Business Law 2

Business Law 2
By
Mike Wilson, Esq.

About the Author
Mike Wilson is a freelance writer and college instructor who has
had wide legal and educational experience.

He graduated with his bachelor of arts degree in English from the

University of Kentucky in 1976, and three years later received his
juris doctorate from the same school. He has been a partner in
a law firm and a solo practitioner and has worked in general

and family mediation. He has also been a full-time instructor
in Paralegal Studies at Sullivan College in Kentucky. He was
given the “Teacher of the Year” award in 1997.

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

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

Copyright © 2015 by Penn Foster, Inc.
All rights reserved. No part of the material protected by this copyright may be
reproduced or utilized in any form or by any means, electronic or mechanical,
including photocopying, recording, or by any information storage and retrieval
system, without permission in writing from the copyright owner.
Requests for permission to make copies of any part of the work should be
mailed to Copyright Permissions, Penn Foster, 925 Oak Street, Scranton,
Pennsylvania 18515.
Printed in the United States of America

1

LESSON ASSIGNMENTS

5

LESSON 1: PROPERTY

7

LESSON 2: SALES AND CONSUMER PROTECTION

21

LESSON 3: NEGOTIABLE INSTRUMENTS

37

LESSON 4: INSURANCE, SECURED
TRANSACTIONS, AND BANKRUPTCY

47

LESSON 5: TORTS AND CRIMES

59

GRADED PROJECT

67

SELF-CHECK ANSWERS

73

Contents

INSTRUCTIONS TO STUDENTS

iii

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

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

OBJECTIVES

When you complete this course, you’ll be able to
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Explain laws pertaining to ownership and transfer of
property

Describe the general principles involved in wills, trusts,
and estates
Discuss the formation of sales and lease contracts and
the legal issues arising from those types of contracts

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

Explain the rights of secured and unsecured creditors
and the consequences of bankruptcy

Define risk management and discuss the purpose of different types of insurance, including life, property,
automobile, and health
Discuss the principles of torts, the different types of
torts, and criminal law as it relates to business

Instructions

INTRODUCTION

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YOUR TEXTBOOK

Your textbook for this course, Business Law with UCC
Applications, Thirteenth Edition, by Gordon W. Brown
and Paul A. Sukys, offers a solid introduction to the basic
principles of business law. The study guide will help you
understand the material, but your exams are based on your
textbook and will test your understanding of the material
covered in the textbook.

Your textbook’s table of contents in brief begins on page xvii
and lists all the chapters and topics covered by the textbook.
A more detailed table of contents appears on page xix.
At the end of each chapter, the textbook offers a summary
of the material covered, a list of key terms, questions for
review and discussion, and cases for analysis. Each chapter
also contains a quick quiz with answers at the end of the
chapter. A glossary appears at the end of the textbook.
The appendices at the back of your textbook provide
the U.S. Constitution and excerpts from the Uniform
Commercial Code.

Each chapter offers cases selected to illustrate the legal
principles covered in the textbook. Some cases are fictional,
but many are summaries from actual cases, affording you the
opportunity to review real scenarios that pertain to the material covered in this course. When reading the case
summaries, remember that they involve individuals and businesses facing real problems. The rule of law affects all people
as they engage in the activities of their daily lives, whether
directly or indirectly.

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

2

Instructions to Students

COURSE MATERIALS

This course includes the following materials:

1. Your textbook, Business Law with UCC Applications,
which contains the assigned readings, including case
summaries and helpful review questions
2. This study guide, which includes
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A list of lesson assignments

Introductions to your lessons with discussion of the
most crucial portions of the textbook, including,
when relevant, new developments in business law
Self-checks after each assignment and answers to
the self-checks

A STUDY PLAN

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

1. Read the lesson introduction in the study guide to get an
overview of what you’ll learn from the textbook, as well
as objectives.
2. Read the instructions for the assignment in the study
guide. First read the assignment in your study guide.
Then read the assigned pages in your textbook to grasp
the content in your textbook.

3. After you’ve finished each assignment, answer the
questions provided in the self-check exercise in your
study guide. This will serve as a review of the material
covered in the assignment. Then check your answers
with those given in the back of the study guide. If you
miss any questions, review the material covering those
questions. The self-checks are designed to reveal weak
points that you need to review. Don’t send your answers
to the school.

Instructions to Students

3

4. Complete the online textbook chapter quizzes, as well as
the Quick Quizzes that appear throughout each textbook
chapter that are assigned at the end of each reading
assignment in your study guide. The link to the online
textbook chapter quiz is given at the end of each assignment. Answers to the Quick Quizzes are at the end of
each textbook chapter, and feedback will be provided to
you after you take each online textbook chapter quiz.

5. After you’ve completed the self-check and the quizzes, go
to the next assignment, following the procedure outlined
in steps 2–4.
6. Complete the first exam. After you take your exam, you
can move on to the next lesson.

7. Follow this procedure for all five lessons.

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

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

Remember to regularly check “My Courses” on your student homepage.
Your instructor may post additional resources that you can access to
enhance your learning experience.

4

Instructions to Students

For:

Read in the
study guide:

Read in
the textbook:

Assignment 1

Pages 9–12

Chapter 29

Assignment 3

Pages 17–19

Chapter 31

Assignment 2

Pages 12–16

Examination 060372

Chapter 30
Material in Lesson 1

Lesson 2: Sales and Consumer Protection
For:

Read in the
study guide:

Read in
the textbook:

Assignment 4

Pages 23–27

Chapter 13

Assignment 6

Pages 32–36

Chapter 15

Assignment 5

Pages 28–31

Examination 060373

Chapter 14
Material in Lesson 2

Lesson 3: Negotiable Instruments
For:

Assignment 7

Assignment 8

Assignment 9

Read in the
study guide:

Pages 38–41

Pages 42–43

Pages 44–46

Examination 060374

Read in
the textbook:

Chapter 16

Chapter 17

Chapter 18

Material in Lesson 3

Assignments

Lesson 1: Property

5

Lesson 4: Insurance, Secured Transactions,
and Bankruptcy
For:

Read in the
study guide:

Read in
the textbook:

Assignment 10

Pages 48–51

Chapter 19

Assignment 12

Pages 55–58

Chapter 21

Assignment 11

Pages 52–54

Examination 060375

Lesson 5: Torts and Crimes
For:

Assignment 13

Assignment 14

Read in the
study guide:

Pages 60–62

Pages 62–66

Examination 060376

Chapter 20
Material in Lesson 4

Read in
the textbook:

Chapter 5

Chapter 6

Material in Lesson 5

Graded Project 06038200

Note: To access and complete any of the examinations for this study
guide, click on the appropriate Take Exam icon on your “My Courses”
page. You should not have to enter the examination numbers. These
numbers are for reference only if you have reason to contact Student
Services.

