In this book . . . STUDY TOOLS
that help you make the grade
C A S E I N PO I NT Patricia Ostolaza and José Diaz
owned a home on which they had two mortgage
loans and a home equity line of credit provided by
Bank of America. Anthony Falcone called them and
said that he could refinance their mortgages in a
manner that would reduce their monthly payments.
Falcone said that he represented Bank of America
when in fact he represented Countrywide Home
Loans, Inc. At the closing of the new loan, the homeowners were given all of the relevant documents,
including the TILA disclosure statement. The documents accurately stated the monthly payment under
the new loan, which was higher than the couple’s
original payments. The homeowners later filed a
lawsuit against Falcone and Countrywide Bank,
alleging fraud. The trial court dismissed the suit, and
the appellate court upheld the dismissal because the
homeowners had been given the opportunity to read
all of the relevant documents, but had not done so.3
3. Ostolaza-Diaz v. Countrywide Bank, N.A., 2010 WL 95145 (4th
Cir. 2010).

᭣ Short Case in Point examples
in every chapter make it easy to
remember important legal concepts.
᭢ Concept Summary boxes located at key points in each
chapter help you review more effectively for exams.
C HAP T E R 2

Type of Court

Description

Trial Courts

Trial courts are courts of original jurisdiction in which actions are initiated.
1. State courts—Courts of general jurisdiction can hear any case that has not been
specifically designated for another court; courts of limited jurisdiction include,
among others, domestic relations courts, probate courts, municipal courts, and
small claims courts.
2. Federal courts—The federal district court is the equivalent of the state trial court.
Federal courts of limited jurisdiction include the bankruptcy courts and others
8/26/10
AM 38.
shown in Exhibit
2–27:16:04
on page

Intermediate
Appellate Courts

Courts of appeals are reviewing courts; generally, appellate courts do not have original jurisdiction. About three-fourths of the states have intermediate appellate courts;
in the federal court system, the U.S. circuit courts of appeals are the intermediate
appellate courts.

Supreme Courts

The highest state court is that state’s supreme court, although it may be called by
some other name. Appeal from state supreme courts to the United States Supreme
Court is possible only if a federal question is involved. The United States Supreme

Court is the highest court in the federal court system and the final arbiter of the
Constitution and federal law.

Clarkson 12e Ch31_605-622.indd 609

198

U N I T T WO

41

Courts and Alternative Dispute Resolution

TORTS AN D C R I M ES

9–2. Property Crimes Which, if any, of the following crimes
necessarily involves illegal activity on the part of more
than one person?
(a) Bribery
(b) Forgery
(c) Embezzlement
(d) Larceny
(e) Receiving stolen property
9–3. QUESTION WITH SAMPLE ANSWER: Cyber Scam.
Kayla, a student at Learnwell University, owes
$20,000 in unpaid tuition. If Kayla does not
pay the tuition, Learnwell will not allow her
to graduate. To obtain the funds to pay the
debt, she sends e-mail letters to people that she does not
personally know asking for financial help to send Milo,

her disabled child, to a special school. In reality, Kayla
has no children Is this a crime? If so which one?

9–6. CASE PROBLEM WITH SAMPLE ANSWER: Credit Cards.
Oleksiy Sharapka ordered merchandise online
using stolen credit cards. He had the items sent to
outlets of Mail Boxes, Etc., and then arranged for
someone to deliver the items to his house. He subsequently shipped the goods overseas, primarily to Russia.
Sharapka was indicted in a federal district court. At the time
of his arrest, government agents found in his possession,
among other things, more than three hundred stolen creditcard numbers, including numbers issued by American
Express. There was evidence that he had used more than ten
of the American Express numbers to buy goods worth
between $400,000 and $1 million from at least fourteen
vendors. Did Sharapka commit any crimes? If so, who were
his victims? Explain. [ United States v. Sharapka, 526 F.3d
58 (1st Cir. 2008)]
• To view a sample answer for Problem 9–6, go to this book’s Web

Sample answers to selected Questions and Case Problems are
available in this book’s Appendix I and at the Companion Web Site.
At the end of every chapter in this book, you’ll find a great variety of
questions and case problems that help you retain and apply what you’ve
learned. We’ve provided sample answers at the back of the book and at
www.cengage.com/blaw/clarkson to selected Questions and Case Problems
so you can compare the authors’ answers to yours.
Clarkson 12e Ch02_28-49.indd 41

8/26/10 7:05:28 AM


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In the STUDY GUIDE . . .
resources to ace every test
What better way to study for a test than with
a Study Guide prepared by the co-author of this
textbook. Written by Roger LeRoy Miller and
William Eric Hollowell, this comprehensive
resource includes:

Study Guide

᭤ Brief introductions and outlines for every

chapter
᭤ True-false, fill-in-the-blank, and multiple-choice

questions for every chapter, as well as short
essay problems to help you test yourself
᭤ Issue Spotters that focus your study
᭤ Sample CPA exam questions
᭤ An appendix at the end of the Study Guide

containing answers to all questions and
Issue Spotters

Bookstore doesn’t carry the Study Guide?
You can get it online (ISBN: 0-538-47277-7) at

www.cengagebrain.com.

WILLIAM ERIC HOLLOWELL | ROGER LEROY MILLER

BLT&C_SG_cvr.indd 1

8/16/10 12:31:51 PM

FREE RESOURCES!
Visit this book’s Companion Web Site
for many additional study tools
www.cengage.com/blaw/clarkson
᭤ Answers to selected Case Problems from

this textbook
᭤ Video clips from the Business Law Digital

Video Library (You’ll need to view these
clips to help you answer Video Questions that
appear in selected chapters of this book.)
᭤ Interactive self-quizzes for every chapter
᭤ Practical Internet exercises for every chapter
᭤ Court case updates
᭤ Legal reference materials and much more!

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BUSINESS LAW

© 2012, 2009 South-Western, Cengage Learning

TEXT AND CASES
Legal, Ethical, Global, and
Corporate Environment
TWELFTH EDITION

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UNIT ONE

THE LEGAL ENVIRONMENT OF BUSINESS 1

Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5

Introduction to Law and Legal Reasoning 2
Courts and Alternative Dispute Resolution 28
Court Procedures 50
Constitutional Authority to Regulate Business 74
Ethics and Business Decision Making 93

UNIT TWO

TORTS AND CRIMES 115

Chapter 6
Chapter 7
Chapter 8
Chapter 9

Intentional Torts and Privacy 116
Negligence and Strict Liability 136

Intellectual Property and Internet Law 151
Criminal Law and Cyber Crime 174

UNIT THREE CONTRACTS AND E-CONTRACTS 205
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Chapter 16
Chapter 17
Chapter 18

Nature and Terminology 206
Agreement in Traditional and E-Contracts 222
Consideration 243
Capacity and Legality 256
Mistakes, Fraud, and Voluntary Consent 274
The Statute of Frauds—Writing Requirement and Electronic Records 289
Third Party Rights 304
Performance and Discharge in Traditional and E-Contracts 319
Breach of Contract and Remedies 334

UNIT FOUR

DOMESTIC AND INTERNATIONAL
SALES AND LEASE CONTRACTS 355

Chapter 19

Chapter 20
Chapter 21
Chapter 22
Chapter 23

The Formation of Sales and Lease Contracts 356
Title, Risk, and Insurable Interest 384
Performance and Breach of Sales and Lease Contracts 400
Warranties and Product Liability 421
International Law in a Global Economy 441

UNIT FIVE

NEGOTIABLE INSTRUMENTS 461

Chapter 24
Chapter 25
Chapter 26
Chapter 27

The Function and Creation of Negotiable Instruments 462
Transferability and Holder in Due Course 479
Liability, Defenses, and Discharge 498
Checks and Banking in the Digital Age 518

