Fact Pattern 31-3
Dhani, an accountant for Eureka, Inc., learns of undisclosed company plans to market a
new laptop. Dhani buys 1,000 shares of Eureka stock. He reveals the company plans to
Fay, who buys 500 shares. Fay tells Geoff, who tells Hu. Both Geoff and Hu buy 100
shares. They know that Fay got her information from Dhani. When Eureka publicly an-
nounces its new laptop, Dhani, Fay, Geoff, and Hu sell their stock for a profit.
Refer to Fact Pattern 31-3. Under the Securities Exchange Act of 1934, Geoff is most
likely
a. liable for insider trading.
b. not liable because Geoff did not prevent others from profiting.
c. not liable because Geoff did not solicit information from Dhani.
d. not liable because Geoff does not work for Eureka.
Workbilt Hardware Company employs workers, including Gina, at six locations in two
states. Workbilt’s discharge of Gina outside the terms of an employment contract may
result in
a. Workbilt’s liability for damages.
b. Gina’s deportation under the Immigration Act.
c. discontinuance of Gina’s health-plan coverage.
d. monitoring Workbilt’s communications for privacy violations.
Holiday Sales Company and Global Distributors, Inc., enter into a contract for the
delivery of imported specialty goods. Until the goods are delivered and paid for, these
parties have
a. an executory contract.
b. no contract.
c. a quasi contract.
d. an informal contract.
Derrick buys a hunting license and goes hunting. He shoots a deer, cleans it, and takes it
back to his truck. He takes the deer to town and has the meat processed. Derrick’s
acquisition of the deer is by
a. possession.
b. a bailment.
c. confusion.
d. production.
Norma Jean files for Chapter 7 bankruptcy. She turns her assets over to Addie, who
sells the assets and then distributes the proceeds to Norma Jean’s creditors. Addie is a
a. creditor.
b. federal judge.
c. bankruptcy trustee.
d. debtor.
The credit department of Metro-Mart calls Nikki at work about an overdue bill. Nikki’s
employer objects. Metro-Mart continues to call Nikki at work. This is a violation of
a. no federal law.
b. the Fair and Accurate Credit Transactions Act.
c. the Fair Debt Collection Practices Act.
d. the Truth-in-Lending Act.
Betty is selling her used clothing shop on Main Street. In the sale agreement, there is a
covenant not to compete that prohibits Betty from opening another used clothing shop
within 300 miles of the shop she is selling. A court will most likely conclude that this
restriction on competition is
a. reasonable.
b. unreasonable and order Betty’s successor to stop doing business.
c. unreasonable and may reform the covenant .
d. unreasonable and prohibit both parties from opening used clothing shops.
Big Dog Security Service, Inc. orally agrees to provide security services for NorthGate
Mall for as long as NorthGate Mall requires them. This contract is enforceable by
a. Big Dog Security only.
b. NorthGate Mall only.
c. either party.
d. neither party.
Iggy hires Joy to act as his agent to purchase Kup-a-Koffee Company. Iggy tells Joy to
reveal only that she is buying the firm on behalf of a third party, without telling
Kup-a-Koffee’s seller who that third party is. Iggy is
a. a disclosed principal.
b. an implied principal.
c. an undisclosed principal.
d. a partially disclosed principal.
Isabel obtains a fire insurance policy on her home from Justice Insurance Company.
The home is lost in a fire, but the parties dispute the amount of Justice’s liability under
an ambiguous clause in the policy. A court would most likely
a. interpret the clause against Isabel.
b. interpret the clause against Justice.
c. rewrite the clause and apply it as rewritten.
d. strike the clause from the policy.
The commerce clause of the U.S. Constitution is found in
a. Article I, Section 8.
b. Article I, Section 2.
c. Article VIII, Section 1.
d. Article II, Section 8.
Jackson pays Phil in good faith for a promissory note. Phil warrants that the draft has
not been altered. This warranty is a
a. presentment warranty.
b. consideration warranty.
c. conditional warranty.
d. fixed warranty.