6

Lesson Assignments

INTRODUCTION

Lesson 1

Property

Lesson 1 introduces you to the law of property. You’ll learn
that law divides property into two types: real property and
personal property. You’ll study the law as it pertains to each
type of property. You’ll also study bailment, which is the temporary transfer of personal property to another. You’ll learn
about landlord-tenant law. Finally, you’ll study the law that
governs the transfer of property on death and law concerning
trusts.

OBJECTIVES

When you complete this lesson, you’ll be able to
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Explain ownership of personal property

Describe the law concerning property that has been lost,
misplaced, or abandoned
Discuss laws related to stolen and gifted personal
property

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

Define bailment and describe types of bailment and how
each type differs in terms of legal duties created

Discuss special bailment situations involving innkeepers,
carriers, and warehousers

Discuss real property and the main types of estates in
real property

Explain how the law on real property treats trees and
vegetation, air rights, subterranean rights, water rights,
and fixtures
Define and give examples of easements

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

Explain the methods by which title to real property is
acquired, including the differences in acquiring property
by deed, reason of death, or adverse possession
Discuss how zoning laws affect property rights

Explain eminent domain and its use by government to
acquire real property for a public purpose

Define the relationship between a landlord and a tenant,
and describe a landlord’s duties and a tenant’s duties
Differentiate among leasing, licensing, and lodging

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

Discuss common terms appearing in a lease agreement
and the process of eviction
Explain probate law and how it may relate to business

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

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

Discuss problems arising when people die simultaneously and what’s involved in settling an estate

Discuss the law of trusts and common types of trusts

Business Law 2

ASSIGNMENT 1

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

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

Nine states recognize a form of ownership called community
property, in which property (except a gift or inheritance)
acquired by either spouse during the marriage belongs to
both spouses equally. Spouses may bequeath their share of
community property by will to whomever they choose, but if
they die without a will, the property passes by survivorship to
the surviving spouse.
There are special rules for lost and abandoned property.
Someone who finds lost property becomes the owner after
making reasonable but unsuccessful efforts to find the original owner. When property is stolen, a thief doesn’t thereby
acquire title and is incapable of transferring title to anyone.
Abandoned property, if proven abandoned by clear and convincing evidence, belongs to whoever finds it. The right to
abandoned shipwrecks outside the boundaries of a state is
governed by the law of finds or the law of salvage. If an
abandoned shipwreck is found in the submerged land of any
state, the Abandoned Shipwreck Act of 1987 applies rather
than the law of finds or the law of salvage.

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

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

Lesson 1

9

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

Intellectual property is a kind of intangible property. Patents
give inventors exclusive rights, for a time, to processes,
machines, chemical formulas, and articles of manufacture.
Copyrights protect the work of authors, artists, musicians,
and software designers from unauthorized reproduction,
republication, or sale. The owner of a trademark can register
that trademark and thereby protect the exclusive right to use
that trademark. However, companies may lose trademark
protection if the trademark becomes a popular generic term
by use of a large segment of the public.
Bailment involves transfer of possession of personal property
temporarily with the intent that it be returned later. The
bailor is the person transferring possession. The bailee is
the person temporarily receiving possession. Bailments are
distinguished by whom they benefit. Bailment could benefit
only the bailor—for example, asking a friend to mail you a
package as a favor. Bailment could benefit only the bailee—
for example, your neighbor borrowing your wheelbarrow.
Mutual-benefit bailments benefit both parties—for example,
leaving your clothes at the dry cleaners (you benefit from
having your clothes cleaned, and the cleaner benefits by
receiving payment for the service).

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

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

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Business Law 2

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

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

Warehousers are also a type of bailee. A public warehouse is
a warehouse that any member of the public may pay to store
goods in. A private warehouse is a warehouse not open to the
public. Warehousers must use reasonable care and are liable
for damage caused by failure to exercise reasonable care.
Warehousers who aren’t paid have a lien on goods stored in
the warehouse and may retain possession of them until paid.
The lien covers the storage charge and other charges, such
as transportation, insurance, and expenses incurred to preserve the goods. The lien is lost if the warehouser voluntarily
gives up possession of the goods or wrongfully fails to deliver
possession.

Review and Application

When you finish reading the chapter,
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Answer the Quick Quiz questions on pages 638 and 649.
Check your answers on page 652. These quizzes will not
be scored so don’t send them to the school; they’re for
you to gauge your progress. If there are any questions
you don’t understand, refer back to the textbook and
reread the assignment.

Lesson 1

11

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Complete the online textbook chapter quiz at
http://highered.mheducation.com/sites/0073524956/st
udent_view0/chapter29/chapter_quiz.html. Feedback on
your answers will be provided once you finish the quiz
and click the Submit Answers button.

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

Self-Check 1
At the end of each section of Business Law 2, you’ll be asked to pause and check
your understanding of what you’ve just read by completing a “Self-Check” exercise.
Answering these questions will help you review what you’ve studied so far. Please
complete Self-Check 1 now.
Answer the “Questions for Review and Discussion” on page 650 of your textbook.
Check your answers with those on page 73.

ASSIGNMENT 2

Read this introduction to Assignment 2. Then read Chapter 30
of your textbook.