UNIT SIX

CREDITORS’ RIGHTS AND BANKRUPTCY 545

Chapter 28

Chapter 29

Creditors’ Rights and Remedies 546
Secured Transactions 557
iii

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iv

CO N T E N T S I N B R I E F

Chapter 30
Chapter 31

Bankruptcy Law 581
Mortgages and Foreclosures after the Recession 605

UNIT SEVEN

AGENCY AND EMPLOYMENT 623

Chapter 32
Chapter 33
Chapter 34
Chapter 35

Agency Formation and Duties 624

Agency Liability and Termination 639
Employment, Immigration, and Labor Law 658
Employment Discrimination 681

UNIT EIGHT

BUSINESS ORGANIZATIONS 705

Chapter 36
Chapter 37
Chapter 38
Chapter 39
Chapter 40
Chapter 41
Chapter 42
Chapter 43

Sole Proprietorships and Franchises 706
Partnerships and Limited Liability Partnerships 719
Limited Liability Companies and Special Business Forms 739
Corporate Formation and Financing 753
Corporate Directors, Officers, and Shareholders 775
Corporate Merger, Consolidation, and Termination 796
Securities Law and Corporate Governance 812
Law for Small Business 837

UNIT NINE

GOVERNMENT REGULATION 859


Chapter 44
Chapter 45
Chapter 46
Chapter 47
Chapter 48

Administrative Law 860
Consumer Law 880
Environmental Law 897
Antitrust Law 913
Professional Liability and Accountability 933

UNIT TEN

PROPERTY AND ITS PROTECTION 955

Chapter 49
Chapter 50
Chapter 51
Chapter 52

Personal Property and Bailments 956
Real Property and Landlord-Tenant Relationships 975
Insurance 1000
Wills and Trusts 1018

APPENDICES
A How to Brief Cases and Analyze Case Problems A–1
B The Constitution of the United States A–4
C


The Uniform Commercial Code A–12

D The United Nations Convention on Contracts for the International Sale of Goods (Excerpts) A–176
E

The Uniform Partnership Act (Excerpts) A–180

F

The Revised Uniform Limited Partnership Act (Excerpts) A–190

G The Revised Model Business Corporation Act (Excerpts) A–200
H The Sarbanes-Oxley Act of 2002 (Excerpts and Explanatory Comments) A–210
I

Sample Answers for End-of-Chapter Questions with Sample Answer A–218

GLOSSARY G–1
TABLE OF CASES TC–1
INDEX I–1

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


UNIT ONE

THE LEGAL ENVIRONMENT
OF BUSINESS 1

CHAPTER 1

Introduction to Law and Legal Reasoning 2
Business Activities and the Legal Environment 2
Sources of American Law 4
The Common Law Tradition 7
Schools of Jurisprudential Thought 13
Classifications of Law 14
How to Find Primary Sources of Law 15
How to Read and Understand Case Law 21
REVIEWING: INTRODUCTION TO LAW AND LEGAL
REASONING 26
TERMS AND CONCEPTS 26
QUESTIONS AND CASE PROBLEMS 26
LEGAL RESEARCH EXERCISES ON THE WEB 27

CHAPTER 2

Courts and Alternative Dispute
Resolution 28
The Judiciary’s Role in American Government 28
Basic Judicial Requirements 29
EXTENDED CASE 2.1 Southern Prestige Industries, Inc.
v. Independence Plating Corp. 31
CASE 2.2 Oregon v. Legal Services Corp. 36
The State and Federal Court Systems 37
Alternative Dispute Resolution 41
CASE 2.3 NCR Corp. v. Korala Associates, Ltd. 43
International Dispute Resolution 46
REVIEWING: COURTS AND ALTERNATIVE DISPUTE

RESOLUTION 46
TERMS AND CONCEPTS 47
QUESTIONS AND CASE PROBLEMS 47
LEGAL RESEARCH EXERCISES ON THE WEB 49

CHAPTER 3

Court Procedures 50
Procedural Rules 50
Pretrial Procedures 52

EXTENDED CASE 3.1 Cruz v. Fagor America, Inc. 54
CASE 3.2 Blankenship v. Collier 58
The Trial 62
CASE 3.3 Novak v. Tucows, Inc. 64
Posttrial Motions 66
The Appeal 67
CASE 3.4 Evans v. Eaton Corp. Long-Term Disability
Plan 68
Enforcing the Judgment 70
REVIEWING: COURT PROCEDURES 71
TERMS AND CONCEPTS 71
QUESTIONS AND CASE PROBLEMS 72
LEGAL RESEARCH EXERCISES ON THE WEB 73

CHAPTER 4

Constitutional Authority
to Regulate Business 74
The Constitutional Powers of Government 74

EXTENDED CASE 4.1 Family Winemakers of California
v. Jenkins 77
Business and the Bill of Rights 79
CASE 4.2 Bad Frog Brewery, Inc. v. New York State
Liquor Authority 81
CASE 4.3 In re Espiscopal Church Cases 84
Due Process and Equal Protection 86
Privacy Rights 88
REVIEWING: CONSTITUTIONAL AUTHORITY TO REGULATE
BUSINESS 90
TERMS AND CONCEPTS 90
QUESTIONS AND CASE PROBLEMS 90
LEGAL RESEARCH EXERCISES ON THE WEB 92

CHAPTER 5

Ethics and Business Decision Making 93
Business Ethics 93
CASE 5.1 Skilling v. United States 95
EXTENDED CASE 5.2 Krasner v. HSH Nordbank AG 97
Ethical Transgressions by Financial Institutions 99
Approaches to Ethical Reasoning 100
CASE 5.3 Fog Cutter Capital Group, Inc. v. Securities
and Exchange Commission 102
Making Ethical Business Decisions 104
Practical Solutions to Corporate Ethics Questions 105

v
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vi

CO N T E N TS

Business Ethics on a Global Level 106
REVIEWING: ETHICS AND BUSINESS DECISION
MAKING 107
TERMS AND CONCEPTS 108
QUESTIONS AND CASE PROBLEMS 108
LEGAL RESEARCH EXERCISES ON THE WEB 110
UNIT ONE FOCUS ON ETHICS: ETHICS AND THE LEGAL
ENVIRONMENT OF BUSINESS 111
UNIT TWO

TORTS AND CRIMES 115
CHAPTER 6

Intentional Torts and Privacy 116
The Basis of Tort Law 116
Intentional Torts against Persons 117
EXTENDED CASE 6.1 Orlando v. Cole 119
Business Torts 124
Intentional Torts against Property 126
CASE 6.2 Trustees of University of District of
Columbia v. Vossoughi 127
Cyber Torts 129
CASE 6.3 Fair Housing Council of San Fernando Valley
v. Roommate.com, LLC 130

REVIEWING: INTERNATIONAL TORTS AND PRIVACY 132
TERMS AND CONCEPTS 133
QUESTIONS AND CASE PROBLEMS 133
LEGAL RESEARCH EXERCISES ON THE WEB 135

CHAPTER 7

EXTENDED CASE 8.2 KSR International Co. v., Teleflex,
Inc. 159
Copyrights 162
Copyrights in Digital Information 164
CASE 8.3 Maverick Recording Co. v. Harper 165
Trade Secrets 167
International Protection
for Intellectual Property 168
REVIEWING: INTELLECTUAL PROPERTY AND INTERNET
LAW 171
TERMS AND CONCEPTS 171
QUESTIONS AND CASE PROBLEMS 171
LEGAL RESEARCH EXERCISES ON THE WEB 173

CHAPTER 9

Criminal Law and Cyber Crime 174
Civil Law and Criminal Law 174
Criminal Liability 176
Types of Crimes 178
EXTENDED CASE 9.1 People v. Sisuphan 180
Defenses to Criminal Liability 186
Criminal Procedures 187

