PART I InTROduCTIOn 1 PART II fOundATIOnAl legAl COnCePTs

PREFACE

PART I InTROduCTIOn 1

Chapter 1 Law: Importance, Purposes, and Sources 2Chapter 2 Legal Reasoning, Ethical Behavior, and Social Responsibility 24Chapter 3 Court Systems 56Chapter 4 Litigation 74Chapter 5 Alternatives for Resolving Controversies 96Chapter 6 Constitutional Grounds for Regulating Business 112

PART II fOundATIOnAl legAl COnCePTs 136

Chapter 7 Criminal Law and Business 138Chapter 8 Torts: Introduction and Intentional Torts 158Chapter 9 Torts: Negligence and Strict Liability 172Chapter 10 Property: Introduction, Personal Property, and Wills 188Chapter 11 Property: Real Property 208Chapter 12 Intellectual Property and Cyber Law 228

PART III COnTRACTuAl RelATIOnshIPs 270

Chapter 13 Nature of Contracts and Contract Remedies 272Chapter 14 Agreement: Offer and Acceptance 294Chapter 15 Consideration 318Chapter 16 Genuine Assent and Contractual Capacity 336Chapter 17 Illegality 356Chapter 18 Written Form 374Chapter 19 Rights of Third Parties 392Chapter 20 Performance 412

PART IV dOmesTIC And glOBAl sAles 440

Chapter 21 Sales Contracts: Domestic and Global Aspects of Formation, Title, and Risk of Loss 444

Chapter 22 Sales Contracts: Domestic and Global Aspects of Performance, Breach, and Remedies 464

Chapter 23 Sales Contracts: Domestic and Global Aspects of Product Warranties 480

PART V AgenCy And emPlOymenT 500

Chapter 24 Basic Principles of Agency 502Chapter 25 Agency Liability Concepts 520Chapter 26 Employment and Labor Law 540Chapter 27 Employment Discrimination 562

Brief Contents

iv Brief Contents

PART VI BusIness ORgAnIzATIOns 580

Chapter 28 Forms of Business Organization 582Chapter 29 Partnerships 602Chapter 30 Nature of Corporations 630Chapter 31 Financial and Operational Features of Corporations 652Chapter 32 Limited Liability Companies and Related Forms 678

PART VII negOTIABle InsTRumenTs 691

Chapter 33 Introduction to Negotiable Instruments 692Chapter 34 Creation and Negotiation 710Chapter 35 Holders in Due Course and Defenses 728Chapter 36 Liability of Parties to Negotiable Instruments 746

PART VIII CRedITORs And deBTORs 766

Chapter 37 Secured Transactions 768Chapter 38 Creditor Rights, Responsibilities, and Remedies 796Chapter 39 Bankruptcy 820

PART IX gOVeRnmenT RegulATIOn Of BusIness 848

Chapter 40 Administrative Law 850Chapter 41 Securities Regulation 870Chapter 42 Antitrust Law 900Chapter 43 Consumer Law 924Chapter 44 Environmental Regulation 948

PART X InTeRnATIOnAl And enTRePReneuRIAl ReAlms 968

Chapter 45 Legal Aspects of International Business 970Chapter 46 Law for the Aspiring Entrepreneur 988

APPENDIx A: The Constitution of the United States 1009

APPENDIx B: The Uniform Commercial Code 1015

APPENDIx C: Selected Revisions to the Uniform Commercial Code 1122

APPENDIx D: United Nations Convention on Contracts for the International Sale of Goods (1980) [CISG] 1151

GLOSSARy 1161

TABLE OF CASES 1181

INDEx 1185

Contents

PREFACE

PART I InTROduCTIOn …………… 1

1 lAw: ImPORTAnCe, PuRPOses, And sOuRCes …………………………… 21.1 Importance of law to Business ……… 3 1.1a Why Study the Legal Environment of

Business? ………………………………… 3 1.1b Addressing Risk and Achieving

Strategic Integration …………………… 6

CASE 1.1 Susette Kelo et al. v. City of New London, Connecticut, et al. ………… 7

1.2 An Overview of Our legal system …… 9 1.2a Defi nitions of Law …………………… 9 1.2b Objectives of a Legal System ……… 10

CASE 1.2 In the Matter of Julianne Delio, on Behalf of Daniel Delio v. Westchester County Medical Center, et al. …………… 11

1.2c Classifi cation of Legal Subjects …… 121.3 sources of law …………………………… 13 1.3a Four Sources of Law ………………… 13 1.3b Basic Constitutional Principles …… 13 1.3c Legislation …………………………… 14 1.3d Interpreting Legislation …………… 14 1.3e Uniform State Laws ………………… 15 1.3f Court Decisions ……………………… 161.4 Case law …………………………………… 17 1.4a Stare Decisis …………………………… 17 1.4b Problems Inherent in Case Law … 18 1.4c Rejection of Precedent ……………… 18 1.4d Confl ict of Laws …………………… 19

CASE 1.3 The Estee Lauder Companies, Inc. v. Shashi Batra ………………………………… 20

Chapter summary ……………………………… 22

Review Questions and Problems ………… 23

2 legAl ReAsOnIng, eThICAl BehAVIOR, And sOCIAl ResPOnsIBIlITy ………… 24

2.1 legal Reasoning ………………………… 25 2.1a Defi nition of Legal Reasoning …… 25 2.1b Principal Tools of Legal Reasoning 26 2.1c The Legal Reasoning Process ……… 28

CASE 2.1 Bammert v. Don’s Super Valu, Inc. …………………… 30

2.1d Jurisprudence ………………………… 31

CASE 2.2 The Case of the Speluncean Explorers ……………………… 33

2.2 ethical Behavior ………………………… 36 2.2a Signifi cance of Ethical Behavior … 36 2.2b Defi nition of Ethics ………………… 37 2.2c The Relationship of Ethics to Law 37 2.2d Ethical Theories ……………………… 39

CASE 2.3 Jeffrey K. Skilling v. United States ………………………………… 42

2.2e Framework for Making Ethical Decisions …………………… 43

2.2f Encouraging Ethical Behavior Within an Organization …………………… 45

2.3 social Responsibility …………………… 48 2.3a The Emergence of Social

Responsibility ……………………… 48 2.3b Competing Theories for Conducting

Business in a Socially Responsible Manner ……………………………… 49

2.3c Models of Corporate Social Responsibility ……………… 51



3 COuRT sysTems …………………… 563.1 Operating the Court system ………… 57 3.1a Trial Judges …………………………… 57 3.1b Reviewing Court Judges and Justices 57 3.1c The Jury ……………………………… 59

CASE 3.1 Colgrove v. Battin …………… 59

3.2 Court systems …………………………… 60 3.2a The State Structure ………………… 60 3.2b The Federal Structure ……………… 62 3.2c Federal District Courts ……………… 63

CASE 3.2 Hertz Corporation v. Friend 64

3.2d The Law in Federal Courts ………… 67

CASE 3.3 Erie Railroad v. Tompkins … 68

3.2e Federal Reviewing Courts ………… 693.3 law and equity …………………………… 69 3.3a Basic Distinction …………………… 69 3.3b Equitable Procedures ……………… 70



4 lITIgATIOn …………………………… 744.1 Basic Principles …………………………… 75 4.1a Parties ………………………………… 75 4.1b Standing to Sue ……………………… 75 4.1c Class Actions ………………………… 76

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CASE 4.1 Wal-Mart Stores, Inc. v. Betty Dukes ………………………………… 77

4.2 The Place of litigation ………………… 80 4.2a Jurisdiction …………………………… 80 4.2b Long-Arm Statutes ………………… 80

CASE 4.2 Butler v. Beer Across America 81

4.2c Venue ………………………………… 834.3 Proceedings Prior to the Trial ……… 83 4.3a Pleadings ……………………………… 83 4.3b Motions Attacking Pleadings ……… 84 4.3c Discovery Procedures ……………… 84 4.3d Decisions Prior to a Trial …………… 854.4 The Trial …………………………………… 85 4.4a Jury Selection ………………………… 85

CASE 4.3 Edmonson v. Leesville Concrete Company, Inc. ……… 86

4.4b Proof …………………………………… 87 4.4c Motions During Trial ……………… 88 4.4d Jury Instructions …………………… 88 4.4e Verdicts and Judgments …………… 904.5 Proceedings After the Trial ………… 90 4.5a Post-Trial Motions ………………… 90 4.5b Appeals ……………………………… 90


Internet Resources …………………………… 93


5 AlTeRnATIVes fOR ResOlVIng COnTROVeRsIes …………………… 96

5.1 Compromises ……………………………… 97 5.1a Reasons to Compromise …………… 97

CASE 5.1 Burbach Broadcasting Company of Delaware v. Elkins Radio Corporation; Cat Radio Incorporated …………………… 98

5.1b Mediation …………………………… 995.2 Arbitration ………………………………… 100 5.2a Advantages …………………………… 100 5.2b Common-Law Arbitration ………… 101 5.2c Approaches to Arbitration ………… 101 5.2d General Aspects of

Arbitration Statutes ………………… 102

CASE 5.2 Marybeth Armendariz, et al. v. Foundation Health Psychcare Services, Inc. …………………… 103