Clara is a salesperson in The Corner Store. When Carla makes a sale to Jenny, the sale
is
a. binding on The Corner Store.
b. binding on Carla.
c. binding on The Corner Store only if the owner of The Corner Store is present when
the sale is made.
d. not binding on anyone.
Eye Appliance Company and Fresh Views, Inc., wish to combine all of their assets,
stock, and personnel into a new firm to be called Goggles Corporation. This is
a. a consolidation.
b. a merger.
c. an exchange of assets.
d. a takeover.
Mountain Bikes, Inc. (MBI), and Nero enter into a contract for a sale of a mountain
bike. MBI, a merchant who deals in goods of the kind sold, makes implied and express
warranties in connection with the sale. The Magnuson-Moss Warranty Act attempts to
prevent deception in warranties by
a. displacing the UCC as the primary source of warranty rules.
b. making warranties easier to understand.
c. prohibiting disclaimers of warranties.
d. requiring sellers to give written warranties for consumer goods.
Cody is a partner in Delta Accounting Service. Cody can inspect
a. all of Delta’s books and records.
b. Delta’s books and records only as the firm’s management permits.
c. Delta’s books and records only for a reasonable purpose.
d. Delta’s books and records relating to Cody’s capital contribution only.
Dwayne, an electrician, files a suit against Electro Mechanix, Inc., alleging that its
circuit breakers are unreasonably dangerous due to the possibility of electrical shock.
Dwayne’s suit is most likely to
a. fail, because Dwayne assumes the risk if he uses an Electro product.
b. fail, because Dwayne is a knowledgeable user.
c. succeed, because the danger is open and obvious.
d. succeed, because Electro’s products are not safe for all uses.
Cole is a shareholder of Donut Holes, Inc. Cole will be deemed to have a fiduciary duty
to Donut Holes and its minority shareholders if he has
a. a restriction on the transferability of his shares.
b. a right of first refusal.
c. a sufficient number of shares to exercise de facto control.
d. voting rights.
Doctors Medical Associates obtains an insurance policy that protects its members
against negligence claims by their patients. This is
a. casualty insurance.
b. fidelity or guaranty insurance.
c. malpractice insurance.
d. worker’ compensation insurance.
Simon signs a check “pay to the order of Tilly” drawn on Simon’s account in United
Bank. Vela forges Tilly’s indorsement, First Federal Bank cashes the check, and Vela
disappears. United pays First Federal and debits Simon’s account. Most likely, the
ultimate loss will fall on
a. Simon.
b. Trudy.
c. United Bank.
d. First Federal Bank.
Sonny agrees to buy a unique collection of Olympics memorabilia for $7,000 from Jana
and sends $1,500 as a down payment. When Sonny sends Jana the rest of the price, she
refuses to ship the collection. Sonny should seek
a. a penalty.
b. liquidated damages.
c. restitution.
d. specific performance.
Hollister and Gladys do business as partners in Frothy Confections. For federal income
tax purposes, Frothy Confections would be treated as
a. a pass-through entity.
b. a natural person.
c. a tax-paying entity.
d. a partnership by estoppel.
Will owes Jenny $1,000. Brad owes Will $1,000. Will unconditionally assigns his rights
to Jenny. Will’s right to the $1,000 is then
a. unchanged.
b. extinguished.
c. incidental.
d. assigned to a court.
Fact Pattern 30-1
Ray is a shareholder of Small Biz Company (SBC). When the directors fail to undertake
an action to redress a wrong suffered by SBC, Ray files a suit on the firm’s behalf.
Refer to Fact Pattern 30-1. Ray’s suit is a shareholder’s
a. business-judgment rule suit.
b. derivative suit.
c. duty-of-care suit.
d. duty-of-loyalty suit.
Regional Wood Products Company and Sylvia enter into a contract for a sale of lumber.