CASE 9.2 Herring v. United States 188
CASE 9.3 Miranda v. Arizona 190
Cyber Crime 193
REVIEWING: CRIMINAL LAW AND CYBER CRIME 196
TERMS AND CONCEPTS 197
QUESTIONS AND CASE PROBLEMS 197
LEGAL RESEARCH EXERCISES ON THE WEB 199
UNIT TWO FOCUS ON ETHICS:
ETHICS AND TORTS AND CRIMES 200

Negligence and Strict Liability 136
Negligence 136
CASE 7.1 McClain v. Octagon Plaza, LLC 137
CASE 7.2 Palsgraf v. Long Island Railroad Co. 140
Defenses to Negligence 141
EXTENDED CASE 7.3 Pfenning v. Lineman 143
Special Negligence Doctrines and Statutes 145
Strict Liability 147
REVIEWING: NEGLIGENCE AND STRICT LIABILITY 148
TERMS AND CONCEPTS 148
QUESTIONS AND CASE PROBLEMS 148
LEGAL RESEARCH EXERCISES ON THE WEB 150

CHAPTER 8

Intellectual Property and Internet Law 151
Trademarks and Related Property 151
CASE 8.1 The Coca-Cola Co. v. The Koke Co. of
America 152
Cyber Marks 156

Patents 158

UNIT THREE

CONTRACTS
AND E-CONTRACTS 205
CHAPTER 10

Nature and Terminology 206
An Overview of Contract Law 206
Elements of a Contract 207
Types of Contracts 208
Quasi Contracts 212
CASE 10.1 Scheerer v. Fisher 213
Interpretation of Contracts 215
EXTENDED CASE 10.2 Wagner v. Columbia Pictures
Industries, Inc. 215
CASE 10.3 U.S. Bank, N.A. v. Tennessee Farmers
Mutual Insurance Company 218
REVIEWING: NATURE AND TERMINOLOGY 219

Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


vii

CO N T E N TS

TERMS AND CONCEPTS 219

QUESTIONS AND CASE PROBLEMS 220
LEGAL RESEARCH EXERCISES ON THE WEB 221

CHAPTER 11

Agreement in
Traditional and E-Contracts 222
Agreement 222
CASE 11.1 Lucy v. Zehmer 223
CASE 11.2 Basic Technology Corp. v. Amazon.com,
Inc. 226
EXTENDED CASE 11.3 Alexander v. Lafayette Crime
Stoppers, Inc. 228
Agreement in E-Contracts 233
The Uniform Electronic Transactions Act 237
International Treaties Affecting E-Contracts 239
REVIEWING: AGREEMENT IN TRADITIONAL AND
E-CONTRACTS 239
TERMS AND CONCEPTS 240
QUESTIONS AND CASE PROBLEMS 240
LEGAL RESEARCH EXERCISES ON THE WEB 242

CHAPTER 12

QUESTIONS AND CASE PROBLEMS 271
LEGAL RESEARCH EXERCISES ON THE WEB 273

CHAPTER 14

Mistakes, Fraud, and Voluntary Consent 274

Mistakes 274
CASE 14.1 Inkel v. Pride Chevrolet-Pontiac, Inc. 275
Fraudulent Misrepresentation 277
CASE 14.2 Rosenzweig v. Givens 279
EXTENDED CASE 14.3 Eaton v. Waldrop 280
Undue Influence 283
Duress 283
Adhesion Contracts and Unconscionability 284
REVIEWING: MISTAKES, FRAUD, AND
VOLUNTARY CONSENT 285
TERMS AND CONCEPTS 286
QUESTIONS AND CASE PROBLEMS 286
LEGAL RESEARCH EXERCISES ON THE WEB 288

CHAPTER 15

The Statute of Frauds—Writing
Requirement and Electronic Records 289

REVIEWING: CONSIDERATION 252
TERMS AND CONCEPTS 253
QUESTIONS AND CASE PROBLEMS 253
LEGAL RESEARCH EXERCISES ON THE WEB 255

The Origins of the Statute of Frauds 289
Contracts That Fall within the Statute of Frauds 289
EXTENDED CASE 15.1 Salim v. Solaiman 290
CASE 15.2 School-Link Technologies, Inc. v. Applied
Resources, Inc. 294
Sufficiency of the Writing 295

The Parol Evidence Rule 297
CASE 15.3 Watkins v. Schexnider 298
The Statute of Frauds
in the International Context 300
REVIEWING: THE STATUTE OF FRAUDS—WRITING
REQUIREMENT AND ELECTRONIC RECORDS 301
TERMS AND CONCEPTS 301
QUESTIONS AND CASE PROBLEMS 301
LEGAL RESEARCH EXERCISES ON THE WEB 303

CHAPTER 13

CHAPTER 16

Capacity and Legality 256

Third Party Rights

Contractual Capacity 256
Legality 260
CASE 13.1 United States v. $6,976,934.65, Plus
Interest Deposited into Royal Bank of
Scotland International 262
CASE 13.2 Comedy Club, Inc. v. Improv West
Associates 264
EXTENDED CASE 13.3 Lhotka v. Geographic Expeditions,
Inc. 267

Assignments and Delegations 304
CASE 16.1 Martha Graham School and Dance

Foundation, Inc. v. Martha Graham Center
of Contemporary Dance, Inc. 306
Third Party Beneficiaries 311
EXTENDED CASE 16.2 Allan v. Nersesova 311
CASE 16.3 Revels v. Miss America Organization 314

Consideration 243
Elements of Consideration 243
CASE 12.1 Hamer v. Sidway 243
Adequacy of Consideration 245
Agreements That Lack Consideration 245
CASE 12.2 Access Organics, Inc. v. Hernandez 246
Settlement of Claims 249
Exceptions to the Consideration Requirement 250
EXTENDED CASE 12.3 1861 Group, LLC v. Wild Oats
Markets, Inc. 251

REVIEWING: CAPACITY AND LEGALITY 270
TERMS AND CONCEPTS 271

REVIEWING: THIRD PARTY RIGHTS 315
TERMS AND CONCEPTS 316
QUESTIONS AND CASE PROBLEMS 316
LEGAL RESEARCH EXERCISES ON THE WEB 318

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


viii


CO N T E N TS

CHAPTER 17

Performance and Discharge
in Traditional and E-Contracts 319
Conditions 319
Discharge by Performance 320
EXTENDED CASE 17.1 Jacob & Youngs v. Kent 321
CASE 17.2 Wisconsin Electric Power Co. v. Union
Pacific Railroad Co. 323
Discharge by Agreement 325
Discharge by Operation of Law 326
CASE 17.3 Merry Homes, Inc. v. Chi Hung Luu 329
REVIEWING: PERFORMANCE AND DISCHARGE IN
TRADITIONAL AND E-CONTRACTS 331
TERMS AND CONCEPTS 331
QUESTIONS AND CASE PROBLEMS 331
LEGAL RESEARCH EXERCISES ON THE WEB 333

CHAPTER 18

Breach of Contract and Remedies 334
Damages 334
CASE 18.1 Hadley v. Baxendale 336
EXTENDED CASE 18.2 B-Sharp Musical Productions, Inc.
v. Haber 338
Equitable Remedies 339
CASE 18.3 Drake v. Hance 341

Recovery Based on Quasi Contract 342
Election of Remedies 343
Waiver of Breach 344
Contract Provisions Limiting Remedies 345
REVIEWING: BREACH OF CONTRACT AND REMEDIES 346
TERMS AND CONCEPTS 346
QUESTIONS AND CASE PROBLEMS 347
LEGAL RESEARCH EXERCISES ON THE WEB 349
UNIT THREE FOCUS ON ETHICS:
CONTRACT LAW AND THE APPLICATION OF ETHICS 350
UNIT FOUR