5.2e The Submission ……………………… 104 5.2f The Award …………………………… 105 5.2g Procedures in Arbitration Hearings 105 5.2h Judicial Review of Arbitration Issues 105

CASE 5.3 Hall Street Associates, LLC v. Mattel, Inc. ………………………………… 107



6 COnsTITuTIOnAl gROunds fOR RegulATIng BusIness ……… 112

6.1 Overview …………………………………… 113 6.1a An Introduction to the Constitution

and Government Regulation ……… 1136.2 The federal form of government … 114 6.2a Separation of Powers ……………… 114

CASE 6.1 Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board et al. ……… 115

6.2b Checks and Balances ……………… 1176.3 federalism ………………………………… 118 6.3a Nature of Federalism ……………… 118 6.3b Distribution of Powers ……………… 118 6.3c Commerce Clause …………………… 119

CASE 6.2 Heart of Atlanta Motel, Inc. v. United States et al. ………………………… 120

6.3d Supremacy and Preemption ……… 1226.4 Checks on the Power

of government …………………………… 123 6.4a Basic Aspects of

Constitutional Limitations ………… 123 6.4b Freedom of Speech ………………… 125

CASE 6.3 Kasky v. Nike, Inc. …………… 127

6.4c Takings ……………………………… 129 6.4d Due Process ………………………… 130 6.4e Equal Protection …………………… 1306.5 Privacy ……………………………………… 132 6.5a Privacy Rights ……………………… 132




PART II fOundATIOnAl legAl COnCePTs ……………… 136

7 CRImInAl lAw And BusIness 1387.1 Basic Concepts …………………………… 139 7.1a Terminology ………………………… 139 7.1b Classification of Crimes …………… 139 7.1c Administrative Crimes ……………… 140 7.1d White-Collar Crimes ……………… 141 7.1e Damage Suits ………………………… 1437.2 essential elements ……………………… 144 7.2a Act and Intent ……………………… 144

CASE 7.1 Cheek v. United States ……… 145

7.2b Capacity ……………………………… 147 7.2c Corporate Liability ………………… 147

CASE 7.2 Arthur Andersen, LLP v. United States ………………………………… 147

7.2d Defenses to Criminal Prosecutions … 1497.3 Constitutional Protections …………… 150 7.3a General Principles …………………… 150

Contents vii

7.3b The Fourth Amendment …………… 151

CASE 7.3 Danny Lee Kyllo v. United States ………………………………… 151

7.3c The Fifth Amendment ……………… 153 7.3d The Sixth Amendment …………… 154 7.3e The Eighth Amendment …………… 155



8 TORTs: InTROduCTIOn And InTenTIOnAl TORTs …………… 158

8.1 Theories of Tort liability …………… 159 8.1a Overview ……………………………… 159 8.1b Damages ……………………………… 159

CASE 8.1 Ansell Healthcare Products, Inc., and Becton Dickinson & Co., Inc. v. Owens & Minor, Inc. and Owens & Minor Medical, Inc. …………… 161

8.2 Intentional Torts ………………………… 162 8.2a Introduction ………………………… 162 8.2b Interference with Personal Freedom 163

CASE 8.2 Jeff Roach et al. v. Howard Stern et al. ………………………… 163

8.2c Interference with Property Rights … 164

CASE 8.3 Gary Kremen and Online Classified, Inc. v. Stephen Michael Cohen, Ocean Fund International, LTD. et al. … 165

8.2d Interference with Economic Relations ……………………………… 167

8.2e Wrongful Communications ……… 168



9 TORTs: neglIgenCe And sTRICT lIABIlITy ……………… 172

9.1 negligence ………………………………… 173 9.1a Introduction ………………………… 173 9.1b Due Care ……………………………… 174 9.1c Reasonable-Person Test …………… 174 9.1d Degrees of Negligence ……………… 175

CASE 9.1 Helen Palsgraf v. the Long Island Railroad Company …… 175

9.1e Negligence by Professional Persons: Malpractice …………………………… 176

9.1f Special Doctrines That Show Negligence …………………… 176

9.1g Actual Cause ………………………… 177 9.1h Proximate Cause …………………… 177

CASE 9.2 Kathleen Delaney v. John M. Reynolds ………………………… 178

9.1i Defenses to Negligence …………… 179

9.2 strict liability …………………………… 180 9.2a Theory ………………………………… 180 9.2b Recent Trends in Products Liability 181

CASE 9.3 Leesa Bunch, a Minor, etc. v. Hoffinger Industries, Inc. and McMasker Enterprises, Inc. ……………… 183

9.2c Defenses ……………………………… 184




10 PROPeRTy: InTROduCTIOn, PeRsOnAl PROPeRTy, And wIlls ………………………………… 188

10.1 Classifications of Property …………… 189 10.1a Real Versus Personal Property …… 189 10.1b Real Property ………………………… 190 10.1c Personal Property …………………… 190 10.1d Reasons for Distinguishing Between

Real and Personal Property ………… 19010.2 fixtures ……………………………………… 191 10.2a What Is a Fixture? …………………… 191

CASE 10.1 Prospect Hill Acquisition, LLC v. Tyco Electronics Corporation ………… 191

10.2b Reasons for Determining Fixture Status ………………………… 193

10.3 Acquiring Title to Personal Property ……………………… 193

10.3a Methods of Transfer ………………… 193 10.3b Inter Vivos Gifts ……………………… 193 10.3c Abandoned, Lost, and

Mislaid Property …………………… 19510.4 Bailments of Personal Property …… 195 10.4a Required Elements ………………… 195 10.4b Types of Bailments ………………… 195 10.4c Degree of Care Owed by Bailees … 196 10.4d Common Carriers as Bailees ……… 196

CASE 10.2 Era Nunez, as personal representative of the Estate of Linda Brown v. Professional Transit Management of Tucson, Inc. and Grace Zoellner ……… 197

10.4e Innkeepers as Bailees ……………… 19810.5 documents of Title ……………………… 198 10.5a General Concepts and Definitions 198 10.5b Negotiation and Transfer ………… 19910.6 leases of Personal Property ………… 200 10.6a Basic Concepts ……………………… 200 10.6b Application of the UCC …………… 20010.7 Acquiring Title to Personal and

Real Property: wills and Intestate succession ………………………………… 201

10.7a Terminology ………………………… 201 10.7b Testamentary Capacity …………… 201 10.7c Formalities of Execution …………… 201

viii Contents

CASE 10.3 In the Matter of the Will of Marion L. Priddy, Deceased ……………… 202

10.7d Intestate Succession ………………… 203



11 PROPeRTy: ReAl PROPeRTy 20811.1 Real Property Ownership Interests 209 11.1a Bundle of Rights …………………… 209 11.1b Ownership Interests ………………… 209 11.1c Easements and Licenses …………… 210 11.1d Types of Multiple-Party Ownership 211 11.1e Restrictions on Ownership Interests 21211.2 Acquiring Title to Real Property … 214 11.2a Introduction ………………………… 214 11.2b Original Entry ……………………… 214 11.2c Transfer by Deed …………………… 214

CASE 11.1 Historic Blakeley Foundation, Inc. v. Williams …………………………………… 215

11.2d Types of Deeds ……………………… 216 11.2e Title by Adverse Possession ……… 21711.3 leases of Real Property ………………… 217 11.3a In General …………………………… 217 11.3b Classification of Leases …………… 217 11.3c Tenants: Rights and Duties ………… 218 11.3d Landlords: Rights and Duties ……… 219 11.3e Warranty of Habitability …………… 22011.4 Real Property as security …………… 220 11.4a Introduction ………………………… 220

CASE 11.2 Tiffany Childs et al. v. Samuel B. Purll, Jr. et al. ………………… 221

11.4b Rights and Duties of the Parties … 222 11.4c Alternative to the Mortgage:

Deed of Trust ………………………… 222 11.4d Foreclosure …………………………… 223 11.4e Priority to Proceeds ………………… 223

CASE 11.3 Cynthia young v. Kenneth Embley …………………………… 224



12 InTelleCTuAl PROPeRTy And CyBeR lAw ………………………… 228

12.1 Intellectual Property …………………… 229 12.1a What Is Intellectual Property? …… 229 12.1b Why Is the Protection of Intellectual

Property Important?………………… 23012.2 Patent law: Protecting Inventions

and methods ………………………………230 12.2a The Nature of a Patent……………… 230 12.2b Basic Requirements of a Patent …… 231

CASE 12.1 Association for Molecular Pathology v. Myriad Genetics …………… 232

12.2c Types of Patents …………………… 234 12.2d How Are Patents Obtained? ……… 236 12.2e Patent Infringement ………………… 239 12.2f Remedies ……………………………… 240 12.2g Strategic Aspects …………………… 24012.3 Trademark law: Protecting distinctive

Indicators of the source of Products and services ……………………………… 241

12.3a Essence of a Trademark …………… 241 12.3b Categories of Distinctiveness ……… 242 12.3c Creating and Keeping Legal Rights in a

Trademark …………………………… 243 12.3d Enforcing a Trademark …………… 245

CASE 12.2 Louis Vuitton Malletier S.A. v. Haute Diggity Dog, LLC ……………… 246

12.3e Strategic Aspects …………………… 24812.4 Copyright law: Protecting Original

expressions ………………………………… 249 12.4a Nature of a Copyright ……………… 249 12.4b Copyright Basics …………………… 249 12.4c Infringement, Defenses,

and Remedies ………………………… 251 12.4d Strategic Aspects …………………… 25212.5 Trade secrets law:

Protecting Valuable secrets ………… 253 12.5a Essence of a Trade Secret …………… 253

CASE 12.3 E. I. duPont deNemours & Company, Inc. v. Rolfe and Gary Christopher……………… 254

12.5b Misappropriation of a Trade Secret 256 12.5c Remedies for Misappropriation …… 256 12.5d Strategic Aspects …………………… 25612.6 Cyber law ………………………………… 260 12.6a Introduction to Cyber Law ………… 260 12.6b Civil Law Aspects …………………… 261 12.6c Criminal Law Aspects ……………… 263




PART III COnTRACTuAl RelATIOnshIPs ……… 270

13 nATuRe Of COnTRACTs And COnTRACT RemedIes ………… 272

13.1 Basic Concepts …………………………… 273 13.1a Contract Defined …………………… 273 13.1b Elements Necessary to Create a

Contract ……………………………… 273 13.1c Sources of Contract Law …………… 274 13.1d Enforcement Theory Regarding

Contractual Obligations …………… 275

Contents ix

CASE 13.1 Ellen Chalk, et al. v. T-Mobile USA, Inc., a Delaware corporation, & Sony Ericsson Opinion Mobile Communications USA, Inc., a Delaware corporation ………………………………… 276

13.2 Contract Classification and Terminology ……………………………… 278

13.2a Bilateral and Unilateral Contracts 279 13.2b Express and Implied-in-Fact

Contracts …………………………… 280 13.2c Implied-in-Law Contracts

(Quasi-Contracts) …………………… 280 13.2d Enforcement Terminology ………… 281 13.2e Performance Terminology ………… 28113.3 legal Remedies for

Breach of Contract ……………………… 281 13.3a Introduction ………………………… 281 13.3b Nominal Damages ………………… 282 13.3c Compensatory Damages: Theory … 282 13.3d Compensatory Damages:

Special Aspects ……………………… 283 13.3e Consequential Damages …………… 283

CASE 13.2 Lewis Jorge Construction Management, Inc. v. Pomona Unified School District………… 284

13.3f Punitive Damages …………………… 286 13.3g Liquidated Damages Clause ……… 286

CASE 13.3 H&R Block Enterprises, Inc. v. Mary Short and AAA Tax Specialists, Inc. 287

13.4 equitable Remedies for Breach of Contract …………………………………… 288

13.4a Introduction ………………………… 288 13.4b Specific Performance ……………… 288 13.4c Rescission …………………………… 290 13.4d Restitution …………………………… 290



14 AgReemenT: OffeR And ACCePTAnCe ……………………… 294

14.1 Basic Concept ……………………………… 295 14.1a Objective Theory of Contracts …… 295

CASE 14.1 Pamela Dalton v. Robert Jahn Corporation, and Opal Jahn, et al. …………………………… 296

14.2 Offers ………………………………………… 297 14.2a Definition …………………………… 297 14.2b Test for Offer’s Existence …………… 298 14.2c Present Intention to Contract …… 298 14.2d Reasonably Definite Terms ………… 299 14.2e Omitted Terms: Gap Filling ……… 299 14.2f Vagueness …………………………… 300 14.2g To Whom Addressed ……………… 300

CASE 14.2 John D. R. Leonard v. PepsiCo, Inc. ………………………………… 301

14.2h An Offer Must Be Communicated 304 14.2i Auctions ……………………………… 30414.3 duration of Offers ……………………… 305 14.3a Introduction ………………………… 305 14.3b Lapse of Time ………………………… 305 14.3c Termination by Operation of Law 305 14.3d Rejection by Offeree ………………… 306 14.3e Revocation by Offeror ……………… 306 14.3f Counteroffer ………………………… 30614.4 Irrevocable Offers ……………………… 307 14.4a Option Contract …………………… 307 14.4b Firm Offers Under the Code ……… 307 14.4c Conduct of the Offeree …………… 30714.5 The law of Acceptance ………………… 308 14.5a Introduction ………………………… 308 14.5b Accepting a Bilateral Offer ………… 309 14.5c Counteroffers Under the

Mirror-Image Rule ………………… 309 14.5d Rejection of the Mirror-Image Rule

Under the Code ……………………… 310

CASE 14.3 Standard Bent Glass Corp. v. Glassrobots Oy, a corporation registered in Finland …………………………………… 310

14.5e Treatment of Additional Terms Under the Code ……………………… 312

14.5f Treatment of Different Terms Under the Code ……………………… 312

14.5g Silence as Assent …………………… 312 14.5h Communication of Acceptance … 313 14.5i Accepting a Unilateral Offer ……… 313



15 COnsIdeRATIOn ………………… 31815.1 Bargain Theory of Consideration … 319 15.1a Benefits and Detriments …………… 319 15.1b Elements of a Bargain ……………… 319 15.1c Adequacy of Consideration ……… 320 15.1d Recitals of Consideration ………… 320

CASE 15.1 Robert Apfel v. Prudential-Bache Securities ……………… 321

15.2 mutuality of Obligation ……………… 322 15.2a Introduction ………………………… 322 15.2b Illusory Promises …………………… 323 15.2c Requirement and

Output Contracts …………………… 324 15.2d Preexisting Duty …………………… 324 15.2e Modification of

Non-Code Contracts ……………… 325

CASE 15.2 Plante & Moran Cresa, LLC v. Kappa Enterprises, LLC, et al. …………… 326

15.2f Modification of Code Contracts … 327 15.2g Discharge of Liquidated Debts

and Claims …………………………… 328

x Contents

15.2h Exception for Composition Agreements …………………………… 328

15.2i Discharge of Unliquidated Debts and Claims …………………………… 328

CASE 15.3 Addison Express, LLC v. Medway Air Ambulance, Inc. …………… 329

15.2j Forbearance ………………………… 33015.3 Contracts Valid without

Consideration …………………………… 331 15.3a Promissory Estoppel ………………… 331 15.3b Moral Obligation …………………… 332 15.3c Firm Offers and Renunciations …… 333



16 genuIne AssenT And COnTRACTuAl CAPACITy …… 336

16.1 genuineness of Assent ………………… 337 16.1a Nature of Assent …………………… 337 16.1b Remedy of Rescission ……………… 33716.2 mistake ……………………………………… 338 16.2a Definitions …………………………… 338 16.2b Bilateral Mistake …………………… 338 16.2c Unilateral Mistake ………………… 339

CASE 16.1 Amerisourcebergen Drug Corp. v. Kohll’s Pharmacy & Homecare, Inc. … 340

16.2d Reformation of Written Contracts 34116.3 misrepresentation ……………………… 341 16.3a Types of Misrepresentation ……… 341 16.3b Scienter ………………………………… 342 16.3c False Representation………………… 342

CASE 16.2 Audrey E. Vokes v. Arthur Murray, Inc., A Corporation, J. P. Davenport, d/b/a Arthur Murray School of Dancing ………………………… 343

16.3d Silence as Fraud ……………………… 345 16.3e Justifiable Reliance ………………… 345 16.3f Injury or Damage …………………… 34616.4 lack of Voluntary Consent …………… 346 16.4a Undue Influence …………………… 346 16.4b Duress ………………………………… 347 16.4c Adhesion Contracts

and Unconscionability …………… 34716.5 Incapacity to Contract ………………… 348 16.5a Types of Incapacity ………………… 348 16.5b Minors’ Contracts …………………… 349 16.5c Avoiding Contracts by Minors …… 349 16.5d Ratification …………………………… 349 16.5e Liability for Necessaries …………… 350

CASE 16.3 yale Diagnostic Radiology v. Estate of Harun Fountain et al. ………… 350

16.5f Third-Party Rights …………………… 351



17 IllegAlITy ………………………… 35617.1 status of Illegal Contracts …………… 357 17.1a Litigation Disallowed ……………… 357

CASE 17.1 Massoud Bassidji v. Simon Soul Sun Goe ……………………… 358

17.1b Exceptions …………………………… 35917.2 Agreements in Violation of statutes 359 17.2a Introduction ………………………… 359 17.2b Violations of License Requirements 360 17.2c Usury ………………………………… 361

CASE 17.2 Renee N. Galloway v. Bluegreen Vacation Club ………………… 361

17.2d Agreements and Activities in Restraint of Trade …………………… 362

17.3 Agreements in Violation of Public Policy ……………………………… 364

17.3a Introduction ………………………… 364 17.3b Agreements Not to Compete ……… 364

CASE 17.3 Emerson Electric Co. v. Guy Rogers; Guy Rogers Sales, Inc. …… 366

17.3c Unconscionability ………………… 368 17.3d Contracts of Adhesion ……………… 369 17.3e Contracts Disclaiming Liability …… 369 17.3f Tickets Disclaiming Liability ……… 371



18 wRITTen fORm ………………… 37418.1 The writing Requirement …………… 375 18.1a Introduction to the

Statute of Frauds …………………… 375 18.1b Contracts Within the

Statute of Frauds …………………… 376 18.1c Contracts Involving Marriage …… 376 18.1d Guaranty Contracts ………………… 377 18.1e Contracts Involving

