Deck 14: Legality

Question 1

L & M loaned Joan $400 so that she could buy her textbooks for the current semester. L & M's terms for repayment of the loan (including interest) are $200 in two months, $200 in four months, and another $100 at the end of the fifth month. The legal maximum rate of interest on this type of loan is 6 percent per annum. L & M's loan is usurious.

Answer 1

True

Question 2

Which of the following can be characterized as an exculpatory clause?

A) Contractor is not liable for damage caused by its employees.
B) Buyer agrees to pay $5,000 for a used cell phone.
C) Creditor charges 45% interest on a loan.
D) All of these are correct.

Answer 2

A

Question 3

Virginia borrowed money from G & L Lending at 35% interest per year. The state maximum interest rate is 20% per year. Virginia defaulted on the loan. What amount can G & L collect from Virginia?

A) G & L will be able to collect the principal plus 20% interest per year.
B) G & L will be able to collect the principal but not any interest.
C) G & L will not be able to collect either the principal or interest.
D) Any one of these may be correct. The answer depends on the particular state law.

Answer 3

D

Question 4

In many states it is illegal to lend money to help someone gamble.

Question 5

E-mation, Inc. hires Marvin to steal trade secrets from one of its competitors for $10,000. Marvin demands half of the money up front. E-mation pays Marvin $5,000, but Marvin decides not to pursue theft of the trade secrets. E-mation sues Marvin for the return of the $5,000. What will the court do with this contract?

A) The court will order Marvin to return the $5,000.
B) The court will order Marvin to return the $5,000 with interest.
C) The court will order Marvin to obtain the trade secrets.
D) The court will not do anything to help E-mation get its money back.

Question 6

Roger parked his car at a garage that has a large sign at the entrance saying, "This garage is not liable for items stolen from a car." This type of notice is referred to as an exculpatory clause.

Question 7

To be valid, an agreement not to compete must be ancillary to a legitimate bargain.

Question 8

E-mation entered into a contract with a consumer, Ezra, a recent immigrant to the United States who spoke very little English and had no formal education. The contract provided for Ezra to pay $2,500 for a computer system. The system was worth $400. If E-mation sued Ezra for enforcement of the contract, what is the most likely result?

A) The contract is enforceable because of usury statutes.
B) The contract is unenforceable because it is ancillary to a legitimate bargain.
C) The contract is enforceable because of the exculpatory clause.
D) The contract is unenforceable because it is unconscionable.

Question 9

If a contract is made with a person required by law to hold a license, and the purpose of the license is protection of the public, the contract made by an unlicensed person will generally be unenforceable.

Question 10

A gambling contract is illegal unless it is a type of wagering specifically authorized by state statute.

Question 11

Rudolph overhears Macy's plans to go skydiving over spring break. Not really knowing Macy, but figuring it's worth a chance, Rudolph rushes out and buys an insurance policy for $100,000 on Macy's life. Macy does in fact meet her demise jumping out of the airplane. Rudolph can collect the $100,000.

Question 12

Barbara, a skilled welder, was hired at Mainco Enterprises for a welding position. She was asked to sign a non-compete clause limiting future employment if she left Mainco. A court would be very likely to enforce the non-compete clause unless the time or geographic restriction is unreasonable.

Question 13

When Randy, an electrician, accepted a job with Buren Construction, Randy signed the following agreement: "Upon termination of my employment with Buren Construction, I agree never to work for another employer as an electrician." If Randy resigns from Buren Construction, this agreement would be upheld under the theory of freedom of contract.

Question 14

Cynthia and Brian were friends. Brian was a dare devil. Because of his antics, Cynthia thought that Brian wasn't long for this life. Cynthia purchased a life insurance policy on Brian's life. Subsequently, Brian was killed in a car accident. Since Cynthia and Brian were friends, Cynthia had an insurable interest in his life and will be entitled to the insurance proceeds.

Question 15

Usury laws are designed to protect consumers from

A) obtaining loans to gamble on credit.
B) taking insurance policies out on the life of another.
C) companies charging excess interest on loans.
D) professionals practicing a trade without a valid license.

Question 16

According to Section 2-302 of the UCC, if a court finds as a matter of law that a clause of a contract was unconscionable at the time the contract was made, the court must refuse to enforce the contract.

