGowan told Daigle to sign a promissory note in the amount of $26,973, which represented the amount that Daigle then owed to the firm, or McGowan would withdraw from the case and Daigle would be forced to get another attorney or to continue the trial by himself. Daigle said that he wanted another attorney, Martin Rutchik, to see the note. McGowan urged Daigle to sign it and assured him that a copy would be sent to Rutchik. Feeling that he had no other choice, Daigle signed the note. When he did not pay, the law firm filed a suit in a Connecticut state court against him. Daigle asserted that the note was unenforceable because he had signed it under duress. What are the requirements for the use of duress as a defense to a contract? Are the requirements met here? What might the law firm argue in response to Daigle's assertion? Explain.

For duress to constitute a defense to a contract, there must have been a wrongful act or threat that intimidated a party into entering into the contract through fear. The exaction of a high price does not meet this requirement unless the party who exacts the price also creates the other party's need to pay it. This case is an example. Daigle signed the note under duress—the law firm created the situation that compelled him to sign the high-priced note—making the note unenforceable. The law firm might argue that it was entitled to a payment of $26,873, but the strength of this argument is undermined by McGowan's threat to withdraw after the first day of the trial if Daigle did not sign the note, at a time when Daigle was especially dependent on McGowan's services. The lawyer also rebuffed Daigle's request to show the note to Rutchik before signing it. Daigle was left with no reasonable alternative but to sign it before he could seek the advice of another attorney. This was unfair.

Niles sold Kennedy a small motorboat for $1,500, maintaining to Kennedy that the boat was in excellent condition. Kennedy gave Niles a check for $1,500, which Niles indorsed and gave to Frazier for value. When Kennedy took the boat for a trial run, she discovered that the boat leaked, needed to be painted, and required a new motor. Kennedy stopped payment on her check, which had not yet been cashed. Niles has disappeared. Can Frazier recover from Kennedy as a holder in due course? Discuss.

Frazier can recover the $1,500 from Kennedy if he is a holder in due course (HDC). He will be an HDC only if he, as a holder, took the check (a) for value, (b) in good faith, and (c) without notice that the check was overdue or dishonored or that a claim or defense against it exists. In this instance, Frazier qualifies for HDC status. First, he is a holder as the check was properly negotiated to him (by indorsement). Second, the facts indicate that he gave value. Third, there is nothing to indicate that he took the instrument in bad faith. Fourth, he was unaware of Niles's fraud (claim or defense), and he took the check before it was overdue (within thirty days of issue). Thus, Frazier is a holder in due course and can hold Kennedy liable.

In which of the following situations would specific performance be an appropriate remedy? Discuss fully. (a) Thompson contracts to sell her house and lot to Cousteau. Then, on finding another buyer willing to pay a higher purchase price, she refuses to deed the property to Cousteau. (b) Amy contracts to sing and dance in Fred's nightclub for one month, beginning May 1. She then refuses to perform. (c) Hoffman contracts to purchase a rare coin owned by Erikson, who is breaking up his coin collection. At the last minute, Erikson decides to keep his coin collection intact and refuses to deliver the coin to Hoffman. (d) ABC Corp. has three shareholders: Panozzo, who owns 48 percent of the stock; Chang, who owns another 48 percent; and Ryan, who owns 4 percent. Ryan contracts to sell her 4 percent to Chang. Later, Ryan refuses to transfer the shares to Chang.

Generally, the equitable remedy of specific performance will be granted only if two criteria are met: monetary damages (under the situation) must be inadequate as a remedy, and the subject matter of the contract must be unique. (a) In the sale of land, the buyer's contract is for a specific piece of real property. Money damages would not compensate a buyer adequately, as the same land cannot be purchased elsewhere. Specific performance is an appropriate remedy. (b) The basic criteria for specific performance do not apply well to personal-service contracts. If the identical service contracted for is readily available from others, the service is not unique, and monetary damages for nonperformance are adequate. If, however, the services are so personal that only the contract party can perform them, the contract meets the test of uniqueness. In the case of Amy and Fred, specific performance is not an appropriate remedy. (c) A rare coin is unique, and monetary damages for breach are inadequate, as Hoffman cannot obtain a substantially identical substitute in the market. This is a typical case in which specific performance is an appropriate remedy. (d) The key issue here is that this is a closely held corporation. Therefore, the stock is not available in the market, and the shares become unique. The uniqueness of these shares is enhanced by the fact that if Ryan sells her 4 percent of the shares to Chang, Chang will control the corporation. Because of this, monetary damages for Chang are totally inadequate as a remedy. Specific performance is an appropriate remedy.

Costello hired Sagan to drive his racing car in a race. Sagan's friend Gideon promised to pay Sagan $3,000 if she won the race. Sagan won the race, but Gideon refused to pay the $3,000. Gideon contended that no legally binding contract had been formed because he had received no consideration from Sagan in exchange for his promise to pay. Sagan sued Gideon for breach of contract, arguing that winning the race was the consideration given in exchange for Gideon's promise to pay. What rule of law discussed in this chapter supports Gideon's claim?

Gideon's claim—that no contract existed because Sagan had given no consideration for Gideon's promise—is supported by the preexisting duty rule. Sagan was already obligated to Costello to do her best to win the race, and the same consideration (attempting to win the race) could not be used in a second contract with Gideon.

Grano owns a forty-room motel on Highway 100. Tanner is interested in purchasing the motel. During the course of negotiations, Grano tells Tanner that the motel netted $30,000 during the previous year and that it will net at least $45,000 the next year. The motel books, which Grano turns over to Tanner before the purchase, clearly show that Grano's motel netted only $15,000 the previous year. Also, Grano fails to tell Tanner that a bypass to Highway 100 is being planned that will redirect most traffic away from the front of the motel. Tanner purchases the motel. During the first year under Tanner's operation, the motel nets only $18,000. At this time, Tanner learns of the previous low profitability of the motel and the planned bypass. Tanner wants Grano to return the purchase price. Discuss fully Tanner's probable success in getting his funds back.

Grano's statement that the motel would make at least $45,000 next year would probably be treated as a prediction or opinion; thus, one of the elements necessary to prove fraud—misrepresentation of facts— would be missing. The statement that the motel netted $30,000 last year is a deliberate falsehood (with intent and knowledge). Grano's defense will be that the books in Tanner's possession clearly indicated that the figure stated was untrue, and therefore Tanner cannot be said to have purchased the motel in reliance on the falsehood. If the innocent party, Tanner, knew the true facts, or should have known the true facts because they were available to him, Grano's argument will prevail. Lastly, the issue centers on Grano's duty to tell Tanner of the bypass. Ordinarily, neither party in a nonfiduciary relationship has a duty to disclose facts, even when the information might bear materially on the other's decision to enter into the contract. Exceptions are made, however, when the buyer cannot reasonably be expected to discover the information known by the seller, in which case fairness imposes a duty to speak on the seller. Here, the court can go either way. If the court decides there was no duty to disclose, deems the prediction of future profits to be opinion rather than a statement of fact, and also decides there was no justifiable reliance by Tanner because the books available to Tanner clearly indicated Grano's profit statement for the last year to be false, then Tanner cannot get his money back on the basis of fraud.

Peggy Williams helped eighty-seven-year-old Melvin Kaufman care for Elsie Kaufman, his wife and Williams's great aunt, for several years before her death. Melvin then asked Williams to "take care of him the rest of his life." He conveyed his house to her for "Ten and No/100 Dollars ($10.00), and other good and valuable consideration," according to the deed, and executed a power of attorney in her favor. When Melvin returned from a trip to visit his brother, however, Williams had locked him out of the house. He filed a suit in a Texas state court, alleging fraud. He claimed that he had deeded the house to her in exchange for her promise of care, but that she had not taken care of him and had not paid him the ten dollars. Williams admitted that she had not paid the ten dollars, but argued that she had made no such promise, that Melvin had given her the house when he had been unable to sell it, and that his trip had been intended as a move. Do these facts show fraud? If so, what would be the appropriate remedy? Explain.

Here, the evidence of Williams's "misrepresentation of a material fact"—her promise to care for Kaufman for the rest of his life—includes Williams's assistance to Kaufman with the care for his wife before her death. The power-of-attorney indicates that they anticipated a further ongoing relationship, even after his trip. The deed's statement of consideration is inconsistent with Williams's claim that the deed was a gift. That she locked him out of the house and he brought this suit against her is evidence that she did not fulfill the promise. Her "intent to deceive" is shown by her failure to pay the ten dollars of consideration recited in the deed. Kaufman's "justifiable reliance" is clear from his deeding of the property to Williams and his execution of the power-of-attorney. Kaufman's return to the house after his trip also shows reliance. His having been locked out of the house by Williams is part of the harm that he suffered, which includes the loss of his property. As a remedy, the return of Kaufman's house—the cancellation of the deed—would be appropriate. In this case, the court declared the deed void and canceled it. On Williams's appeal, a state intermediate appellate court affirmed this judgment.

Yannuzzi has a checking account at Texas Bank. She frequently uses her debit card to obtain cash from the bank's automated teller machines. She always withdraws $50 when she makes a withdrawal, but she never withdraws more than $50 in any one day. When she received the April statement on her account, she noticed that on April 13 two withdrawals for $50 each had been made from the account. Believing this to be a mistake, she went to her bank on May 10 to inform it of the error. A bank officer told her that the bank would investigate and advise her as to the result. On May 26, the bank officer called her and said that bank personnel were having trouble locating the error but would continue to try to find it. On June 20, the bank sent her a full written report telling her that no error had been made. Yannuzzi, unhappy with the bank's explanation, filed a suit against the bank, alleging that it had violated the Electronic Fund Transfer Act. What was the outcome of the suit? Would it matter if the bank could show that on the day in question it deducted $50 from Yannuzzi's account to cover a check that cleared the bank on that day—a check that Yannuzzi had written to a local department store?

If a customer believes there is an error on his or her statement and notifies the bank of this supposed error, the bank has ten business days in which to investigate and report the results according to the EFTA. The bank may take up to forty-five days if it recredits the cus- tomer's account for the amount alleged to be in error. The bank violated the EFTA on two counts: (1) It failed to report the results within ten days, and (2) it failed to credit her account for the amount in dispute after taking more than the ten days to investigate. It would not matter if Yannuzzi wrote the check for $50 that cleared on the same day as withdrawal from an ATM. There was a genuine dispute as to this item, and the bank was required to investigate the matter according to the rules of the EFTA.

PRM Energy Systems, Inc. (PRM), owned technology patents that it licensed to Primenergy to use and to sublicense in the United States. The agreement stated that all disputes would be settled by arbitration. Kobe Steel of Japan was interested in using the technology at its U.S. subsidiary. PRM directed Kobe to talk to Primenergy about that. Kobe talked to PRM directly about using the technology in Japan, but no agreement was reached. Primenergy then agreed to let Kobe use the technology in Japan without telling PRM. The dispute between PRM and Primenergy about Kobe went to arbitration, as required by the license agreement. In addition, PRM sued Primenergy for fraud and theft of trade secrets. PRM also sued Kobe for using the technology in Japan without its permission. The district court ruled that PRM had to take all complaints about Primenergy to arbitration. PRM also had to take its complaint about Kobe to arbitration because the complaint involved a sublicense Kobe was granted by Primenergy. PRM appealed, contending that the fraud and theft of trade secrets went beyond the license agreement with Primenergy and that Kobe had no right to demand arbitration because it never had a right to use the technology under a license from PRM. Is PRM correct, or must all matters go to arbitration? Why or why not?

In many circumstances, a party that has not signed an arbitration agreement (Kobe in this case) cannot compel arbitration. There are exceptions, however. According to the court, "The first relies on agency and related principles to allow a nonsignatory (Kobe) to compel arbitration when, as a result of the nonsignatory's close relationship with a signatory (Primenergy), a failure to do so would eviscerate [gut] the arbitration agreement." That applies here. Kobe and Primenergy claimed to have entered into a licensing agreement under the terms of the agreement between PRM and Primenergy. The license agreement is central to the resolution of the dispute, so Kobe can compel arbitration. Similarly, all claims PRM has against Primenergy go to arbitration because the arbitration clause covers "all disputes." That would include allegations of fraud and theft. Such matters can be resolved by arbitration. "Arbitration may be compelled under a broad arbitration clause ... as long as the underlying factual allegations simply "touch matters covered by" the arbitration provision.‟ It generally does not matter that claims sound in tort, rather than in contract." The reviewing court affirmed the trial court's decision.

Burger Baby restaurants engaged Air Advertising to fly an advertisement above the Connecticut beaches. The advertisement offered $1,000 to any person who could swim from the Connecticut beaches to Long Island in less than a day. At 10:00 A.M. on October 10, Air Advertising's pilot flew a sign above the Connecticut beaches that read: "Swim across the Sound and Burger Baby pays $1,000." On seeing the sign, Davison dived in. About four hours later, when he was about halfway across the Sound, Air Advertising flew another sign over the Sound that read: "Burger Baby revokes." Davison completed the swim in another six hours. Is there a contract between Davison and Burger Baby? Can Davison recover anything?

In the modern view, most courts would hold that there was a contract between Davison and Burger Baby, and that Burger Baby could not revoke once Davison started to perform. This case is an example of a unilateral contract. Burger Baby promised to pay $1,000 as a unilateral promise under which it would not be bound unless somebody completely performed the act that Burger Baby requested. Davison could not accept Burger Baby's offer merely by promising to swim across Long Island Sound. Burger Baby's offer could be accepted only by full performance. The contract between Davison and Burger Baby was an express contract, because the terms of the agreement were fully and explicitly stated in the banner that Air Advertising flew over the beach. The contract was also executory, because it called for future performance; it would be considered executed only when Davison had fully performed. The contract could also be classified as valid, enforceable, and informal.

Robert Gutkowski, a sports marketing expert, met numerous times with George Steinbrenner, the owner of the New York Yankees, and other Yankees executives over a ten-year period to help launch the Yankees Entertainment and Sports Network (YES Network). He was a paid consultant during that time. When the parties quit working together, Gutkowski sued, contending that he had been promised an ownership share in YES as part of the compensation for his work. While he was a paid consultant, he was not given a share of YES or hired as a regular executive. He contended that, by industry standards, a reasonable value for his services would be a 2 to 3 percent ownership share. There was no written contract for such a share, but Gutkowski claimed he was due that to prevent unjust enrichment of the Yankees for exploiting his expertise. Does Gutkowski have a good claim for payment based on quantum meruit? Explain.

In this case, Plaintiff alleges that Defendant told Plaintiff that he would be compensated fairly for his efforts, and, similarly, that Plaintiff would be fairly compensated for his idea and efforts. It is therefore undisputed that the purported oral agreement lacks a specifically alleged price or compensation term. Gutkowski was compensated as a consultant for his expertise. For him to claim that he is due more compensation based on unjust enrichment or quantum meruit, he must have proof. As it is, he only has a claim that there were discussions about him being an ex- ecutive or part owner of YES. Such negotiations are not the basis for a monetary claim. The claims were dismissed.

To comply with accounting principles, a company that engages in software development must either "expense" the cost (record it immediately on the company's financial statement) or "capitalize" it (record it as a cost incurred in increments over time). If the project is in the pre- or postdevelopment stage, the cost must be expensed. Otherwise it may be capitalized. Capitalizing a cost makes a company look more profitable in the short term. Digimarc Corp., which provides secure personal identification documents, announced that it had improperly capitalized software development costs over at least the previous eighteen months. The errors resulted in $2.7 million in overstated earnings, requiring a restatement of prior financial statements. Zucco Partners, LLC, which had bought Digimarc stock within the relevant period, filed a suit in a federal district court against the firm. Zucco claimed that it could show that there had been disagreements within Digimarc over its accounting. Is this suffi- cient to establish a violation of SEC Rule 10b-5? Why or why not?

In this case, Zucco could likely establish the requirement of material misrepresentation with Digimarc's announcement about the improper capitalization of the software development costs. The connection with the purchase or sale of a security, causation, and economic loss might be demonstrated by the plaintiff's purchase of Digimarc stock within the relevant period and the probable drop in the stock's price when the company's earnings were restated. The most difficult element to prove on these facts would likely be scienter. This is more than a mistake or negligence. In departing from a standard of ordinary care, the defendant must, or should, have known that buyers or sellers would be misled. Here, Zucco claimed only that it could show there had been some disagreement within the company over its accounting. This is not a sufficient allegation of scienter. And, in fact, the court in the case on which this problem is based dismissed Zucco's suit for this reason. The U.S. Court of Appeals for the Ninth Circuit affirmed.

The Caplans own a real estate lot, and they contract with Faithful Construction, Inc., to build a house on it for $360,000. The specifications list "all plumbing bowls and fixtures . . . to be Crane brand." The Caplans leave on vacation, and during their absence Faithful is unable to buy and install Crane plumbing fixtures. Instead, Faithful installs Kohler brand fixtures, an equivalent in the industry. On completion of the building contract, the Caplans inspect the work, discover the substitution, and refuse to accept the house, claiming Faithful has breached the conditions set forth in the specifications. Discuss fully the Caplans' claim.

In this case, the specifications were stated not as express conditions but as mere promises (implied conditions). To avoid the harsh result of the Caplans having a house on their lot without having to pay Faithful, the courts would require only that Faithful prove substantial performance. Because Kohler brand is equivalent to Crane brand by industry standards, the substantial performance test has been met, and the Caplans are obligated to accept and pay. Whether they can deduct any damages from the contract price for the less than full performance will depend on proof that they suffered monetary damages.

Joanne is a seventy-five-year-old widow who survives on her husband's small pension. Joanne has become increasingly forgetful, and her family worries that she may have Alzheimer's disease (a brain disorder that seriously affects a person's ability to carry out daily activities). No physician has diagnosed her, however, and no court has ruled on Joanne's legal competence. One day while she is out shopping, Joanne stops by a store that is having a sale on pianos and enters into a fifteen-year installment contract to buy a grand piano. When the piano arrives the next day, Joanne seems confused and repeatedly asks the deliveryperson why a piano is being delivered. Joanne claims that she does not recall buying a piano. Explain whether this contract is void, voidable, or valid. Can Joanne avoid her contractual obligation to buy the piano? If so, how?

In this problem, Joanne most likely falls into the voidable category—her buying an expensive piano on a limited budget and repeated questioning of the delivery person seems to indicate incompetence. She has not yet apparently disaffirmed the contract, however. If she does, and it is determined that she is incompetent, the store's best defense might be that she was experiencing a lucid interval at the time of the purchase.

Mallory promises a local hardware store that she will pay for a lawn mower that her brother is purchasing on credit if the brother fails to pay the debt. Must this promise be in writing to be enforceable? Why or why not?

In this situation, Mallory becomes what is known as a guarantor on the loan. This kind of collateral promise, in which the guarantor states that he or she will become responsible only if the primary party does not perform, must be in writing to be enforceable.

In 1996, Troy Blackford was gambling at Prairie Meadows Casino when he destroyed a slot machine. After pleading guilty to criminal mischief, Blackford was banned from the casino. In 1998, Blackford was found in the casino, escorted out, and charged with trespass. In 2006, he gambled at the casino again and won $9,387. When Blackford went to collect his winnings, casino employees learned who he was and refused to pay. He sued for breach of contract, contending that he and the casino had an enforceable contract because he had accepted its offer to gamble. The casino argued that it had not made an offer and in fact had banned Blackford from the premises. The trial court held in favor of the casino. The appellate court reversed and ordered a new trial. The casino appealed to the Iowa high court for review. Did the casino make a valid offer to Blackford to gamble and thus create an enforceable contract between them? Explain your answer.