Interests in Land …………………… 377 18.1f Contracts That Cannot Be

Performed Within One Year ……… 378

CASE 18.1 Linda Velez v. Betsy Sanchez ……………………………… 379

18.1g Contracts for the Sale of Goods … 380 18.1h Contracts for the Sale of Personal

Property Other than Goods ……… 380 18.1i Writing Required by the

Statute of Frauds …………………… 381 18.1j Writing Required for

Code Contracts ……………………… 38118.2 Common law exceptions to the

writing Requirement ………………… 381 18.2a Introduction ………………………… 381 18.2b Part Performance …………………… 382 18.2c Promissory Estoppel ………………… 382

Contents xi

18.3 Code exceptions to the writing Requirement ………………… 382

18.3a Written Confirmation Between Merchants …………………………… 382

CASE 18.2 Central Illinois Light Company v. Consolidation Coal Company ……… 383

18.3b Specially Manufactured Goods …… 384 18.3c Judicial Admissions ………………… 384 18.3d Part Performance …………………… 38418.4 Parol evidence Rule …………………… 385 18.4a Theory and Application …………… 385 18.4b Exceptions to the

Parol Evidence Rule ………………… 385

CASE 18.3 Charles Cagin v. The McFarland Clinic, P.C. ……………… 386

18.4c Parol Evidence Rule and the Code 387



19 RIghTs Of ThIRd PARTIes … 39219.1 Third-Party Beneficiary Contracts … 393 19.1a Nature of Third-Party Beneficiary

Contracts …………………………… 393 19.1b Legal Requirements ………………… 394

CASE 19.1 @Wireless Enterprises, Inc. v. AI Consulting, LLC and Andrew Iorio … 395

19.2 Assignments ……………………………… 396 19.2a Terminology ………………………… 396 19.2b General Principles …………………… 396

CASE 19.2 In re xMH Corp., Debtor. Appeal of: Western Glove Works. ……… 397

19.2c Consent Required …………………… 399 19.2d Consent Required Under the Code 400 19.2e Anti-assignment Clauses …………… 400 19.2f Claims for Money …………………… 401 19.2g Rights of the Assignee ……………… 402 19.2h Obligations of the Parties ………… 402 19.2i Notice of Assignment ……………… 40319.3 delegations ………………………………… 404 19.3a General Principles …………………… 404 19.3b Duties that Cannot Be Delegated … 40419.4 novation …………………………………… 405 19.4a Meaning ……………………………… 405 19.4b Application …………………………… 405

CASE 19.3 James William Burgess and Georgia Burgess v. Jim Walter Homes, Inc.; First Union National Bank ……………… 406



20 PeRfORmAnCe …………………… 41220.1 Interpretation …………………………… 413 20.1a Tools for Determining Intent

of the Parties ………………………… 413

20.2 Conditions ………………………………… 415 20.2a Definition …………………………… 415 20.2b Types of Conditions ………………… 415 20.2c Express Conditions Generally …… 416 20.2d Express Conditions of

Personal Satisfaction ……………… 416

CASE 20.1 Michael Silvestri and Francisco Celestino v. Optus Software, Inc., A New Jersey Corp. and Joseph Avellino, Individually ………………………………… 417

20.2e Constructive Conditions…………… 41920.3 Performance of Conditions ………… 419 20.3a Tender of Performance …………… 419 20.3b Substantial Performance …………… 420 CASE 20.2 Jacob & youngs, Inc. v.

George E. Kent ……………………………… 421 20.3c Divisibility: Installment Contracts 422 20.3d Anticipatory Repudiation ………… 42220.4 excuses for nonperformance………… 423 20.4a Introduction ………………………… 423 20.4b Hindrance, Prevention, or

Noncooperation …………………… 424 20.4c Waiver ………………………………… 425 20.4d Impossibility of Performance ……… 425 20.4e Specific Cases of Impossibility …… 426 20.4f Commercial Frustration …………… 427 20.4g Commercial Impracticability

Under the Code ……………………… 428

CASE 20.3 Specialty Beverages, LLC v. Pabst Brewing Company ………………… 428

20.5 discharge of Contracts ………………… 432 20.5a Methods ……………………………… 432 20.5b Payment ……………………………… 432 20.5c Accord and Satisfaction …………… 433 20.5d Statute of Limitations ……………… 434



PART IV dOmesTIC And glOBAl sAles …………………… 440

21 sAles COnTRACTs: dOmesTIC And glOBAl AsPeCTs Of fORmATIOn, TITle, And RIsk Of lOss …… 444

21.1 Article 2 of the uCC …………………… 445 21.1a Summary of Common-Law

Changes ……………………………… 445 21.1b Scope ………………………………… 445 21.1c Definitions …………………………… 445

CASE 21.1 Leslie Adel and Joanne Adel v. Greensprings of Vermont, Inc., Dennis Glennon, Thomas Cross, and Robert Rubin ………………………………… 447

21.1d Abbreviations ………………………… 44921.2 The sales Contract ……………………… 449

xii Contents

21.2a Express Agreement ………………… 449 21.2b Documentary Transactions ……… 450 21.2c Course of Dealing, Usage of Trade,

Course of Performance …………… 450

CASE 21.2 Todd Heller, Inc. v. Indiana Department of Transportation 451

21.2d Gap Filling Under the Code ……… 45321.3 Title ………………………………………… 454 21.3a In General …………………………… 454 21.3b Identification to the Contract …… 455 21.3c Transfer of Title to Goods ………… 455 21.3d Good-Faith Purchasers ……………… 45521.4 Risk of loss ………………………………… 456 21.4a In Breach-of-Contract Cases ……… 456 21.4b If No Breach Exists ………………… 456

CASE 21.3 Jacq Wilson et al. v. Brawn of California, Inc. ………………… 457

21.5 global sales Contracts ………………… 459 21.5a Application of the CISG …………… 459 21.5b Significant CISG Provisions

Relating to Formation ……………… 459




22 sAles COnTRACTs: dOmesTIC And glOBAl AsPeCTs Of PeRfORmAnCe, BReACh, And RemedIes …………………………… 464

22.1 Overview of Code Remedies ………… 465 22.1a Checklist ……………………………… 465 22.1b Adequate Assurances ……………… 466

CASE 22.1 Al-Misehal Commercial Group, LTD. v. The Armored Group, LLC ……… 466

22.2 Buyer’s duties, Rights, and Remedies ……………………………… 467

22.2a Summary ……………………………… 467 22.2b Right to Inspect ……………………… 468 22.2c Right to Reject ……………………… 468 22.2d Notice of Rejection ………………… 469 22.2e Rights and Duties on Rejection …… 469 22.2f Right to Revoke Acceptance ……… 469 22.2g Right to Cover ……………………… 470 22.2h Right to Damages for Nondelivery 470

CASE 22.2 Jessica Mayberry v. Volkswagen of America, Inc. …………… 470

22.2i Right to the Goods ………………… 47222.3 seller’s duties, Rights,

and Remedies ……………………………… 472 22.3a Summary ……………………………… 472 22.3b Right to Cure ………………………… 472

22.3c Right to Reclaim Goods from an Insolvent Buyer ………………… 472

CASE 22.3 In re Trico Steel Company, LLC, Inc., et al., Debtors. Trico Steel Company, LLC v. Cargill Inc. ………………………… 473

22.3d Right to Reclaim Goods from a Solvent Buyer ……………… 474

22.3e Right to Resell Goods ……………… 474 22.3f Right to Collect Damages ………… 475 22.3g Right to Collect the Purchase Price 47522.4 global sales law ………………………… 476 22.4a Performance Aspects ……………… 476 22.4b Remedial Aspects …………………… 476




23 sAles COnTRACTs: dOmesTIC And glOBAl AsPeCTs Of PROduCT wARRAnTIes ……………………… 480

23.1 Types of warranties …………………… 481 23.1a Express Warranties ………………… 481

CASE 23.1 James Jelinek, et al. v. Land O’Lakes, Inc., Doing Business as Hytest Seeds. ………………………………… 482

23.1b Warranty of Title …………………… 486 23.1c Implied Warranty of

Merchantability ……………………… 484 23.1d Implied Warranty of Fitness for a

Particular Purpose …………………… 48623.2 limitations ……………………………… 486 23.2a Express Disclaimers of Warranties 486 23.2b Written Disclaimers of

Implied Warranties ………………… 487

CASE 23.2 Sandra Wilson v. Royal Motor Sales, Inc. …………………… 487

23.2c Other Exclusions of Implied Warranties ………………… 489

23.2d Remedies ……………………………… 48923.3 Other Aspects of warranties ………… 490 23.3a Notice ………………………………… 490 23.3b Third Parties ………………………… 491

CASE 23.3 Hyundai Motor America, Inc. v. Sandra Goodin …………………………… 492

23.3c Comparison of Strict Liability and Sales Warranty Law ……………………… 493

23.4 global sales law ………………………… 495 23.4a Warranty Aspects …………………… 495



Resources ………………………………………… 499

Contents xiii

PART V AgenCy And emPlOymenT ………… 500

24 BAsIC PRInCIPles Of AgenCy 50224.1 In general ………………………………… 503 24.1a Introduction ………………………… 503 24.1b Types of Principals ………………… 503 24.1c Types of Agents ……………………… 504 24.1d Capacity of Parties ………………… 505 24.1e Formal Requirements ……………… 50524.2 duties of Agents ………………………… 505 24.2a Introduction ………………………… 505