DOMESTIC AND
INTERNATIONAL SALES
AND LEASE CONTRACTS 355
CHAPTER 19

The Formation of
Sales and Lease Contracts 356
The Uniform Commercial Code 356
The Scope of Article 2—The Sale of Goods 357
CASE 19.1 Jannusch v. Naffziger 359
The Scope of Article 2A—Leases 361
The Formation of Sales and Lease Contracts 362
CASE 19.2 Glacial Plains Cooperative v. Lindgren 369

EXTENDED CASE 19.3 Jones v. Star Credit Corp. 372
Contracts for the International Sale of Goods 373
REVIEWING: THE FORMATION OF SALES AND LEASE
CONTRACTS 376

TERMS AND CONCEPTS 377
QUESTIONS AND CASE PROBLEMS 377
LEGAL RESEARCH EXERCISES ON THE WEB 379
APPENDIX TO CHAPTER 19: AN EXAMPLE OF A CONTRACT
FOR THE INTERNATIONAL SALE OF COFFEE 380

CHAPTER 20

Title, Risk, and Insurable Interest 384
Identification 384
When Title Passes 385
CASE 20.1 Lindholm v. Brant 388
Risk of Loss 389
EXTENDED CASE 20.2 Spray-Tek, Inc. v. Robbins Motor
Transportation, Inc. 390
CASE 20.3 In re Music City RV, LLC 394
Insurable Interest 397
REVIEWING: TITLE, RISK, AND INSURABLE INTEREST 397
TERMS AND CONCEPTS 398
QUESTIONS AND CASE PROBLEMS 398
LEGAL RESEARCH EXERCISES ON THE WEB 399

CHAPTER 21

Performance and Breach
of Sales and Lease Contracts 400
Performance Obligations 400
Obligations of the Seller or Lessor 401
CASE 21.1 Maple Farms, Inc. v. City School District of
Elmira 404

Obligations of the Buyer or Lessee 406
EXTENDED CASE 21.2 Romero v. Scoggin-Dickey
Chevrolet-Buick, Inc. 406
Anticipatory Repudiation 408
Remedies of the Seller or Lessor 409
Remedies of the Buyer or Lessee 411
CASE 21.3 Houseman v. Dare 412
Additional Provisions Affecting Remedies 415
Dealing with International Contracts 416
REVIEWING: PERFORMANCE AND BREACH OF
SALES AND LEASE CONTRACTS 418
TERMS AND CONCEPTS 418
QUESTIONS AND CASE PROBLEMS 418
LEGAL RESEARCH EXERCISES ON THE WEB 420

CHAPTER 22

Warranties and Product Liability 421
Types of Warranties 421
CASE 22.1 Webster v. Blue Ship Tea Room, Inc. 424
Overlapping Warranties 426

Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
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Warranty Disclaimers and Limitations on
Liability 428
Product Liability 429
Strict Product Liability 430
CASE 22.2 Wyeth v. Levine 432
Defenses to Product Liability 435
EXTENDED CASE 22.3 Boles v. Sun Ergoline, Inc. 435
REVIEWING: WARRANTIES AND PRODUCT LIABILITY 438
TERMS AND CONCEPTS 438
QUESTIONS AND CASE PROBLEMS 438
LEGAL RESEARCH EXERCISES ON THE WEB 440

CHAPTER 23

International Law in a Global Economy 441
International Law 441
Doing Business Internationally 444
Regulation of Specific Business Activities 446
CASE 23.1 Fuji Photo Film Co. v. International Trade
Commission 447
CASE 23.2 United States v. Inn Foods, Inc. 449
U.S. Laws in a Global Context 451
EXTENDED CASE 23.3 Khulumani v. Barclay National
Bank, Ltd. 452
REVIEWING: INTERNATIONAL LAW
IN A GLOBAL ECONOMY 453
TERMS AND CONCEPTS 454
QUESTIONS AND CASE PROBLEMS 454
LEGAL RESEARCH EXERCISES ON THE WEB 456
UNIT FOUR FOCUS ON ETHICS: DOMESTIC AND

INTERNATIONAL SALES & LEASE CONTRACTS 457
UNIT FIVE

NEGOTIABLE
INSTRUMENTS 461

CHAPTER 25

Transferability and
Holder in Due Course 479
Negotiation 479
Indorsements 480
EXTENDED CASE 25.1 Hammett v. Deutsche Bank
National Co. 482
Miscellaneous Indorsement Problems 485
Holder in Due Course (HDC) 486
CASE 25.2 Georg v. Metro Fixtures Contractors,
Inc. 488
CASE 25.3 South Central Bank of Daviess County v.
Lynnville National Bank 491
Holder through an HDC 493
REVIEWING: TRANSFERABILITY AND HOLDER IN DUE
COURSE 494
TERMS AND CONCEPTS 495
QUESTIONS AND CASE PROBLEMS 495
LEGAL RESEARCH EXERCISES ON THE WEB 497

CHAPTER 26

Liability, Defenses, and Discharge 498

Signature Liability 498
CASE 26.1 Jeanmarie v. Peoples 502
Warranty Liability 505
Defenses and Limitations 508
EXTENDED CASE 26.2 Keesling v. T.E.K. Partners,
LLC 509
Discharge 513
REVIEWING: LIABILITY, DEFENSES, AND DISCHARGE 514
TERMS AND CONCEPTS 515
QUESTIONS AND CASE PROBLEMS 515
LEGAL RESEARCH EXERCISES ON THE WEB 517

CHAPTER 27

Checks and Banking in the Digital Age 518
CHAPTER 24

The Function and Creation
of Negotiable Instruments 462
Types of Negotiable Instruments 462
Requirements for Negotiability 466
EXTENDED CASE 24.1 Reger Development, LLC v.
National City Bank 470
CASE 24.2 Foundation Property Investments, LLC v.
CTP, LLC 471
Factors That Do Not Affect Negotiability 475
REVIEWING: THE FUNCTION AND CREATION OF
NEGOTIABLE INSTRUMENTS 475
TERMS AND CONCEPTS 476
QUESTIONS AND CASE PROBLEMS 476

LEGAL RESEARCH EXERCISES ON THE WEB 478

Checks 518
CASE 27.1 MidAmerica Bank, FSB v. Charter One
Bank, FSB 519
The Bank-Customer Relationship 521
The Bank’s Duty to Honor Checks 522
CASE 27.2 Auto-Owners Insurance Co. v. Bank
One 525
EXTENDED CASE 27.3 Schultz v. Bank of America,
N.A. 527
The Bank’s Duty to Accept Deposits 530
Electronic Fund Transfers 536
E-Money and Online Banking 537
REVIEWING: CHECKS AND BANKING
IN THE DIGITAL AGE 539
TERMS AND CONCEPTS 539

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QUESTIONS AND CASE PROBLEMS 539
LEGAL RESEARCH EXERCISES ON THE WEB 541
UNIT FIVE FOCUS ON ETHICS:
NEGOTIABLE INSTRUMENTS 542

UNIT SIX

CREDITORS’ RIGHTS
AND BANKRUPTCY 545
CHAPTER 28

Creditors’ Rights and Remedies 546
Laws Assisting Creditors 546
CASE 28.1 Indiana Surgical Specialists, v. Griffin 548
Suretyship and Guaranty 550
EXTENDED CASE 28.2 Overseas Private Investment Corp.
v. Kim 551
Protection for Debtors 553
REVIEWING: CREDITORS’ RIGHTS AND REMEDIES 554
TERMS AND CONCEPTS 555
QUESTIONS AND CASE PROBLEMS 555
LEGAL RESEARCH EXERCISES ON THE WEB 556

Bankruptcy Relief under
Chapter 13 and Chapter 12 596
CASE 30.3 United Student Aid Funds, Inc., v.
Espinosa 598
REVIEWING: BANKRUPTCY LAW 601
TERMS AND CONCEPTS 602
QUESTIONS AND CASE PROBLEMS 602
LEGAL RESEARCH EXERCISES ON THE WEB 604