In this situation, Prairie Meadows is the offeror. It makes an offer to its patrons that, if accepted by wagering an amount and the patron wins, it will pay off the wager. Simply stated, the issue is whether Prairie Meadows made an offer to Blackford. Because Prairie Meadows has the ability to determine the class of individuals to whom the offer is made, it may also exclude certain individuals. Blackford had been banned for life from the casino. ... Under an objective test, unless the ban had been lifted, Blackford could not have reasonably believed he was among the class of individuals invited to accept Prairie Meadows's offer. The jury found that the ban against Blackford had not been lifted, and, therefore, Prairie Meadows had not extended him an offer to wager. Because there was no offer to him, no contract could result. Court of appeals is reversed; trial court judgment affirmed.

Grant is the owner of a relatively old home valued at $45,000. He notices that the bathtubs and fixtures are leaking and need to be replaced. He contracts with Jane's Plumbing to replace the bathtubs and fixtures. Jane replaces them, and on June 1 she submits her bill of $4,000 to Grant. Because of financial difficulties, Grant does not pay the bill. Grant's only asset is his home, but his state's homestead exemption is $40,000. Discuss fully Jane's remedies in this situation.

Jane's has basically two remedies in this situation. The best remedy would be to file a mechanic's lien on the home of Grant. The filing must take place within a statutory period. Failure by Grant to pay the debt after the filing allows lien holder Jane's to foreclose on the real estate to satisfy the debt. Notice of foreclosure must be given to Grant. From the proceeds of the sale, all costs to Jane's and the debt of $4,000 will be deducted, with the remainder paid to Grant. The second remedy would be to reduce the $4,000 debt to judgment and then obtain a writ of execution (levy) on Grant's property. Grant's only property is his homestead and its contents. Because the value of the homestead exceeds the exempt amount, Jane's could exercise the writ by having the homestead sold at public auction. The excess can be used by Jane's to cover the foreclosure costs incurred and the debt, with any surplus returned to Grant. Should the proceeds exceed the exemption amount but not cover the costs incurred and the debt, Jane's is entitled to a deficiency judgment that allows her to go after other nonexempt property owned by Grant. In this case, however, there is none.

Gil makes out a $900 negotiable promissory note payable to Ben. By special endorsement, Ben transfers the note for value to Jess. By blank indorsement, Jess transfers the note for value to Pam. By special indorsement, Pam transfers the note for value to Adrien. In need of cash, Adrien transfers the instrument for value by blank indorsement back to Jess. When told that Ben has left the country, Jess strikes out Ben's indorsement. Later she learns that Ben is a wealthy restaurant owner in Baltimore and that Gil is financially unable to pay the note. Jess contends that, as a holder in due course, she can hold Ben, Pam, or Adrien liable on the note. Discuss fully Jess's contentions.

Jess cannot hold any of the parties liable on the instrument. Ben is discharged from liability by Jess's intentional cancellation of Ben's signature. This cancellation operates as a discharge even without consideration. Thus, Jess's own action of striking out Ben's indorsement discharged Ben's liability. In addition, Jess also cannot hold Pam or Adrien liable, as their obligations on the note are discharged for two reasons. First, when Jess reacquired the note previously held by her, all intervening parties (indorsers) were discharged. Second, when Jess crossed out Ben's indorsement, not only was Ben's liability on the note discharged, but also the liability of subsequent indorsers.

After Kira had had several drinks one night, she sold Charlotte a diamond necklace worth thousands of dollars for just $100. The next day, Kira offered the $100 to Charlotte and requested the return of her necklace. Charlotte refused to accept the $100 or return the necklace, claiming that there was a valid contract of sale. Kira explained that she had been intoxicated at the time the bargain was made and thus the contract was voidable at her option. Was Kira correct? Explain.

Kira is right and will prevail over Charlotte if Kira can prove that she was indeed intoxicated at the time she sold the necklace to Charlotte. Most likely, Kira will have little difficulty proving this because no reasonable person would sell a valuable necklace for only one hundred dollars. The fact that Kira did so strongly suggests that she was intoxicated at the time and not aware of the significance of her action. Because contracts made by an intoxicated person are voidable at the option of the intoxicated party, Kira has a good chance of recovering the necklace.

Ameripay, LLC, is a payroll services company that, among other things, issues payroll checks to the employees of its clients. In July 2002, Nu Tribe Radio Networks, Inc. (NTRN), based in New York City, hired Ameripay. Under their agreement, Ameripay set up an account on NTRN's behalf at Commerce Bank. NTRN agreed to deposit funds in the account to cover its payroll obligations. Arthur Piacentini, an owner of Ameripay, was an authorized signatory on the account. On the checks, NTRN was the only identified company, and Piacentini's signature appeared without indicating his status. At the end of the month, four NTRN employees cashed their payroll checks, which Piacentini had signed, at A-1 Check Cashing Emporium, Inc. The checks were returned dishonored. Ameripay had stopped their payment because it had not received the funds from NTRN. A-1 assigned its interest in the checks to Robert Triffin, who filed a suit in a New Jersey state court against Ameripay. Between a principal and an agent, what principles determine which party is liable for the amount of an unpaid instrument? How do those principles apply in this case? Is Ameripay liable? Why or why not?

Liability for a dishonored check lies with a disclosed principal, not the principal's agent. An authorized agent who signs a check imprinted with the principal's corporate name, on behalf of the principal and drawn on the principal's account, is not liable if the check is returned for insufficient funds, even when the instrument does not indicate on its face that it is being signed in a representative capacity. In this case, NTRN was the principal, with Piacentini acting as its agent. Piacentini's signature on the checks was therefore that of an authorized agent on a principal's behalf. There was nothing on the face of the checks to indicate to A-1 Check Cashing that any party other than NTRN would be liable for their dishonor. Triffin could not thus enforce the dishonored payroll checks against Ameripay.

Alice Banks was injured when a chair she was sitting on at an Elks club collapsed. As a result of her injury, Dr. Robert Boyce performed the surgery on her back, fusing certain vertebrae. However, Boyce fused the wrong vertebrae and then had to perform a second surgery to correct the error. Then, during rehabilitation at a nursing home, Banks developed a serious staph infection that required additional surgeries and extensive care and treatment. She sued the Elks club and Boyce for negligence. The Elks club and Boyce filed motions against each other and also sued the nursing home. After complicated holdings by lower courts, the Tennessee Supreme Court reviewed the matter. Did the Elks club have primary liability for all of the injuries suffered by Banks after the initial accident, or did each defendant alone contribute to Banks's injuries? Explain.

Liability in these circumstances arises when the subsequent negligent conduct is a foreseeable or natural consequence of the original tortfeasor's negligence. That is, had Banks‟ injuries been accidentally worsened by parties who tried to assist her immediately after the chair collapsed, the Elks Club could be liable for those successive injuries. Claim Banks may have against Dr. Boyce would not fall under this rule, as the claims against him did not arise from immediate efforts to provide aid but to surgery performed later. Independent negligent acts, as alleged here, will be separate actions by Banks against the Elks Lodge, Dr. Boyce, and the nursing home. Negligence claims against each may stand alone. The alleged tortfeasors were not acting in concert with each other, there were distinct incidents involving each party.

Middleton Motors, Inc., a struggling Ford dealership in Madison, Wisconsin, sought managerial and financial assistance from Lindquist Ford, Inc., a successful Ford dealership in Bettendorf, Iowa. While the two dealerships negotiated the terms for the services and a cash infusion, Lindquist sent Craig Miller, its general manager, to assume control of Middleton. After about a year, the parties had not agreed on the terms, Lindquist had not invested any money, Middleton had not made a profit, and Miller was fired without being paid. Lindquist and Miller filed a suit in a federal district court against Middleton based on quasi contract, seeking to recover Miller's pay for his time. What are the requirements to recover on a theory of quasi-contract? Which of these requirements is most likely to be disputed in this case? Why?

Lindquist lent its manager Miller to Middleton, Lindquist did not do this as a volunteer but at Middleton's request, and Middleton would be unjustly enriched if Miller's services accrued to its ultimate benefit without being paid for. The most likely requirement to be disputed is whether Lindquist reasonably expected to be paid if Miller did not make Middleton profitable. If Lindquist did not expect to be paid unless its manager made the Wisconsin dealership profitable, the Iowa dealership could not recover on a quasi-contract basis, because Miller did not make a profit for Middleton. The court awarded damages on a quasi- contractual basis, but the U.S. Court of Appeals for the Seventh Circuit reversed and remanded the case to determine what Lindquist's reasonable expectations were.

Marya Callais, a citizen of Florida, was walking along a busy street in Tallahassee, Florida, when a large crate flew off a passing truck and hit her, causing numerous injuries. She experienced a great deal of pain and suffering, incurred significant medical expenses, and could not work for six months. She wants to sue the trucking firm for $300,000 in damages. The firm's headquarters are in Georgia, although the company does business in Florida. In what court might Callais bring suit—a Florida state court, a Georgia state court, or a federal court? What factors might influence her decision?

Marya can bring suit in all three courts. The trucking firm did business in Florida, and the accident occurred there. Thus, the state of Florida would have jurisdiction over the defendant. Because the firm was headquartered in Georgia and had its principal place of business in that state, Marya could also sue in a Georgia court. Finally, because the amount in controversy exceeds $75,000, the suit could be brought in federal court on the basis of diversity of citizenship.

In July 2001, John Warren viewed a condominium in Woodland Hills, California, as a potential buyer. Hildegard Merrill was the agent for the seller. Because Warren's credit rating was poor, Merrill told him he needed a co-borrower to obtain a mortgage at a reasonable rate. Merrill said that her daughter Charmaine would "go on title" until the loan and sale were complete if Warren would pay her $10,000. Merrill also offered to defer her commission on the sale as a loan to Warren so that he could make a 20 percent down payment on the property. He agreed to both plans. Merrill applied for and secured the mortgage in Charmaine's name alone by misrepresenting her daughter's address, business, and income. To close the sale, Merrill had Warren remove his name from the title to the property. In October, Warren moved into the condominium, repaid Merrill the amount of her deferred commission, and began paying the mortgage. Within a few months, Merrill had Warren evicted. Warren filed a suit in a California state court against Merrill and Charmaine. Who among these parties was in an agency relationship? What is the basic duty that an agent owes a principal? Was the duty breached here? Explain.

Merrill and Warren were in an agency relationship in this case, with Merrill acting as Warren's agent. That relationship began when Merrill undertook to represent Warren in the purchase of the condominium. Under the fiduciary duty that an agent owes a principal, and that thus Merrill owed Warren, she was required to place his interests above her own in the real estate transaction. Also, an agent is charged with a duty to disclose all material facts that might affect a principal's decision. Merrill breached her duties to Warren, and committed fraud, by falsely promising that she would put his name on the title to the condominium if he went along with her plan to structure the transaction in a certain way. Furthermore, she misappropriated his funds by having him evicted soon after the transaction was completed but not before he had made several mortgage payments. This conduct was more than sufficient to show violations of the agent's duty of loyalty. A court should at least order that the title in the condominium be transferred to Warren.

After World War II, an international tribunal of judges convened at Nuremberg, Germany and convicted several Nazis of "crimes against humanity." Assuming that these convicted war criminals had not disobeyed any law of their country and had merely been following their government's orders, what law had they violated? Explain.

Natural law, which is the oldest and one of the most significant schools of jurisprudence, holds that governments and legal systems should reflect the moral and ethical ideals that are inherent in human nature. Because natural law is universal and discoverable by reason, its adherents believe that all other law is derived from natural law. Natural law therefore supersedes laws created by humans (national, or "positive," law), and in a conflict between the two, national or positive law loses its legitimacy. The Nuremberg defendants asserted that they had been acting in accordance with German law. The judges dismissed these claims, reasoning that the defendants' acts were commonly regarded as crimes and that the accused must have known that the acts would be considered criminal.

American International Group, Inc. (AIG), an insurance company, issued a check to Jermielem Merriwether in connection with a personal-injury matter. Merriwether presented the check to A-1 Check Cashing Emporium for payment. A-1's clerk forgot to have Merriwether sign the check. When he could not reach Merriwether and ask him to come back to A-1 to sign the check, the clerk printed Merriwether's name on the back and deposited the check for collection. When the check was not paid, A-1 sold it to Robert Triffin, who is in the business of buying dishonored checks. When Triffin could not get the check honored, he sued AIG, contending that he, through A-1, had the right to collect on the check as a holder in due course (HDC). The trial court rejected that claim. Triffin appealed. On what basis could he claim HDC status?

Neither Triffin nor A-1 could claim holder in due course status and therefore had no right to have the check cashed. Merriwether never signed the check. Even though this was apparently just an oversight, the printing of his name on the check by an A-1 employee was not a proper signature, so there was no requirement that it be paid. Merriwether was the only person authorized to sign the check and he did not. Even if that was merely an oversight, not an effort to engage in fraud against A-1, there was no right for A-1 or Triffin to cash the check.

Germanie Fequiere executed and delivered a promissory note in the principal amount of $240,000 to BNC Mortgage. As security for the note, Fequiere executed and delivered a mortgage on real property. BNC indorsed the promissory note in blank. Several years later, when Fequiere failed to make payments on the note, Chase Home Finance, LLC—the holder in due course of the note and holder of the mortgage—moved to foreclose on the property. In defense, Fequiere asserted that Chase could not foreclose on the property because the mortgage on the property had not been properly transferred from BNC to Chase. Assuming that is true, does it mean that Chase, as holder of the negotiable note, cannot foreclose on the collateral (the property secured by the mortgage)? Explain your answer.

No, even if the assignment of the mortgage was not done properly, Chase, as holder of a negotiable instrument secured by the mortgage, had the right to foreclose on the mortgage. Fequiere has no defense on that basis. Collateral, such as the mortgage, follows the note, is the general rule. Chase is the bona fide holder of the promissory note. The holder of a note has the right to enforce the instrument. Since it was endorsed in blank, it was "payable to the bearer and may be negotiated by transfer of possession alone"

Caroline McAfee loaned $400,000 to Carter Oaks Crossing. Joseph Harman, president of Carter Oaks Crossing, signed a promissory note providing that the company would repay the amount with interest in installments beginning in 1999 and ending by 2006. Harman signed a personal guaranty for the note. Carter Oaks Crossing defaulted on the note, so McAfee sued Harman for payment under the guaranty. Harman moved for summary judgment on the ground that McAfee's claim against him had been discharged in his Chapter 7 bankruptcy case, filed after 1999 but before the default on the note. The guaranty was not listed among Harman's debts in the bankruptcy filing. Would the obligation under the guaranty have been discharged in bankruptcy, as Harman claimed? Why or why not?

No. Harman owes McAfee under the guaranty. The obligation was not discharged in his bankruptcy proceedings. No determination of the status of the obligation was made during bankruptcy proceedings, because Harman did not list the guaranty obligation. While such matters are normally determined by the bankruptcy court, a state court can decide whether a creditor has a viable claim. Because McAfee was never informed of the bankruptcy proceedings, a state court can uphold the validity of the obligation and declare that it was not discharged in bankruptcy.

Williams purchased a used car from Stein for $1,000. Williams paid for the car with a check (written in pencil) payable to Stein for $1,000. Stein, through careful erasures and alterations, changed the amount on the check to read $10,000 and negotiated the check to Boz. Boz took the check for value, in good faith, and without notice of the alteration and thus met the Uniform Commercial Code's requirements for the status of a holder in due course. Can Williams successfully raise the universal (real) defense of material alteration to avoid payment on the check? Explain.

No. Material alteration of a negotiable instrument may be a real defense against payment on the instrument. As against a holder in due course, the raising of the amount (material alteration) is only a defense as to the altered amount, and the HIDC can recover according to the original tenor of the instrument. In this case, however, Williams materially contributed to the alteration by his negligence in writing the check in pencil. Thus, the defense of material alteration was not available to him, and Williams is liable to Boz for the $10,000. If Williams had written the check in ink, and Stein had altered the amount in such a clever fashion that Boz could take the check without notice and become an HIDC, then Williams would have a real defense against paying $10,000. In the latter case, Boz, as an HIDC, could collect only $1,000, the original amount of the check.

Edward owned a retail sporting goods shop. A new ski resort was being constructed in his area, and to take advantage of the potential business, Edward decided to expand his operations. He borrowed a large sum from his bank, which took a security interest in his present inventory and any after-acquired inventory as collateral for the loan. The bank properly perfected the security interest by filing a financing statement. Edward's business was profitable, so he doubled his inventory. A year later, just a few months after the ski resort had opened, an avalanche destroyed the ski slope and lodge. Edward's business consequently took a turn for the worse, and he defaulted on his debt to the bank. The bank then sought possession of his entire inventory, even though the inventory was now twice as large as it had been when the loan was made. Edward claimed that the bank had rights to only half of his inventory. Is Edward correct? Explain.

No. The bank will prevail because it held a properly perfected security interest in Edward's entire inventory, not just in specific items or in the value of the inventory at the time the loan was made. The entire inventory (the present inventory and any inventory thereafter acquired) was given as collateral for the loan, and, regardless of the fact the inventory is now twice as large, the bank can rightfully take possession of the entire inventory on Edward's default in his payments on the loan.

Jabil Circuit, Inc., is a publicly traded electronics and technology company headquartered in St. Petersburg, Florida. In 2008, a group of shareholders who had owned Jabil stock from 2001 to 2007 sued the company and its auditors, directors, and officers for insider trading. Stock options were a part of Jabil's compensation for executives. In some situations, stock options were backdated to a point in time when the stock price was lower, making the options worth more to certain company executives. Backdating is legal as long as it is reported, but Jabil did not report the fact that backdating had occurred. Thus, expenses were understated and net income was overstated by millions of dollars. The shareholders claimed that by rigging the value of the stock options by backdating, the executives had engaged in insider trading and that there had been a general practice among the executives of selling stock before unfavorable news about the company was reported to the public. The shareholders, however, had no specific information about these stock trades or about when (or even if) a particular executive was aware of any accounting errors during the time of any backdating purchases. Were the shareholders' allegations sufficient to assert that insider trading had occurred under SEC Rule 10b-5? Why or why not?

No. These allegations are not sufficient to show a violation of Rule10b-5 for insider trading claims because the complaint was too general. Given the lack of any particular factual assertions indicating that any individual defendant knew about accounting errors at the time of trading, and the dearth of facts indicating any individual defendant's knowledge about problems during the relevant times, make the allegations insufficient to support a claim.

In the following situations, certain events take place after the contracts are formed. Discuss whether each of these contracts is discharged because the events render the contracts impossible to perform. (a) Jimenez, a famous singer, contracts to perform in your nightclub. He dies prior to performance. (b) Raglione contracts to sell you her land. Just before title is to be transferred, she dies. (c) Oppenheim contracts to sell you one thousand bushels of apples from her orchard in the state of Washington. Because of a severe frost, she is unable to deliver the apples. (d) Maxwell contracts to lease a service station for ten years. His principal income is from the sale of gasoline. Because of an oil embargo by foreign oilproducing nations, gasoline is rationed, cutting sharply into Maxwell's gasoline sales. He cannot make his lease payments.