CASE 24.1 Lanna L. Lee, a/k/a Lanna Pai, and B. Lanna, Inc. v. Theodore Hasson, H. International Distribution, Inc. a/k/a Hasson International Distribution, Inc., and Diversified Financial Enterprises … 506

24.2b Duty of Loyalty ……………………… 507 24.2c Duty to Protect

Confidential Information ………… 508 24.2d Duty to Obey Instructions ………… 509 24.2e Duty to Inform ……………………… 509 24.2f Duty Not to Be Negligent ………… 509 24.2g Duty to Account …………………… 51024.3 duties of Principals …………………… 511 24.3a Introduction ………………………… 511 24.3b Duty to Compensate: In General … 511 24.3c Duty to Compensate:

Sales Representatives ……………… 512 24.3d Duty to Reimburse ………………… 512 24.3e Duty to Indemnify ………………… 512

CASE 24.2 Admiral Oriental Line v. United States ………………………………… 513

24.4 Termination by Operation of law … 514 24.4a In General …………………………… 514 24.4b Death ………………………………… 514

CASE 24.3 In re Estate of Eugene T. Capuzzi, M.D., Deceased, Michael Capuzzi and Eugene T. Capuzzi, Jr. v. Christina Fisher … 514

24.4c Insanity ……………………………… 515 24.4d Bankruptcy …………………………… 515 24.4e Destruction or Illegality of

Subject Matter ……………………… 51624.5 Termination by Parties’ Actions …… 516 24.5a Mutual Agreement ………………… 516 24.5b Unilateral Action …………………… 516



25 AgenCy lIABIlITy COnCePTs 52025.1 Basic Principles of

Contract liability ……………………… 521 25.1a Actual Authority …………………… 521

CASE 25.1 Board of Trustees of The City of Delray Beach Police and Firefighters Retirement System v. Citigroup Global Markets Inc., f.k.a. Salomon Smith Barney …………… 523

25.1b Apparent or Ostensible Authority 524 25.1c Ratification …………………………… 52625.2 Contract liability of Principals …… 527 25.2a Introduction ………………………… 527 25.2b Disclosed Principal’s Liability

to Agents ……………………………… 527 25.2c Disclosed Principal’s Liability

to Third Parties ……………………… 527 25.2d Undisclosed Principal’s Liability

to Agents ……………………………… 528 25.2e Undisclosed Principal’s Liability

to Third Parties ……………………… 52825.3 Tort liability Principles ……………… 529 25.3a Introduction ………………………… 529 25.3b Tort Liability of Agents, Employees,

and Independent Contractors …… 52925.4 Tort liability of employers ………… 530 25.4a Respondeat Superior ……………… 530 25.4b Expanding Vicarious Liability …… 531 25.4c Exceptions: Frolics and Detours … 532

CASE 25.2 Arthur F. Riley, an Infant, by Eleanor D. Riley, His Guardian Ad Litem v. The Standard Oil Company of New york 532

25.4d Intentional Torts …………………… 533

CASE 25.3 Kent Bodin v. Gregory S. Vagshenian, MD, et al. ……… 534

25.4e Tort Suits: Procedures ……………… 53425.5 Independent Contractors’ Torts …… 535 25.5a Control over Independent

Contractors …………………………… 535 25.5b General Rule: No Liability ………… 535 25.5c Exceptions: Liability Created ……… 536



26 emPlOymenT And lABOR lAw 54026.1 wrongful discharge …………………… 541 26.1a The Theory of Employment at Will 541 26.1b Statutory and Judicial Exceptions to

Employment at Will ………………… 542 26.1c The Public Policy Exception ……… 542

CASE 26.1 Steve Bastible, John Beyan, Douglas Rowan, Donald Payne, Larry Mullens, and Scott Darden v. Weyerhaeuser Company ………………… 543

26.1d The Good Cause Exception ……… 544 26.1e Ancillary Torts ……………………… 54526.2 Conditions of employment ………… 545 26.2a Determining Employment Status … 545 26.2b Pay and Benefits …………………… 547

xiv Contents

CASE 26.2 Michael Shane Christophe v. Smithkline Beecham Corporation DBA Glaxosmithkline …………………………… 547

26.2c Worker Safety ………………………… 551 26.2d Privacy ………………………………… 55226.3 labor law ………………………………… 554 26.3a Overview of Labor Law …………… 554 26.3b Collective Bargaining ……………… 556

CASE 26.3 National Labor Relations Board v. Curwood, Inc. …………………………… 556

26.3c Job Actions, Strikes, and Lockouts 558




27 emPlOymenT dIsCRImInATIOn 56227.1 Introduction ……………………………… 563 27.1a Laws Prohibiting

Employment Discrimination ……… 56327.2 Title VII ……………………………………… 564 27.2a Scope of Title VII …………………… 564 27.2b Proving Discrimination Under

Title VII ……………………………… 565

CASE 27.1 Price Waterhouse v. Hopkins 566

27.2c Constructive Discharge …………… 568 27.2d Retaliation …………………………… 568 27.2e Categories of Discrimination ……… 569

CASE 27.2 Brown v. Pena ……………… 570

27.2f Defenses to Discrimination ……… 57127.3 Age and disability discrimination 571 27.3a Age Discrimination ………………… 571 27.3b Disability Discrimination ………… 57127.4 harassment ………………………………… 574 27.4a Theoretical Aspects of Harassment 574 27.4b Hostile Environment

Sexual Harassment ………………… 574

CASE 27.3 Meritor Savings Bank v. Vinson ……………………………………… 575

27.4c Employer Liability for Harassment 576




PART VI AgenCy And emPlOymenT ………… 580

28 fORms Of BusIness ORgAnIzATIOn …………………… 582

28.1 Introduction ……………………………… 583 28.1a Proprietorships ……………………… 583 28.1b Franchising …………………………… 583 28.1c General Partnerships ……………… 584

CASE 28.1 David G. Byker v. Thomas J. Mannes ………………………… 585

28.1d Joint Venture ………………………… 586 28.1e Limited Partnership ………………… 58828.2 The Business Corporation …………… 588 28.2a Advantages and Disadvantages …… 588 28.2b Taxation of Corporate Income …… 589 28.2c Avoidance of Double Taxation …… 590 28.2d Subchapter S Corporations ………… 590

CASE 28.2 Watson v. Commissioner … 591

28.2e Professional Service Associations … 59228.3 limited liability Companies ………… 593 28.3a Nature of the Limited Liability

Company …………………………… 593 28.3b Advantages and Disadvantages …… 594

CASE 28.3 Peter A. Rapoza, M.D. v. Jonathan H. Talamo, M.D. et al.………… 594

28.4 making the decision …………………… 595 28.4a The Process of Selecting the

Most Appropriate Legal Form …… 595



29 PARTneRshIPs …………………… 60229.1 when does a Partnership exist? …… 603 29.1a Introduction ………………………… 603

CASE 29.1 Ted Norris, et al. v. Stafford P. Fontenot, et al. ……………… 604

29.1b Express Partnerships………………… 605 29.1c Implied Partnerships ……………… 605 29.1d Partnership by Estoppel …………… 60629.2 The Partnership Agreement ………… 606 29.2a Introduction ………………………… 606 29.2b Firm Name Provision ……………… 606 29.2c Capital Provision …………………… 607 29.2d Property Provision ………………… 607 29.2e Profit-and-Loss Provision ………… 608 29.2f Goodwill Provision ………………… 608 29.2g Buy-and-Sell Provision……………… 60929.3 The Rights of Partners ………………… 609 29.3a Terminology ………………………… 609 29.3b To Participate in Management …… 609 29.3c To Be Compensated for Services … 610 29.3d To Interest …………………………… 610 29.3e To Information and to Inspection

of Books ……………………………… 610 29.3f To an Accounting …………………… 611 29.3g To Partnership Property and

Interest in the Partnership ………… 61129.4 duties and Powers of Partners ……… 612 29.4a Duties ………………………………… 612 29.4b Power to Contract …………………… 613 29.4c Power to Impose Tort Liability …… 614

Contents xv

CASE 29.2 Martin Moren, as Parent and Guardian of Remington Moren, a Minor v. Jax Restaurant, John Doe, et al. and Jax Restaurant …………………………………… 614

29.4d Powers over Property ……………… 615 29.4e Financial Powers …………………… 61529.5 methods of dissolution ………………… 616 29.5a Terminology ………………………… 616 29.5b By Acts of Partners ………………… 616 29.5c By Operation of Law ……………… 617 29.5d By Court Decree …………………… 61729.6 The effect of dissolution ……………… 618 29.6a On Powers of Partners ……………… 618 29.6b On Rights of Partners ……………… 619 29.6c On New Partners …………………… 620

CASE 29.3 Moseley v. Commercial State Bank …………………… 620

29.6d On Third Parties …………………… 62129.7 distributions on Termination ……… 622 29.7a Solvent Partnerships ……………… 622 29.7b Insolvent Partnerships ……………… 622