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

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Business Law 2

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

Fixtures are items that were formerly personal property but
that have become attached to real property. Whether an item
is a fixture depends on various factors a court will consider.
Those factors include whether the item has been temporarily
or permanently installed, whether the item has been adapted
to the intended use of the real property, and the intent of the
party at the time the item was attached to the real property.
Easements are rights to use property for a limited purpose—
for example, an easement for ingress and egress, which
means a right to cross someone else’s property to go into
and come out of your own property. An easement can be
created by grant (expressly conveying the easement to someone), reservation (retaining an easement right in property
one has outconveyed), or implication (implied under the
circumstances).

In law, estate is used in various ways. One use of estate is to
describe the degree of ownership of real property. A leasehold
estate gives one the right to occupy property as a tenan. A
freehold estate is a greater degree of ownership and consists
primarily of two types: a life estate, which is the right to own
for life, and a fee simple, which is an absolute and unlimited
ownership. Fee simple estates pass on death to whoever
takes the decedent’s estate.
Dower for widows and curtesy for widowers are common-law
rights to a life estate in one-third of the real estate owned by
the spouse during the marriage. Many states have eliminated
or modified dower and curtesy rights.

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

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

Lesson 1

13

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

Zoning is governmental regulation of the use of property.
Properties are classified or zoned into various categories, and
only certain types of use are permitted in each zone. If one has
established a use that was permitted at the time, but due to
changes in zoning is no longer permitted, the use is called a nonconforming use and the owner may continue such use. A variance
is permission granted by zoning authorities to engage in a use
not normally permitted under applicable zoning ordinances.

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

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

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

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Business Law 2

be in writing. A lease also is different from lodging. A lodger is a
type of licensee with the right to use property but not to possess
it.

There are four types of tenancy. A tenancy for years is an estate
for a fixed time period—it may be less than a year. A periodic tenancy is a fixed-period tenancy that continues for successive
periods until one of the parties chooses to terminate the arrangement. A tenancy at will is a tenancy for which no term has been
fixed. Tenancy at sufferance is a way of describing someone who
wrongfully remains in possession after his or her tenancy expires.
To create a lease, the parties must define the bounds of the property being leased, identify the term of the lease, and agree on a
definite rent.

A tenant may transfer the right to occupy property by assignment
or by sublease. Assignment is a transfer of the tenant’s rights
under the lease. A sublease is a new lease between the tenant and
the sublessee. If the transfer of the right to occupy property is for
less than the remainder of the term, or there’s any sort of reversion right retained by the tenant, the arrangement will be treated
as a sublease. Leases may require that the landlord’s approval be
obtained before assignment or subleasing may occur.
When dwellings are rented, most states imply a warranty by the
landlord that the property is habitable.

Landlords have certain duties under leases. These duties include
a duty to refrain from violating laws against
discrimination, to make repairs necessary to maintain the habitability of the premises, and to deliver peaceful possession or quiet
enjoyment. Landlords may not commingle security deposits and
must return the balance of any security deposit to the tenant at
the end of the lease.

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

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

Lesson 1

15

Landlords have the right to evict tenants who violate the
terms of the lease. Some states permit landlords to enter
wrongfully held premises and retake possession if it can be
done peacefully. The common law name for a lawsuit brought
to evict is ejectment. Unlawful detainer is a legal proceeding
with the same purpose but accomplishes its objective more
quickly. Strict notice requirements apply.

Review and Application

When you finish reading the chapter,
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Answer the Quick Quiz questions on pages 658, 661,
666, 671, and 674. Check your answers on page 677.
These quizzes will not be scored so don’t send them to
the school; they’re for you to gauge your progress. If
there are any questions you don’t understand, refer back
to the textbook and reread the assignment.
Complete the online textbook chapter quiz at
http://highered.mheducation.com/sites/0073524956/st
udent_view0/chapter30/chapter_quiz.html. Feedback on
your answers will be provided once you finish the quiz
and click the Submit Answers button.

Take a moment to complete Self-Check 2. You can check
your answers by turning to the back of this study guide.
If you have trouble with any of the material, review those
sections in your text.

Self-Check 2
Answer the “Questions for Review and Discussion” on page 676 of your textbook.
Check your answers with those on page 75.

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Business Law 2

ASSIGNMENT 3

Read this introduction to Assignment 3. Then read Chapter 31
of your textbook.

Chapter 31 introduces you to will, trusts, and estates. The
text will explain probate law and how it may relate to business. Probate is the court supervised administration of a
decedent’s estate. Each state’s law is different on the procedures involved, so you’ll need to check your state’s law when
addressing probate matters. A decedent’s property is distributed according to the instructions in the decedent’s will, or if
there’s no will, according to the law of intestate succession.

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

Advance medical directives are written instructions for future
medical care in the event the patient becomes unable to give
such instructions. The most common use of advance medical
directives is a living will, which expresses a person’s wishes
regarding whether he or she, if in a terminal condition or persistent vegetative state, wishes to be allowed to die a natural
death rather than being kept alive by artificial means.
Another way to accomplish these purposes is to execute a
health care proxy, which authorizes another person to make
medical decisions in the event of incapacity.

A durable power of attorney is a power of attorney that’s not
affected by the disability of the principal.

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

Lesson 1

17

will requires that the testator generally knows the nature and
extent of the property he or she owns, knows who would be
the natural recipients of the estate, is free from delusions
that might influence the terms of the will, and intends to
make a will.

State laws differ on the formal requirements for executing a
will, but in general, it must be in writing, signed by the testator, and witnessed in the testator’s presence by the number
of witnesses required under state law.

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

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

Sometimes people make wills and change their minds. Wills
may be revoked by burning, tearing, canceling, or obliterating
the will with intent to revoke. They also may be revoked by
executing another will. In some states, marriage, divorce, or
annulment may revoke a will in whole or in part.