Question 17

When a licensing requirement is designed merely to raise revenue, a contract made by an unlicensed person is generally enforceable.

Question 18

John was a licensed physician in Michigan. When he retired to Florida, he started providing medical services to the people in his condo, relying on his Michigan license since he did not have a Florida license and there is no reciprocity between the two states. Isaac, John's next-door neighbor, owed John $2,000 for medical services. John will be able to enforce the contract he made with Isaac.

Question 19

Morality plays no part of gambling contract legality.

Question 20

A contract may violate public policy even if the agreement does not violate a statute.

Question 21

Larry has the largest pizza business in the city. He learns that Henry is thinking of opening a competing pizza and pasta delivery business. Larry gives Henry $25,000 to not open his proposed business in the same city. Which statement is correct?

A) The contract is voidable at Larry's option.
B) The contract is void for lack of consideration.
C) The contract is illegal and void.
D) The contract is enforceable.

Question 22

An exculpatory clause is generally unenforceable when

A) it attempts to release a party from liability for ordinarily negligent behavior.
B) it involves public transportation.
C) it is written clearly and in bold, large print.
D) the affected activity is a recreational activity.

Question 23

A court is unlikely to enforce the non-compete agreement Kelly and Amber signed because of which of the following clauses?

A) Kelly agrees not to work for a competitor for two years.
B) Kelly agrees not to work for a competitor within a 10-mile radius of Amber's business.
C) Kelly agrees to go into a completely different line of work than Amber.
D) All of these are correct.

Question 24

A national bank based in New York issues credit cards to customers in all 50 states. What interest rate can the bank charge customers?

A) the interest rate of New York only
B) the interest rate of New York or that of the customer's state, whichever is higher
C) the interest rate of the customer's state only
D) the interest rate of New York or that of the customer's state, whichever is lower

Question 25

Wendell, new to the area, selects a doctor from the telephone book and visits that doctor to have a splinter extracted. Unbeknownst to Wendell, the doctor has never passed the state licensing exams. Later, when Wendell discovers the truth, he refuses to pay his bill. If the doctor sues for recovery of the fee, will the court support the doctor's claim?

A) Yes, it was up to Wendell to verify the doctor's qualifications prior to having the splinter extracted.
B) No, the court is likely to take the position that it is not in the public's best interest to enforce contracts with unlicensed doctors.
C) It depends on whether Wendell's injury healed properly.
D) Yes, it is unconscionable that Wendell would not pay a bill he owed.

Question 26

Suppose that Lenny Lawyer enters into an agreement with Cindy Client that his fee will be a percentage of the recovery Lenny obtains for Cindy in her pending divorce. State law makes such a contingency fee arrangement illegal in divorce actions. What will be the probable outcome if Lenny attempts to enforce the agreement?

A) The contract will be valid. Cindy would not have been able to afford an attorney otherwise and therefore Lenny was doing a public service.
B) The contract will be voidable at Cindy's option.
C) The contract will be void as violating a statute. Lenny will not be able to recover anything.
D) The contract will be unenforceable if Lenny did not get the agreement in writing.

Question 27

In bailment cases, exculpatory clauses

A) are very rarely used.
B) are somewhat more likely to be enforced than in other types of cases.
C) ordinarily involve an attempt to limit liability for damage to persons rather than property.
D) are not enforced because any harm is to property and not persons.

Question 28

Mike owns a house in a low-income area of a large city. Mike is on disability, and his total monthly income is $700. A sales representative visits his home to sell him a water purification system. Mike signs a contract that calls for monthly payments of $500 for the next 10 years. The water system is worth no more than $1,000. Mike thought he was signing a permission slip allowing the salesman to conduct a free water test to determine the toxins in the water. How would a court most likely describe this contract?

A) The contract is fully enforceable as written.
B) The contract is unenforceable because it is unconscionable.
C) The contract is enforceable, but only up to the value of the water system.
D) The contract is unenforceable because it is exculpatory.

Question 29

What are the two most common settings for legitimate non-compete agreements?

A) real estate purchase and employment relationship
B) sale of a business and real estate purchase
C) real estate purchase and insurance purchase
D) sale of a business and employment relationship

Question 30

Which of the following relationships generally fails to create an insurable interest?