30 nATuRe Of CORPORATIOns … 63030.1 Introduction ……………………………… 631 30.1a Corporation Defined ……………… 631

CASE 30.1 J&J Sports Productions, Inc. v. Coach’s, Inc. d/b/a Jock’s Sports Bar & Grill, Gilbert Duncan and Carol Ann Malone ………………………… 632

30.2 Procedure for Incorporation ………… 633 30.2a The Application for a Charter …… 633 30.2b Corporate Name …………………… 634 30.2c Corporate Powers …………………… 634 30.2d Bylaws ………………………………… 634 30.2e Domestic and Foreign Corporations 635 30.2f Promoters …………………………… 635 CASE 30.2 P.I.M.L., Inc., a Florida

Corp. v. Chain Link Graphix, LLC, Edwin W. Davidson, Christopher J. Hilburn, and John D. McKelvey …………………… 637

30.3 disregarding the Corporate entity 638 30.3a Piercing the Corporate Veil ……… 638 30.3b Alter Ego Theory …………………… 638 30.3c Promotion of Justice Theory ……… 63930.4 Voluntary dissolutions ………………… 639 30.4a Procedures …………………………… 639 30.4b Notice to Creditors ………………… 639 30.4c Distributions ………………………… 64030.5 Involuntary dissolutions ……………… 640 30.5a Commenced by the State ………… 640 30.5b Commenced by Shareholders …… 641 30.5c Commenced by Creditors ………… 642

30.5d Procedures …………………………… 642 30.5e Liability of Shareholders …………… 64230.6 Consolidations, mergers, and

Acquisitions ……………………………… 643 30.6a Definitions …………………………… 643 30.6b Procedures …………………………… 643 30.6c Rights of Dissenting Shareholders 643

CASE 30.3 Natcom Bankshares, Inc. v. Brenda L. Johnson, et al. ………………… 644

30.6d Liability of Successors ……………… 646 30.6e Antitrust Considerations …………… 647



31 fInAnCIAl And OPeRATIOnAl feATuRes Of CORPORATIOns 652

31.1 Corporate stock ………………………… 653 31.1a Stock Basics ………………………… 653 31.1b Stock Subscriptions ………………… 655 31.1c Right to Transfer Stock …………… 655 31.1d Mechanics of Transfer ……………… 65631.2 shareholders ……………………………… 656 31.2a Rights in General …………………… 656 31.2b Inspection …………………………… 657 31.2c Meetings ……………………………… 658 31.2d Voting ………………………………… 658 31.2e Preemptive Rights …………………… 659

CASE 31.1 Benihana of Tokyo, Inc., Individually and on Behalf of Benihana, Inc. v. Benihana, Inc., John E. Abdo, Norman Becker, Darwin Dornbush, Max Pine, yoshihiro Sano, Joel Schwartz, Robert B. Sturges, Takanori yoshimoto, and BFC Financial Corp. ………………… 660

31.2f Derivative Suits ……………………… 662

CASE 31.2 In re Citigroup Inc. Shareholder Derivative Litigation ……… 662

31.2g Dividends …………………………… 665

CASE 31.3 Dodge v. Ford Motor Co. … 665

31.2h Fiduciary Aspects …………………… 66631.3 directors …………………………………… 667 31.3a Powers ………………………………… 667 31.3b Meetings ……………………………… 668 31.3c Compensation ……………………… 66831.4 liability of Officers and directors … 669 31.4a In General …………………………… 669 31.4b The Business Judgment Rule ……… 670 31.4c Duty of Loyalty ……………………… 670 31.4d Duty of Due Care …………………… 671 31.4e Duty of Good Faith ………………… 672 31.4f Indemnification and Insurance …… 672



xvi Contents

32 lImITed lIABIlITy COmPAnIes And RelATed fORms ………… 678

32.1 limited liability Companies …………679 32.1a Background ………………………… 679 32.1b Comparing Forms …………………… 680 32.1c Formation …………………………… 681

CASE 32.1 Carrie Burkle v. Ronald Burkle ……………………………… 683

32.1d Management ………………………… 684

CASE 32.2 The People of the State of California v. Pacific Landmark, LLC, et al. …………… 684

32.2 Related forms …………………………… 686 32.2a Limited Partnerships ……………… 686

CASE 32.3 Gotham Partners, LP, v. Hallwood Realty Partners, LP, Hallwood Realty Corp., the Hallwood Group Inc., Anthony J. Gumbiner and William L. Guzzetti ………………………… 686

32.2b Limited Liability Partnerships …… 688




PART VII negOTIABle InsTRumenTs ……… 691

33 InTROduCTIOn TO negOTIABle InsTRumenTs … 692

33.1 The Concept of negotiability ……… 69333.2 kinds of Commercial Paper ………… 694 33.2a Terminology ………………………… 694 33.2b Notes ………………………………… 695 33.2c Certificates of Deposit ……………… 695 33.2d Drafts ………………………………… 695 33.2e Checks ………………………………… 69533.3 Bank deposits and Collections ……… 696 33.3a Terminology ………………………… 696

CASE 33.1 Chambers v. Miller and Others ………………………… 697

33.3b The Bank Collection Process ……… 698

CASE 33.2 Douglas Companies, Inc. v. Commercial National Bank of Texarkana ………………………………… 699

33.3c Collecting Banks …………………… 701 33.3d Payor Banks ………………………… 70133.4 Banks and Their Customers ………… 702 33.4a The Debtor-Creditor Relationship 702 33.4b Wrongful Dishonor ………………… 702 33.4c Stop-Payment Orders ……………… 702 33.4d Banks’ Rights and Duties ………… 703

CASE 33.3 Estate of Eugene Christian Freitag v. Frontier Bank ……………………………… 703

33.4e Depositors’ Rights and Duties …… 704 33.4f Funds Transfers ……………………… 705



34 CReATIOn And negOTIATIOn 71034.1 general Requirements ………………… 711 34.1a Writing Signed by a

Maker or Drawer …………………… 711 34.1b Necessity of a Promise or Order … 711 34.1c Unconditional Promise or Order … 712

CASE 34.1 In re Apponline.com, Inc. Island Mortgage Network, Inc., et al., Debtors, Broward Title Company v. Matrix Capital Bank and HSA Residential Mortgage Services of Texas, Inc.………… 713

34.1d The Particular Fund Concept ……… 714 34.1e Sum Certain in Money …………… 715 34.1f Certain Time of Payment ………… 715 34.1g Acceleration and Extension Clauses 71634.2 The magic words of negotiability … 716 34.2a Introduction ………………………… 716

CASE 34.2 First Investment Co. v. Andersen …………………………………… 716

34.2b Order Paper ………………………… 717

CASE 34.3 The Hyatt Corp. v. Palm Beach National Bank, et al. ……… 718

34.2c Bearer Paper ………………………… 71934.3 Other factors Affecting

negotiability ……………………………… 719 34.3a Terms and Omissions Not Affecting

Negotiability ………………………… 719 34.3b Incomplete Instruments …………… 720 34.3c Ambiguous Terms and Rules of

Construction ………………………… 72034.4 Transfer of Commercial Paper ……… 720 34.4a Introduction ………………………… 720 34.4b Transfer by Negotiation …………… 721 34.4c Types of Endorsements …………… 722 34.4d Blank Endorsements ……………… 722 34.4e Special Endorsements ……………… 723 34.4f Restrictive Endorsements ………… 723



35 hOldeRs In due COuRse …… 72835.1 status of Third Parties ………………… 729 35.1a Status Possibilities …………………… 729

CASE 35.1 Edwards v. Mesch ………… 730

35.1b Contract Provisions ………………… 73135.2 holder in due Course …………………… 732 35.2a Requirements ………………………… 732 35.2b Value ………………………………… 732 35.2c Good Faith …………………………… 732

Contents xvii

35.2d Without Notice ……………………… 733

CASE 35.2 Carl W. Henderson, Jr., Administrator of the Estate of David M. Henderson, Francisco Solis, Trustee of Messenger Trust One, and Michael S. Henderson, Successor Trustee of Messenger Trust One v. Metropolitan Bank & Trust Company ………………………… 734

35.2e Before Overdue ……………………… 736 35.2f Holder from a Holder in

Due Course …………………………… 73635.3 defenses …………………………………… 737 35.3a Classifications ……………………… 737

CASE 35.3 The Cadle Company v. Barbara E. Shearer and Barbara J. Couvion 738

35.3b Personal Defenses …………………… 740 35.3c Real Defenses ………………………… 74035.4 exceptions to holder-in-due-Course

status ………………………………………… 740 35.4a Introduction ………………………… 740 35.4b FTC Rule ……………………………… 741 35.4c Close-Connectedness Doctrine …… 742



36 lIABIlITy Of PARTIes TO negOTIABle InsTRumenTs … 746

36.1 liability Based on signatures ……… 747 36.1a In General …………………………… 747 36.1b Capacity of the Signature ………… 747 36.1c Agency Principles …………………… 747

CASE 36.1 Helmer, et al. v. Rumarson Technologies, Inc. …………… 748

36.1d Exceptions: Impostors and Fictitious Payees …………………… 748

36.1e Classification of Parties …………… 750 36.1f Liability of Primary Parties ………… 75036.2 Conditional liability …………………… 751 36.2a Introduction ………………………… 751 36.2b Presentment: In General …………… 751 36.2c Presentment: How and Where …… 751