When people die owning assets, their estate must be probated. Heirs are notified, and an executor or administrator
is appointed to settle the estate. Settling the estate involves
collecting the assets, paying debts, paying taxes, and distributing what remains according to the will or the law of
intestate succession if the person dies without a will.

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

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Business Law 2

Review and Application

When you finish reading the chapter,
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Answer the Quick Quiz questions on pages 680, 689,
692, and 694. Check your answers on page 697. These
quizzes will not be scored so don’t send them to the
school; they’re for you to gauge your progress. If there
are any questions you don’t understand, refer back to
the textbook and reread the assignment.

Complete the online textbook chapter quiz at
http://highered.mheducation.com/sites/0073524956/st
udent_view0/chapter31/chapter_quiz.html. Feedback on
your answers will be provided once you finish the quiz
and click the Submit Answers button.

Take a moment to complete Self-Check 3. You can check
your answers by turning to the back of this study guide.
If you have trouble with any of the material, review those
sections in your text.

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

Self-Check 3
Answer the “Questions for Review and Discussion” on pages 695–696 of your textbook.
Check your answers with those on page 78.

Lesson 1

19

NOTES

20

Business Law 2

INTRODUCTION

Lesson 2

Sales and Consumer
Protection

Lesson 2 introduces you to sales and consumer protection.
Much of contract and property law provides the legal support
for commercial activity, and a significant portion of commercial activity involves sale or lease of goods. In this lesson,
you’ll learn that the Uniform Commercial Code (UCC) provides statutory law that governs the sale and lease of goods.
Warranties are representations regarding the quality or
performance of a product. You’ll study laws applicable to
warranties.
Products can cause injury to persons who buy them or use
them. Products also can injure innocent bystanders. You’ll
study the law pertaining to product liability.
Consumers can be harmed in commercial transactions.
You’ll learn about laws designed to protect consumers.

OBJECTIVES

When you complete this lesson, you’ll be able to
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Explain the basic principles governing the sale and lease
of goods
Discuss how the law treats contracts created for sale of
goods and services

Discuss the special rules that apply to sales contracts
and how those rules may differ from common law contract rules

Discuss UCC writing requirements for sales contracts
and how they may differ from common law rules
Explain void and voidable title

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Discuss the relationship of passage of title and risk
of loss
Discuss the rules for risk of loss when the goods
are delivered

Explain the law concerning sales with right of return

Explain how the UCC defines the obligations of seller
and buyer

Describe tender of delivery, the rules concerning it, and
how it affects the duties of the parties

Identify the rights of buyers when the goods that are
delivered are nonconforming
Explain the seller’s right to cure an improper tender

Discuss breach of contract under the UCC, including
anticipatory breach, and identify remedies available
under the UCC for breach
Explain the difference between express and implied
warranties

Identify the three automatic implied warranties under
the UCC

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

Discuss protections afforded consumers against unfair or
deceptive acts or practices

Explain the role of the Federal Trade Commission in consumer protection

Discuss the main features of the Consumer Product
Safety Act and the Consumer Leasing Act

Describe important consumer-protection provisions that
appear in other federal laws

Business Law 2

ASSIGNMENT 4

Read this introduction to Assignment 4. Then read Chapter 13
of your textbook.

Chapter 13 introduces you to the law on sale and lease of
goods. The UCC governs the law of contracts for sale and
lease of goods. The law applies to transactions between individuals, between businesses, and between consumers and
businesses. In some cases, there may be special rules for
transactions between merchants.
In general, goods are movable, tangible property. Examples
are cars, clothes, and furniture. Laws concerning sale of
goods for the most part apply to future goods as well, such
as minerals in the group that will be mined, fish in the sea,
or timber yet to be cut.
Contracts for sale of goods can involve a sale of goods
presently or it may contemplate sale of goods in the future.
Both types of contracts are contracts for sale covered by
the UCC.

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

The UCC has special rules that apply to sale of goods that,
in some cases, may differ from the common law that governs
other contracts. Many of these rules are intended to make
it easier to create contracts without following common law
contract rules strictly. Examples of special rules in the UCC
applicable to sale of goods include the following:
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No consideration is necessary to modify a contract for
the sale of goods. Under the common law, additional or
new consideration is required to modify a contract.

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

The UCC expressly permits course of dealing and usage
of trade to be considered when interpreting the terms of
a contract.

Lesson 2

23

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Sales contracts can be created in any matter that shows
the parties reached an agreement.

Under common law, contracts couldn’t be created unless
the material terms were agreed on. Under the UCC, contracts can be created even if all terms aren’t stated, if the
parties intend to contract. Thus, for example, a contract
could be created even though the price or time for delivery wasn’t discussed. The UCC has rules used to supply
the missing terms. For example, if the price isn’t stated,
it will be a “reasonable” price at the time of delivery.

Unless otherwise specified in the offer, acceptance can be
in any manner sufficient to show agreement, including
shipment of the goods.

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

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

Under common law, acceptance had to be a “mirror
image” of the offer, neither varying nor adding to the
terms of the offer. Under the UCC, the presence of minor
differences in the acceptance doesn’t make the acceptance ineffective. However the different terms don’t
become part of the contract unless both parties are merchants, the differences aren’t material, and no objection
is made within a reasonable time.

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

24

Business Law 2

$500 or more, or lease of goods for $1,000 or more, must be
in writing to be enforceable. Like with the statute of frauds,
the writing must be signed by the party against whom
enforcement is sought. However, the requirements of the
writing are less stringent than under the common law, and
there are exceptions to the writing requirements. For example, if both parties are merchants and one of the parties
receives written confirmation and doesn’t object to it in writing within 10 days, the contract is enforceable against the
party who didn’t object to the confirmation. You’ll want to
note the other exceptions discussed in your textbook.
Title is the right to ownership of goods. A bill of sale is a
written evidence of transfer of such ownership from one
person to another. However, a bill of sale doesn’t prove that
the possessor has good title. What if the goods were stolen
or obtained by fraud and then transferred to an innocent
purchaser? Does the innocent purchaser have good title?
This depends on whether the transferor’s title was void or
voidable.
Void title isn’t title, has never been title, and can never be
title. Voidable title means the title may be voided if one of
the parties acts to void it.

