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 n n n n n n n 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 1 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 n n n 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 n n n n n n n n n 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 7 n n n n n n n n n n n n n 8 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. 10 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, n 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 n n 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. 12 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 14 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, n n n 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. 16 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. 18 Business Law 2 Review and Application When you finish reading the chapter, n n n 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 n n n n n 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 21 n n n n n n n n n n n n n n n 22 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: n n n 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 n n n n n n 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, n 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 28 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, n n n 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 n n n 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: n n n 32 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 n n 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: n n n n n n n 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: n n n 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 n n n n n 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 34 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, n 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 n n n n n n n n 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 n n n n n n 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. 38 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: n n 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 n n 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): n n n n n 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 n n n n 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, n n n 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: n n 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 n 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