Page 1 of 11. print name as your signature

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1 Page 1 of 11 print name as your signature EXAM #1 Legal and Ethical Applications LAWS Review b-law-1 and econ; Chapters 5 & FoE; Chapters 48, 49, 45, & 8; and 25 through 31 INSTRUCTIONS: 1. Affix your printed name as your signature in the space provided above. 2. This is a closed book exam. It is an objective test of your subjective knowledge. No group work is permitted. 3. The time for this exam is limited to the class meeting time (i.e., exam ends at 1:15pm). That ought not be a constraint for any student. 4. Both print your last name and bubble in your last name on your blue computer graded bubble sheet. 5. Both print your NU ID number and bubble in your NU ID number on your blue computer graded bubble sheet. 6. This is a multiple-choice exam. Select the single best answer for each question. 7. All ten questions will use the same answer sequence of: a. b. c. 8. Read carefully. Think. Read closely. Think. The correct answer is quite clear. Recall, this is an objective test of your subjective knowledge. 9. Recall the material difference between i.e. (that is) versus e.g. (for example). 10. This is not a trivia test. Accordingly, never is an answer option false because of the description of a number in the answer option. For example, if an answer option describes Amd. X, then that description is accurate. The answer option might be false for a reason other than the description of the number. The number is included solely to aid the student's recall. 11. WARNING: A student earns NEGATIVE TEN COURSE POINTS for each failure to comply with Instruction #1, Instruction #4, and/or Instruction #5.

2 Page 2 of 11 QUESTIONS: 1. Alice, Betty, and Carol jointly own the corporation, ABC, Inc. ABC, Inc. is a small business that sells at retail goods (i.e., tangible and moveable personal property). They have a written and jointly signed ownership contract for their joint ownership of this corporation. Alice has embezzled over $100,000 from ABC, Inc. by submitting fraudulent documents (e.g., expense reports) for payment by ABC, Inc. Betty is Alice's wife. Betty knows nothing of Alice's embezzlement. Betty has been receiving very expensive, but not covered by insurance, health care. All of the embezzlement by Alice goes to pay for Betty's health care; and, without Alice's embezzlement Betty would not receive this health care. Alice is CEO of ABC. Betty is a passive investor in ABC (i.e., only involvement with ABC is Betty owns shares but otherwise has no "agency" relationship with ABC). Carol is the bookkeeper for ABC. Recently, Carol has discovered both the embezzlement by Alice and the reason Alice has been embezzling from ABC. Inc. a. Alice's embezzlement both is a crime and is a tort against Carol personally. b. All goods sold by the ABC store automatically come with an implied warranty of fitness for the buyer's particular purpose. c. In economic theory Betty has "demand" for this health care with the embezzlement, and Betty has no "demand" for this health care without this embezzlement.

3 Page 3 of For questions #2 through #10 repeat the facts of question #1. And, if any facts are added below, then add those facts to that question and all subsequent questions. Because law focuses upon the objective and ethics focuses upon the subjective, unethical conduct might be lawful conduct; and unlawful conduct might be ethical conduct. Also, because individual business persons so often act in a representative capacity (e.g., as an "agent" of a "principal"), business ethics are not necessarily identical to personal ethics. a. As a businessperson, Alice's embezzlement actions were unethical. b. Betty acted both unethically and unlawfully by receiving the funds embezzled by Alice. c. Carol is both ethically obligated to ABC, Inc. and legally obligated to ABC, Inc. to report Alice's crime, seek Alice's arrest, and seek Alice's conviction.

4 Page 4 of ABC has a brick-and-mortar store as well as a mouse-and-click web store. a. ABC sold many small items, but, on purpose, Alice made sure ABC did not provide shopping carts. Accordingly, multiple times per day as shoppers picked up store items for examination those same shoppers set down and forgot personal items (e.g., phones) on the display case shelves. Rarely did a shopper come back to claim those items. If a shopper did return before the store closed that day, then Alice cheerfully returned the customer's personal item; otherwise, Alice told the customer the item had not been found by ABC. Alice told Carol all of these personal items were abandoned property; thus, the finder's keeper's rule of law applied, and, since Alice found the items those items now belonged to Alice. For all of the personal items of customers who did not return that day Alice pawned the items, keeping the cash for Betty's medical expense. Alice stated the law correctly. b. One morning Alice and Carol arrived at ABC and found that during the night a dilapidated car had been parked at the back of the ABC parking lot. The junk car remained unmoved in the lot for over a week. Alice wanted to pawn the car, but Carol refused. Carol told Alice that because it was a car and it was in a business' parking lot a constructive bailment had been imposed on ABC. Carol stated the law correctly. c. For ABC's physical store Alice ordered expensive display cases so that Alice could double bill ABC. Once installed (e.g., attached with screws to the walls) these display cases are not "fixtures".