If goods are stolen, title is void. The innocent purchaser can
sue the person who sold the stolen item to him or her, but
the true owner is entitled to return of the item. Voidable title
can arise when property is obtained by fraud, misrepresentation, mutual mistake, undue influence, or duress. Voidable
title means title can be voided if the injured party acts to void
it. Title acquired from a person lacking capacity, such as a
minor or mentally impaired person, is also voidable. Voidable
title is valid title until it’s voided.
When goods are entrusted to a merchant who in turn sells
them in the ordinary course of business to someone who
doesn’t know about the real owner’s rights, the original
owner loses title. The owner can sue the merchant if sale was
wrongful, but the purchaser has good title. This rule allows
customers to have confidence that what they buy will belong
to them. An exception to the rule is stolen property.

Lesson 2

25

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

A shipment contract is one in which the seller delivers the
goods via a common carrier. In a shipment contract, title and
risk pass when the goods are given to a common carrier for
delivery. If the terms of shipment don’t specify a shipping
point or destination, it’s assumed to be a shipment contract.

In a destination contract, the seller’s obligation is to deliver
the goods to a destination. Title and risk pass when the seller
tenders the goods at the place of destination.
Where delivery isn’t required and buyer picks up the goods,
title passes to the buyer when the contract is made, but risk
of loss passes when the buyer receives the goods. If the seller
isn’t a merchant, the risk passes when seller tenders the
goods to the buyer.

Some types of goods are sold with documents of title that
authorize the buyer to pick up the goods at a warehouse. In
such cases, receipt of the document of title is the event that
causes title and risk to pass.

These are default rules, and in general, the parties can
expressly agree on when risk and title pass. However, if the
agreement allows the seller to retain title after the goods are
shipped, title passes to buyer at shipment, and the seller is
treated as having a security interest in the goods rather than
having title.

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

Buyers may insure goods from the moment the contract is
made and the goods are identified to the contract, even
though title has yet to pass.

26

Business Law 2

Review and Application

When you finish reading the chapter,
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n

n

Answer the Quick Quiz questions on pages 279, 283,
288, 293, and 294. Check your answers on page 297.
These quizzes will not be scored so don’t send them to
the school; they’re for you to gauge your progress. If
there are any questions you don’t understand, refer back
to the textbook and reread the assignment.
Complete the online textbook chapter quiz at
http://highered.mheducation.com/sites/0073524956/st
udent_view0/chapter13/chapter_quiz.html. Feedback on
your answers will be provided once you finish the quiz
and click the Submit Answers button.

Take a moment to complete Self-Check 4. You can check
your answers by turning to the back of this study guide.
If you have trouble with any of the material, review those
sections in your text.

Self-Check 4
Answer the “Questions for Review and Discussion” on page 296 of your textbook.
Check your answers with those on page 81.

Lesson 2

27

ASSIGNMENT 5

Read this introduction to Assignment 5. Then read Chapter 14
of your textbook.

Chapter 14 concerns performance and breach of the obligations under a sales contract. The UCC defines the obligations
of parties to a sales contract in a very simple manner: The
seller is obligated to tender conforming goods, and the buyer
is obligated to accept and pay for them. Conforming goods
means that the goods conform to the requirements of the
sales contract.
To tender performance is to attempt or offer to do what one
is obligated to do under the sales contract. The seller must
make tender of delivery, and the buyer must make tender of
payment. If one party fails to make tender, that party can’t
bring suit, even if the other party is in breach.
Tender of delivery requires that conforming goods be at
the buyer’s disposition. Delivery must be at a reasonable
time, and the seller must be given notice of delivery. If it’s
a shipment contract, tender of delivery is accomplished by
delivering the goods to a common carrier and contracting
to have them transported to the buyer. If delivery is made
by transporting the goods to a warehouse where the buyer
will pick them up, the seller must deliver to the buyer
any documents necessary to claim the goods or obtain
acknowledgment from the warehouse of the buyer’s right
to claim them.

Tender of payment may be made in any manner that’s customary, such as a check, provided that buyer may demand
legal tender if the buyer gives the seller a reasonable time to
obtain it.

A buyer has a duty to accept the goods but has an intervening right to inspect them before accepting or paying. An
exception exists for goods shipped cash on delivery (c.o.d.)
or when the contract provides for payment against a document of title.

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

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Business Law 2

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

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

Acceptance occurs when the buyer signifies that the goods are
conforming, signifies a willingness to accept the goods though
not conforming, fails to reject them within a reasonable time, or
acts with regard to the goods in a way that’s inconsistent with
the seller’s ownership.
The UCC provides a number of remedies for the seller when the
buyer breaches: withhold delivery of goods, stop delivery of
goods in transit, resell the goods, sue for damages (difference
between market price and contract price or the profit seller
would have made had the contract been performed), sue for
incidental damages that result indirectly from the breach, sue
for the price under the contract, or cancel the contract.

The UCC also provides remedies for the buyer when the seller
breaches: cover (purchase the same goods from someone else)
and sue for the difference between the contract price and
the cost of the cover, sue for damages (difference between contract price and market price) and incidental and consequential
damages, keep the goods and seek an adjustment in the price,
or sue for specific performance if money damages are inadequate, such as when the goods are unique, rare, or specially
manufactured.

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

Lesson 2

29

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

Express warranties can arise from express statements of fact
or promise by a description of the goods or by use of a sample or model. The federal Magnuson-Moss Warranty Act is
designed to prevent deceptive warranty practices and provide
consumers with information about warranties on the products they purchase. Under the act, when a written warranty
is given, it must be made available to the consumer before
the consumer purchases, must state the terms and conditions in simple, understandable language, and must state
whether it’s a full warranty or a limited warranty.