Normally, events that take place after the formation of the contract and that make performance of the contract more difficult or burdensome do not render the contract impossible to perform and do not discharge a party's liability for failure to fully perform. If such events make performance so extremely difficult or burdensome that it is, in effect, impossible, impractical, or unreasonably expensive to perform, however, the contract is discharged. The basic problem is determining when this degree of difficulty or burdensomeness is reached. (a) Jiminez's contract is personal, requiring his services for full performance of the contract. His death makes performance totally impossible, thereby discharging his estate from liability. (b) The passage of title to this land can be by Raglione or any person so authorized. Therefore, the death of Raglione does not render the contract impossible to perform, because a representative of her estate can perform it in her place. The contract is not discharged. (c) The contract called for apples to come from a specific orchard. Through no fault of Oppenheim's, the specific subject matter of the contract is destroyed by the frost. Therefore, Oppenheim cannot deliver the apples called for in the contract, rendering the contract impossible to perform. (d) Major discussion should center on the doctrine of commercial impracticability or frustration of commercial purpose. For the doctrine to be applied, most courts would need proof that either the rationing frustrated the very purpose both parties had in mind in making the contract, or that there was an implied condition that the premises were to be used for the sole purpose of selling products no longer available, or that the events rendered the anticipated performance extremely difficult or costly. In cases involving rationing during World War II, some courts held that the rationing merely created a hardship, not an absolute prohibition, and the lease contracts were enforced even though performance was more burdensome.

Daniel, a recent college graduate, is on his way home for the Christmas holidays from his new job. He gets caught in a snowstorm and is taken in by an elderly couple, who provide him with food and shelter. After the snowplows have cleared the road, Daniel proceeds home. Daniel's father, Fred, is most appreciative of the elderly couple's action and in a letter promises to pay them $500. The elderly couple, in need of funds, accept Fred's offer. Then, because of a dispute between Daniel and Fred, Fred refuses to pay the elderly couple the $500. Discuss whether the couple can hold Fred liable in contract for the services rendered to Daniel.

Past consideration is no consideration; therefore, a promise to pay for an event that has already taken place is not enforceable. Also, there is no consideration if the promise is based on a moral duty (obligation) to pay. Because Daniel is presumed to be an adult responsible for his own care, Fred has no legal duty of care to Daniel. Thus, Fred's promise cannot be enforced by the elderly couple, because Fred had at best only a moral obligation to reimburse them for the care rendered, and the promise to pay was for an event already performed.

Shannon's physician gives her some pain medication and tells her not to drive after she takes it, as the medication induces drowsiness. In spite of the doctor's warning, Shannon decides to drive to the store while on the medication. Owing to her lack of alertness, she fails to stop at a traffic light and crashes into another vehicle, causing a passenger in that vehicle to be injured. Is Shannon liable for the tort of negligence? Explain fully.

Shannon was well aware that the medication she took would make her drowsy, and her failure to observe due care (that is, refrain from driving) under the cir- cumstances was negligent.

Roy Supply, Inc., and R. M. R. Drywall, Inc., had checking accounts at Wells Fargo Bank. Both accounts required all checks to carry two signatures—that of Edward Roy and that of Twila June Moore, both of whom were executive officers of both companies. Between January 2009 and March 2010, the bank honored hundreds of checks on which Roy's signature was forged by Moore. On January 31, 2011, Roy and the two corporations notified the bank of the forgeries and then filed a suit in a California state court against the bank, alleging negligence. Who is liable for the amounts of the forged checks? Why?

The UCC requires customers to discover and report forgeries to their banks within one year of the time the checks and a statement of account showing payment of the checks are made available to the customer. Thus, Roy and the two corporations can only be held liable for the amounts of any forged checks that were reported less than one year after the bank statement showing payment of the checks.

In 1998, William Larry Smith signed a lease for certain land in Chilton County, Alabama, owned by Sweet Smitherman. The lease stated that it was between "Smitherman, and WLS, Inc., d/b/a [doing business as] S&H Mobile Homes," and the signature line identified the lessee as "WLS, Inc. d/b/a S&H Mobile Homes . . . By: William Larry Smith, President." The amount of the rent was $5,000, payable by the tenth of each month. All of the checks that Smitherman received for the rent identified the owner of the account as "WLS Corporation d/b/a S&H Mobile Homes." Nearly four years later, Smitherman filed a suit in an Alabama state court against William Larry Smith, alleging that he owed $26,000 in unpaid rent. Smith responded, in part, that WLS was the lessee and that he was not personally responsible for the obligation to pay the rent. Is Smith a principal, an agent, both a principal and an agent, or neither? In any event, in the lease, is the principal disclosed, partially disclosed, or undisclosed? With the answers to these questions in mind, who is liable for the unpaid rent, and why? Discuss.

Smith was, in this case, the agent of WLS. In the lease, the identity of the principal was disclosed, Smith was identified as WLS's agent, and under those circumstances, WLS, not Smith, was liable to Smitherman for the unpaid rent. An agent who signs a contract on behalf of his or her principal is presumed to intend to bind the principal only and incurs no personal liability unless an intention to substitute or add the agent's personal liability is clear. Also, here, the signature line of the lease contained the names of both the principal and agent and otherwise indicated the fact of the agency. The principal's name was followed by the agent's name, which was preceded by the preposition "By" and followed by the title "President."

On January 5, Brian drafts a check for $3,000 drawn on Southern Marine Bank and payable to his assistant, Shanta. Brian puts last year's date on the check by mistake. On January 7, before Shanta has had a chance to go to the bank, Brian is killed in an automobile accident. Southern Marine Bank is aware of Brian's death. On January 10, Shanta presents the check to the bank, and the bank honors the check by payment to Shanta. Later, Brian's widow, Joyce, claims that because the bank knew of Brian's death and also because the check was by date more than one year old the bank acted wrongfully when it paid Shanta. Joyce, as executor of Brian's estate and sole heir by his will, demands that Southern Marine Bank recredit Brian's estate for the check paid to Shanta. Discuss fully Southern Marine's liability in light of Joyce's demand.

Southern Marine Bank is not liable to Joyce or to Brian's estate for the $3,000 paid to Shanta. Joyce's claim that Brian's death and Southern Marine Bank's knowledge of it revoked Southern Marine Bank's authority to pay is incorrect. The Code specifically provides that neither the death nor the incompetence of a customer revokes a payor bank's authority to pay a check drawn by a customer and that even with knowledge of a customer's death, the bank may for ten days after the date of death pay checks drawn prior to death, unless a proper stop-payment order has been issued by a person claiming an interest in the account. Therefore, unless Joyce had issued a stop-payment order, Southern Marine Bank's payment on January 10, three days after Brian's death, is a proper payment. Joyce's claim that the bank must not pay a check presented more than six months after its date is also incorrect. A check whose date and presentment are more than six months apart is called a "stale check." Although the bank is under no obligation to honor such a check, it may in good faith honor the check without liability. Normally, a bank will consult its depositor, but this is a time of year during which many drawers mistakenly still use last year's date. Thus, since consultation is not required and payment in good faith is permitted, Southern Marine Bank will not be liable.

How does statutory law come into existence? How does it differ from the common law?

Statutory law refers to the body of law that is enacted by state and federal legislatures. Common law is not in any particular form; it consists of quotable statements taken from relevant opinions by prior judges. Statutory law is found in the current published laws of each jurisdiction and is relatively concise. Statutory (civil) = written laws and statutes. Common = case precedents.

Just Homes, LLC (JH), hired Mike Building & Contracting, Inc., to do $1.35 million worth of renovation work on three homes. Community Preservation Corporation (CPC) supervised Mike's work on behalf of JH. The contract stated that in the event of a dispute, JH would have to obtain the project architect's certification to justify terminating Mike. As construction progressed, relations between Mike and CPC worsened. At a certain point in the project, Mike requested partial payment, and CPC recommended that JH not make it. Mike refused to continue work without further payment. JH evicted Mike from the project. Mike sued for breach of contract. JH contended that it had the right to terminate the contract due to CPC's negative reports and Mike's failure to agree with the project's engineer. Mike moved for summary judgment for the amounts owed for work performed, claiming that JH had not fulfilled the condition precedent—that is, JH never obtained the project architect's certification for Mike's termination. Which of the two parties involved breached the contract? Explain your answer.

Summary judgment for Mike. JH breached the contract because it failed to fulfill the condition precedent requiring it to obtain certification from the architect that sufficient cause existed to justify its termination. Hence, JH is liable to Mike for losses it can demonstrate. The clause in the construction contract is a standard clause and should have been followed. Of course, if JH can show that Mike acted improperly, then there may be no damages owed to Mike, but JH failed to follow the procedure provided in the contract by bringing the architect into the situation to decide if termination was in order for failure to perform properly.

In December 1999, Jenny Triplett applied for a bookkeeping position with Spacemakers of America, Inc., in Atlanta, Georgia. Spacemakers hired Triplett and delegated to her all responsibility for maintaining the company checkbook and reconciling it with the monthly statements from SunTrust Bank. Triplett also handled invoices from vendors. Spacemakers' president, Dennis Rose, reviewed the invoices and signed the checks to pay them, but no other employee checked Triplett's work. By the end of her first full month of employment, Triplett had forged six checks totaling more than $22,000, all payable to Triple M Entertainment, which was not a Spacemakers vendor. By October 2000, Triplett had forged fifty-nine more checks, totaling more than $475,000. A SunTrust employee became suspicious of an item that required sight inspection under the bank's fraud detection standards, which exceeded those of other banks in the area. Triplett was arrested. Spacemakers filed a suit in a Georgia state court against SunTrust. The bank filed a motion for summary judgment. On what basis could the bank avoid liability? In whose favor should the court rule, and why?

SunTrust could argue that it should not be held liable for Spacemakers's loss on two grounds: Spacemakers failed to timely report the forgeries to the bank, and the bank did not fail to exercise ordinary care. On these grounds, the court should grant the bank's motion for summary judgment. A customer who fails to report the first forged item within thirty days is precluded from recovering for that transaction and for any additional items forged by the same wrongdoer, because this failure gives the wrongdoer an opportunity to repeat the misdeeds. Here, if Spacemakers had reviewed its bank statement covering Triplett's first month of employment, it would have discovered the forgeries. It would have been able to timely notify the bank and avoid its subsequent loss of almost $475,000. If the bank had failed to exercise ordinary care, it might have been comparatively negligent and liable for some of the loss, but SunTrust's standards for the sight inspection of checks exceeded the standards of other banks in the area and thus more than complied with reasonable commercial standards.

Mitsubishi Motors North America, Inc., operates an auto plant in Normal, Illinois. In 2003, TNT Logistics Corp. coordinated deliveries of auto parts to the plant, and DeKeyser Express, Inc., transported the parts. On January 21, TNT told DeKeyser to transport three pallets of parts from Trelleborg YSH, Inc., to the plant. DeKeyser dispatched its driver Lola Camp. At Trelleborg's loading dock, Camp noticed that the pallets would fit inside the trailer only if they were stacked. Camp was concerned that the load might shift during transport. DeKeyser dispatcher Ken Kasprzak and TNT supervisor Alan Marten told her that she would not be liable for any damage. Trelleborg loaded the pallets, and Camp drove to TNT's dock in Normal. When she opened the trailer door, the top pallet slipped. As Camp tried to close the door to prevent the pallet from falling, she injured her shoulder and arm. She filed a suit against TNT and Trelleborg, claiming negligence. What is their defense? Discuss.

TNT and Trellebog could argue that they did not owe Camp a duty. They might also argue that she assumed any risk. Camp was aware of the risk that the pallets might shift during transport. It would not be fair to hold that a defendant owes a plaintiff a duty to guard against the risk of an injury of which the plaintiff is fully aware. With respect to the assumption of risk, this same reasoning applies. It would not be fair to hold a defendant liable for an injury that results from a plaintiff's voluntary encounter with a known risk. The court issued a summary judgment in the defendants' favor. On Camp's appeal, the U.S. Court of Appeals for the Seventh Circuit affirmed this judgment.

Merrick grows and sells blueberries. Maine Wild Blueberry Co. agreed to buy all of Merrick's crop under a contract that left the price unliquidated. Merrick delivered the berries, but a dispute arose over the price. Maine Wild sent Merrick a check with a letter stating that the check was the "final settlement." Merrick cashed the check but filed a suit for breach of contract, claiming that he was owed more. What will the court likely decide in this case? Why?

The accord and satisfaction created by Merrick's cashing the check would bar any recovery. An accord and satisfaction is created by cashing a check that is accompanied by a letter with restrictive language. In this case, the language in the letter is unambiguous. The check was the "final settlement." There is no doubt as to what Maine Wild intended or what should reasonably have been understood by Merrick. Merrick had the choice of accepting the check on these terms or of returning it—he chose to accept it.

Autolign Manufacturing Group, Inc., was a plastic injection molder that made parts for the auto industry. Because of a fire at its plant, Autolign subcontracted its work to several other companies to produce parts for its customers. Autolign provided the subcontractors with molds it owned so that they could produce the exact parts needed. The subcontractors produced the parts for Autolign, which it then sold to automakers. Shortly afterward, Autolign ceased operations. The subcontractors sued Autolign for breach of contract, claiming that they were never paid for the parts that they had produced for Autolign. The subcontractors asserted a statutory "molder's lien" on the molds in their possession. A molder's lien is similar to an artisan's lien in that it is possessory, but was established by a Michigan statute rather than common law. One of Autolign's creditors, Wamco 34, Ltd., argued that the molds were its property because the molds were used to secure repayment of a debt that Autolign owed to Wamco. The trial court held that Wamco was a secured creditor and that its interest had priority over the plaintiffs' lien in the molds. The subcontractors appealed. Which party had the superior claim? Explain your answer.

The appellate court stated that: "It was the purpose of the UCC to prefer a service lien, common law or statutory, where the service provider retained possession of the goods, over a perfected security interest, except where the lien is statutory and the statute expressly provides otherwise. Plaintiffs accurately state that pursuant to [the UCC], their possessory liens ... have priority." Hence, the subcontractors have a superior lien on the molds. That would give them the opportunity to use them to help offset the sums they were not paid by Autolign for the products they produced for it. The reviewing court reversed the trial court‟s decision and remanded.

Roberto Basulto and Raquel Gonzalez, who did not speak English, responded to an ad on Spanish-language television sponsored by Hialeah Automotive, LLC, which does business as Potamkin Dodge. Potamkin's staff understood that Basulto and Gonzalez did not speak or read English and conducted the entire transaction in Spanish. They explained the English-language contract, but did not explain an accompanying arbitration agreement. This agreement limited the amount of damages that the buyers could seek in court to less than $5,000, but did not limit Potamkin's right to pursue greater damages. Basulto and Gonzalez bought a Dodge Caravan and signed the contract in blank (meaning that some parts were left blank). Potamkin later filled in a lower trade-in allowance than agreed and refused to change it. The buyers returned the van—having driven it a total of seven miles—and asked for a return of their trade-in vehicle, but it had been sold. The buyers filed a suit in a Florida state court against Potamkin. The dealer sought arbitration. Was the arbitration agreement unconscionable? Why or why not?

The arbitration agreement in this case was both procedurally and substantively unconscionable. Procedural unconscionability concerns the manner in which a contract is entered into. Here, the buyers did not speak or read English, and the sale was conducted in Spanish. The written contract was in English and explained in Spanish, but the accompanying arbitration agreement was not explained in any language. Having undertaken to explain the terms of the contract in Spanish, the dealer's staff was obliged to do so accurately to give the buyers a meaningful opportunity to understand the contract and bargain. Substantive unconscionability can occur when a contract leaves one party to the agreement without a remedy for the nonperformance of the other. The contract in this case limited the buyers' right in a court to seek relief for no more than $5,000 against the dealer. The dealer, however, had the right to seek a higher amount of damages in a court against the buyers. This made the agreement substantively unconscionable. The court refused to compel arbitration. On the dealer's appeal, a state intermediate appellate affirmed the ruling.

Thomas Baker and others who bought new homes from Osborne Development Corp. sued for multiple defects in the houses they purchased. When Osborne sold the homes, it paid for them to be in a new home warranty program administered by Home Buyers Warranty (HBW). When the company enrolled a home with HBW, it paid a fee and filled out a form that stated the following: "By signing below, you acknowledge that you . . . CONSENT TO THE TERMS OF THESE DOCUMENTS INCLUDING THE BINDING ARBITRATION PROVISION contained therein." HBW then issued warranty booklets to the new homeowners that stated: "Any and all claims, disputes and controversies by or between the Homeowner, the Builder, the Warranty Insurer and/or HBW . . . shall be submitted to arbitration." Were the new homeowners bound by the arbitration agreement, or could they sue the builder, Osborne, in court? Explain.

The arbitration agreement was not binding on the homeowners, so they could sue the builder, Osborne, in court. Osborne signed the contract with HBW; that did not bind the homeowners to the agreement because they were not parties to the agreement. The appeals court held the arbitration agreement to be "oppression" against the homeowners. As such, the agreements were one-sided and unconscionable. The homeowners were handed the warranty agreement at the time of closing (final sale) on their houses, but they did not know the terms of the warranty and had no chance to bargain over it. They did not give up their right to sue Osborne for breach of contract and other claims.

Between 1988 and 1992, Lorna Nys took out thirteen student loans, totaling about $30,000, to finance an associate of arts degree in drafting from the College of the Redwoods and a bachelor of arts degree from Humboldt State University (HSU) in California. In 1996, Nys began working at HSU as a drafting technician. As a "Drafter II," the highest-paying drafting position at HSU, Nys's gross income in 2002 was $40,244. She was fifty-one years old. Her net monthly income was $2,299.33, and she had $2,295.05 in monthly expenses, including saving $140 for her retirement, which she planned for age sixty-five. When Educational Credit Management Corp. (ECMC) began to collect payments on Nys's student loans, she filed a Chapter 7 petition in a federal bankruptcy court, seeking a discharge of the loans. ECMC argued that Nys did not show any "additional circumstances" that would impede her ability to repay. What is the standard for the discharge of student loans under Chapter 7? Does Nys meet that standard? Why or why not?

The bankruptcy court ruled in ECMC's favor, finding that Nys had not proved "undue hardship," which is required to obtain a discharge of student loans under Chapter 7. The court stated that "[e]xceptional circumstances must be shown." On Nys's appeal, the U.S. Bankruptcy Appellate Panel of the Ninth Circuit reversed this ruling, holding that "additional," not "exceptional," circumstances was the test. On ECMC's appeal, the U.S. Court of Appeals for the Ninth Circuit ruled again in Nys's favor, holding that "[u]ndue hardship does not require an exceptional circumstance beyond the inability to pay now and for a substantial portion of the loan's repayment period. . . . The focus of this inquiry is the debtor's financial situation." The court remanded the case for a determination of the merits of Nys's claim under this standard.

Danny and Marion Klein were injured when part of a fireworks display went astray and exploded near them. They sued Pyrodyne Corp., the pyrotechnic company that was hired to set up and discharge the fireworks, alleging, among other things, that the company should be strictly liable for damages caused by the fireworks display. Will the court agree with the Kleins? What factors will the court consider in making its decision? Discuss fully.