Regional knows the purpose for which Sylvia will use the goods. Under the UCC, an
implied warranty of fitness of a particular purpose arises
a. if the buyer is relying on the seller to select suitable goods.
b. if the buyer asks for it.
c. if the seller is a merchant who deals in goods of the kind sold.
d. in conjunction with lease contracts, not sales contracts.
Worldwide Realtors, Inc., sells a franchise to XL Sales Company. XL is
a. a franchisee.
b. a franchisor.
c. an agent.
d. a principal.
Industrial Solvents, Inc., averages $15,000 profit per day before deciding to ignore air
pollution standards, after which the average is $30,000. Industrial Solvents is subject to
a fine of
a. $0.
b. $15,000 per day.
c. $30,000 per day.
d. $30,000 total.
Samson is a government employee. Samson is limited in drug testing by the
a. First Amendment.
b. Second Amendment.
c. Fourth Amendment.
d. Eighth Amendment.
Stan incorporates his scientific products business as Tech Supply, Inc. Unless the
articles of incorporation state otherwise, Tech Supply most likely has
a. a finite, yet-to-be-determined existence.
b. a one-year, nonrenewable existence.
c. a one-year, renewable existence.
d. perpetual existence.
Wally offers to sell a certain used forklift to Valu Lumber Outlet, but Wally dies before
Valu accepts. Most likely, Wally’s death
a. did not affect the offer.
b. shortened the time of the offer but did not terminate it.
c. extended the time of the offer.
d. terminated the offer.
Stormclouds Inc. makes and markets its U.S. patented Tempest Tablet in the United
States. Squalls Ltd., a Chinese firm, begins making and marketing the same product in
China as Outburst Pad without Stormclouds’s permission. Squalls is
a. not guilty of patent infringement.
b. guilty of patent infringement.
c. guilty of trademark infringement.
d. in violation of the America Invents Act.
Premier Clothing, Inc., a U.S. firm, obtains a judgment in a U.S. court against Quang
Tri, Ltd., a Vietnamese business. Whether the court’s judgment will be enforced by a
court in Vietnam depends on the Vietnamese court’s application of
a. the act of state doctrine.
b. the doctrine of sovereign immunity.
c. the principle of comity.
d. the World Trade Organization.
Someone suffering from a mental illness may be incapable of the state of mind to
commit a crime.
If a seller repudiates a contract, the buyer’s damages do not have to be adjusted to
reflect any expenses that were saved as a result of the breach.
A contract is sometimes voidable if one party is aware that the other party made a
mistake of fact.
A time draft is payable on sight.
Appraisal rights normally extend to regular mergers and consolidations.
A security interest is enforceable only if the collateral is in the secured party’s
possession.
An employer may be liable for the harassment by nonemployees if the employer knew
about the harassment and failed to take corrective action.
The measure of damages for the breach of a contract for a sale of land depends on
which party breaches and when.
When a customer deposits cash into a checking account, he or she becomes a debtor for
the amount deposited.
Forbearance is a process that allows a lender to legally repossess and auction off the
property securing a loan.
A seller does not have to use words such as “warrant” to make an express warranty.
Rubber stamp signatures can be legally binding signatures.
Patty, who is divorced, owns a house. She has no reasonable expectation of benefit from
the life of Quinn, her ex-spouse, but she applies for insurance on his life anyway. She
also obtains a fire insurance policy on the house, which she later sells. Five years later,
Quinn dies and the house is destroyed in a fire. Can Patty obtain payment on either the
death of Quinn or the loss of the house? Explain.
The doctrine of sovereign immunity cannot immunize a foreign nation from the
jurisdiction of U.S. courts.
Under the Constitution, the judicial branch interprets the laws.
Petra, Queenie, and Randall want to form Sales-to-Infinity, LLC (limited liability
company). What should they provide in their operating agreement? If they fail to
include some important operating details, what determines these details?
Employees who deal with third parties are agents of their employers.
Lenders can require balloon payments for loans with terms of five years or less.