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

In addition to express warranties that a seller may make,
there are three automatic implied warranties under the
UCC. The first is warranty of title. Under the implied warranty of title, the seller warrants that the seller is transferring
good title, free of all claims. The second is warranty of
merchantability. Warranty of merchantability applies to merchants selling goods and means the goods are of ordinary
quality and would pass without objection in the trade under
the contract description, be of fair average quality if fungible
goods, be fit for the normal purposes for which such goods
are used, be of even kind quality and quantity, be properly
packaged, and conform to any representations about the
goods made on the packaging. The third is warranty of fitness for a particular purpose. This arises during negotiations
between buyer and seller if buyer makes known a purpose
and relies upon seller’s knowledge to choose the product.

Implied warranties of merchantability don’t apply to obvious
defects that would be discovered on examination if the buyer
has the opportunity to examine. Implied warranties also
may be disclaimed. To disclaim merchantability, the word
merchantability must be used, and if in writing, the disclaimer must be conspicuous. To disclaim fitness for a

30

Business Law 2

particular purpose, the disclaimer must be written and conspicuous. Phrases like as is and with all its faults are also
used to make disclaimers.

If warranties are breached, the buyer must give notice within
a reasonable time after the defect was discovered or should
have been discovered, or the buyer may lose the right to sue
for damages.

Review and Application

When you finish reading the chapter,
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n

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

Complete the online textbook chapter quiz at
http://highered.mheducation.com/sites/0073524956/st
udent_view0/chapter14/chapter_quiz.html. Feedback on
your answers will be provided once you finish the quiz
and click the Submit Answers button.

Take a moment to complete Self-Check 5. You can check
your answers by turning to the back of this study guide.
If you have trouble with any of the material, review those
sections in your text.

Self-Check 5
Answer the “Questions for Review and Discussion” on page 315 of your textbook.
Check your answers with those on page 82.

Lesson 2

31

ASSIGNMENT 6

Read this introduction to Assignment 6. Then read Chapter 15
of your textbook.

Chapter 15 concerns product liability and consumer
protection. In addition to suing under the theory of breach
of warranty, a person harmed by a product may sue in tort
under negligence theory or under strict liability. Negligence
theory requires proof that the manufacturer failed to exercise
reasonable care. This may be difficult to prove sometimes
as the consumer or user has no first-hand knowledge of how
the product was made. Under strict liability, the injured party
must prove that the product was sold in an unreasonably
dangerous condition that proximately caused the injury.

Consumer protection laws apply to transactions between
businesses and consumers. The Federal Trade Commission
(FTC) Act prohibits unfair or deceptive practices in or affecting commerce. Unfair and deceptive practices can include
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Fraudulent misstatements that deceive

False statements about the construction, durability,
reliability, safety, strength, condition, or life expectancy
of a product

Failing to disclose facts that would cause a buyer not to
purchase

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

The FTC created a Used Car Rule that requires a buyer’s
guide be posted on the window of the car disclosing the
following:
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That the car is sold as is, with limited warranties only,
or with full warranty

The length of any express warranty, the systems covered,
and the percentage of repair costs the buyer must pay
A warning not to rely on spoken promises

Business Law 2

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A suggestion that consumers ask to have the vehicle
inspected by their own mechanic

A list of the 14 major systems of an automobile and
some of the principal defects that occur in these systems

Another rule created by the FTC is the Cooling-Off Rule,
which applies to sales of goods or services of more than $25
that occur away from the seller’s regular place of business,
such as at the consumer’s home. Under this rule, the buyer
has three days to cancel the sale and must be given two
copies of a cancellation form, one of which can be sent to the
seller to cancel the deal.
The FTC’s Negative Option Rule requires sellers of subscriptions, such as magazines or CD clubs, to tell subscribers:
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How many selections they must buy, if any

How and when they can cancel membership

How to notify the seller that they don’t want a selection
When to return the negative option form to cancel
shipment of a selection
When they get credit for return of a selection
How postage and handling costs are charged

How often they’ll receive announcements and forms

The FTC’s Mail, Telephone, Internet, or Fax Rule requires sellers to ship orders within the time promised in advertisements
or, if none, within 30 days of receipt of the order. If there’s a
delay, an option notice must be sent giving the option to
accept the delay or cancel the order.

The FTC’s Telemarketing Sales Rule does the following:
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Prohibits calling if the consumer hasn’t asked to be
called

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

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

Lesson 2

33

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Requires the consumer to be told, if it’s a prize promotion, that no purchase or payment is necessary to enter
or win
Prohibits misrepresentations

Requires disclosure of total cost of product

Prohibits withdrawal of money from consumer’s checking
account without express, verifiable authorization from
the consumer

Requires that certain services (credit repair, “recovery
room,” and advance-fee loans) be performed before the
customer is required to pay

The FTC’s 900-Telephone Number Rule requires that callers
be warned of the cost and given a chance to hang up before
charges begin, that telephone companies block service to 900
numbers if requested by the customer, and that customers
be sent annual pay-per-call disclosures. It also bars phone
companies from disconnecting phone service to customers
who refuse to pay for 900-number calls.
The Can Spam Act requires unsolicited commercial e-mail be
truthful and not use misleading subject lines or incorrect
return addresses. E-mail containing pornography must be
specifically labeled in the subject line. Spammers are prohibited from harvesting e-mail addresses from chat rooms or
other sites without permission. The FTC is authorized to
establish a Do-Not-E-mail Registry.

The FTC has Antislamming Rules to protect consumers whose
telephone service was changed without permission. The consumer need not pay for service up to 30 days after being
slammed. After that, you must pay for services to your
authorized company at the authorized company’s rate rather
than at the slammer’s rate.

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

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Business Law 2

create standards and rules and to enforce those rules with
sanctions. The commission can seek injunctions, can ban
hazardous products, and can impose fines.

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

The Truth-in-Lending Act requires creditors to disclose finance
charges and the annual percentage rate (the true cost of the
debt when charges in addition to interest are factored in)
before loaning to customers. Credit card holders aren’t
responsible for charges made on lost, stolen, or possibly
misused cards after notifying the card company, and
exposure for unauthorized charges is limited to $50.