The court agreed with the Kleins, applying the rule that "any party carrying on an abnormally dangerous activity‟ is strictly liable for ensuing damages."

In May 1998, RDP Royal Palm Hotel, L.P., contracted with Clark Construction Group, Inc., to build the Royal Palms Crowne Plaza Resort in Miami Beach, Florida. The deadline for "substantial completion" was February 28, 2000, but RDP could ask for changes, and the date would be adjusted accordingly. During construction, Clark faced many setbacks, including a buried seawall, contaminated soil, the unforeseen deterioration of the existing hotel, and RDP's issue of hundreds of change orders. Clark requested extensions of the deadline, and RDP agreed, but the parties never specified a date. After the original deadline passed, RDP continued to issue change orders, Clark continued to perform, and RDP accepted the work. In March 2002, when the resort was substantially complete, RDP stopped paying Clark. Clark stopped working. RDP hired another contractor to finish the resort, which opened in May. RDP filed a suit in a federal district court against Clark, alleging, among other things, breach of contract for the two-year delay in the resort's completion. In whose favor should the court rule, and why? Discuss.

The court concluded in part that RDP waived its right to enforce the original "substantial completion date by accepting Clark's continued performance" and thus was not entitled to any damages, but that Clark was entitled to payment for its work. On RDP's appeal, the U.S. Court of Appeals for the Eleventh Circuit affirmed these conclusions. As for the award of damages to Clark, "the substantial delays which severely impacted the Resort's construction" were "all attributable to RDP."

Roger Bannister was the director of technical and product development for Bemis Co. He signed a covenant not to compete that prohibited him from working for a "conflicting organization" for eighteen months following his termination, but required Bemis to pay his salary if he was unable to find a job "consistent with his abilities and education." Bemis terminated Bannister. Mondi Packaging, a Bemis competitor, told him that it would like to offer him a job but could not do so because of the the noncompete agreement. Bemis released Bannister from the agreement with respect to "all other companies than Mondi" and refused to pay his salary. Nine months later, Bannister accepted a position with Bancroft Bag, Inc., another Bemis competitor. He filed a suit in a federal district court against his former employer. Do these facts show a material breach of contract? If so, what is the appropriate remedy? Explain.

The court concluded that Bemis breached its agreement with Bannister, issued a summary judgment in his favor, and awarded him $81,051.36, which was the amount of his unpaid salary for the nine months of unemployment. Bemis appealed to the U.S. Court of Appeals for the Eighth Circuit, which affirmed the judgment and award.

Kermit Johnson formed FB&I Building Products, Inc., in Watertown, South Dakota, to sell building materials. In December 1998, FB&I contracted with Superior Truss & Components in Minneota, Minnesota, "to exclusively sell Superior's open-faced wall panels, floor panels, roof trusses and other miscellaneous products." In March 2000, FB&I agreed to exclusively sell Component Manufacturing Co.'s building products in Colorado. Two months later, Superior learned of FB&I's deal with Component and terminated its contract with FB&I. That contract provided that on cancellation, "FB&I will be entitled to retain the customers that they continue to sell and service with Superior products." Superior refused to honor this provision. Between the cancellation of FB&I's contract and 2004, Superior made $2,327,528 in sales to FB&I customers without paying a commission. FB&I filed a suit in a South Dakota state court against Superior, alleging, in part, breach of contract and seeking the unpaid commissions. Superior insisted that FB&I had materially breached their contract, excusing Superior from performing. In whose favor should the court rule and why?

The court concluded that FB & I materially breached its contract with Superior when FB & I entered into an agreement with Component. This justified Superior's canceling its contract with FB & I. But Superior also breached the contract when it refused to let FB & I retain its Superior customers. The court calculated FB & I's unpaid commissions at 5.243 percent, "representing a fair rate because FB & I did not incur any expenses when Superior did business with FB & I's customers," and awarded FB & I $122,032.29, plus interest. Superior appealed to the South Dakota Supreme Court, which affirmed the lower court's ruling. The court reasoned, "Material breach or not, the contract required that FB & I be allowed to retain its customers in the event the agreement was cancelled. The parties did not limit or restrict FB & I's right to retain its customers upon cancellation. The contract expressly required Superior to act, to perform a duty, in the event the contract was cancelled. . . . [W]hen contracting parties specifically provide for a resolution in the event that contract conditions are not met, then we must defer to their agreement." As for the effect of FB & I's agreement with Component on FB & I's right to its Superior customers, "[n]othing in the contract stated that this right would be extinguished or limited if FB & I breached its agreement by entering into another sales agreement with a different company."

Misrepresentation Ricky and Sherry Wilcox hired Esprit Log and Timber Frame Homes to build a log house, which the Wilcoxes intended to sell. They paid Esprit $125,260 for materials and services. They eventually sold the home for $1,620,000 but sued Esprit due to construction delays. The logs were supposed to arrive at the construction site precut and predrilled, but that did not happen. So it took five extra months to build the house while the logs were cut and drilled one by one. The Wilcoxes claimed that the interest they paid on a loan for the extra construction time cost them about $200,000. The jury agreed and awarded them that much in damages, plus $250,000 in punitive damages and $20,000 in attorneys' fees. Esprit appealed, claiming that the evidence did not support the verdict because the Wilcoxes had sold the house for a good price. Is Esprit's argument credible? Why or why not? How should the court rule?

The court determined that "a promise made without a present intent to perform is a misrepresentation of a material fact and is sufficient to support a cause of action for fraud." Fireside had promised to deliver pre-cut and pre-drilled logs that could be assembled quickly. It knew the delivery of unfinished logs would cause problems. "After the logs arrived at the home Fireside further misrepresented that there would be only a two- or three-day delay while the logs where cut and drilled on site. The jury could conclude that Fireside's actions amounted to fraud or such indifference to negative consequences for the buyers as to support an award for punitive damages." The fact that the house was later sold successfully had nothing to do with the extra costs incurred by the Wilcoxes as they had borrowed about a million dollars to finance the project and Fireside knew that. The judgment of the lower court was affirmed.

Cleveland Chiropractic College (CCC) promised prospective students that CCC would provide clinical training and experience—a critical part of a chiropractic education and a requirement for graduation and obtaining a license to practice. Specifically, CCC expressly promised that it would provide an ample variety of patients. CCC knew, however, that it did not have the ability to provide sufficient patients, as evidenced by its report to the Council on Chiropractic Education, an accreditation body through which chiropractic colleges monitor and certify themselves. In that report, CCC said that patient recruitment was the "joint responsibility" of the college and the student. During the 1990s, most of the "patients" that students saw were healthy persons whom the students recruited to be stand-in patients. After graduating and obtaining licenses to practice, Michael Troknya and nineteen others filed a suit in a federal district court against CCC, alleging, among other things, negligent misrepresentation. What are the elements of this cause of action? Are they satisfied in this case? Why or why not?

The court entered a judgment against CCC on the negligent misrepresentation claim. CCC appealed to the U.S. Court of Appeals for the Eighth Circuit, which affirmed this part of the lower court's judgment. The appellate court concluded, "The evidence readily showed that, in the course of recruiting students, CCC intentionally provided prospective students (including plaintiffs) promotional materials containing information regarding CCC's clinical program, that those materials gave false information about who would be responsible for recruiting clinical patients, and that plaintiffs relied on that information. Moreover, . . . CCC did not exercise reasonable care to ensure that its joint responsibility policy was truthfully stated in its promotional materials and that plaintiffs' reliance upon those misleading materials was both justified and the proximate cause of . . . minor, but unexpected, costs associated with having to find and recruit patients themselves for the clinic."

Frank Rodziewicz was driving a Volvo tractor-trailer on Interstate 90 in Lake County, Indiana, when he struck a concrete barrier. His tractortrailer became stuck on the barrier, and the Indiana State Police contacted Waffco Heavy Duty Towing, Inc., to assist in the recovery of the truck. Before beginning work, Waffco told Rodziewicz that it would cost $275 to tow the truck. There was no discussion of labor or any other costs. Rodziewicz told Waffco to take the truck to a local Volvo dealership. Within a few minutes, Waffco pulled the truck off the barrier and towed it to Waffco's nearby towing yard. Rodziewicz was soon notified that, in addition to the $275 towing fee, he would have to pay $4,070 in labor costs and that Waffco would not release the truck until payment was made. Rodziewicz paid the total amount. Disputing the labor charge, however, he filed a suit in an Indiana state court against Waffco, alleging, in part, breach of contract. Was the towing contract unconscionable? Would it make a difference if the parties had discussed the labor charge before the tow? Explain.

The court entered a judgment in favor of Waffco. Rodziewicz appealed to a state intermediate appellate court, which reversed the judgment of the lower court and ordered the entry of a judgment in Rodziewicz's favor. The appellate court acknowledged that "a contract to tow the truck for $275 existed. However, the record reveals no evidence that Waffco informed Rodziewicz that he would also be charged $4,070 in labor for moving the truck a few miles. There is also no evidence that Waffco's services included anything more than pulling Rodziewicz's truck off of the barrier and towing it to its yard. We also note that it is likely that Waffco did not take the truck to the Volvo dealer, as instructed, so that it would have leverage to extract this $4,070 charge that Rodziewicz did not agree to and for which Waffco produced no evidence of work product." The court reasoned that even assuming for the sake of argument "the $4,070 charge [was] part of the initial negotiations between Rodziewicz and Waffco as part of a binding contract, we would be forced to find this term to be unconscionable." In this case, no one not under delusion would offer to tow a truck a few miles for $4,070 in labor, let alone accept it."

Sierra Bravo, Inc., and Shelby's, Inc., entered into a written "Waste Disposal Agreement" under which Shelby's allowed Sierra to deposit on Shelby's land waste products, harmful materials, and debris removed by Sierra in the construction of a highway. Later, Shelby's asked Sierra why it had not constructed a waterway and a building pad suitable for a commercial building on the property, as they had orally agreed. Sierra denied any such agreement. Shelby's filed a suit in a Missouri state court against Sierra, alleging breach of contract. Sierra contended that any oral agreement was unenforceable under the Statute of Frauds. Sierra argued that because the right to remove minerals from land is considered a contract for the sale of an interest in land to which the Statute of Frauds applies, the Statute of Frauds should apply to the right to deposit soil on another person's property. How should the court rule, and why?

The court found a breach of contract and awarded $7,185 in damages to Shelby's. Sierra appealed to a state intermediate appellate court, which affirmed the lower court's judgment. The appellate court reasoned that the contract in the case was not a sale, "much less a sale of an interest in lands." There "was no transfer of ownership or title. The written agreement gave [Sierra] permission to deposit debris and soil on [Shelby's] land, not the right to do so. The oral contract was for the construction of a waterway and building pad and passed no interest in the land." Sierra "has no interest in the land to deposit the debris, excess dirt, and soil. [Sierra] agreed to construct a waterway and building pad which is a simple contract for services. The oral contract did not violate the statute of frauds."

Xcentric Ventures, LLC, is an Arizona firm that operates the Web sites RipOffReport.com and BadBusinessBureau.com. Visitors to the sites can buy a copy of a book titled Do-It-Yourself Guide: How to Get RipOff Revenge. The price ($21.95) includes shipping to anywhere in the United States, including Illinois, to which thirteen copies have been shipped. The sites accept donations and feature postings by individuals who claim to have been "ripped off." Some visitors posted comments about George S. May International Co., a management consulting firm. The postings alleged fraud, larceny, possession of child pornography, and possession of controlled substances (illegal drugs). May filed a suit in a federal district court in Illinois against Xcentric and others, charging, among other things, "false descriptions and representations." The defendants filed a motion to dismiss for lack of jurisdiction. What is the standard for exercising jurisdiction over a party whose only connection to a jurisdiction is over the Web? How would that standard apply in this case? Explain.

The court found that the defendants' contacts with Illinois were sufficient to establish personal jurisdiction. The court set out the "sliding scale" standard for exercising jurisdiction over parties whose sole contact with a jurisdiction is over the Web. In this case, among other things, the "[d]efendants maintain websites that fall into the middle ground of the . . . „sliding scale‟ [standard]. These Sites allow visitors to post messages (to which Defendants sometimes respond), purchase books, and make donations." The court concluded that "[t]hese Sites are a far cry from passive websites." Their "level of interactivity is enough . . . for the court to exercise jurisdiction over Defendants." The court also pointed out that "[d]efendants' Internet activities more than satisfy the minimum contacts standard . . . . By purposefully reaching out to the state of Illinois, and conducting business with Illinois citizens, Defendants are on notice that they may be subject to suit in this state." In other words, "the exercise of personal jurisdiction over Defendants would be reasonable in this case."

In July 2004, Emellie Anderson hired Kenneth Whitten, a licensed building contractor, to construct a two-story addition to her home. The bottom floor was to be a garage and the second floor a home office. In August, the parties signed a second contract under which Whitten agreed to rebuild a deck and railing attached to the house and to further improve the office. A later inspection revealed gaps in the siding on the new garage, nails protruding from incomplete framing, improper support for a stairway to the office, and gaps in its plywood flooring. One post supporting the deck was cracked; another was too short. Concrete had not been poured underneath the old posts. A section of railing was missing, and what was installed was warped, with gaps at the joints. Anderson filed a suit in a Connecticut state court against Whitten, alleging that his work was "substandard, not to code, unsafe and not done in a [workmanlike] manner." Anderson claimed that she would have to pay someone else to repair all of the work. Does Whitten's "work" satisfy the requirements for a claim grounded in negligence? Should Anderson's complaint be dismissed, or should she be awarded damages? Explain.

The court found, in Whitten's construction of the two-story addition, and the deck and its railing, "substandard and incomplete work" produced by improper techniques and installation methods. Further, Whitten knew or should have known that the "poor quality" of his work would result in "the foreseeable harm" of Anderson‟s having to pay someone else to make repairs. The court imposed liability for the breach of a "duty of care that required [Whitten] to render performance in a good, substantial workmanlike manner" and awarded Anderson the cost to make the repairs.

Robert Helmer and Percy Helmer, Jr., were authorized signatories on the corporate checking account of Event Marketing, Inc. The Helmers signed a check drawn on Event Marketing's account and issued to Rumarson Technologies, Inc. (RTI), in the amount of $24,965. The check was signed on July 13, 1998, but dated August 14. When RTI presented the check for payment, it was dishonored due to insufficient funds. RTI filed a suit in a Georgia state court against the Helmers to collect the amount of the check. Claiming that the Helmers were personally liable on Event Marketing's check, RTI filed a motion for summary judgment. Can an authorized signatory on a corporate account be held personally liable for corporate checks returned for insuf- ficient funds? Are the Helmers liable in this case? Discuss.

The court granted RTI's motion for summary judgment, holding the Helmers personally liable on Event Marketing's check. The court awarded damages, including "bad check" charges. The Helmers appealed to a state intermediate appellate court, which reversed the decision of the lower court. The appellate court stated simply that under UCC 3-402(c), "an authorized representative is not personally liable when he or she signs a negotiable instrument on behalf of the represented entity, even if the instrument does not indicate on its face that it is being signed in a representative capacity."

On September 13, 1979, Barbara Shearer and Barbara Couvion signed a note for $22,500, with interest at 11 percent, payable in monthly installments of $232.25 to Edgar House and Paul Cook. House and Cook assigned the note to Southside Bank in Kansas City, Missouri. In 1997, the note was assigned to Midstates Resources Corp., which assigned the note to the Cadle Co. in 2000. According to the payment history that Midstates gave to Cadle, the interest rate on the note was 12 percent. A Cadle employee noticed the discrepancy and recalculated the payments at 11 percent. When Shearer and Couvion refused to make further payments on the note, Cadle filed a suit in a Missouri state court against them to collect. Couvion and Shearer responded that they had made timely payments on the note, that Cadle and the previous holders had failed to accurately apply the payments to the reduction of principal and interest, and that the note "is either paid in full and satisfied or very close to being paid in full and satisfied." Is the makers' answer sufficient to support a verdict in their favor? If so, on what ground? If not, why not?

The court granted a directed verdict in Couvion and Shearer's favor, and Cadle appealed to a state intermediate appellate court, which reversed and remanded the case for further proceedings. Shearer and Couvion had no valid real or personal defenses to payment on the note. The appellate court held that "Cadle made a prima facie case and therefore, the trial court's grant of a directed verdict was against the weight of the evidence. . . . [T]here seems to be no dispute that the note was held by Cadle and there was a default by the makers. The amount of the note balance was arrived at with difficulty, but the evidence did show that the note had not been paid in full. Difficulty in determining the exact amount of Cadle's damages should not have resulted in a directed verdict in favor of the makers."

California's Subdivision Map Act (SMA) prohibits the sale of real property until a map of its subdivision is filed with, and approved by, the appropriate state agency. In November 2004, Black Hills Investments, Inc., entered into two contracts with Albertson's, Inc., to buy two parcels of property in a shopping center development. Each contract required that "all governmental approvals relating to any lot split [or] subdivision" be obtained before the sale but permitted Albertson's to waive this condition. Black Hills made a $133,000 deposit on the purchase. A few weeks later, before the sales were complete, Albertson's filed with a local state agency a map that subdivided the shopping center into four parcels, including the two that Black Hills had agreed to buy. In January 2005, Black Hills objected to concessions that Albertson's had made to a buyer of one of the other parcels, told Albertson's that it was terminating its deal, and asked for a return of its deposit. Albertson's refused. Black Hills filed a suit in a California state court against Albertson's, arguing that the contracts were void. Are these contracts valid, voidable,unenforceable, or void? Explain.

The court granted a summary judgment in favor of Black Hills. Albertson's appealed to a state intermediate appellate court, which affirmed the lower court‟s judgment. The appellate court concluded in part that "the contracts violated the prohibition codified in [the SMA] because they were contracts to sell unsubdivided parcels of real property before the seller, Albertson's, recorded a parcel map in compliance with the SMA . . . and were therefore void." Also, the contracts were void under the SMA because they expressly permitted Albertson's to waive the conditional filing of a subdivision plan. Because the SMA required this filing, it would have been illegal to waive this condition.

Hartford Mutual Insurance Co. issued a check for $60,150 payable to "Andrew Michael Bogdan, Jr., Crystal Bogdan, Oceanmark Bank FSB, Goodman-Gable-Gould Company." The check was to pay a claim related to the Bogdans' commercial property. Besides the Bogdans, the payees were the mortgage holder (Oceanmark) and the insurance agent who adjusted the claim. The Bogdans and the agent indorsed the check and cashed it at Provident Bank of Maryland. Meanwhile, Oceanmark sold the mortgage to Pelican National Bank, which asked Provident to pay it the amount of the check. Provident refused. Pelican filed a suit in a Maryland state court against Provident, arguing that the check had been improperly negotiated. Was this check payable jointly or in the alternative? Whose indorsements were required to cash it? In whose favor should the court rule? Explain.

The court granted a summary judgment in favor of Provident. Pelican appealed to the Maryland Court of Appeals, the state's highest court, which affirmed the lower court's judgment. The subject check was drawn to the order of three payees, listed in stacked format, with no grammatical connector, punctuation or symbol indicating their relationship or how the check was intended to be paid. Therefore, the check was neither clearly payable in the alternative, the payees not being connected by 'or' or its equivalent, nor clearly payable jointly, the payees not being joined by 'and' or its equivalent. It was, consequently ambiguous as to whether it is payable to the persons alternatively. "Accordingly, we further hold, it was proper for the appellee to have negotiated the check . . . . The indorsement of any one of the payees was sufficient."