A) Husband and wife
B) Doctor and patient
C) Debtor and creditor
D) Chief executive officer and corporation

Question 31

In a non-compete agreement, the term "ancillary" means that

A) both parties must have a stake in the outcome.
B) the agreement is harmless to the general public.
C) the non-compete agreement must be part of a larger agreement.
D) the non-compete agreement is unfair to the employee, but not the employer.

Question 32

A contract most likely will be declared unconscionable if

A) it allows for an extremely high rate of interest to be charged.
B) it contains a cancellation clause.
C) it is oppressive and one-sided.
D) it is signed by a minor for an item of luxury.

Question 33

Judith is a CPA with an excellent reputation and client base. She sells her tax preparation business to Shawn, and the sales contract includes a non-compete clause restricting Judith from opening a similar business for one year within a 10-mile radius of her former office. If she opens a tax preparation office five miles away after one year, a court would probably

A) grant an injunction barring her from operating the new office.
B) order confiscation of all of her new client files and turn them over to Shawn.
C) refuse to become involved, as the non-compete clause was illegal.
D) refuse to enforce the non-compete clause, as it is unreasonable regarding time and geographic area.

Question 34

The Tavern's secret recipe for its pizza sauce would be considered

A) a trade secret, and an employment non-compete clause would be enforceable to protect it.
B) a trade secret, but an employment non-compete clause would NOT be enforceable to protect it.
C) just a secret recipe and not something the Tavern could protect in a non-compete clause.
D) an exculpatory clause and not enforceable.

Question 35

Barb has been a children's day care provider for several years in the small town of Sallton. She has decided to give it all up and move to the big city for excitement and adventure. She sells her business to Ken, agreeing not to open a competing business within five miles of Sallton for a period of nine months. After five months of the big city life, Barb is broke and moves back to Sallton. She opens a small day care business. Ken sues on the non-compete clause. What is the most likely result?

A) Ken wins. The agreement is enforceable.
B) Barb wins. The agreement is denying her the right to do the only thing she knows how to do.
C) Barb wins. The agreement is not enforceable because it is not ancillary to a legitimate bargain.
D) Barb wins. The agreement is not reasonable as to time.

Question 36

Asher buys a linen suit from Miriam and gives it to his father, Moises. Moises takes the suit to Vanessa, who runs a local dry cleaner, to have the suit cleaned and pressed. Who is the bailee?

A) Asher
B) Moises
C) Miriam
D) Vanessa

Question 37

An unconscionable contract is one that a court refuses to enforce because of

A) fundamental unfairness.
B) illegality.
C) its limit to free trade.
D) overt vagueness.

Question 38

An insurance contract is NOT considered to be an illegal form of "wagering" because

A) one must have an insurable interest in the person being insured.
B) insurance contracts are underwritten by reputable companies.
C) insurance activities are regulated by the state department of insurance.
D) the money being paid out comes from premiums collected over time.

Question 39

Giving possession and control of personal property to another person is referred to as

A) adhesion.
B) usury.
C) unconscionability.
D) bailment.

Question 40

The UCC deals with unconscionability in a contract by providing that a court may

A) refuse to enforce the contract.
B) enforce the remainder of the contract without the unconscionable clause.
C) limit the application of any unconscionable clause as to avoid any unconscionable result.
D) All of these are correct.

Question 41

Discuss the pros and cons of gambling and state what the California Court of Appeals ruled regarding the treatment of gambling on credit.

Question 42

Differentiate between licensing requirements designed to protect the public and those designed to generate revenue.

Question 43

Marcy and Elliot are both sophisticated merchants who deal in diamonds. Marcy contracted to purchase a diamond for $20,000. The day after the purchase, Marcy took the diamond to a jeweler's show but the highest offer for the diamond was only $10,000. Is Marcy's contract for purchase of the diamond for $20,000 unconscionable?

Question 44

Discuss exculpatory clauses, and designate when an exculpatory clause is unenforceable.

Question 45

Cherise contacted her insurance agent and said she was interested in purchasing several life insurance policies: (a) a policy on her own life for $100,000, naming her son and daughter as beneficiaries; (b) a policy on her neighbor's life for $100,000, since she had observed him engaging in reckless behavior, naming herself as beneficiary; (c) a $5,000 policy on another neighbor to cover a loan Cherise made to him, naming herself as beneficiary; and (d) a $250,000 policy on her business partner, naming herself as beneficiary. Discuss the legality of each of these potential contracts.