The Equal Credit Opportunity Act prohibits denying credit
based on gender, marital status, color, race, religion, national
origin, ethnicity, age, or receipt of public assistance.
The Fair Debt Collection Practices Act prohibits debt collectors
from engaging in deceptive or abusive practices. Among the
prohibited practices are overcharging, harassment, and disclosing information about the debt to third parties.

Review and Application

When you finish reading the chapter,
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n

Answer the Quick Quiz questions on pages 323, 329,
and 333. Check your answers on page 335. These
quizzes will not be scored so don’t send them to the
school; they’re for you to gauge your progress. If there
are any questions you don’t understand, refer back to
the textbook and reread the assignment.

Complete the online textbook chapter quiz at
http://highered.mheducation.com/sites/0073524956/st
udent_view0/chapter15/chapter_quiz.html. Feedback on
your answers will be provided once you finish the quiz
and click the Submit Answers button.

Lesson 2

35

n

Take a moment to complete Self-Check 6. You can check
your answers by turning to the back of this study guide.
If you have trouble with any of the material, review those
sections in your text.

Then review the material you’ve learned in this study guide
and the assigned pages in your textbook for Assignments
4–6. When you’re sure that you completely understand the
information presented in those assignments, complete your
multiple-choice examination for Lesson 2.

Self-Check 6
Answer questions in “Questions for Review and Discussion” on page 334 of your textbook.
Check your answers with those on page 85.

36

Business Law 2

INTRODUCTION

Lesson 3

Negotiable Instruments

Negotiable instruments are written documents that contain a
promise or an order to pay money. In this lesson, you’ll learn
about the different types of negotiable instruments and the
rules governing them. You’ll learn how negotiable instruments are transferred. You’ll study the special protections
afforded holders in due course. You’ll also study the laws
that govern the relationships between banks and their
depositors.

OBJECTIVES

When you complete this lesson, you’ll be able to
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Identify the purpose of and parties to negotiable
instruments

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

State the requirements for a writing to constitute a
negotiable instrument

Explain how negotiable instruments are transferred and
the difference between assignment and negotiation

Explain how instruments are negotiated by endorsement
and the different types of endorsement
Discuss the obligations of those who endorse a
negotiable instrument

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

Define the term holder in due course and explain why it
matters

37

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Discuss personal defenses that can’t be asserted against
a holder in due course

Discuss real defenses that can be asserted against all
holders

Explain the liability of makers, acceptors, drawers, and
endorsers

Discuss the duties that banks have to depositors and
that depositors have to banks
Explain how electronic banking works

Describe the process of bank deposits and collections

ASSIGNMENT 7

Read this introduction to Assignment 7. Then read Chapter 16
of your textbook.

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

The purpose of negotiable instruments is to facilitate transfers of money and borrowing of money.

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

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

The UCC doesn’t require that a preprinted form be used to
write checks and allows for any writing to serve as a check if
it otherwise meets the requirements of the UCC.
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Business Law 2

A bank draft is a check drawn by one bank on another bank
in which it has funds on deposit. Such accounts may be used
to facilitate a customer’s business transactions in distant
places. A cashier’s check is drawn by the bank on itself. A
certified check is a check guaranteed by the bank at the
request of either the depositor or the holder. The UCC doesn’t
require banks to certify checks. A money order is a type of
draft that may be purchased from banks, post offices, or
other companies as a substitute for a check.
A bearer is a person who possesses a negotiable instrument
payable to “bearer,” “cash,” or an instrument that has been
endorsed in blank. A holder is a person in possession of an
instrument issued or endorsed to that person’s order or to
the bearer. A holder in due course is one who’s treated favorably and immune from certain defenses.

Negotiable instruments are used daily by millions of people
and are highly trusted. When an instrument is transferred by
negotiation, the person receiving the instrument is provided
with more protection than might have been available to the
person from whom it was received. In some instances, the
transferee may be able to recover money using the instrument when the person transferring it couldn’t have done so.
Negotiable instruments may be assigned or transferred.
Assignment occurs when the instrument is transferred without proper endorsement or otherwise in a form that’s not
negotiable. An assignee has only the rights of the assignor
and is subject to all defenses existing against the assignor.
Negotiation occurs when the transfer makes the transferee a
holder. A holder has greater rights than an assignee.
Negotiation is accomplished by endorsement with the intent
to transfer ownership.
Different types of endorsements include the following:
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A blank endorsement, which is a signature alone, in
which the holder of such an instrument can recover its
face value by delivery alone, even if the holder isn’t the
person who made the endorsement

A special endorsement, which is made by writing “pay to
the order of” or “pay to” followed by the name of the person to whom it’s transferred, and then followed by the
endorser’s signature

Lesson 3

39

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A restrictive endorsement, which limits the subsequent
use of an instrument, such as endorsing “for deposit
only”

A qualified endorsement, which limits the liability of the
endorser

Certain warranties are automatically made by a person who
receives consideration for an instrument (for example, uses a
check to pay for goods or cashes a check at a bank):
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The endorser has the right to enforce the instrument
(has good title).
All signatures are genuine or authorized.

The instrument hasn’t been materially altered.

No defense of any party is good against the endorser.

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

Unless the endorsement provides otherwise, an endorser
agrees to pay any subsequent holder the face amount of the
instrument.
If an instrument is payable to one person and another
person, it must be endorsed by both. If it’s payable to one
person or another person, the endorsement by either is
sufficient.

The tort of conversion is committed when an instrument is
paid on a forged endorsement. A forged endorsement isn’t
effective as the signature of the person whose name is signed
unless
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40

It’s ratified

The person signing is an impostor and impersonates the
person whose name is signed
The maker intends the payee to have no interest or the
payee is a fictitious person

An agent pads the payroll by supplying the employer
with fictitious names

Business Law 2

Review and Application

When you finish reading the chapter,
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n

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Answer the Quick Quiz questions on pages 351 and 358.
Check your answers on page 361. These quizzes will not
be scored so don’t send them to the school; they’re for
you to gauge your progress. If there are any questions
you don’t understand, refer back to the textbook and
reread the assignment.
Complete the online textbook chapter quiz at
http://highered.mheducation.com/sites/0073524956/st
udent_view0/chapter16/chapter_quiz.html. Feedback on
your answers will be provided once you finish the quiz
and click the Submit Answers button.