In 1994, Brian and Penny Grieme bought a house in Mandan, North Dakota. They borrowed for the purchase through a loan program financed by the North Dakota Housing Finance Agency (NDHFA). The Griemes obtained insurance for the house from Center Mutual Insurance Co. When a hailstorm damaged the house in 2001, Center Mutual determined that the loss was $4,378 and issued a check for that amount, drawn on Bremer Bank, N.A. The check's payees included Brian Grieme and the NDHFA. Grieme presented the check for payment to Wells Fargo Bank of Tempe, Arizona. The back of the check bore his signature and in handprinted block letters the words "ND Housing Finance." The check was processed for collection and paid, and the canceled check was returned to Center Mutual. By the time the insurer learned that NDHFA's indorsement had been forged, the Griemes had canceled their policy, defaulted on their loan, and filed for bankruptcy. The NDHFA filed a suit in a North Dakota state court against Center Mutual for the amount of the check. Who is most likely to suffer the loss in this case? Why?

The court held Center Mutual liable to NDHFA for the amount of the check. Center Mutual appealed to the North Dakota Supreme Court, which affirmed the lower court's judgment. The state supreme court concluded that the "forged endorsement of NDHFA on the check did not operate as a signature of NDHFA and. . . did not discharge Center Mutual's obligations as drawer." The insurer, in turn, under UCC 4-401, "had a right to demand reimbursement for the improperly paid check from Bremer Bank." Ultimately, the loss falls on the party who took the check from the forger, or on the forger himself. Thus, the drawer of the check can usually avoid liability on a check with a forged endorsement simply by showing the unauthorized endorsement and the depositary or initial collecting bank will likely suffer the loss.

Lee Dennegar and Mark Knutson lived in Dennegar's house in Raritan, New Jersey. Dennegar paid the mortgage and other household expenses. With Dennegar's consent, Knutson managed their household's financial affairs and the "general office functions concerned with maintaining the house." Dennegar allowed Knutson to handle the mail and "to do with it as he chose." Knutson wrote checks for Dennegar to sign, although Knutson signed Dennegar's name to many of the checks with Dennegar's consent. AT&T Universal issued a credit card in Dennegar's name in February 2001. Monthly statements were mailed to Dennegar's house, and payments were sometimes made on those statements. Knutson died in June 2003. The unpaid charges on the card of $14,752.93 were assigned to New Century Financial Services, Inc. New Century filed a suit in a New Jersey state court against Dennegar to collect the unpaid amount. Dennegar claimed that he never applied for or used the card and knew nothing about it. Under what theory could Dennegar be liable for the charges? Explain.

The court held Dennegar liable for the debt plus interest, and on Dennegar's appeal, a state intermediate appellate court affirmed this judgment. Dennegar "either expressly applied for the card, or authorized his roommate—to whom he ceded authority over his finances—to apply for and use the card." Dennegar, "as principal, had appointed Knutson as his agent for the conducting of his financial affairs," which in this case included the authority "to borrow funds or make purchases based on defendant's credit." The court also cited the periodic payments made on the statements mailed to Dennegar‟s house.

Josef Boehm was an offi- cer and the majority shareholder of Alaska Industrial Hardware, Inc. (AIH), in Anchorage, Alaska. In August 2001, Lincolnshire Management, Inc., in New York, created AIH Acquisition Corp. to buy AIH. The three firms signed a "commitment letter" to negotiate "a definitive stock purchase agreement" (SPA). In September, Harold Snow and Ronald Braley began to work, on Boehm's behalf, with Vincent Coyle, an agent for AIH Acquisition, to produce an SPA. They exchanged many drafts and dozens of e-mails. Finally, in February 2002, Braley told Coyle that Boehm would sign the SPA "early next week." That did not occur, however, and at the end of March, after more negotiations and drafts, Boehm demanded a larger payment. AIH Acquisition agreed, and, following more work by the agents, another SPA was drafted. In April, the parties met in Anchorage. Boehm still refused to sign. AIH Acquisition and others filed a suit in a federal district court against AIH. Did Boehm violate any of the duties that principals owe to their agents? If so, which duty, and how was it violated? Explain.

The court held in part that Boehm, as the principal, was bound to the stock purchase agreement (SPA) under the principles of agency law and that Boehm had violated the principal's duty of cooperation. The court stated, "Snow and Braley acted as Boehm's agents for the purpose of reaching a binding stock purchase agreement. An agency relationship requires that both the principal and the agents take affirmative steps to assure the success of a cooperative effort. The burden is not solely on the agent. The principal, too, must use his best efforts to cooperate and cannot by act or omission thwart the effectiveness of the agency. Moreover, a principal must avoid conduct towards third persons that prevents the accomplishment of the work of the agent. Thus, Boehm, who at least twice told [Snow and Braley] he was satisfied and there was a deal, may not defeat the efforts and good faith representations that [the agents] made in furtherance of the Commitment [letter] by capriciously refusing at the last instant to sign an agreement which all had agreed was in final form." The court ruled that the April SPA was "a valid contract for the sale of AIH to AIH Acquisition even absent Boehm's signature, and it is so declared enforceable forthwith today."

East Mill Associates (EMA) was developing residential "units" in East Brunswick, New Jersey, within the service area of the East Brunswick Sewerage Authority (EBSA). The sewer system required an upgrade to the Ryder's Lane Pumping Station to accommodate the new units. EMA agreed to pay "fifty-five percent (55%) of the total cost" of the upgrade. At the time, the estimated cost to EMA was $150,000 to $200,000. Impediments to the project arose, however, substantially increasing the cost. Among other things, the pumping station had to be moved to accommodate a widened road nearby. The upgrade was delayed for almost three years. When it was completed, EBSA asked EMA for $340,022.12, which represented 55 percent of the total cost. EMA did not pay. EBSA filed a suit in a New Jersey state court against EMA for breach of contract. What rule should the court apply to interpret the parties' contract? How should that rule be applied? Why?

The court held that East Mill Associates (EMA) should not have to pay the costs associated with unforeseen events, reallocated the amount between the parties, and ordered EMA to pay $213,884.47. East Brunswick Sewage Authority (EBSA) appealed to a state intermediate appellate court, which reversed the lower court‟s order and directed an entry of judgment in EBSA's favor for the full amount of its claim. The appellate court explained, "Generally, contracts are given their plain and ordinary meaning. When the terms of a contract are clear, the court must enforce them as written. A court has no power to rewrite the contract of the parties by substituting a new or different provision from what is clearly expressed in the instrument. In this case, the terms of the contract are clear; the judge must enforce them as written. The contract bound EMA to pay 55% of the total costs associated with the upgrade. The additional costs relating to the road-widening project and [other things] are part of the total costs.

Ford Motor Credit Co. is a subsidiary of Ford Motor Co. with its own offices, officers, and directors. Ford Credit buys contracts and leases of automobiles entered into by dealers and consumers. Ford Credit also provides inventory financing for dealers' purchases of Ford and non-Ford vehicles and makes loans to Ford and non-Ford dealers. Dealers and consumers are not required to finance their purchases or leases of Ford vehicles through Ford Credit. Ford Motor is not a party to the agreements between Ford Credit and its customers and does not directly receive any payments under those agreements. Also, Ford Credit is not subject to any agreement with Ford Motor "restricting or conditioning" its ability to finance the dealers' inventories or the consumers' purchases or leases of vehicles. A number of plaintiffs filed a product liability suit in a Missouri state court against Ford Motor. Ford Motor claimed that the court did not have venue. The plaintiffs asserted that Ford Credit, which had an office in the jurisdiction, acted as Ford's "agent for the transaction of its usual and customary business" there. Is Ford Credit an agent of Ford Motor? Discuss.

The court held that Ford Motor could be sued in the jurisdiction in which the suit was filed, on the basis that Ford Credit operated as the defendant's agent there. Ford Motor appealed to the Missouri Supreme Court, which reversed this determination. The state supreme court explained, "A corporation does not become an agent of another corporation merely because a majority of its voting shares is held by the other. Therefore, an agency relationship between a parent and its subsidiary may only be established if the elements of an agency relationship exist." The court cited in particular that Ford Motor is not a party to any of Ford Credit's financing contracts and that Ford Credit is not subject to any agreement with Ford Motor "restricting or conditioning" its ability to finance the dealers' inventories or the customers' purchases or leases of vehicles. These facts "establish that Ford Credit has no power to alter legal relations between Ford Motor Company and third parties. Therefore, Ford Credit does not act as agent for Ford Motor."

Susan Guinta is a real estate salesperson. Smythe Cramer Co. went to an Ohio state court and obtained a garnishment order to attach Guinta's personal earnings. The order was served on Russell Realtors to attach sales commissions that Russell owed to Guinta. Russell objected, arguing that commissions are not personal earnings and are therefore exempt from attachment under a garnishment of personal earnings. An Ohio statute defines personal earnings as "money, or any other consideration or thing of value, that is paid or due to a person in exchange for work, labor, or personal services provided by the person to an employer." An employer is "a person who is required to withhold taxes out of payments of personal earnings made to a judgment debtor." Russell does not withhold taxes from its salespersons' commissions. Under a federal statute, earnings means "compensation paid or payable for personal services, whether denominated as wages, salary, commission, bonus, or otherwise." When the federal definition is more restrictive and results in a smaller garnishment, that definition is controlling. Property other than personal earnings may be subject to garnishment without limits. How should the court rule regarding Russell's objection? Why?

The court held that real estate commissions are personal earnings subject to garnishment. The court reasoned that if it "merely adopts the definition of personal earnings in [the state statute] which excludes real estate commissions, then real estate commissions become property other than personal earnings and the entire commission is subject to garnishment by a creditor."

Rhonda Schroeder married Gennady Shvartsshteyn (Gene) in 1997. Gene worked at Royal Courier and Air Domestic Connect in Illinois, where Melissa Winyard also worked in 1999 and 2000. During this time, Gene and Winyard had an affair. A year after leaving Royal, Winyard filed a petition in a federal bankruptcy court under Chapter 7 and was granted a discharge of her debts. Sometime later, in a letter to Schroeder who had learned of the affair, Winyard wrote, "I never intentionally wanted any of this to happen. I never wanted to disrupt your marriage." Schroeder obtained a divorce and, in 2005, filed a suit in an Illinois state court against Winyard, alleging "alienation of affection." Schroeder claimed that there had been "mutual love and affection" in her marriage until Winyard engaged in conduct intended to alienate her husband's affection. Schroeder charged that Winyard "caused him to have sexual intercourse with her," resulting in "the destruction of the marital relationship." Winyard filed a motion for summary judgment on the ground that any liability on her part had been discharged in her bankruptcy. Is there an exception to discharge for "willful and malicious conduct"? If so, does Schroeder's claim qualify? Discuss.

The court issued a judgment in Winyard's favor. On Schroeder's appeal, a state intermediate appellate court affirmed this judgment. The appellate court explained that bankruptcy relief discharges the debtor from all debts that arose before the date of the order for relief. Nondischargeable debts include debts "for willful and malicious injury by the debtor to another entity or to the property of another entity." Winyard posited that "defendant's letter to plaintiff indicates a lack of intent." The court agreed. "[I]t cannot be inferred from the letter that defendant subjectively intended plaintiff to be injured, and that to the contrary, the letter indicates defendant's total lack of the requisite intent. . . . Here, defendant's letter is evidence indicating a lack of subjective intent to injure plaintiff, and plaintiff has not provided any evidence, such as other documents, depositions, or affidavits, to counter this showing of a lack of intent."

Milton Blankenship agreed in writing to buy 15 acres of Ella Mae Henry's junkyard property for $15,000 per acre with a ten-year option to buy the remaining 28.32 acres. Blankenship orally agreed to (1) begin operating a car skeleton-processing plant within six to fifteen months; (2) buy as many car skeletons generated by the yard as Henry wanted to sell him, at a certain premium over the market price; and (3) allow all junk vehicles on the property to remain until they were processed at the new plant. Blankenship never operated such a plant, never bought any vehicles from the yard, and demanded that all vehicles be removed from the property. To obtain the remaining 28.32 acres, Blankenship filed a suit in a Georgia state court against Henry, who responded with a counterclaim for breach of contract. Under oath during discovery, Henry testified that their oral agreement allowed him to sell "as many of the car skeletons generated by the Henry junkyard" as he wished, and Blankenship testified that he had agreed to buy as many skeletons as Henry was willing to sell. Does the Statute of Frauds undercut or support Henry's counterclaim? Explain.

The court issued a summary judgment in Blankenship's favor. On Henry's appeal, a state intermediate appellate court reversed this judgment and remanded the case for trial. The appellate court ruled first that the contract Henry now seeks to enforce was one for the sale of car skeletons or other scrap"—in other words, "one for the sale of goods to which the UCC [Statute of Frauds] applies." If the party against whom enforcement is sought admits in pleadings, testimony, or otherwise in court that a contract was made, the contract is enforceable even absent a writing. Here, of course, the parties did not put their agreement concerning the skeletons in writing. But, just as Henry testified that he could sell "as many of the car skeletons generated by the Henry junkyard" as he wished, Blankenship testified that he agreed to buy as many skeletons as Henry was willing to sell. Thus, the court concluded, "Blankenship admitted the existence of an output contract for the purchase and sale of as many car skeletons as Henry wished to provide from the junkyard. As such, the contract specified a quantity of goods, and was enforceable under" the Statute of Frauds.

In 1995, Helikon Furniture Co. appointed Tom Gaede as an independent sales agent for the sale of its products in parts of Texas. The parties signed a one-year contract that specified, among other things, the commissions that Gaede would receive. More than a year later, although the parties had not signed a new contract, Gaede was still representing Helikon when it was acquired by a third party. Helikon's new management allowed Gaede to continue to perform for the same commissions and sent him a letter stating that it would make no changes in its sales representatives "for at least the next year." Three months later, in December 1997, the new managers sent Gaede a letter proposing new terms for a contract. Gaede continued to sell Helikon products until May 1997, when he received a letter effectively reducing the amount of his commissions. Gaede filed a suit in a Texas state court against Helikon, alleging breach of contract. Helikon argued, in part, that there was no contract because there was no consideration. In whose favor should the court rule, and why?

The court issued a summary judgment in Helikon's favor, and Gaede appealed to a state intermediate appellate court, which reversed the lower court's decision and remanded the case for trial. The appellate court concluded that Gaede's "substantial performance under the alleged agreement," as evidenced by the letters, "and [Helikon's] knowing acceptance of benefits thereunder, constitute sufficient consideration to render the agreement mutually enforceable." The court explained that Gaede, "at his own risk and expense, continued to perform valuable services on behalf of [Helikon] for a period of some seven months after the acquisition, and a jury might reasonably infer from the evidence that [Helikon] knowingly accepted the benefits of [these] services for a substantial portion of the extended contract term."

Gary Forsee was an executive officer with responsibility for the U.S. operations of BellSouth Corp., a company providing global telecommunications services. Under a covenant not to compete, Forsee agreed that for a period of eighteen months after termination from employment, he would not "provide services . . . in competition with [BellSouth] . . . to any person or entity which provides products or services identical or similar to products and services provided by [BellSouth] . . . within the territory." Territory was defined to include the geographic area in which Forsee provided services to BellSouth. The services included "management, strategic planning, business planning, administration, or other participation in or providing advice with respect to the communications services business." Forsee announced his intent to resign and accept a position as chief executive officer of Sprint Corp., a competitor of BellSouth. BellSouth filed a suit in a Georgia state court against Forsee, claiming, in part, that his acceptance of employment with Sprint would violate the covenant not to compete. Is the covenant legal? Should it be enforced? Why or why not?

The court issued an order finding the covenant not to compete in Forsee's employment agreement unenforceable under Georgia law. BellSouth appealed to a state intermediate appellate court, which affirmed the lower court's order. It has been held that a restrictive covenant—which prohibits an employee from accepting employment with a competitor of the employer 'in any capacity,' or from engaging in a business 'similar to' the employer's business or a 'related trade'—is unenforceable in that it imposes a greater limitation upon the employee than is necessary for the protection of the employer and does not specify with particularity the nature of the business activities in which the employee is forbidden to engage."

In August 2000, in California, Terry Reigelsperger sought treatment for pain in his lower back from chiropractor James Siller. Reigelsperger felt better after the treatment and did not intend to return for more, although he did not mention this to Siller. Before leaving the office, Reigelsperger signed an "informed consent" form that read, in part, "I intend this consent form to cover the entire course of treatment for my present condition and for any future condition(s) for which I seek treatment." He also signed an agreement that required the parties to submit to arbitration "any dispute as to medical malpractice. . . . This agreement is intended to bind the patient and the health care provider . . . who now or in the future treat[s] the patient." Two years later, Reigelsperger sought treatment from Siller for a different condition relating to his cervical spine and shoulder. Claiming malpractice with respect to the second treatment, Reigelsperger filed a suit in a California state court against Siller. Siller asked the court to order the dispute to be submitted to arbitration. Did Reigelsperger's lack of intent to return to Siller after his first treatment affect the enforceability of the arbitration agreement and consent form? Why or why not?

The court refused to compel arbitration, and on Siller's appeal, a state intermediate appellate court affirmed this decision. On further appeal, the California Supreme Court reversed the judgment of the lower court. The state supreme court concluded that the arbitration agreement, which had been signed after treatment for a different condition two years before, applied to the claim arising from the later treatment because the agreement stated it "is intended to bind the patient and health care provider . . . who now or in the future treat[s] the patient." The court characterized this agreement as an "objective manifestation of the parties' intent to arbitrate." To counter this "objective manifestation," Reigelsperger asserted that "he had not intended to return to Siller for treatment. However, his uncommunicated subjective intent is irrelevant. . . . [M]utual consent is gathered from the reasonable meaning of the words and acts of the parties, and not from their unexpressed intentions or understanding. Regardless of whether Reigelsperger had a present intention to return for treatment, he agreed that if he did decide to do so, the arbitration provision . . . would apply to a future dispute." Furthermore, "[l]ogic and standard rules of construction" dictate that the "informed consent" agreement and the arbitration agreement be construed together." Those agreements' "own terms provide additional evidence that the parties contemplated the possibility of future transactions for which they made provision in" the arbitration agreement.

In October 1996, Robert Hildebrandt contracted with Harvey and Nancy Anderson to find a tenant for the Andersons' used-car lot. The Andersons agreed to pay Hildebrandt "a commission equal in amount to five percent up to first three years of lease." On December 12, Paramount Automotive, Inc., agreed to lease the premises for three years at $7,500 per month, and the Andersons signed a promissory note, which stated that they would pay Hildebrandt $13,500, plus interest, in consecutive monthly installments of $485 until the total sum was paid. The note contained an acceleration clause. In a separate agreement, Paramount promised to pay $485 of its monthly rent directly to Hildebrandt. Less than a year later, Paramount stopped making payments to all parties. To enforce the note, Hildebrandt filed a suit in an Oregon state court against the Andersons. One issue in the case was whether the note was a negotiable instrument. The Andersons claimed that it was not, because it was not "unconditional," arguing that their obligation to make payments on the note was conditioned on their receipt of rent from Paramount. Are the Andersons correct? Explain.