CASE 36.2 Jeff E. Messing v. Bank of America, N.A. …………………… 752

36.2d Presentment: When ………………… 753 36.2e Dishonor ……………………………… 753 36.2f Notice of Dishonor ………………… 754 36.2g Protest ………………………………… 75436.3 liability of secondary Parties ……… 754 36.3a Introduction ………………………… 754 36.3b Accommodation Parties …………… 754 36.3c Guarantors …………………………… 756 36.3d Drawers ……………………………… 756 36.3e Endorsers……………………………… 756 36.3f Transferors Without Endorsement 759 36.3g Forgeries ……………………………… 759

CASE 36.3 Halifax Corporation v. Wachovia Bank …………………………… 759

36.3h Double Forgeries …………………… 76136.4 Additional Aspects of liability …… 761 36.4a Excuses for Failure to Perform

Conditions Precedent ……………… 761 36.4b Discharge of Liability ……………… 761



PART VIII CRedITORs And deBTORs ……………… 766

37 seCuRed TRAnsACTIOns …… 76837.1 Introduction ……………………………… 769 37.1a Unsecured Creditors ………………… 769 37.1b Secured Debt ………………………… 76937.2 scope of Article 9 ………………………… 770 37.2a In General …………………………… 770 37.2b Classifications of Collateral ……… 770

CASE 37.1 Jerke Construction, Inc. v. Home Federal Savings Bank and Matt Peck and Tank Testing, Inc. …………………… 771

37.2c Tangible Goods ……………………… 772 37.2d Documentary Collateral …………… 773 37.2e Intangible Collateral ……………… 77437.3 Creation of a security Interest ……… 774 37.3a Introduction ………………………… 774 37.3b The Security Agreement …………… 775 37.3c Debtor’s Rights in Collateral ……… 776 37.3d Creditor’s Value ……………………… 77637.4 Perfection of a security Interest …… 776 37.4a Introduction ………………………… 776 37.4b Perfection by Filing ………………… 777 37.4c Perfection by Possession …………… 778 37.4d Perfection by Attachment ………… 77837.5 floating liens …………………………… 779 37.5a In General …………………………… 779 37.5b After-Acquired Property …………… 780 37.5c Future Advances …………………… 780 37.5d Proceeds ……………………………… 780

CASE 37.2 In re Jim Lee Wiersma and Patricia Darlene Wiersma, Debtors. Jim Lee Wiersma; Patricia Darlene Wiersma v. O. H. Kruse Grain and Milling, NKA Ferndale Grain, et al. ………………… 781

37.6 Priority Issues in general …………… 78237.7 secured Party versus Buyers of

Collateral …………………………………… 783 37.7a General Rule ………………………… 783 37.7b Buyers in the Ordinary Course of

Business ……………………………… 783 37.7c Buyers of Consumer Goods ……… 783

CASE 37.3 John Meskell v. John Bertone, et al. ………………………… 784

xviii Contents

37.8 secured Party versus secured Party 785 37.8a General Rule ………………………… 785 37.8b PMSI in Inventory Collateral ……… 786 37.8c PMSI in Non-inventory Collateral 78637.9 secured Party versus lien Creditors 78637.10 Rights and duties on

debtor’s default ……………………… 787 37.10a Introduction ………………………… 787 37.10b Rights and Duties of

Secured Party in Possession ……… 787 37.10c Foreclosure Sale …………………… 787 37.10d Rights of Parties after Foreclosure 788 37.10e Strict Foreclosure …………………… 788 37.10f Debtor’s General Remedies ……… 789



38 CRedITORs RIghTs, ResPOnsIBIlITIes, And RemedIes ……………………………… 796

38.1 Artisan’s liens …………………………… 79738.2 suretyship in general ………………… 798 38.2a Introduction ………………………… 798 38.2b Terminology ………………………… 798

CASE 38.1 Flying J, Inc. v. Booth …… 799

38.2c Suretyship versus Indemnity ……… 801 38.2d Creation of Suretyship Contracts … 801

CASE 38.2 WRS, Inc., d/b/a WRS Motion Picture Laboratories, a Corp., v. Plaza Entertainment, Inc., a Corp., Eric Parkinson, Charles von Bernuth and John Herklotz ……………………………… 802

38.2e Liability of the Parties in General … 80438.3 Creditor-surety Relationship ……… 804 38.3a Fiduciary Aspects …………………… 804 38.3b Principal’s Default: Notice ………… 805 38.3c Surety’s Performance and

Subrogation Rights ………………… 80538.4 Creditor-Principal Relationship …… 806 38.4a Introduction ………………………… 806 38.4b Principal’s Defenses ………………… 806 38.4c Releases ……………………………… 807 38.4d Extensions of Time for Payment … 808 38.4e Other Modifications ………………… 80838.5 Principal-surety Relationship ……… 810 38.5a Surety’s Duty to Account ………… 810 38.5b Surety’s Right to Reimbursement … 810 38.5c Liability of Co-sureties ……………… 81038.6 mechanic’s liens ………………………… 811 38.6a Introduction ………………………… 811

CASE 38.3 Wesco Distribution, Inc. v. Westport Group, Inc. ……………………… 811

38.6b Potential Lienholders ……………… 812 38.6c Perfection and Enforcement ……… 813 38.6d Priorities ……………………………… 814

38.6e Protection against Liens …………… 81438.7 enforcement of Judgments

and decrees ………………………………… 818 38.7a Writ of Execution …………………… 818 38.7b Garnishment ………………………… 818 38.7c Citation Proceeding ………………… 816 38.7d Attachment ………………………… 816 38.7e Is It Worth It?………………………… 816Chapter summary ……………………………… 817


39 BAnkRuPTCy ……………………… 82039.1 Terminology ……………………………… 82139.2 Types of Proceedings …………………… 821 39.2a In General …………………………… 821

CASE 39.1 Howard K. Stern, Executor of the Estate of Vickie Lynn Marshall v. Elaine T. Marshall, Executrix of the Estate of E. Pierce Marshall ……………………… 823

39.2b Liquidation Proceedings Under Chapter 7 …………………… 825

39.2c Reorganization Proceedings Under Chapter 11 …………………… 825

39.2d Adjustment of Individuals’ Debts Under Chapter 13 …………………… 828

39.3 general Principles ……………………… 828 39.3a Property of the Estate ……………… 828 39.3b Exemptions ………………………… 829 39.3c Debts That Are Not Discharged …… 830

CASE 39.2 In the Matter of Jonathon R. Gerhardt, Debtor: United States Department of Education v. Jonathon R. Gerhardt …………………… 831

39.3d Grounds for Denying Discharge … 83239.4 Procedural steps ………………………… 833 39.4a Introduction ………………………… 833 39.4b Voluntary Commencement ……… 833 39.4c Involuntary Commencement …… 834 39.4d Conversion of Cases ………………… 834 39.4e Automatic Stay ……………………… 834

CASE 39.3 Diana Adams, Acting United States Trustee v. Diana M. Finlay, et al. ………………………………… 835

39.4f Meeting of Creditors ……………… 83339.5 Trustee and Case Administration … 837 39.5a Trustee and the Estate ……………… 837 39.5b General Duties and Powers………… 837 39.5c Executory Contracts and

Unexpired Leases …………………… 838 39.5d Voidable Preferences ……………… 838 39.5e Fraudulent Transfers………………… 83939.6 Creditors …………………………………… 841 39.6a Creditors and Claims ……………… 841 39.6b Right of Setoff ……………………… 841 39.6c Priorities ……………………………… 842

Contents xix




PART IX gOVeRnmenT RegulATIOn Of BusIness ……………… 848

40 AdmInIsTRATIVe lAw ………… 85040.1 nature of Administrative Agencies 851 40.1a Role of Administrative Agencies … 851 40.1b Purposes of Administrative Agencies 852 40.1c Conceptual Framework for

Administrative Agencies …………… 854 40.1d Agency Types and Functions ……… 85540.2 Rulemaking ……………………………… 856 40.2a Types of Rules ……………………… 856 40.2b Types of Legislative Rulemaking … 856

CASE 40.1 National Tour Brokers Association v. United States of America and the Interstate Commerce Commission 857

40.3 enforcement function ………………… 859 40.3a Investigative Power ………………… 859 40.3b Constitutional Protections ………… 859

CASE 40.2 Marshall, Secretary of Labor, et al. v. Barlow’s, Inc. ……………………………… 860

40.4 Adjudicatory function ………………… 862 40.4a Elementary Aspects of Adjudication 862 40.4b Formal Adjudication ……………… 86240.5 Judicial Review of Agency Actions … 862 40.5a Basic Requirements ………………… 862 40.5b Legal Foundations for

Judicial Review ……………………… 863

CASE 40.3 Federal Communications Commission v. Fox Television Stations 864

40.5c Scope of Review ……………………… 86540.6 Public Access to Agency Information 865 40.6a Improving Public Accountability … 865




41 seCuRITIes RegulATIOn …… 87041.1 Overview of securities Regulation 871 41.1a Introduction ………………………… 871 41.1b Securities Regulation Landscape … 872 41.1c Securities and Exchange