5 Page 5 of Carol's father Charles is a family farmer. Charles is not married, but he does have a live-in lover half his age named Chrissy. (Recall, in Nebraska it is not legally feasible to become "common law married".) Charles died last week. In Charles' will he devised two real property interests. FIRST, Chrissy was left a life estate in the real property; SECOND, following Chrissy's life estate, Carol was left the fee simple absolute. This week, at the funeral, Chrissy surprised Carol by delivering to Carol a document drafted by Chrissy's lawyer and signed by Chrissy irrevocably hiring Carol to manage the real property (e.g., run the farm) in exchange for Carol paying Chrissy half the annual income from the real property every year for the rest of Chrissy's life. Carol immediately signed the document making it a contract that satisfied the Statute of Frauds. By signing the contract with Chrissy, Carol became a family farmer. a. Before the end of this week Chrissy had spent most of her half of the farm's annual income. Carol believes Chrissy is squandering Chrissy's half of the farm's income. Carol has sued Chrissy for the cause of action of waste of Chrissy's life estate. Chrissy makes a Motion to Dismiss. The judge will grant Chrissy's Motion to Dismiss. b. Every year during hunting season and after harvest, with a valid hunting permit, Charles encouraged his next door neighbor Wilbur to hunt pheasant on Charles' farm. Carol hates hunting so Carol forbids Wilbur to hunt on the land. Chrissy now is dating Wilbur and Chrissy tells Wilbur he has a property right to hunt that land. Chrissy tells Wilbur he has a profit. Chrissy is correct. c. Over the last five years the adjacent city has grown rapidly, now surrounding Charles' farm with urban property (e.g., church, shopping mall, houses, and a gas station). A month after Charles' death the city changed the zoning of the property, and did not grandfather the property. The new zoning prohibits hunting and many actions necessary to run the farm as it has been run the last 30 years. The new zoning prohibits uses more intensive than residential uses or eleemosynary (e.g., church) uses. The city announced next month the city will use eminent domain to condemn the property for use as a city park. The city offers Carol what the city honestly believes is a fair price per acre for park land. Both Carol and Chrissy object. The price per acre Carol demands is that for the farm; Chrissy demands the price for another shopping mall. Chrissy is correct.

6 Page 6 of The city completes the condemnation of Charles' farm and turns it into a city park. a. Wilbur is not happy since Chrissy dumped him for a real estate developer, so Wilbur decides to go hunting pheasant. A person living across the street from the city park sees Wilbur hunting and calls police. The neighbor is shocked when all the police do is tell Wilbur to stop and do not come back. So the neighbor sues Wilbur for creating a nuisance. Wilbur makes a Motion to Dismiss. The judge will grant Wilbur's Motion to Dismiss. b. Charles' farm had a small pond fed by and emptied by a small stream. ABC, Inc. bid for and won a city concession to rent two-person paddle boats for use on the city park's pond. Now Alice wants to grow the business by tripling the depth and tripling the surface area of the pond. Alice wants to dam the stream to capture more water and make the pond bigger. The city must complete an EIS (i.e., environmental impact statement) to implement Alice's proposal. c. In addition to the boat rental, ABC, Inc. has a food truck concession in the park. Alice refuses to minimize paper waste from the food truck. For example, Alice refuses to use recycled paper products and refuses to provide customers with trash cans for recycling. A local environment group protests against ABC carrying signs asserting ABC's business practices are hazardous to the environment and toxic. Because of the environmentalist's complaints ABC will be required to comply with regulations governing waste that is hazardous or toxic.

7 Page 7 of Alice dislikes losing. Another firm, XYZ, Inc., also has a city park food truck and is getting much more business than is ABC's food truck. a. XYZ's best selling sandwich has a distinctive name. Before XYZ does, Alice has ABC obtain the federal trademark for that sandwich's name. Alice sues XYZ demanding XYZ stop using that now federally trademarked name at XYZ's food truck in the city park. XYZ makes a Motion to Dismiss. The judge will grant XYZ's Motion to Dismiss. b. XYZ's best selling sandwich is a funning looking sandwich. XYZ can get a design patent on the sandwich. c. XYZ made a radio ad with snappy jingle. Folks loved the jingle so much XYZ started selling audio recordings by web download. Alice was the very first buyer of the download. Alice starts taking business from XYZ by playing the jingle over the ABC food truck's speakers. XYZ sues ABC seeking an injunction. Alice's asserts ABC's use is copyright fair use because Alice's status as first buyer means ABC's use satisfies the first sale limitation on copyrights. ABC makes a Motion to Dismiss. The judge will grant ABC's Motion to Dismiss.