CHAPTER 31

Mortgages and Foreclosures

after the Recession 605
Mortgages 605
Real Estate Financing Law 608
CASE 31.1 Bank of New York v. Parnell 610
Foreclosures 612
EXTENDED CASE 31.2 Mitchell v. Valteau 614
REVIEWING: MORTGAGES AND FORECLOSURES
AFTER THE RECESSION 616
TERMS AND CONCEPTS 617
QUESTIONS AND CASE PROBLEMS 617
LEGAL RESEARCH EXERCISES ON THE WEB 619
UNIT SIX FOCUS ON ETHICS:
CREDITORS’ RIGHTS AND BANKRUPTCY 620

CHAPTER 29

Secured Transactions 557
The Terminology of Secured Transactions 557
Creation of a Security Interest 557
Perfection of a Security Interest 559
The Scope of a Security Interest 564
Priorities 566
EXTENDED CASE 29.1 Citizens National Bank of
Jessamine County v. Washington
Mutual Bank 567
Rights and Duties of Debtors and Creditors 570
Default 572
CASE 29.2 First National Bank of Litchfield v.
Miller 573
CASE 29.3 Hicklin v. Onyx Acceptance Corp. 575

REVIEWING: SECURED TRANSACTIONS 577
TERMS AND CONCEPTS 578
QUESTIONS AND CASE PROBLEMS 578
LEGAL RESEARCH EXERCISES ON THE WEB 580

CHAPTER 30

Bankruptcy Law 581
The Bankruptcy Code 581
Liquidation Proceedings 582
CASE 30.1 In re Kuehn 585
EXTENDED CASE 30.2 In the Matter of TransTexas Gas
Corp. 589
Reorganizations 594

UNIT SEVEN

AGENCY
AND EMPLOYMENT 623
CHAPTER 32

Agency Formation and Duties 624
Agency Relationships 624
CASE 32.1 Lopez v. El Palmar Taxi, Inc. 626
Formation of the Agency Relationship 627
CASE 32.2 Laurel Creek Health Care Center v.
Bishop 628
Duties of Agents and Principals 631
EXTENDED CASE 32.3 Taser International, Inc. v.
Ward 632

Rights and Remedies of Agents and Principals 634
REVIEWING: AGENCY FORMATION AND DUTIES 635
TERMS AND CONCEPTS 636
QUESTIONS AND CASE PROBLEMS 636
LEGAL RESEARCH EXERCISES ON THE WEB 638

CHAPTER 33

Agency Liability and Termination 639
Scope of Agent’s Authority 639
CASE 33.1 Azur v. Chase Bank, USA 641
CASE 33.2 Ermoian v. Desert Hospital 643

Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
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Liability for Contracts 645
Liability for Torts and Crimes 647
EXTENDED CASE 33.3 Warner v. Southwest Desert
Images, LLC 648
Termination of an Agency 651
REVIEWING: AGENCY LIABILITY AND TERMINATION 654
TERMS AND CONCEPTS 655
QUESTIONS AND CASE PROBLEMS 655
LEGAL RESEARCH EXERCISES ON THE WEB 657


CHAPTER 34

Employment, Immigration,
and Labor Law 658
Employment at Will 658
Wage and Hour Laws 659
EXTENDED CASE 34.1 Smith v. Johnson and
Johnson 662
Layoffs 663
Family and Medical Leave 664
CASE 34.2 Darst v. Interstate Brands Corp. 664
Worker Health and Safety 666
Income Security 667
Employee Privacy Rights 670
Immigration Law 672
Labor Unions 674
CASE 34.3 Local Joint Executive Board of Las Vegas v.
National Labor Relations Board 676
REVIEWING: EMPLOYMENT, IMMIGRATION,
AND LABOR LAW 678
TERMS AND CONCEPTS 678
QUESTIONS AND CASE PROBLEMS 678
LEGAL RESEARCH EXERCISES ON THE WEB 680

CHAPTER 35

Employment Discrimination 681
Title VII of the Civil Rights Act of 1964 681
EXTENDED CASE 35.1 Burlington Northern and Santa Fe

Railroad Co. v. White 686
Discrimination Based on Age 688
CASE 35.2 Mora v. Jackson Memorial Foundation,
Inc. 689
Discrimination Based on Disability 691
CASE 35.3 Rohr v. Salt River Project Agricultural
Improvement and Power District 692
Defenses to Employment Discrimination 695
Affirmative Action 696
REVIEWING: EMPLOYMENT DISCRIMINATION 697
TERMS AND CONCEPTS 697
QUESTIONS AND CASE PROBLEMS 698
LEGAL RESEARCH EXERCISES ON THE WEB 700
UNIT SEVEN FOCUS ON ETHICS:
AGENCY AND EMPLOYMENT 701

UNIT EIGHT

BUSINESS ORGANIZATIONS 705
CHAPTER 36

Sole Proprietorships and Franchises 706
Sole Proprietorships 706
CASE 36.1 Garden City Boxing Club, Inc. v.
Dominguez 707
Franchises 708
Franchise Termination 712
CASE 36.2 LJL Transportation, Inc. v. Pilot Air Freight
Corp. 712
EXTENDED CASE 36.3 Mac’s Shell Service, Inc. v. Shell

Oil Products Co. 714
REVIEWING: SOLE PROPRIETORSHIPS AND
FRANCHISES 716
TERMS AND CONCEPTS 716
QUESTIONS AND CASE PROBLEMS 716
LEGAL RESEARCH EXERCISES ON THE WEB 718

CHAPTER 37

Partnerships and
Limited Liability Partnerships 719
Basic Partnership Concepts 719
Partnership Formation 721
Partnership Operation 722
CASE 37.1 Meinhard v. Salmon 724
Dissociation of a Partner 727
Partnership Termination 728
Limited Liability Partnerships 730
Limited Partnerships 731
CASE 37.2 1515 North Wells, LP v. 1513 North Wells,
LLC 733
EXTENDED CASE 37.3 In re Dissolution of Midnight Star
Enterprises, LP 734
REVIEWING: PARTNERSHIPS AND
LIMITED LIABILITY PARTNERSHIPS 735
TERMS AND CONCEPTS 736
QUESTIONS AND CASE PROBLEMS 736
LEGAL RESEARCH EXERCISES ON THE WEB 738

CHAPTER 38


Limited Liability Companies
and Special Business Forms 739
The Limited Liability Company 739
CASE 38.1 02 Development, LLC v. 607 South Park,
LLC 740
EXTENDED CASE 38.2 ORX Resources, Inc. v. MBW
Exploration, LLC 742
Operation and Management of an LLC 744

Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


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Dissociation and Dissolution of an LLC 745
Special Business Forms 746
CASE 38.3 SPW Associates, LLP v. Anderson 747
REVIEWING: LIMITED LIABILITY COMPANIES
AND SPECIAL BUSINESS FORMS 750
TERMS AND CONCEPTS 750
QUESTIONS AND CASE PROBLEMS 750
LEGAL RESEARCH EXERCISES ON THE WEB 752

CHAPTER 39

Corporate Formation and Financing 753

The Nature and Classification of Corporations 753
CASE 39.1 Williams v. Stanford 757
Corporate Formation 759
CASE 39.2 Brown v. W. P. Media, Inc. 764
Corporate Powers 765
Piercing the Corporate Veil 766
EXTENDED CASE 39.3 Schultz v. General Electric
Healthcare Financial
Services 767
Corporate Financing 769
REVIEWING: CORPORATE FORMATION AND
FINANCING 771
TERMS AND CONCEPTS 772
QUESTIONS AND CASE PROBLEMS 772
LEGAL RESEARCH EXERCISES ON THE WEB 774