Commission ………………………… 872

CASE 41.1 Securities and Exchange Commission v. Citigroup Global Markets, Inc. ………… 873

41.2 Initial sales of securities: The securities Act of 1933 …………… 876

41.2a Purpose of the 1933 Act …………… 876 41.2b Definition of a Security …………… 877 41.2c Registration Statement and

Prospectus …………………………… 877 41.2d Exempt Securities …………………… 878 41.2e Exempt Transactions: Background 879

CASE 41.2 SEC v. Ralston Purina Company …………………………………… 879

41.2f Exempt Transactions: Categories … 880 41.2g Integration and Resale ……………… 881 41.2h Liability and Due Diligence Defense 88241.3 secondary securities Transfers:

The securities and exchange Act of 1934 ……………………………………… 884

41.3a Purpose of the 1934 Act …………… 884 41.3b Registration and Reporting

Requirements ………………………… 884 41.3c Proxy Solicitation …………………… 885 41.3d Insider Trading—Fraud Liability:

Basics ………………………………… 885

CASE 41.3 SEC v. Texas Gulf Sulphur Co. ………………………………… 886

41.3e Insider Trading—Fraud Liability: Elements ……………………………… 889

41.3f Insider Trading—Short-Swing Profit Liability ……………………… 890

41.4 Recent securities Regulation legislation ……………………………………… 891 41.4a Sarbanes-Oxley Act of 2002 ……… 891 41.4b Dodd-Frank Act of 2010 …………… 892 41.4c JOBS Act of 2012 …………………… 893




42 AnTITRusT lAw ………………… 90042.1 Background ……………………………… 901 42.1a History ………………………………… 901 42.1b Schools of Thought ………………… 902 42.1c Basic Principles ……………………… 903 42.1d Enforcement ………………………… 90442.2 monopolization ………………………… 905 42.2a Nature of a Monopoly ……………… 905 42.2b Monopoly Power …………………… 905 42.2c Relevant Market …………………… 905 42.2d Intent ………………………………… 906

CASE 42.1 Weyerhaeuser Company v. Ross-Simmons Hardwood Lumber Company, Inc. ……………………………… 906

42.2e Attempting to Monopolize ………… 90842.3 Restraints of Trade—Basic

Provisions ………………………………… 908

xx Contents

42.3a Concerted Action …………………… 908 42.3b Per Se and Rule of Reason

Violations …………………………… 910 42.3c Horizontal Restraints Under the

Sherman Act ………………………… 911 42.3d Vertical Restraints Under the

Sherman Act ………………………… 912

CASE 42.2 Continental T.V., Inc., et al. v. GTE Sylvania Inc. ………………………… 912

42.4 Restraints of Trade—Advanced Provisions ………………………………… 914

42.4a Exclusionary Contracts Under the Clayton Act ………………………… 914

42.4b Mergers Under the Clayton Act … 915 42.4c Price Discrimination Fundamentals 916 42.4d Price Discrimination Defenses …… 916

CASE 42.3 Water Craft Management LLC, Douglas Wayne Glascock, Nick A. Martrain v. Mercury Marine, a Division of Brunswick Corp., et al. …………………… 917

42.5 International Considerations ……… 918 42.5a Reach of United States Laws ……… 918 42.5b Reach of Foreign Laws ……………… 920


Internet sources ………………………………… 922


43 COnsumeR lAw ………………… 92443.1 Protecting the Purchaser …………… 925 43.1a Labeling and Packaging …………… 926 43.1b Advertising …………………………… 926

CASE 43.1 Federal Trade Commission v. QT, Inc.; Q-Ray Company, Bio-Metal, Inc.; Que Te Park, a.k.a. Andrew Q. Park; and Jung Joo Park ……………………………… 927

43.1c Sales …………………………………… 93043.2 Protecting the debtor ………………… 930 43.2a Attaining Credit …………………… 931

CASE 43.2 Chase Bank USA, N.A., v. James A. McCoy, individually and on behalf of all others similarly situated ………………… 932

43.2b Reporting Credit Information …… 934 43.2c Electronic Funds Transfers ………… 936 43.2d Identity Theft ………………………… 937 43.2e Collecting the Debt ………………… 937

CASE 43.3 Elizabeth Brown, on behalf of herself and all others similarly situated, f/k/a Elizabeth Schenck v. Card Service Center; Cardholder Management Services …………………… 939

43.2f Understanding the New Regulatory Environment ………………………… 940




44 enVIROnmenTAl RegulATIOn 94844.1 Introduction ……………………………… 949 44.1a Business, Law, and the Environment:

An Overview ………………………… 94944.2 governmental Regulation of the

environment …………………………………951 44.2a The National Environmental

Policy Act …………………………… 951 44.2b Regulatory Agencies ………………… 95244.3 Air Pollution ……………………………… 953 44.3a Air Pollution Regulatory Principles 953 44.3b Enforcement of the Clean Air Act 953 44.3c Current Issues in Air Pollution

Control ……………………………… 954

CASE 44.1 Coalition for Responsible Regulation, Inc., et al., v. Environmental Protection Agency ………………………… 954

44.4 water Pollution ………………………… 958 44.4a Water Pollution Regulatory

Principles …………………………… 958

CASE 44.2 Colvin v. United States …… 959

44.4b Enforcement of the Clean Water Act …………………… 960

44.5 waste management ……………………… 961 44.5a Solid Waste …………………………… 961 44.5b Hazardous and Toxic Waste ……… 962

CASE 44.3 United States v. Timmons Corporation, Donald W. Stone Sr., and Real Property Located at 191 Watervliet Shaker Road, Colonie, Albany County, New york ……………… 964

44.6 Toxic substances ………………………… 965 44.6a The Toxic Substances Control Act 965


Internet sources ………………………………… 966


PART X InTeRnATIOnAl And enTRePReneuRIAl ReAlms …………………… 968

45 legAl AsPeCTs Of InTeRnATIOnAl BusIness … 970

45.1 International Business Transactions 971 45.1a Comparative Legal Systems and

International Law …………………… 971 45.1b Conflict-of-Laws Principles and

International Litigation …………… 972

Contents xxi

CASE 45.1 Af-Cap Inc. v. Chevron Overseas (Congo) Limited, The Republic of Congo, et al. …………… 972

45.1c Methods of Conducting International Business ……………… 973

45.1d International Contracts …………… 975 45.1e The Multinational Enterprise……… 97645.2 Regulating International Business 976 45.2a Introduction ………………………… 976 45.2b International Controls …………… 977 45.2c Host Country Regulations ………… 978 45.2d Regional Regulation:

The European Community ………… 979

CASE 45.2 Johann Gruber v. BayWa AG 979

45.3 united states Regulation Impacting International Commerce …………… 981

45.3a Nature of Extraterritorial United States Laws ………………… 981

CASE 45.3 Esther Kiobel, Individually and on Behalf of Her Late Husband, Dr. Barinem Kiobel, v. Royal Dutch Petroleum Co. ……………………………… 981

45.3b Import Controls …………………… 982 45.3c Export Controls ……………………… 983 45.3d Antitrust Laws ……………………… 983 45.3e Foreign Corrupt Practices Act …… 984 45.3f Anti-boycott Laws …………………… 985




46 lAw fOR The AsPIRIng enTRePReneuR ………………… 988

46.1 law and the entrepreneur …………… 989 46.1a The Importance of Law

to the Entrepreneur ………………… 98946.2 engaging an Attorney ………………… 990 46.2a The Role of the Attorney ………… 990

CASE 46.1 The Facebook, Inc.; Mark Zuckerberg; Divya Narendra; Cameron Winklevoss; Tyler Winklevoss v. Pacific Northwest Software, Inc.; Wayne Chang; Winston Williams ………………………… 992

46.2b Finding Capable Legal Counsel …… 993 46.2c The Attorney-Client Privilege …… 99346.3 leaving employment …………………… 995 46.3a Common Law and Contractual Duties

of Current Employees ……………… 995 46.3b Common Law and Contractual Duties

of Former Employees (Post Employment) ………………… 996

CASE 46.2 KGB, Inc., v. Ted Giannoulas …………………………… 998

46.3c Ancillary Issue: Hiring Restrictions 1001

46.4 selecting the Appropriate legal form ……………………………… 1001

46.4a Preliminary Matters ……………… 1001 46.4b The Limited Liability Company 1003

CASE 46.3 Kaycee Land and Livestock, a Wyoming Partnership v. Roger Flahive 1003

46.4c The Corporation ………………… 1007

Chapter summary …………………………… 1006

sources for further Reading: …………… 1006

Review Questions and Problems ……… 1007

APPENDIx A: The Constitution of the United States ……………… 1009

APPENDIx B: The Uniform Commercial Code …………………………… 1015

APPENDIx C: Selected Revisions to the Uniform Commercial Code 1122

APPENDIx D: United Nations Convention on Contracts for the International Sale of Goods (1980) [CISG] ………………………… 1151

GLOSSARy ……………………………………… 1161

TABLE OF CASES ……………………………… 1181

INDEx …………………………………………… 1185

Documents

PART I InTROduCTIOn 1 PART II fOundATIOnAl legAl COnCePTs