The court ruled in favor of the Andersons. Hildebrandt appealed to a state intermediate appellate court, which reversed this judgment and remanded the case for the entry of a judgment in Hildebrandt's favor. The appellate court pointed out that "no condition appears on the face of the note, and nothing in the record supports the conclusion that the note was conditional. Therefore, the promissory note was a 'negotiable instrument.' " The court added that "[t]he only evidence offered was [Harvey's] testimony that he expected [Hildebrandt's] fee would be deducted from payments made by the lessee. That testimony proves at most that defendants expected a portion of the monthly rent would go directly to plaintiff as payment on the commission. It does not prove that defendants expected payments on the commission to cease if rent payments ceased. Nor, more importantly, does it prove that if defendants did have this expectation they communicated it to plaintiff or anybody else."

Sam and Theresa Daigle decided to build a home in Cameron Parish, Louisiana. To obtain financing, they contacted Trinity United Mortgage Co. At a meeting with Joe Diez on Trinity's behalf, on July 18, 2001, the Daigles signed a temporary loan agreement with Union Planters Bank. Diez assured them that they did not need to make payments on this loan until their house was built and permanent financing had been secured. Because the Daigles did not make payments on the Union loan, Trinity declined to make the permanent loan. Meanwhile, Diez left Trinity's employ. On November 1, the Daigles moved into their new house. They tried to contact Diez at Trinity but were told that he was unavailable and would get back to them. Three weeks later, Diez came to the Daigles' home and had them sign documents that they believed were to secure a permanent loan but that were actually an application with Diez's new employer. Union filed a suit in a Louisiana state court against the Daigles for failing to pay on its loan. The Daigles paid Union, obtained permanent financing through another source, and filed a suit against Trinity to recover the cost. Who should have told the Daigles that Diez was no longer Trinity's agent? Could Trinity be liable to the Daigles on this basis? Explain.

The court ruled in favor of the Daigles and awarded damages of more than $26,000. Trinity appealed to a state intermediate appellate court, which affirmed the lower court's ruling and the award. The appellate court pointed out that "many of the representations made by Diez and relied upon by the Daigles, including the representations that he had secured permanent financing for them upon completion of the home and that it was . . . not required that interest payments be made on the [temporary] loan, were made by him prior to the termination of his relationship with Trinity." The court also explained that a principal must notify third persons with whom its agent is authorized to contract on the termination of the agency. "If the principal fails to do so, he is bound to perform the obligations that the [agent] has undertaken." Here, "Trinity never notified the Daigles that Diez was no longer associated with their office in spite of the fact the Daigles made numerous calls to Trinity attempting to contact Diez. Trinity is, therefore, responsible for Diez's actions under the facts of this case."

Jason Knapp, doing business as Knapp Associates, hired Barbara Meade as an independent contractor in March 2009. The parties orally agreed on the terms of employment, including payment to Meade of a share of the company's income, but they did not put anything in writing. In March 2011, Meade quit. Knapp then told Meade that she was entitled to $9,602.17—25 percent of the difference between the accounts receivable and the accounts payable as of Meade's last day. Meade disagreed and demanded more than $63,500—25 percent of the revenue from all invoices, less the cost of materials and outside processing, for each of the years that she worked for Knapp. Knapp refused. Meade filed a lawsuit in a state court against Knapp, alleging breach of contract. In Knapp's response and at the trial, he testified that the parties had an oral contract under which Meade was entitled to 25 percent of the difference between accounts receivable and payable as of the date of Meade's termination. Did the parties have an enforceable contract? How should the court rule, and why?

The court should conclude that the parties had a contract and order its enforcement. Meade would not have to prove the existence of a contract, despite its terms being part of an oral agreement, because she asserted it in her complaint and Knapp admitted to its existence in his answer and at trial. The pleadings and the testimony thus establish that at the time the parties formed the oral contract, there was a meeting of the minds. They disagree only about its terms. As to these differing claims, the court should assess the credibility of the parties, weigh the evidence, and determine the amount of damages to which Meade is entitled.

Tyna Ek met Russell Peterson in Seattle, Washington. Peterson persuaded Ek to buy a boat that he had once owned, the O'Hana Kai, which was in Juneau, Alaska. Ek paid $43,000 for the boat, and in January 2000, the parties entered into a contract. In the contract, Peterson agreed to make the vessel seaworthy so that within one month it could be transported to Seattle, where he would pay its moorage costs. He would also renovate the boat at his own expense in return for a portion of the profit on its resale in 2001. At the time of the resale, Ek would recover her costs, after which she would reimburse Peterson for his expenses. Ek loaned Peterson her cell phone so that they could communicate while he prepared the vessel for the trip to Seattle. In March, Peterson, who was still in Alaska, borrowed $4,000 from Ek. Two months later, Ek began to receive unanticipated, unauthorized bills for vessel parts and moorage, the use of her phone, and charges on her credit card. She went to Juneau to take possession of the boat. Peterson moved it to Petersburg, Alaska, where he registered it under a false name, and then to Taku Harbor, where the police seized it. Ek filed a suit in an Alaska state court against Peterson, alleging breach of contract and seeking damages. If the court finds in Ek's favor, what should her damages include? Discuss.

The court should hold that Peterson breached the contract with Ek and award her damages. Of the four broad categories of damages, she would be entitled at least to compensatory damages, which would cover her direct losses and costs. In this case, these damages would include the loan to Peterson, the unauthorized charges on her credit card and other bills, and the moorage costs to the date of the boat's repossession. Any loss that has been avoided, however, reduces the amount of the recovery. Here, the amount of Ek's loss would be offset by the increase in the value of the boat as a result of Peterson's efforts. Ek might also be entitled to consequential damages, which are foreseeable damages that result from a breach but are caused by special circumstances beyond the contract. In this case, these damages would include the costs to repossess the boat, which were a foreseeable result of Peterson's material breach of the contract and his failure to surrender possession of the boat.

Millennium Club, Inc., operates a tavern in South Bend, Indiana. In January 2003, Pamela Avila and other minors gained admission by misrepresenting themselves to be at least twenty-one years old. According to the club's representatives, the minors used false driver's licenses, "fraudulent transfer of a stamp used to gain admission by another patron or other means of false identification." To gain access, the minors also signed affidavits falsely attesting to the fact that they were aged twentyone or older. When the state filed criminal charges against the club, the club filed a suit in an Indiana state court against Avila and more than two hundred others, charging that they had misrepresented their ages and seeking damages of $3,000 each. The minors filed a motion to dismiss the complaint. Should the court grant the motion? What are the competing policy interests in this case? If the club was not careful in checking minors' identification, should it be allowed to recover? If the club reasonably relied on the minors' representations, should the minors be allowed to avoid liability? Discuss.

The court should not dismiss the Millennium Club's complaint against the minors. The policy principle at the heart of this case is that a person should not be allowed to profit from his or her wrongful act by, for example, avoiding or imposing liability on the basis of that act. The minors' wrongful acts consist of the misrepresentations of their ages. The Club's wrongful act may have been a failure to reasonably check its customers' identification. Allowing the Club to recover in this case might discourage tavern owners from being careful when checking their customers' identification, which could undermine efforts to prevent minors from patronizing taverns. But permitting the minors to avoid liability would encourage the use of fraudulent identification to gain access to drinking establishments. Ultimately, if the Club acted reasonably and did not aid the minors' in their fraud, then the minors should bear the consequences.

Heublein, Inc., makes wines and distilled spirits. Tarrant Distributors, Inc., agreed to distribute Heublein brands. When problems arose, the parties entered mediation. Under a settlement agreement, Heublein agreed to pay Tarrant the amount of its "net loss" as determined by Coopers & Lybrand, an accounting firm, according to a specified formula. The parties agreed that Coopers & Lybrand's calculation would be "final and binding." Heublein disagreed with Coopers & Lybrand's calculation, however, and refused to pay. The parties asked a court to rule on the dispute. Heublein argued that the settlement agreement included an implied condition precedent that Coopers & Lybrand would correctly apply the specified formula before Heublein would be obligated to pay. Tarrant pointed to the clause stating that the calculation would be "final and binding." With whom will the court agree, and why?

The court should refuse to imply a condition precedent in the settlement agreement, and order Heublein to pay Tarrant. The settlement agreement's use of the terms "final and binding" meant that both parties gave up the right to probe the correctness of Coopers & Lybrand's determination unless Heublein presented evidence of fraud, misconduct, or a serious mistake to imply bad faith or a failure to exercise an honest judgment, or evidence of an undisputed mistake of fact in the determination. An error in computing the net loss under the formula set out in the settlement agreement was a foreseeable event, and the settlement agreement between Heublein and Tarrant did not provide any review procedure. Instead, it expressly stated that Coopers's determination would be "final and binding upon the parties."

Marsh has a prize horse named Arabian Knight. Marsh is in need of working capital. She borrows $50,000 from Mendez, who takes possession of Arabian Knight as security for the loan. No written agreement is signed. Discuss whether, in the absence of a written agreement, Mendez has a security interest in Arabian Knight. If Mendez does have a security interest, is it a perfected security interest?

The creditor has a security interest in the collateral and is a perfected secured party. Mendez has given value and has taken possession of the collateral owned by the debtor (rights in the collateral). Thus, the creditor has a security interest even though no security agreement was signed by the debtor. Once a security interest attaches, perfection can be made by a transfer of possession to the secured party without a filing. Thus, a security interest was created and perfected at the time the debtor transferred the collateral to the creditor as security for the loan.

Evelyn Kowalchuk, an eighty-eight-year-old widow, and her son, Peter, put their savings into accounts managed by Matthew Stroup. Later, they initiated an arbitration proceeding before the National Association of Securities Dealers (NASD), asserting that Stroup fraudulently or negligently handled their accounts. They asked for an award of $832,000. After the hearing, but before a decision was rendered, Stroup offered to pay the Kowalchuks $285,000, and they e-mailed their acceptance. Stroup signed a settlement agreement and faxed it to the Kowalchuks for their signatures. Meanwhile, the NASD issued an award in the Kowalchuks' favor for $88,788. Stroup immediately told them that he was withdrawing his settlement "offer." When Stroup did not pay according to its terms, the Kowalchuks filed a suit in a New York state court against him for breach of contract. Did these parties have a contract? Why or why not?

The elements of an enforceable agreement include an offer and its acceptance. The moment of acceptance is the moment that the contract is created. For an acceptance to be effective, it must comply with the terms of the offer and be clear, unambiguous, and unequivocal. In this case, the parties' conduct established that they understood their dispute and that they intended its settlement through their agreement. The Kowalchuks' e-mail shows that Stroup made an offer. The same e-mail shows that the Kowalchuks accepted it. Because there appears to be nothing unclear, ambiguous, or equivocal about the e-mail, it constituted an effective acceptance. Stroup contended that his offer was revoked before it was accepted, because the Kowalchuks had not yet added their signatures to his signed, faxed copy of the settlement when he communicated the revocation. But the document signed by Stroup established the existence of the parties' agreement, including its offer and acceptance, and was enforceable against him. The court issued a judgment in the Kowlachuks' favor, and state intermediate appellate court affirmed the judgment.

Cohen contracts to sell his house and lot to Windsor for $100,000. The terms of the contract call for Windsor to pay 10 percent of the purchase price as a deposit toward the purchase price, or a down payment. The terms further stipulate that if the buyer breaches the contract, Cohen will retain the deposit as liquidated damages. Windsor pays the deposit, but because her expected financing of the $90,000 balance falls through, she breaches the contract. Two weeks later Cohen sells the house and lot to Ballard for $105,000. Windsor demands her $10,000 back, but Cohen refuses, claiming that Windsor's breach and the contract terms entitle him to keep the deposit. Discuss who is correct.

The entire issue rests on whether the provision is an enforceable liquidated damages clause or a penalty. Generally, the courts will enforce liquidated damages clauses under the principle of freedom of contract if damages resulting from breach would have been difficult to estimate at the time the contract was entered into and, more importantly, if the amount set is a reasonable estimate of what such damages would be. If the amount is excessive, the court will declare the clause to be a penalty and unenforceable, and only the amount of ac- tual damages proved will be allowed. If, however, the amount in the clause is a reasonable estimate, the court will enforce the clause, even if the actual damages proved to be less. A good discussion of this case would go into the hindsight effect of the court in comparing actual damages proved to result from breach against those estimated at the time the contract was entered into. Should this influence the court‟s decision? (Here, Cohen actually suffered no damage and instead profited from the breach.) If one believes that $10,000 (10 percent) is excessive, what about $1,000, given the same facts? These clauses are commonly placed in real estate purchase contracts, and the answer in either case depends on whether the clause is treated as a penalty.

Everett McCleskey, a local businessperson, is a good friend of Al Miller, the owner of a local candy store. Every day on his lunch hour, McCleskey goes into Miller's candy store and stays about five minutes. After looking at the candy and talking with Miller, McCleskey usually buys one or two candy bars. One afternoon, McCleskey goes into Miller's candy shop, looks at the candy, and picks up a $1 candy bar. Seeing that Miller is very busy, he waves the candy bar at Miller without saying a word and walks out. Is there a contract? If so, classify it within the categories presented in this chapter.

The facts presented here indicate the presence of all the elements necessary for a valid contract. There are a serious offer and acceptance, consideration is exchanged (a candy bar for $1), both parties have capacity, the selling of the candy is legal, and there is no particular form required for this type of contract. Thus, a contract exists and for the reasons given here is classified as valid, enforceable, and informal. In addition, this is a classic case of an implied-in-fact contract. By his conduct McCleskey is telling Miller that because the store is crowded, he will pay for the candy bar later. The contract is also bilateral (as opposed to unilateral), because Miller impliedly promises to sell the candy bar to McCleskey in exchange for McCleskey's implied promise to pay. The contract is partially executory, as McCleskey has engaged to pay for the candy bar in the future. Because the contract is for a legal purpose, both parties have capacity, and reality of consent is not an issue, the contract is neither voidable nor void.

Adam is a traveling salesperson for Peter Petri Plumbing Supply Corp. Adam has express authority to solicit orders from customers and to offer a 5 percent discount if payment is made within thirty days of delivery. Petri has said nothing to Adam about extending credit. Adam calls on a new prospective customer, John's Plumbing Firm. John tells Adam that he will place a large order for Petri products if Adam will give him a 10 percent discount with payment due in equal installments thirty, sixty, and ninety days from delivery. Adam says he has authority to make such a contract. John calls Petri and asks if Adam is authorized to make contracts giving a discount. No mention is made of payment terms. Petri replies that Adam has authority to give discounts on purchase orders. On the basis of this information, John orders $10,000 worth of plumbing supplies and fixtures. The goods are delivered and are being sold. One week later, John receives a bill for $9,500, due in thirty days. John insists he owes only $9,000 and can pay it in three equal installments, at thirty, sixty, and ninety days from delivery. Discuss the liability of Petri and John only.

The general rule in agency law is that contracts made within the scope of authority of the agent are binding on the principal and the third party. Authority of an agent can be express, implied, or apparent. In this situation, Adam unquestionably has express authority to solicit orders and to give a discount. This authority is reaffirmed by Petri telling John that Adam has authority to give discounts. Therefore, Adam has express and apparent authority to give a discount. Because a third person is not bound by secret limitations imposed by the principal, John is definitely entitled to a 10 percent discount as contracted for with Adam. The only other issue is the terms of the payment period. If it is customary in the plumbing trade for sales to be paid on a thirty-sixty-ninety-day basis or for credit to be extended on such purchases, Adam will be said to have implied authority to make such a contract and Petri will be so bound. If such is not customary, the authority to sell will be said to imply on the authority to sell for cash; and unless Petri agrees to the thirty-sixty-ninety-day terms, John will owe the lump sum of $9,000 payable within thirty days.

Tabor is a buyer of file cabinets manufactured by Martin. Martin's contract with Tabor calls for delivery of fifty file cabinets at $40 per cabinet in five equal installments. After delivery of two installments (twenty cabinets), Martin informs Tabor that because of inflation, Martin is losing money and will promise to deliver the remaining thirty cabinets only if Tabor will pay $50 per cabinet. Tabor agrees in writing to do so. Discuss whether Martin can legally collect the additional $100 on delivery to Tabor of the next installment of ten cabinets.

The general rule is that a promise to do what one already has a legal or contractual duty to do is not legally sufficient consideration, because there is neither a legal benefit to the promisor nor a legal detriment to the promisee. This is called the preexisting duty rule. Unless there is a change of duties (consideration), the promise to pay for that which was previously contracted is unenforceable. An exception to this rule exists under the UCC for contracts for the sale of goods. The UCC provides that an agreement modifying a contract for the sale of goods needs no consideration to be binding [UCC 2-209(1)]. Therefore, the agreement by Tabor to pay the additional $10 per cabinet (a good) may be binding, even though no consideration (detriment) is given by Martin for the increase in price. (The issue, then, for the courts to determine will be whether Martin is taking unfair advantage of Tabor.)

Stephen Schor, an accountant in New York City, advised his client, Andre Romanelli, Inc., to open an account at J. P. Morgan Chase Bank, N.A., to obtain a favorable interest rate on a line of credit. Romanelli's representative signed a signature card, which he gave to Schor. When the accountant later told Romanelli that the rate was not favorable, the firm told him not to open the account. Schor signed a blank line on the signature card, changed the mailing address to his office, and opened the account in Romanelli's name. In a purported attempt to obtain credit for the firm elsewhere, Schor had its principals write checks payable to themselves for more than $4.5 million, ostensibly to pay taxes. He indorsed and deposited the checks in the Chase account and eventually withdrew and spent the funds. Romanelli filed a suit in a New York state court against Chase and other banks, alleging that a drawer is not liable on an unauthorized indorsement. Is this the rule? What are its exceptions? Which principle applies to these facts, and why?

The general rule is that an unauthorized signature will not bind the person whose name is signed. Under that rule, if an agent lacks the authority to sign the principal's name or exceeds the authority given by the principal, the principal will not be bound. The burden of loss will fall on the first party to take the instrument with the unauthorized indorsement on the basis that he or she was in the best position to avoid the loss. One of the exceptions to this general rule occurs when a person causes an instrument to be issued to a payee who will have no interest in the instrument—a fictitious payee. In that situation, the indorsement of the "payee" is not treated as a forgery, and an innocent holder can hold the drawer liable on the instrument. Under this section, an indorsement by any person in the name of the fictitious payee is effective. In this case, Romanelli's principals wrote checks payable to themselves, not intending themselves to have interests in the instruments, but intending that Schor use the checks to pay taxes. The principals were fictitious payees, the accountant's indorsements were effective, and Chase was not liable. The court in the case on which this problem is based dismissed Romanelli's complaint and, based on the reasoning above, a state intermediate appellate court affirmed the dismissal.

Sheila Bartell was arrested on various charges related to burglary, the possession for sale of methamphetamine, and other crimes. She pleaded guilty in a California state court to some charges in exchange for the dismissal of others and an agreement to reimburse the victims. The victims included "Rita E.," who reported that her checkbook had been stolen and her signature forged on three checks totaling $590. Wells Fargo Bank had "covered" the checks and credited her account, however, so the court ordered Bartell to pay the bank. Bartell appealed, arguing that the bank was not entitled to restitution. What principles apply when a person forges a drawer's signature on a check? Is the bank entitled to recover from the defendant? Explain.