CHAPTER 40

Corporate Directors,
Officers, and Shareholders 775
Roles of Directors and Officers 775
Duties and Liabilities of Directors and Officers 778
CASE 40.1 Guth v. Loft, Inc. 781
The Role of Shareholders 783
Rights of Shareholders 786
EXTENDED CASE 40.2 Bezirdjian v. O’Reilly 789
Liability of Shareholders 790
CASE 40.3 Mazloom v. Mazloom 792
REVIEWING: CORPORATE DIRECTORS, OFFICERS, AND
SHAREHOLDERS 793

TERMS AND CONCEPTS 793
QUESTIONS AND CASE PROBLEMS 794
LEGAL RESEARCH EXERCISES ON THE WEB 795

CHAPTER 41

Corporate Merger,
Consolidation, and Termination 796
Merger, Consolidation, and Share Exchange 796
Purchase of Assets 799
CASE 41.1 American Standard, Inc. v. OakFabco,
Inc. 799

Purchase of Stock 801
Termination 802
EXTENDED CASE 41.2 Parent v. Amity Autoworld,
Ltd. 804
CASE 41.3 Sartori v. S&S Trucking, Inc. 805
Major Business Forms Compared 806
REVIEWING: CORPORATE MERGER, CONSOLIDATION,
AND TERMINATION 809
TERMS AND CONCEPTS 809
QUESTIONS AND CASE PROBLEMS 809
LEGAL RESEARCH EXERCISES ON THE WEB 811

CHAPTER 42

Securities Law
and Corporate Governance 812
The Securities and Exchange Commission 812

The Securities Act of 1933 814
The Securities Exchange Act of 1934 820
CASE 42.1 SEC v. Texas Gulf Sulphur Co. 821
EXTENDED CASE 42.2 Gebhart v. SEC 825
CASE 42.3 Stark Trading v. Falconbridge, Ltd. 827
State Securities Laws 828
Corporate Governance 829
Online Securities Fraud 831
REVIEWING: SECURITIES LAW
AND CORPORATE GOVERNANCE 833
TERMS AND CONCEPTS 834
QUESTIONS AND CASE PROBLEMS 834
LEGAL RESEARCH EXERCISES ON THE WEB 836

CHAPTER 43

Law for Small Business 837
The Importance of Legal Counsel 837
Selection of the Business Organization 838
The Limited Liability Company 840
EXTENDED CASE 43.1 Mixon v. Iberia Surgical,
LLC 841
How to Form a Business Entity 842
Intellectual Property 843
Financial Capital 845
CASE 43.2 Halo Technology Holdings, Inc. v.
Cooper 846
Shareholders Agreements
and Key-Person Insurance 848
Contract Law and Small Businesses 849

Employment Issues 849
REVIEWING: LAW FOR SMALL BUSINESS 851
TERMS AND CONCEPTS 852
QUESTIONS AND CASE PROBLEMS 852
LEGAL RESEARCH EXERCISES ON THE WEB 854
UNIT EIGHT FOCUS ON ETHICS:
BUSINESS ORGANIZATIONS 855

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UNIT NINE

GOVERNMENT
REGULATION 859
CHAPTER 44

Administrative Law 860
The Practical Significance
of Administrative Law 860
Agency Creation and Powers 861
The Administrative Procedure Act 864
EXTENDED CASE 44.1 Federal Communications
Commission v. Fox Television
Stations, Inc. 865

Judicial Deference to Agency Decisions 868
CASE 44.2 Citizens Committee to Save Our Canyons v.
Krueger 869
Enforcement and Adjudication 870
Public Accountability 873
CASE 44.3 United Technologies Corp. v. U.S.
Department of Defense 874
REVIEWING: ADMINISTRATIVE LAW 876
TERMS AND CONCEPTS 877
QUESTIONS AND CASE PROBLEMS 877
LEGAL RESEARCH EXERCISES ON THE WEB 879

CHAPTER 45

Consumer Law 880
Deceptive Advertising 881
CASE 45.1 Federal Trade Commission v.
QT, Inc. 881
Labeling and Packaging Laws 884
CASE 45.2 Paduano v. American
Honda Motor Co. 884
Sales 886
Credit Protection 887
EXTENDED CASE 45.3 Jerman v. Carlisle, McNellie, Rini,
Kramer & Ulrich, LPA 890
Consumer Health and Safety 892
REVIEWING: CONSUMER LAW 893
TERMS AND CONCEPTS 894
QUESTIONS AND CASE PROBLEMS 894
LEGAL RESEARCH EXERCISES ON THE WEB 896


CHAPTER 46

Environmental Law 897
Common Law Actions 897
Federal, State, and Local Regulations 898
Air Pollution 899
CASE 46.1 State of New Jersey v. Environmental
Protection Agency 900

Water Pollution 902
CASE 46.2 Entergy Corp. v.
Riverkeeper, Inc. 903
EXTENDED CASE 46.3 United States v.
Lucas 904
Toxic Chemicals 906
Hazardous Wastes 907
REVIEWING: ENVIRONMENTAL LAW 909
TERMS AND CONCEPTS 909
QUESTIONS AND CASE PROBLEMS 910
LEGAL RESEARCH EXERCISES ON THE WEB 912

CHAPTER 47

Antitrust Law 913
The Sherman Antitrust Act 913
Section 1 of the Sherman Act 914
CASE 47.1 American Needle, Inc. v. National Football
League 915
EXTENDED CASE 47.2 Leegin Creative Leather Products,

Inc. v. PSKS, Inc. 919
Section 2 of the Sherman Act 920
CASE 47.3 Weyerhaeuser Co. v. Ross-Simmons
Hardwood Lumber Co. 922
The Clayton Act 923
Enforcement and Exemptions 926
U.S. Antitrust Laws in the Global Context 927
REVIEWING: ANTITRUST LAW 929
TERMS AND CONCEPTS 930
QUESTIONS AND CASE PROBLEMS 930
LEGAL RESEARCH EXERCISES ON THE WEB 932

CHAPTER 48

Professional Liability
and Accountability 933
Potential Liability to Clients 933
CASE 48.1 Walsh v. State 936
Potential Liability to Third Parties 938
EXTENDED CASE 48.2 Perez v. Stern 939
The Sarbanes-Oxley Act of 2002 941
Potential Liability of Accountants
under Securities Laws 942
CASE 48.3 Overton v. Todman & Co.,
CPAs, P.C. 946
Potential Criminal Liability of Accountants 947
Confidentiality and Privilege 949
REVIEWING: PROFESSIONAL LIABILITY AND
ACCOUNTABILITY 949
TERMS AND CONCEPTS 950

QUESTIONS AND CASE PROBLEMS 950
LEGAL RESEARCH EXERCISES ON THE WEB 952
UNIT NINE FOCUS ON ETHICS:
GOVERNMENT REGULATION 953

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


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CO N T E N TS

UNIT TEN

PROPERTY
AND ITS PROTECTION 955
CHAPTER 49

Personal Property and Bailments 956
Personal Property versus Real Property 956
Fixtures 957
EXTENDED CASE 49.1 APL Limited v. Washington State
Department of Revenue 958
Acquiring Ownership of Personal Property 959
CASE 49.2 In re Estate of Piper 960
Mislaid, Lost, and Abandoned Property 962
Bailments 963
Ordinary Bailments 965
CASE 49.3 LaPlace v. Briere 968

Special Types of Bailments 969
REVIEWING: PERSONAL PROPERTY AND BAILMENTS 972
TERMS AND CONCEPTS 972
QUESTIONS AND CASE PROBLEMS 973
LEGAL RESEARCH EXERCISES ON THE WEB 974

EXTENDED CASE 51.3 Estate of Luster v. Allstate
Insurance Co. 1011
REVIEWING: INSURANCE 1014
TERMS AND CONCEPTS 1015
QUESTIONS AND CASE PROBLEMS 1015
LEGAL RESEARCH EXERCISES ON THE WEB 1017