Take a moment to complete Self-Check 7. You can check
your answers by turning to the back of this study guide.
If you have trouble with any of the material, review those
sections in your text.

Self-Check 7
Answer the “Questions for Review and Discussion” on pages 359–360 of your textbook.
Check your answers with those on page 87.

Lesson 3

41

ASSIGNMENT 8

Read this introduction to Assignment 8. Then read Chapter 17
of your textbook.

Chapter 17 discusses defenses that can be asserted to
enforcing negotiable instruments and differentiates between
the liabilities of holders and the liabilities of holders in due
course.

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

Personal defenses are sometimes called limited defenses
because they can’t be used against a holder in due course.
The most common personal defenses are breach of the
underlying contract for which the instrument was consideration, lack or failure of consideration (the underlying contract
is unenforceable due to lack of consideration), fraud in the
inducement, lack of delivery (the holder obtains possession in
some manner other than voluntary delivery), and payment.
The FTC has adopted a “holder in due course rule” that
allows consumers obligated under credit contracts to assert
personal defenses against holders in due course, such as a
finance company that might purchase the credit obligation.

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

The term presentment means a holder’s demand to pay or
accept an instrument. Presentment may be made by any
commercially reasonable means. The term dishonor refers to
refusal to pay when an instrument is due or to accept when
properly presented. Dishonor also occurs when presentment
is excused and the instrument is past due and unpaid.
42

Business Law 2

The obligations of makers, acceptors, and endorsers are
different. Makers of notes and acceptors of drafts must pay
without reservation. Endorsers, on the other hand, must pay
only if a properly presented instrument is dishonored and
notice of the dishonor is given to the drawee or party obligated to pay the instrument. Notice of dishonor may be given
by any reasonable means. Nonbank holders must give notice
of dishonor to the drawer and endorsers within 30 days
following the dishonor

Review and Application

When you finish reading the chapter,
n

n

n

Answer the Quick Quiz questions on pages 366, 369,
371, and 373. Check your answers on page 375. These
quizzes will not be scored so don’t send them to the
school; they’re for you to gauge your progress. If there
are any questions you don’t understand, refer back to
the textbook and reread the assignment.

Complete the online textbook chapter quiz at
http://highered.mheducation.com/sites/0073524956/st
udent_view0/chapter17/chapter_quiz.html. Feedback on
your answers will be provided once you finish the quiz
and click the Submit Answers button.

Take a moment to complete Self-Check 8. You can check
your answers by turning to the back of this study guide.
If you have trouble with any of the material, review those
sections in your text.

Self-Check 8
Answer the “Questions for Review and Discussion” on page 374 of your textbook.
Check your answers with those on page 88.

Lesson 3

43

ASSIGNMENT 9

Read this introduction to Assignment 9. Then read Chapter 18 of
your textbook.

Chapter 18 describes rules governing bank deposits and
collections. Banks and their depositors have contractual
relationships both of debtor and creditor and of agent and principal. The bank becomes a debtor when the customer deposits
money. The bank acts as an agent when honoring drafts drawn
by the customer on the account.

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

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

If a bank pays an altered amount of a check to a holder, it may
deduct from the account only the amount of the check as it was
originally written. If the bank honors a forged check, it’s
responsible to the depositor. However, the UCC imposes a duty
on depositors to examine their bank statements and canceled
checks promptly and to report forged or altered checks or they
may lose the right to hold the bank responsible for these losses.

Banks haven’t always made deposited funds available with the
same timeliness. As a result, the Competitive Banking Act was
adopted. Pursuant to regulations issued by authority of this act,
the following rules apply:
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44

Funds from checks drawn on the U.S. Treasury or any
state or local government, and funds from any bank draft,
cashier’s check, or postal money order must be made available on the next business day (with some exceptions).
Funds from checks drawn on banks within the same
Federal Reserve district must be available within two business days.

Business Law 2

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Funds from checks drawn on banks outside the bank’s
Federal Reserve district must be available within five business
days.

In many states, writing a check on an account that one knows has
insufficient funds to cover the check is larceny.
A written stop-payment order is binding for six months unless
renewed in writing. An oral stop-payment order is binding for 14
days.

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

Electronic banking is a very important feature of modern life. Many
people use automated teller machines (ATMs) to deposit or withdraw money using an ATM card with a personal identification
number. Debit cards can be used to purchase goods and services
by subtracting money electronically from a bank account. Some
banks permit payment by e-check, in which funds are electronically transferred from a customer’s checking account. Businesses
that deal with large sums of money can avoid loss of interest and
achieve other advantages by using electronic fund transfers.
ATM customers are entitled to a written receipt documenting their
transaction, and the transactions must appear on bank statements
sent to the customer. A consumer’s liability for unauthorized use
of an ATM card is limited to $50 if notice of loss or theft is given to
the bank within two business days. After that, liability increases to
$500 and becomes unlimited if notice isn’t given within 60 days.
A depository bank is the first bank to which an item is transferred
for collection. A payor bank is a bank by which an item is payable,
including a drawee bank. In some circumstances, the same bank
could be both.

The process of collection of a check is as follows. The depository
bank acts as the customer’s agent for collection of the money from
the payor bank. The check is sent to the payor bank, and if honored, the amount is deducted from the drawer’s account. If the
check is dishonored, it will be returned to the payee and credits
will be revoked.

The Check 21 Act allows use of a substitute check—a paper reproduction of the original that can be processed. Customers don’t
have an absolute right to see the original canceled check, only the
right to return of a substitute check. The use of a substitute check
facilitates electronic check processing.
Lesson 3