The general rule is that the forgery of a drawer's signature does not bind the person whose name is forged. When a bank pays a check on which the drawer's signature is forged, generally the bank must recredit the customer's account and suffer the loss. In some circumstances, a bank may be able to recover from the forger of the check because it was the bank's money that the forger took. In this problem, Wells Fargo Bank paid out $590 as a result of the forgeries. Because Wells Fargo Bank could not legally debit Rita E.'s account once it learned the checks were forged, it had to absorb the loss. The bank was a direct victim of the defendant's crimes of forgery and is entitled to restitution. In the case on which this problem is based, a state intermediate appellate court affirmed the lower court's order to the defendant to pay the bank.

In 2007, James Cavazos purchased a new Mercedes vehicle from a dealer and gave JPMorgan Chase Bank (Chase) a purchase-money security interest (PMSI) in the car. The state recorded Chase's lien on the original certificate of title. Cavazos then forged a release of the lien against the title and received a certified copy of the original title. In reliance on that title, NXCESS Motor Cars, Inc., bought the car. It sold the car to Xavier Valeri, who granted a PMSI to U.S. Bank. NXCESS warranted that the title was free of all liens. When a new title was issued, Chase learned of Cavazos's forgery. It sued Cavazos, Valeri, and U.S. Bank for conversion (see page 127 in Chapter 6). Chase demanded possession of the vehicle and that Cavazos repay the loan. Valeri and U.S. Bank contended that they were buyers in the ordinary course of business and had good title to the Mercedes because the state had provided a title free of liens and claims. Cavazos is liable on the loan, but who has the right to possess the car? Which PMSI dominates? Explain your answers.

The holder of the original, valid PMSI dominates, so Chase Bank gets the car. Certificate of title to the car obtained after sale by Cavazos was void, and thus NXCESS, which bought the car, and Valeri, who in turn bought the vehicle from the dealer, were precluded from asserting the defense that they were buyers in ordinary course of business. The certificate of title was obtained in reliance on a release of the lien forged by the initial purchaser (Cavazos). Later purchasers assumed and exercised control over the car and violated the lienholder's rights, so they engaged in conversion. Wrongful intent is not an element of conversion, and thus innocent buyers of property may be liable.

A college student, Austin Keynes, wished to purchase a new entertainment system from Friedman Electronics, Inc. Because Keynes did not have the cash to pay for the entertainment system, he offered to sign a note promising to pay $150 per month for the next six months. Friedman Electronics, eager to sell the system to Keynes, agreed to accept the promissory note, which read, "I, Austin Keynes, promise to pay to Friedman Electronics or its order the sum of $150 per month for the next six months." The note was signed by Austin Keynes. About a week later, Friedman Electronics, which was badly in need of cash, signed the back of the note and sold it to the First National Bank of Halston. Give the specific designation of each of the three parties on this note.

The instrument is a promissory note, which is a two-party instrument. The two parties to a promissory note are the maker and the payee. In this case, Keynes, the buyer, is the maker of the promissory note; Friedman Electronics, Inc., is the payee. First National Bank of Halston, which purchased the promissory note from Friedman Electronics, is called a holder. When Friedman Electronics transferred the note to the bank by signing the back of the note, it became an indorser, and the bank became an indorsee.

Bernstein owns a lot and wants to build a house according to a particular set of plans and specifications. She solicits bids from building contractors and receives three bids: one from Carlton for $160,000, one from Friend for $158,000, and one from Shade for $153,000. She accepts Shade's bid. One month after beginning construction of the house, Shade contacts Bernstein and informs her that because of inflation and a recent price hike for materials, he will not finish the house unless Bernstein agrees to pay an extra $13,000. Bernstein reluctantly agrees to pay the additional sum. After the house is finished, however, Bernstein refuses to pay the extra $13,000. Discuss whether Bernstein is legally required to pay this additional amount.

The legal issue deals with the preexisting duty rule, which basically states that a promise to do what one already has a legal or contractual duty to do does not constitute consideration, and thus the return promise is unenforceable. In this case, Shade was required contractually to build a house according to a specific set of plans for $53,000, and Bernstein's later agreement to pay an additional $3,000 for exactly what Shade was required to do for $53,000 is without consideration and unenforceable.

Sabrina Runyan writes the following note on a sheet of paper: "I, the undersigned, do hereby acknowledge that I owe Leo Woo one thousand dollars, with interest, payable out of the proceeds of the sale of my horse, Lightning, next month. Payment is to be made on or before six months from date." Discuss specifically why this is not a negotiable instrument.

The note is nonnegotiable for the following reasons: (a) The note is not signed by the maker, Sabrina Runyan. (b) The maker did not make a definite promise to pay but merely acknowledged that a debt was owed to Leo Woo. (c) The note is not payable at a definite time, as the note is undated; therefore, the end of the six-month period is uncertain. (d) The note is payable only to Leo Woo, not to his order or to bearer. Any of these four factors would render the note nonnegotiable. Also, payment of the note is conditioned on the sale of Nolan's horse, Lightning (payment is to come from a particular fund—the proceeds of the sale). This would not make the note nonnegotiable under UCC 3-106(b)(ii), but would render it nonnegotiable under unrevised Article 3 [UCC 3- 105(2)(b)].

Dean Brothers Corp. owns and operates a steel drum manufacturing plant. Lowell Wyden, the plant superintendent, hired Best Security Patrol, Inc. (BSP), a security company, to guard Dean property and "deter thieves and vandals." Some BSP security guards, as Wyden knew, carried firearms. Pete Sidell, a BSP security guard, was not certified as an armed guard but nevertheless brought his gun, in a briefcase, to work. While working at the Dean plant on October 31, 2010, Sidell fired his gun at Tyrone Gaines, in the belief that Gaines was an intruder. The bullet struck and killed Gaines. Gaines's mother filed a lawsuit claiming that her son's death was the result of BSP's negligence, for which Dean was responsible. What is the plaintiff's best argument that Dean is responsible for BSP's actions? What is Dean's best defense? Explain.

The plaintiff's best argument that Dean is responsible for BSP's actions may be that work such as BSP was hired to perform creates a peculiar risk of harm to others. Thus, in this case, such an injury is one that might have been anticipated as a direct or probable consequence of the performance of the work contracted for, if reasonable care had not been taken in its performance. Under this reasoning, the plaintiff would argue that Dean could be liable even though the guard responsible was an employee of an independent contractor. To this argument Dean might respond that hiring armed guards to protect property does not create a peculiar risk of harm to others and, therefore, is not inherently dangerous work. On this conclusion, even if Gaine's death was the result of BSP's negligence, Dean would not be liable because BSP was an independent contractor and an employer is not generally liable for the negligent acts of its independent contractor.

Planned Pethood Plus, Inc., is a veterinarian-owned clinic. It borrowed $389,000 from KeyBank at an interest rate of 9.3 percent per year for ten years. The loan had a "prepayment penalty" clause that clearly stated that if the loan was repaid early, a specific formula would be used to assess a lump-sum payment to extinguish the obligation. The sooner the loan was paid off, the higher the prepayment penalty. After a year, the veterinarians decided to pay off the loan. KeyBank invoked a prepayment penalty of $40,525.92, which was equal to 10.7 percent of the balance due. The veterinarians sued, contending that the prepayment requirement was unenforceable because it was a penalty. The bank countered that the amount was not a penalty but liquidated damages and that the sum was reasonable. The trial court agreed with the bank, and the veterinarians appealed. Was the loan's prepayment charge reasonable, and should it have been enforced? Why or why not?

The prepayment penalty is not improper. A liquidated damages provision must not be "unreasonably large for the expected loss from a breach of contract,‟ or "unreasonably disproportionate to the expected loss on the very breach that did occur and was sued upon.‟ In an action for breach of contract, a liquidated damages provision that fails the above tests amounts to an unenforceable penalty." Planned Pethood had the right to prepay the loan principal, but that triggered the prepayment penalty that was clearly stated in the contract. The alternative for Pethood was to pay the loan annually, year by year, for 10 years as the note called for. When it took advantage of the alternative, the prepayment penalty was not unreasonable. This is a common feature of many loan agreements and the sum required does not violate some notion of equity and is not unconscionable.

Karen and Gerald Baldwin owned property in Rapid City, South Dakota, which they leased to Wyoming Alaska Corp. (WACO) for use as a gas station and convenience store. The lease obligated the Baldwins to make repairs, but WACO was authorized to make necessary repairs. After seventeen years, the property was run-down. The store's customers were tripping over chunks of concrete in the parking lot. An underground gasoline storage tank was leaking. The store's manager hired Duffield Construction, Inc., to install a new tank and make other repairs. The Baldwins saw the new tank sitting on the property before the work began. When WACO paid only a small portion of the cost, Duffield filed a mechanic's lien and asked a South Dakota state court to foreclose on the property. The Baldwins disputed the lien, arguing that they had not requested the work. What is the purpose of a mechanic's lien? Should property owners who do not contract for improvements be liable for the cost under such a lien? How might property owners protect themselves against a lien for work that they do not request? Explain.

The purpose of a mechanic's lien is to provide security or protection to persons who improve the property of others by furnishing materials and labor. Even if a property owner has not actually authorized an improvement, the owner's authority will be inferred if he knew about an improvement and did not act to avoid liability for it. Owners are required to take action rather than remain silent when they have notice that improvements are being made on their property or they will be estopped from attacking a mechanic's lien. Here, the Baldwins knew that the improvements were going to be made to their property because they saw the tank. They could have protected themselves against Duffield's eventual lien by, for example, notifying Duffield immediately. Because they did nothing to protect themselves, the court should hold that Duffield is entitled to foreclose on the mechanic's lien.

In 2004 and 2005, Kent Avery, on behalf of his law firm—the Law Office of Kent Avery, LLC— contracted with Marlin Broadcasting, LLC, to air commercials on WCCC-FM, 106.9 "The Rock." Avery, who was the sole member of his firm, helped to create the ads, which solicited direct contact with "defense attorney Kent Avery," featured his voice, and repeated his name and experience to make potential clients familiar with him. When WCCC was not paid for the broadcasts, Marlin filed a suit in a Connecticut state court against Avery and his firm, alleging an outstanding balance of $35,250. Pending the court's hearing of the suit, Marlin filed a request for a writ of attachment. Marlin offered in evidence the parties' contracts, the ads' transcripts, and WCCC's invoices. Avery contended that he could not be held personally liable for the cost of the ads. Marlin countered that the ads unjustly enriched Avery by conferring a personal benefit on him to Marlin's detriment. What is the purpose of attachment? What must a creditor prove to obtain a writ of attachment? Did Marlin meet this test? Explain.

The purpose of attachment is to secure certain property for the payment of a judgment in the plaintiff's favor, pending that result. In Marlin's case, the court granted the request for an attachment order. On Avery's appeal, a state intermediate appellate court affirmed the lower court's judgment. The appellate court explained that attachment is not concerned with "the adjudication of the merits of the action brought by the plaintiff." It is "only concerned with whether and to what extent the plaintiff is entitled to have property of the defendant."

Lauren Barton, a single mother with three children, lived in Portland, Oregon. Cynthia VanHorn also lived in Oregon until she moved to New York City to open and operate an art gallery. VanHorn asked Barton to manage the gallery under a one-year contract for an annual salary of $72,000. To begin work, Barton relocated to New York. As part of the move, Barton transferred custody of her children to her husband, who lived in London, England. In accepting the job, Barton also forfeited her husband's alimony and child-support payments, including unpaid amounts of nearly $30,000. Before Barton started work, VanHorn repudiated the contract. Unable to find employment for more than an annual salary of $25,000, Barton moved to London to be near her children. Barton filed a suit in an Oregon state court against VanHorn, seeking damages for breach of contract. Should the court hold, as VanHorn argued, that Barton did not take reasonable steps to mitigate her damages? Why or why not?

The question of whether a party properly mitigates damages is a question of fact. Here, there is evidence to support a finding that Barton attempted to mitigate her damages—she apparently made reasonable efforts to find, and did find, employment, which it was not unreasonable for her to refuse because of the significantly lower salary. And thus under the circumstances it was not unreasonable for her to choose to move to London. The appellate court reiterated the lower court's findings. The court should award Barton $72,000 for the one year's salary she would have been paid if VanHorn had not repudiated their contract and the costs to move to London.

A North Carolina Department of Transportation regulation prohibits the placement of telephone booths within a public right-of-way. Despite this regulation, GTE South, Inc., placed a booth in the right-of-way near the intersection of Hillsborough and Sparger Roads in Durham County. A pedestrian, Laura Baldwin, was using the booth when an accident at the intersection caused a dump truck to cross the right-of-way and smash into the booth. Was Baldwin within the class of persons protected by the regulation? If so, did GTE's placement of the booth constitute negligence per se? Explain.

The regulation prohibiting the placement of phone booths within rights-of-way was a safety regulation and Baldwin, as a pedestrian, can be considered to be within the class protected by the regulation. A safety regulation creates a specific duty for the protection of others. A violator of the regulation is liable to a member of the class whom the regulation is intended to protect and who suffers harm proximately caused by its violation. The implied purpose of the phone booth regulation is to protect the safety of the motorist who might leave the road and strike the booth while simultaneously protecting the pedestrian who might be using the booth. Thus, Baldwin was within the class that the regulation was intended to protect. On Baldwin‟s proof that GTE‟s placement of the booth proximately caused her injuries, GTE can be held to have been negligent per se.

In 2002, Farrokh and Scheherezade Sharabianlou were looking for a location for a printing business. They signed a purchase agreement to buy a building owned by Berenstein Associates for $2 million and deposited $115,000 in escrow until the time of the final purchase. The agreement contained a clause requiring an environmental assessment of the property. This study indicated the presence of tricholoroethene and other chemicals used in dry cleaning, and it recommended further study of the contamination. Because of this issue, the bank would not provide financing for the purchase. When the deal fell apart, the Berensteins sued for breach of contract. The Sharabianlous sought the return of their $115,000 deposit and rescission of the contract. The trial court awarded the Berensteins $428,660 in damages due to the reduced value of their property when it was later sold to another party at a lower price. The Sharabianlous appealed. Do they have a good argument for rescission? Explain your answer.

The reviewing court concluded that "Rescission is intended to restore the parties as nearly as possible to their former positions and 'to bring about substantial justice by adjusting the equities between the parties'." Rescission does not occur if a contract is affirmed; it means the contract is repudiated. Here rescission is appropriate because the contracting parties were mutually mistaken as to the condition of the property. The environmental contamination substantially reduced its value. When an agreement to purchase property is subject to rescission, "the seller must refund all payments received in connection with the sale." Hence, the award of damages to the Berensteins was reversed and the Sharabianlous were refunded their deposit.

Summerall Electric Co. and other subcontractors were hired by National Church Services, Inc. (NCS), which was the general contractor on a construction project for the Church of God at Southaven. As work progressed, payments from NCS to the subcontractors were late and eventually stopped altogether. The church had paid NCS in full for the entire project beforehand, but apparently NCS had mismanaged the project. When payments from NCS stopped, the subcontractors filed mechanic's liens (see page 546 in Chapter 28) for the value of the work they had performed but for which they had not been paid. The subcontractors sued the church, contending that it was liable for the payments because NCS was its agent on the basis of either actual or apparent authority. Was NCS an agent for the church, thereby making the church liable to the subcontractors? Explain your reasoning.

The subcontractors should have filed liens before the church made its final payment to NCS. Their liens were not timely. NCS was not the agent of the church such that the church could be held liable to the subcontractors for costs owed to subcontractors by NCS. NCS did not give the church authority to contract on its behalf, and the church did not exercise any authority over the subcontractors. Subcontractors did not rely on alleged apparent authority conferred by the church onto NCS to bind the church such as to create an agency relationship in which the subcontractors could hold the church liable for costs owed to subcontractors by NCS, where there was no evidence that any of the subcontractors believed that they were employed by the church or worked on its behalf.

When Hurricane Katrina hit the Gulf Coast in 2005, Evangel Temple Assembly of God in Wichita Falls, Texas, contacted Wood Care Centers, Inc., about leasing a facility it owned to house evacuees from the hurricane. Evangel and Wood Care reached an agreement and signed a twenty-year lease at $10,997 per month. One clause said that Evangel could terminate the lease at any time by giving Wood Care notice and paying 10 percent of the balance remaining on the lease. Another clause stated that if the facility was not given a property tax exemption, Evangel had the option to terminate the lease. Nine months later, the last of the evacuees left the facility, and Evangel notified Wood Care that it would end the lease. Wood Care demanded the 10 percent payment. Evangel claimed that it did not need to make the payment because if the facility converted back to a "non-church" use, it would lose its tax-exempt status and Evangel could simply terminate the lease. Evangel's pastor testified that the parties understood that this would be the scenario at the time the lease was signed. The trial court held that Evangel owed nothing. Wood Care appealed, contending that the trial court improperly allowed parol evidence to interpret the contract. Was the trial court's acceptance of parol evidence correct? Why or why not?

The trial court accepted parol evidence because it believed that there was a conflict between the 10-percent termination clause and the tax-exemption termination clause. But the appellate court did not believe that the trail court had to have accepted parol evidence because the contract in fact could have be interpreted on its face. Under the contract, if the property was not tax-exempt, the tax-exemption termination clause took effect. That was the situation, so Evangel had the right to terminate without payment. The court should not have accepted parol evidence, because it was not needed. In any event, that parol evidence did not change the outcome of the case because the contract could be resolved without it.

Arnett Gertrude, a widow with no children, lived with her sister and her nephew Jack Scriber. When Gertrude was diagnosed with cancer, she added Scriber as an authorized signatory to her checking account at Salyersville National Bank and gave him power of attorney. Shortly before Gertrude died, Scriber wrote checks on the account to withdraw nearly all of the $600,000 in the account and transferred the funds into his own account. After Gertrude's death, Bobbie Caudill, the administrator of the estate, discovered the withdrawals. Caudill sued the bank for aiding Scriber in the conversion of Gertrude's funds. The bank's defense was that Scriber had power of attorney over Gertrude's finances and had the power to write checks on the account, so the bank had to honor the checks that Scriber had written. The estate argued that the bank had breached its duty to Gertrude to guard against such obvious misappropriation. The trial court held for the bank. Did the bank breach its duty to Gertrude? Why or why not?

The trial court was correct. The relationship between a bank and a depositor is that of debtor-creditor and ordinarily does not impose a fiduciary duty upon the bank. The bank did not owe a fiduciary duty to Gertrude. The bank did not act in "bad faith" or with knowledge that Gertrude's nephew breached his fiduciary duty to his aunt when it paid checks drawn by Scriber out of Gertrude's account. A bank is liable for withdrawals if the bank has knowledge that withdrawals constituted breach of fiduciary duty or that paying checks amounted to "bad faith." The bank acted pursuant to valid agreements executed by Gertrude that gave Scriber power of attorney and the right to be a signatory on the account.