CHAPTER 52

Wills and Trusts 1018
Wills 1018
CASE 52.1 Shaw Family Archives, Ltd. v. CMG
Worldwide, Inc. 1022
EXTENDED CASE 52.2 Peterson v. Harrell 1024
Intestacy Laws 1026
Trusts 1029
CASE 52.3 Garrigus v. Viarengo 1031
Other Estate-Planning Issues 1034
REVIEWING: WILLS AND TRUSTS 1035
TERMS AND CONCEPTS 1036
QUESTIONS AND CASE PROBLEMS 1036
LEGAL RESEARCH EXERCISES ON THE WEB 1038
UNIT TEN FOCUS ON ETHICS:
PROPERTY AND ITS PROTECTION 1039


CHAPTER 50

Real Property and
Landlord-Tenant Relationships 975
The Nature of Real Property 975
Ownership and
Other Interests in Real Property 976
CASE 50.1 Biglane v. Under the Hill Corp. 977
Transfer of Ownership 981
CASE 50.2 Scarborough v. Rollins 987
Limitations on the Rights of Property Owners 988
EXTENDED CASE 50.3 Kelo v. City of New London,
Connecticut 989
Zoning and Government Regulations 991
Landlord-Tenant Relationships 993
REVIEWING: REAL PROPERTY AND
LANDLORD-TENANT RELATIONSHIPS 996
TERMS AND CONCEPTS 997
QUESTIONS AND CASE PROBLEMS 997
LEGAL RESEARCH EXERCISES ON THE WEB 999

CHAPTER 51

Insurance 1000
Insurance Terminology and Concepts 1000
The Insurance Contract 1001
CASE 51.1 Cary v. United of Omaha Life Insurance
Co. 1005
CASE 51.2 Woo v. Fireman’s Fund Insurance Co. 1007

Types of Insurance 1009

APPENDICES
A How to Brief Cases
and Analyze Case Problems A–1
B The Constitution of the United States A–4
C

The Uniform Commercial Code A–12

D The United Nations Convention on
Contracts for the International Sale of Goods
(Excerpts) A–176
E

The Uniform Partnership Act
(Excerpts) A–180

F

The Revised Uniform Limited Partnership
Act (Excerpts) A–190

G The Revised Model Business Corporation Act
(Excerpts) A–200
H The Sarbanes-Oxley Act of 2002 (Excerpts
and Explanatory Comments) A–210
I

Sample Answers for End-of-Chapter

Questions with Sample Answer A–218

GLOSSARY G–1
TABLE OF CASES TC–1
INDEX I–1

Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


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1.1
1.2
1.3
2.1
2.2
2.1
2.2
3.1
3.2
3.3
6.1
6.2
9.1
10.1
11.1
12.1

13.1
13.2
13.3
14.1
16.1
18.1
19.1
20.1
20.2
21.1
22.1
24.1
25.1

Sources of American Law 7
The Common Law Tradition 12
Schools of Jurisprudential Thought 14
Jurisdiction 35
Types of Courts 41
Jurisdiction 35
Types of Courts 41
Pretrial Procedures 63
Trial Procedures 67
Posttrial Options 70
Intentional Torts against Persons 125
Intentional Torts against Property 129
Types of Crimes 185
Types of Contracts 212
Methods by Which an Offer Can Be
Terminated 231

Consideration 248
Contracts by Minors 258
Contracts by Intoxicated Persons 259
Contracts by Mentally Incompetent
Persons 260
Voluntary Consent 285
Assignments and Delegations 310
Equitable Remedies 344
The Formation of Sales and Lease
Contracts 374
Delivery without Movement of the
Goods 393
Risk of Loss When a Sales or Lease Contract
Is Breached 396
Performance of Sales and Lease
Contracts 408
Types of Warranties 427
Requirements for Negotiability 474
Types of Indorsements and Their Effect 484

25.2 Rules and Requirements for

HDC Status 494
26.1 Signature Liability 506
26.2 Transfer Warranty Liability for Transferors
27.1
28.1
29.1
29.2
30.1

32.1
33.1
33.2
38.1
39.1
40.1
40.2
40.3
41.1
48.1
48.2
49.1
49.2
49.3
50.1
52.1
52.2

Who Receive Consideration 507
Honoring Checks 531
Remedies Available to Creditors 550
Creating and Perfecting a Security
Interest 565
Remedies of the Secured Party on the
Debtor’s Default 577
Forms of Bankruptcy Relief Compared 600
Formation of the Agency Relationship 630
Authority of an Agent to Bind
the Principal and a Third Party 645
Termination of an Agency 653

Special Business Forms 749
Classification of Corporations 760
Roles of Directors and Officers 778
Duties and Liabilities of Directors and
Officers 783
Role, Rights, and Liability of
Shareholders 791
Methods of Expanding Corporate Operations
and Interests 803
Common Law Liability of Accountants and
Other Professionals 941
Statutory Liability of Accountants and Other
Professionals 948
Acquisition of Personal Property 962
Mislaid, Lost, and Abandoned Property 964
Rights and Duties of the Bailee and the
Bailor 971
Interests in Real Property 982
Wills 1027
Trusts 1033

Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


xvi

CO N T E N TS

1–1 Areas of the Law That May Affect Business

1–2
1–3
1–4
1–5
1–6
2–1
2–2
2–3
2–4
3–1
3–2
3–3
3–4
4–1
8–1
9–1
9–2
9–3
10–1
10–2
10–3
11–1
11–2
13–1
13–2
14–1
15–1
15–2

Decision Making 3

Equitable Maxims 8
Procedural Differences between an
Action at Law and an Action in Equity 9
West’s National Reporter System—
Regional/Federal 17
How to Read Citations 18
A Sample Court Case 23
Exclusive and Concurrent Jurisdiction 33
The State and Federal Court Systems 38
Geographic Boundaries of the U.S. Courts
of Appeals and U.S. District Courts 40
Basic Differences in the Traditional Forms
of ADR 42
Stages in a Typical Lawsuit 51
A Typical Complaint 53
A Typical Summons 54
Pretrial Motions 57
Protections Guaranteed
by the Bill of Rights 80
Forms of Intellectual Property 169
Key Differences between
Civil Law and Criminal Law 175
Civil (Tort) Lawsuit and Criminal
Prosecution for the Same Act 176
Major Procedural Steps in a Criminal
Case 192
Classifications Based on Contract
Formation 208
Enforceable, Voidable, Unenforceable,
and Void Contracts 211

Rules of Contract Interpretation 215
A Click-On Agreement Sample 235
The E-SIGN Act and the UETA 238
Unconscionability 266
Contract Legality 269
Mistakes of Fact 275
The One-Year Rule 292
Collateral Promises 293

15–3 Contracts Subject to the Statute
15–4
16–1
16–2
16–3
17–1
18–1
18–2
19–1
19–2
20–1
20–2
21–1
23–1
24–1
24–2
24–3
24–4
25–1
25–2
25–3

25–4
25–5
25–6
25–7
26–1
26–2
27–1
27–2
27–3
27–4
27–5
27–6

of Frauds 296
The Parol Evidence Rule 300
Assignment Relationships 305
Delegation Relationships 309
Third Party Beneficiaries 313
Contract Discharge 330
Measurement of Damages—
Breach of Construction Contracts 336
Remedies for Breach of Contract 343
The Law Governing Contracts 358
Major Differences between Contract Law
and Sales Law 371
Void and Voidable Titles 387
Contract Terms—Definitions 390
A Letter-of-Credit Transaction 417
The Legal Systems of Selected Nations 443
Basic Types of Negotiable Instruments 463