8 Page 8 of As Betty got sicker Alice started stealing in more ways. a. Alice had Carol draw a check to a payee and has Carol hand the check to Alice so Alice could deliver it to the payee. In fact, the payee is fictitious and Alice keeps the check so Alice can cash it. Because ABC issued the check, Alice is a holder; but, because an issue of a check is not a negotiation of the check Alice can not be an HDC (holder in due course). b. Alice had Carol draw a check to a genuine payee and Alice delivered the check to the genuine payee. When delivering the check Alice lied to payee saying ABC lacked funds to pay the check. Alice offered to buy ABC's "bad check" at a deep discount (i.e., 5 cents on the dollar). The payee gladly sells the check to Alice with a special indorsement. Alice now is both a holder and an HDC (holder in due course). Alice goes to the grocery store to buy groceries. When buying groceries Alice sells the check to the grocery store; but, Alice has to sell at a small discount (i.e., 95 cents on the dollar) since it is three party check. Now the grocery store is an HtHDC (holder through a holder in due course). c. Fraud comes in different forms, some worse than others. For negotiable instruments fraud in the execution is worse than fraud in the inducement. Against an HDC, a check signed due to fraud in the execution is a good defense; but a check signed due to fraud in the inducement is not a good defense..

9 Page 9 of Alice's thieving ways were becoming widely known in the city. a. Alice did not have signature authority on file with ABC's bank; only Carol had signature authority for ABC checks. Alice started stealing ABC check blanks and forging Carol's signature on ABC's check blanks. Carol first noticed the forgeries by Alice 45 days after the first bank statement containing a forgery. The bank must refund to ABC all payments made by the bank on all forged checks drawn with Alice's forgery of Carol's signature. b. Since folks in town were refusing ABC's checks and Betty was getting sicker, Alice started using ABC's debit card to embezzle. Fortunately for ABC, in terms of protecting parties like ABC, the legal rules governing electronic forms of money (e.g., EFT [electronic funds transfer]; debit cards) provide much stronger protection to ABC than do the rules of negotiable instruments. c. All local businesses were refusing payment by check by ABC unless the ABC check was a certified check or was a cashier's check. That is, payees insist the bank's signature be on the front of the check.

10 Page 10 of Betty has died, but not before her medical bills have driven Alice insolvent; and, of course, not before Alice's embezzlement drove ABC, Inc. insolvent. ABC, Inc. mostly has secured creditors and a few unsecured creditors. Ignoring all of her debts due to her criminal action and/or her tortious behavior, Alice has no unsecured creditors and just one secured creditor for her car. a. Generically, all unsecured creditors must sue in State court and all secured creditors must sue in federal court. However, since garnishment of wages is a form of foreclosure, all garnishment of wages, whether for unsecured or for secured debt, must be done in federal court. b. Carol was careful to never sign as a surety for ABC, Inc. when Carol co-signed on a debt with ABC. Instead, Carol always only co-signed as a guarantor for ABC. Alice, in contrast, was careless, thus Alice always co-signed with ABC. Inc. as a surety. Accordingly, Carol never and Alice always must pay off ABC's c0-signed debts when ABC does not pay off those debts. c. A security interest (i.e., written; for value; debtor grants creditor an interest in debtor's interest) perfected by filing a financing statement (i.e., name and address of debtor; name and address of creditor; description of collateral) permits the creditor to enforce a deficiency judgement against the debtor when the proceeds from disposal of the collateral are less than then debt.

11 Page 11 of Bankruptcy has become the best option for Alice as well as the best business option for ABC, Inc. now that Alice has been fired as CEO of ABC. Alice wants to discharge her debts in bankruptcy. ABC wants to get back on its feet since without Alice's stealing ABC would be a going concern. Both Alice and ABC see the potential to use the bankruptcy trustee's unique powers, such as the power discharge executory contracts and the power to reverse preferential transfers. a. The unsecured creditors of ABC for which Alice had co-signed as a surety long ago strongly suspected ABC was insolvent but were not worried because they all believed Alice was independently wealthy since Alice was known to be paying cash for Betty's very expensive health care. However, as soon as these creditors heard of Alice's fraud against ABC had forced Carol to consult a bankruptcy attorney many of these creditors raced to the courthouse seeking to file suit against both Alice and ABC. Each of these unsecured creditors will seek from the trial court an automatic stay so as to stop all bankruptcy proceedings and thus prevent any bankruptcy court discharge of debts owed either by Alice or by ABC, Inc. b. ABC has been insolvent for over 6 months and just now has filed a voluntary chapter 11 (i.e., reorganization). Six months ago when it became clear to Carol that ABC was insolvent, she delayed the filing of chapter 11 until 91 days after Carol completed making preferential payments to those ABC creditors for which Carol personally was a co-signer. Carol delayed ABC's bankruptcy filing since she believed the trustee only had the power to reverse preferential payments made in the 90 days prior to ABC's filing for bankruptcy. Carol believes, this way, Carol will not have to pay any of ABC's debts for which Carol co-signed as a guarantor. Carol is correct. c. Alice has filed a voluntary chapter 7 (i.e., liquidation) bankruptcy. Alice's creditors immediately petitioned to convert her chapter 7 into a chapter 13 (i.e., adjustment with repayment plan augmenting her estate with Alice's future income for a period of years). Alice will agree to the conversation because she would be better off with 13 and using her future income to pay off existing debts. So many of Alice's debts are due to her fraud or embezzlement and will be not eligible for discharge (i.e., exceptions to discharge) by a chapter 7 bankruptcy, but would be discharged in 13 with its super discharge.