David Gain was the chief executive officer (CEO) of Forest Media Corp., which became interested in acquiring RS Communications, Inc., in 2010. To initiate negotiations, Gain met with RS's CEO, Gill Raz, on Friday, July 12. Two days later, Gain phoned his brother Mark, who bought 3,800 shares of RS stock on the following Monday. Mark discussed the deal with their father, Jordan, who bought 20,000 RS shares on Thursday. On July 25, the day before the RS bid was due, Gain phoned his parents' home, and Mark bought another 3,200 RS shares. The same routine was followed over the next few days, with Gain periodically phoning Mark or Jordan, both of whom continued to buy RS shares. Forest's bid was refused, but on August 5, RS announced its merger with another company. The price of RS stock rose 30 percent, increasing the value of Mark and Jordan's shares by $664,024 and $412,875, respectively. Did Gain engage in insider trading? What is required to impose sanctions for this offense? Could a court hold Gain liable? Why or why not?

There is likely enough evidence in the facts of this problem to find that David violated the law because there was a clear pattern—every time David called his brother or father, Mark or Jordan bought more RS stock. Insider trading can be established when it can be inferred that the most likely source of that belief was an insider. For example, a stock purchase or sale's proximity in time to a phone conversation between a trader and one with inside information provides a reasonable basis for inferring an exchange of that information. Thus, in this problem, on this basis, a court could hold David liable for insider trading.

Ruth carelessly parks her car on a steep hill, leaves the car in neutral, and fails to engage the parking brake. The car rolls down the hill and knocks down a power line. The sparks from the broken line ignite a grass fire. The fire spreads until it reaches a barn one mile away. The barn houses dynamite, and the burning barn explodes, causing part of the roof to fall on and injure Jim, a passing motorist. Which element of negligence is of the greatest concern here? What legal doctrine resolves this issue? Will Jim be able to recover damages from Ruth? Explain your answer.

This is a causation question. Ruth did breach the duty of care that she owed Jim (and others in society) when she parked carelessly on the hill. Jim also clearly suffered an injury. The only remaining question, then, has to do with causation. Ruth‟s car set into motion a chain of events without which the barn would not have fallen down. Careless parking on a hill creates a risk that a reasonable person can foresee could result in harm. The question here is whether the electric spark, the grass fire, the barn full of dynamite and the roof falling in are foreseeable risks stemming from a poor parking job. In this case, it would be a question of fact for a jury to determine whether there were enough intervening events between Ruth's parking and Jim's injury to defeat Jim's claim.

Kanahara is employed part-time by the CrossBar Packing Corp. and earns take-home pay of $400 per week. He is $2,000 in debt to the Holiday Department Store for goods purchased on credit over the past eight months. Most of this property is nonexempt and is now in Kanahara's apartment. Kanahara is in default on his payments to Holiday. Holiday learns that Kanahara has a girlfriend in another state and that he plans to give her most of this property for Christmas. Discuss what actions are available to and should be taken by Holiday to collect the debt owed by Kanahara.

Three basic actions are available to Holiday: (a) Attachment—Holiday would have to post a bond and reduce its claim to judgment; then it could sell the attached property to satisfy the debt, returning any surplus to Kanahara. (b) Writ of execution, upon reducing the debt to judgment. The writ is an order issued by the clerk directing the sheriff or other officer of the court to seize (levy) nonexempt property of the debtor located within the court‟s jurisdiction. The property is then sold, and the proceeds are used to pay for the judgment and cost of sale, with any surplus going to the debtor, in this case Kanahara. (c) Garnishment of the wages owed to Kanahara by the Cross-Bar Packing Corp. Holiday can proceed with any one or a combination of these three actions. Because the property may be removed from the jurisdiction, and perhaps Kanahara himself may leave the jurisdiction (he may quit his job), prompt action is important.

Jack and Maggie Turton bought a house in Jefferson County, Idaho, located directly across the street from a gravel pit. A few years later, the county converted the pit to a landfill. The landfill accepted many kinds of trash that cause harm to the environment, including major appliances, animal carcasses, containers with hazardous content warnings, leaking car batteries, and waste oil. The Turtons complained to the county, but the county did nothing. The Turtons then filed a lawsuit against the county alleging violations of federal environmental laws pertaining to groundwater contamination and other pollution. Do the Turtons have standing to sue? Why or why not?

To have standing to sue, a party must have a legally protected, tangible interest at stake. The party must show that he or she has been injured, or is likely to be injured, by the actions of the party that he or she seeks to sue. In this problem, the issue is whether the Turtons had been injured, or were likely to be injured, by the county‟s landfill operations. Clearly, one could argue that the injuries that the Turtons complained of directly resulted from the county's violations of environmental laws while operating the landfill. The Turtons lived directly across from the landfill, and they were experiencing the specific types of harms (fires, scavenger problems, groundwater contamination) that those laws were enacted to address. Thus, the Turtons would have standing to bring their suit.

Wesley Hall, an independent contractor managing property for Acree Investments, Ltd., lost control of a fire he had set to clear ten acres of Acree land. The runaway fire burned seventy-eight acres of Earl Barrs's property. Russell Acree, one of the owners of Acree Investments, had previously owned the ten acres, but he had put it into the company and was no longer the principal owner. Hall had worked for Russell Acree in the past and had told the state forestry department that he was burning the land for Acree. Barrs sued Russell Acree for the acts of his agent, Hall. In his suit, Barrs noted that Hall had been an employee of Russell Acree, Hall had talked about burning the land "for Acree," Russell Acree had apologized to Barrs for the fire, and Acree Investments had not been identified as the principal property owner until Barrs had filed his lawsuit. Barrs argued that those facts were sufficient to create an agency by ratification to impose liability on Russell Acree. Was Barrs's agency by ratification claim valid? Why or why not?

To impose liability for the acts of one's employees or agents under respondeat superior, some relationship must exist between the principal and agent or between the employer and employee. Barrs' argument is not correct. The evidence that Mr. Acree, the presumed landowner, instructed Hall, his alleged employee, to clear the land by controlled burn, was insufficient to establish that an actual agency relationship existed between the parties. Hall was the property manager; Mr. Acree only observed what happened. There was no evidence that Mr. Acree, visiting at the time of burn, had the right to control the time and manner of burn. Mr. Acree testified that Hall worked independently for Acree Investments. Mr. Acree could express regret for Hall's conduct without ratifying Hall's acts such that an agency relationship was created. Similarly, Barrs' claim of agency creation by Hall's saying he was doing the burn "for Acree" was not sufficient to establish an agency. The forestry department that allowed the burn did not know or care if Hall was acting for Mr. Acree, Acree Investments, or himself as property manager.

The defendant in a lawsuit is appealing the trial court's decision in favor of the plaintiff. On appeal, the defendant claims that the evidence presented at trial to support the plaintiff's claim was so scanty that no reasonable jury could have found for the plaintiff. Therefore, argues the defendant, the appellate court should reverse the trial court's decision. Will an appellate court ever reverse a trial court's findings with respect to questions of fact? Discuss fully.

Trial courts are responsible for settling "questions of fact." Appellate courts nearly always defer to trial courts' findings of fact. An appellate court can reverse a lower court‟s findings of fact, however, when so little evidence was presented at trial that no reasonable person could have reached the conclusion that the judge or jury reached.

In October 1998, Somerset Valley Bank notified Alfred Hauser, president of Hauser Co., that the bank had begun to receive what appeared to be Hauser Co. payroll checks. None of the payees were Hauser Co. employees, however, and Hauser had not written the checks or authorized anyone to sign them on his behalf. Automatic Data Processing, Inc., provided payroll services for Hauser Co. and used a facsimile signature on all its payroll checks. Hauser told the bank not to cash the checks. In early 1999, Robert Triffin, who deals in negotiable instruments, bought eighteen of the checks, totaling more than $8,800, from various check-cashing agencies. The agencies stated that they had cashed the checks expecting the bank to pay them. Each check was payable to a bearer for a fixed amount, on demand, and did not state any undertaking by the person promising payment other than the payment of money. Each check bore a facsimile drawer's signature stamp identical to Hauser Co.'s authorized stamp. Each check had been returned to an agency marked "stolen check" and stamped "do not present again." When the bank refused to cash the checks, Triffin filed a suit in a New Jersey state court against Hauser Co. Were the checks negotiable instruments? Why or why not?

Triffin filed a motion for summary judgment, which the court granted. On Hauser Co.'s ap- peal, the state intermediate appellate court affirmed, holding that "the eighteen checks meet the definition of a negotiable instrument. Each check is payable to a bearer for a fixed amount, on demand, and does not state any other undertaking by the person promising payment, aside from the payment of money. In addition, each check appears to have been signed by Mr. Hauser, through the use of a facsimile stamp, permitted by the UCC to take the place of a manual signature." Hauser Co. contended that the checks were not negotiable instruments because Hauser did not sign the checks, did not authorize their signing, and ADP did not "produce" the checks. "Lack of authorization, however, is a separate issue from whether the checks are negotiable instruments." Ultimately (according to principles discussed in the next chapters), the court determined that the agencies from which Triffin acquired the checks had not acted fraudulently, that Triffin acquired the agencies' right to payment as a holder in due course, and that thus Hauser Co. was liable to him for payment of the checks.

On May 1, by telephone, Yu offers to hire Benson to perform personal services. On May 5, Benson returns Yu's call and accepts the offer. Discuss fully whether this contract falls under the Statute of Frauds in the following circumstances: (a) The contract calls for Benson to be employed for one year, with the right to begin performance immediately. (b) The contract calls for Benson to be employed for nine months, with performance of services to begin on September 1. (c) The contract calls for Benson to submit a written research report, with a deadline of two years for submission.

Under the Statute of Frauds, any contract that cannot be performed within one year from the date of entering into the contract (time of acceptance), without breaching the terms, needs a writing to be enforceable. Under this rule, the following decisions are made: (a) The one-year period is measured from the day after the contract is made. Because Benson has the right to begin the one-year contract immediately, it is possible to perform the contract within one year. Therefore, the contract falls outside the Statute of Frauds and can be legally enforced without a writing. (b) The one-year period here begins with the formation of the contract, so it is measured from the day after the contract is made, May 6. Because performance is for nine months and cannot begin until September 1, however, the contract cannot be fully performed until midnight on May 31. Thus, the contract is impossible to perform within the one-year period and therefore comes under the Statute of Frauds. A writing is required for enforceability. (c) The likelihood or probability of a person performing according to the terms of a contract within a year is irrelevant to the question of whether such performance is possible. If it is possible for Benson to submit the written research report within one year, beginning May 6, the contract is outside the Statute of Frauds and legally enforceable without a writing—despite the fact that Benson is permitted two years to submit the report.

Train operators and other railroad personnel use signaling systems to ensure safe train travel. Reading Blue Mountain & Northern Railroad Co. (RBMN) and Norfolk Southern Railway Co. entered into a contract for the maintenance of a signaling system that serviced a stretch of track near Jim Thorpe, Pennsylvania. The system included a series of poles, similar to telephone poles, suspending wires above the tracks. The contract provided that "the intent of the parties is to maintain the existing . . . facilities" and split the cost equally. In December 2002, a severe storm severed the wires and destroyed most of the poles. RBMN and Norfolk discussed replacing the old system, which they agreed was antiquated, inefficient, dangerous to rebuild, and expensive, but they could not agree on an alternative. Norfolk installed an entirely new system and filed a suit in a federal district court against RBMN to recover half of the cost. RBMN filed a motion for summary judgment, asserting, in part, the doctrine of frustration of purpose. What is this doctrine? Does it apply in this case? How should the court rule on RBMN's motion? Explain.

Under the doctrine of frustration of purpose, a contract will be discharged if supervening circumstances make it impossible to attain the purpose that the parties had in mind when they made their contract. In this case, the two railroad companies entered into a contract for the maintenance of a signaling system that serviced a certain stretch of railroad track in Pennsylvania. The purpose of the contract was to maintain the system as it existed at the time of the contract. Of course, this assumed that the facilities were viable and could be maintained. In Norfolk's suit against RBMN, the court should issue a judgment in RBMN's favor. The storm largely destroyed the system and thus frustrated the purpose of the contract. This discharged RBMN's and Norfolk's obligations under their agreement.

Novell, Inc., owned the source code for DR DOS, a computer operating system that Microsoft Corp. targeted with allegedly anticompetitive practices in the early 1990s. Novell worried that if it filed a suit, Microsoft would retaliate with further alleged unfair practices. Consequently, Novell sold DR DOS to Canopy Group, Inc., a Utah corporation. The purposes of the sale were to obligate Canopy to bring an action against Microsoft and to allow Novell to share in the recovery without revealing its role. Novell and Canopy signed two documents—a contract of sale, obligating Canopy to pay $400,000 for rights to the source code, and a temporary license, obligating Canopy to pay at least $600,000 in royalties, which included a percentage of any recovery from the suit. Canopy settled the dispute with Microsoft, deducted its expenses, and paid Novell the remainder of what was due. Novell filed a suit in a Utah state court against Canopy, alleging breach of contract for Canopy's deduction of expenses. Canopy responded that it could show that the parties had an oral agreement on this point. On what basis might the court refuse to consider this evidence? Is that the appropriate course in this case? Explain.

Under the parol evidence rule, a court could refuse to consider Canopy's evidence of an oral agreement between Canopy and Novell with respect to the payment of Canopy's expenses in its suit with Microsoft. Under this rule, prior and contemporaneous conversations, statements, or representations offered for the purpose of varying or adding to the terms of an integrated contract are excluded. Thus, it would be appropriate to exclude Canopy's evidence if the two documents Canopy and Novell signed constituted an integrated contract. Here, the parties entered into a written contract with respect to royalties. The writing obligated Canopy to pay Novell a percentage of its recovery from Microsoft. The writing did not mention a reduction of this amount, however, which would contradict the terms of the parties' contract and, for that reason, under the parol evidence rule, would not be a part of their agreement.

Juan is an elderly man who lives with his nephew, Samuel. Juan is totally dependent on Samuel's support. Samuel tells Juan that unless he transfers a tract of land he owns to Samuel for a price 35 percent below its market value, Samuel will no longer support and take care of him. Juan enters into the contract. Discuss fully whether Juan can set aside this contract.

Undue influence arises from a relationship in which one party can, through unfair persuasion, greatly influence or overcome the free will of another. Any contract entered into under excessive or undue influence lacks genuine assent and is therefore voidable. Here, the influence of Samuel over his Uncle Juan is greatly enhanced by Juan's reliance on Samuel for his support. Although Juan cannot claim duress, the domination of Samuel over Juan's decisions results in undue influence. The contract is primarily for the benefit of Samuel, and Samuel used unfair persuasion in securing the contract from Juan. Juan can have the contract set aside.

Peter hires Alice as an agent to sell a piece of property he owns. The price is to be at least $30,000. Alice discovers that the fair market value of Peter's property is actually at least $45,000 and could be higher because a shopping mall is going to be built nearby. Alice forms a real estate partnership with her cousin Carl, and she prepares for Peter's signature a contract for the sale of the property to Carl for $32,000. Peter signs the contract. Just before closing and passage of title, Peter learns about the shopping mall and the increased fair market value of his property. Peter refuses to deed the property to Carl. Carl claims that Alice, as agent, solicited a price above that agreed on when the agency was created and that the contract is therefore binding and enforceable. Discuss fully whether Peter is bound to this contract.

Upon creation of an agency, the agent owes certain fiduciary duties to the principal. One of the principles invoked by this duty is that an agent employed to sell cannot become a purchaser without the principal's consent. When the agent is a partner, contracting to sell to another partner is equivalent to selling to oneself and is therefore a breach of the agent's duty. In addition, the agent has a duty to disclose to the principal any facts pertinent to the subject matter of the agency. Failure to disclose to Peter the knowledge of the shopping mall and the increased market value of the property also was a breach of Alice's fiduciary duties. When an agent breaches fiduciary duties owed to the principal by becoming a recipient of a contract, the contract is voidable at the election of the principal. Neither Carl nor Alice can hold Peter to the contract, and Alice's breach of fiduciary duties also allows Peter to terminate the agency relationship.

ABC Clothiers, Inc., has a contract with Taylor & Sons, a retailer, to deliver one thousand summer suits to Taylor's place of business on or before May 1. On April 1, Taylor senior receives a letter from ABC informing him that ABC will not be able to make the delivery as scheduled. Taylor is very upset, as he had planned a big ad campaign. He wants to file a suit against ABC immediately (on April 2). Taylor's son Tom tells his father that filing a lawsuit is not proper until ABC actually fails to deliver the suits on May 1. Discuss fully who is correct, Taylor or Tom.

When either party repudiates the contract with respect to a performance not yet due, the party's repudiation constitutes an anticipatory breach. An anticipatory breach legally permits the nonbreaching party to suspend performance without legal liability, and to take his or her choice of either waiting until the performance date to treat the contract as in breach or immediately pursuing a remedy. Generally, until the nonbreaching party does actually pursue a remedy, the repudiating party can, with notice, retract the repudiation, reinstating that party's rights under the contract. Therefore, Taylor senior is correct. He can immediately file suit for breach of contract, even though actual performance is not due until May 1. He does not have to wait until May 1, as Tom insists.

On Thursday, Dennis mailed a letter to Tanya's office offering to sell his car to her for $3,000. On Saturday, having changed his mind, Dennis sent a fax to Tanya's office revoking his offer. Tanya did not go to her office over the weekend and thus did not learn about the revocation until Monday morning, just a few minutes after she had mailed a letter of acceptance to Dennis. When Tanya demanded that Dennis sell his car to her as promised, Dennis claimed that no contract existed because he had revoked his offer prior to Tanya's acceptance. Is Dennis correct?Explain.

Yes. For a revocation to be effective, it must be received by the offeree. In this case, because Tanya received Dennis's revocation before her acceptance (it had been received via fax by her office, constructive receipt), the offer was effectively revoked. Tanya's acceptance is not valid (although an acceptance becomes effective on dispatch, under the mailbox rule, when sent by authorized means).

Shoreline Towers Condominium Owners Association in Gulf Shores, Alabama, authorized Resort Development, Inc. (RDI), to manage Shoreline's property. On Shoreline's behalf, RDI obtained a property insurance policy from Zurich American Insurance Co. In October 1995, Hurricane Opal struck Gulf Shores. RDI filed claims with Zurich regarding damage to Shoreline's property. Zurich determined that the cost of the damage was $334,901. Zurich then subtracted an applicable $40,000 deductible and sent checks to RDI totaling $294,901. RDI disputed the amount. Zurich eventually agreed to issue a check for an additional $86,000 in return for RDI's signing a "Release of All Claims." Later, contending that the deductible had been incorrectly applied and that this was a breach of contract, among other things, Shoreline filed a suit against Zurich in a federal district court. How, if at all, should the agreement reached by RDI and Zurich affect Shoreline's claim? Explain.

Zurich filed a motion for summary judgment, which the court granted. The court explained that "[i]n the absence of fraud, a release supported by a valuable consideration, unambiguous in meaning, will be given effect according to the intention of the parties to be judged from what appears within the four corners of the instrument itself." Here, "[t]he Release releases Zurich from all the claims and causes of actions asserted by Shoreline in this action . . . . These claims are therefore covered under the Release." Shoreline was held bound to its terms. The court also concluded that through RDI, "[a]n accord and satisfaction occurred between Zurich and Shoreline because there was a genuine dispute as to the amount of damages owed under the Policy, and Shoreline agreed to accept payment of $86,000 as a final settlement of all claims. By accepting the $86,000 check, Shoreline agreed to the condition under which payment was made, which was the release of all claims." Consequently, all claims asserted by Shoreline in the present action have been discharged by an accord and satisfaction.