A Typical Time Draft 464
A Typical Promissory Note 465
A Typical Small Certificate of Deposit 467
A Blank Indorsement 480
A Special Indorsement 481
A Qualified Indorsement 481
“For Deposit Only” and
“For Collection Only” Indorsements 483
Trust (Agency) Indorsements 483
Converting an Order Instrument to a Bearer
Instrument and Vice Versa 485
Taking for Value 488
Time for Proper Presentment 500
Defenses against Liability on Negotiable
Instruments 508
A Cashier’s Check 519
An American Express Traveler’s Check 521
A Stop-Payment Order 524
A Poorly Filled-Out Check 530
The Check-Collection Process 533
An Example of Substitute Check 535

Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


xvii

CO N T E N TS


28–1 Suretyship and Guaranty Parties 551
29–1 Secured Transactions—Concept and
29–2
29–3
29–4
30–1
33–1
37–1
37–2
39–1
39–2
39–3
40–1
40–2
41–1
41–2
41–3
41–4
42–1
42–2
42–3

Terminology 558
The Uniform Commercial Code Financing
Statement 560
Types of Collateral and Methods of
Perfection 562
Priority of Claims to a Debtor’s
Collateral 571
The Means Test to Determine

Chapter 7 Eligibility 584
A Sample General Power of Attorney 640
Terms Commonly Included
in a Partnership Agreement 721
A Comparison of General Partnerships
and Limited Partnerships 732
Articles of Incorporation Sample 762
How Do Stocks and Bonds Differ? 769
Types of Stocks 770
Directors’ Management Responsibilities 776
Results of Cumulative Voting 786
Merger 796
Consolidation 797
The Terminology of Takeover Defenses 802
Major Forms of Business Compared 807
Exemptions for Securities Offerings
under the 1933 Securities Act 817
A Sample Restricted Stock Certificate 819
Comparison of Coverage, Application,
and Liability under SEC Rule 10b-5 and
Section 16(b) 824

42–4 Some Key Provisions of the

43–1
44–1
44–2
44–3
45–1
46–1

47–1
48–1

49–1
50–1
51–1
51–2
51–3
52–1
52–2
52–3
52–4

Sarbanes-Oxley Act of 2002 Relating
to Corporate Accountability 832
Venture Capital Issues 846
Executive Departments and Important
Subagencies 862
Selected Independent Regulatory
Agencies 863
The Process of Formal Administrative
Adjudication 873
Selected Areas of Consumer Law Regulated
by Statutes 880
Major Federal Environmental Statutes 899
Exemptions to Antitrust Enforcement 928
Key Provisions of the Sarbanes-Oxley Act
of 2002 Relating to Public Accounting
Firms 944
Degree of Care Required of a Bailee 967

Steps Involved in the Sale of Real Estate 983
Insurance Classifications 1002
Insurance Contract Provisions
and Clauses 1004
Typical Fire Insurance Policies 1010
Excerpts from Michael Jackson’s Will 1019
Per Stirpes Distribution 1029
Per Capita Distribution 1029
A Revocable Living Trust Arrangement 1030

Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


xviii

CO N T E N TS

Chapter 1 Sustainability and the Law 6
Chapter 3 The Duty to Preserve Electronic
Chapter 5

Chapter 8
Chapter 9
Chapter 19
Chapter 23
Chapter 24

Evidence for Discovery 62
Corporate Social Responsibility

and “Outbehaving” the
Competition 105
The Anti-Counterfeiting Trade
Agreement 170
Prosecuting White-Collar Crime with
the Honest-Services Fraud Law 183
Fair Trade and Environmental
Sustainability 364
The National Export Initiative 446
Person-to-Person Mobile Payments
Aid in Sustainability 465

Chapter 2 How the Internet Is Expanding
Chapter 4
Chapter 7
Chapter 10
Chapter 14

Chapter 17
Chapter 22

Precedent 29
Is It Illegal to Distribute Virtual
Pornography? 83
Some Consequences of Caps on
Medical Malpractice Awards 142
Is It Right for a Company to Change
the Prize Offered in a Contest? 209
How Much Information Must
Employers Disclose to Prospective

Employees? 282
When Is Impossibility of
Performance a Valid Defense? 328
Warning Labels for
Video Games 434

Chapter 34 The Online Creation

Chapter 39
Chapter 42
Chapter 45
Chapter 48
Chapter 50

and Modification of
Employment Contracts 660
The Latest Recession Re-Ignites
the Internet Taxation Debate 755
SEC Disclosures and
Climate Change 813
New Health-Care Law Requires
Caloric Information 886
Attacking the Essence
of the Sarbanes-Oxley Act 943
The Law of Building “Green”—
Sustainable Real Estate
Development 994

Chapter 27 Expedited Funds and an
Chapter 30

Chapter 36
Chapter 38
Chapter 40
Chapter 44
Chapter 52

Increase in Check Fraud 532
The Debt That Never Goes Away 594
Information on Potential Earnings
Provided by Franchisors 710
Fiduciary Duties of
LLC Managers 745
Is the Business Judgment Rule
Overly Protective? 780
Should Pharmaceutical Companies
Be Allowed to Tweet? 871
Should Cyberspace Estates
Be Passed On to Heirs? 1020

Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


The study of business law and, more generally,
the legal environment of business has universal
applicability. A student entering any field of business must have at least a passing understanding
of business law in order to function in the real
world. Additionally, students preparing for a career
in accounting, government and political science,
economics, and even medicine can use much of

the information they learn in a business law and
legal environment course. In fact, every individual
throughout his or her lifetime can benefit from a
knowledge of contracts, real property law, landlord-tenant relationships, and other legal topics.
Consequently, we have fashioned this text as a useful “tool for living” for all of your students (including those taking the CPA exam).
For the Twelfth Edition, we have spent a great
deal of effort making this book more contemporary,
exciting, and visually appealing than ever before.
We have also added many new features and special
pedagogical devices that focus on the legal, ethical,
global, and corporate environments, while addressing core curriculum requirements.

WHAT IS NEW IN
THE TWELFTH EDITION
Instructors have come to rely on the coverage,
accuracy, and applicability of Business Law. To
make sure that our text engages your students,
solidifies their understanding of legal concepts,
and provides the best teaching tools available, we
now offer the following items either in the text or
in conjunction with the text.

➢ New Shifting Legal
Priorities for Business Features
For the Twelfth Edition, we have created this new
feature that shows students how legal priorities
are shifting in the business world. Special emphasis is given to sustainability, ethical trends, and
changing managerial responsibilities. Each feature ends with a short section entitled Managerial

Implications that points out why the changing

priorities discussed in the feature are significant
to businesspersons. Topics examined in these features include:
• Prosecuting White-Collar Crime with the
Honest-Services Fraud Law (Chapter 9)
• Fair Trade and Environmental Sustainability
(Chapter 19)
• The National Export Initiative (Chapter 23)
• SEC Disclosures and Climate Change
(Chapter 42)
• The Law of Building “Green”—Sustainable Real
Estate Development (Chapter 50)

➢ New Case in Point Features
Many instructors use cases to illustrate how the
law applies to business. For this edition, we have
expanded our in-text discussion of case law by adding
at least one new Case in Point feature in every chapter. These features present, in paragraph format, the
facts and issues of an actual case and then describe
the court’s decision and rationale. Citations to the
cases are included for further reference. The Case in
Point features are integrated throughout the text to
help students better understand how courts apply the
principles under discussion in the real world.

➢ New Debate This Features
To encourage student participation and motivate
your students to think critically about the rationale underlying the law on a particular topic, we
have created a special new feature for the Twelfth
Edition. Entitled Debate This, it consists of a brief
statement or question concerning the chapter

material that can be used to spur lively classroom
or small group discussions, or can be a written
assignment. These features follow the Reviewing
features (discussed shortly) at the end of each
chapter. Suggested pro and con responses
to the Debate This features can be found
in both the Instructor’s Manual and the
Answers Manual that accompany this text.

xix
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.