Question 1

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.

Accepted Answer

A person may insure her own life for any amount and may name any beneficiary.Anyone who takes out a life insurance policy on the life of another must have an insurable interest in that person.The policy in (a)would be legal,as Cherise is insuring her own life.The potential policy in (b)is lacking in insurable interest; therefore there could be no enforceable contract.The policy in (c)would be legal because the debtor-creditor relationship creates an insurable interest.The potential policy in (d)would be legal,as the business relationship creates an insurable interest; Cherise would need compensation if her business partner dies.

Question 2

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 $2500 for a computer system.The system was worth $400.If E-mation sued Ezra for enforcement the contract,what is the most likely result?

Accepted Answer

A)   The contract is enforceable because of the Statute of Frauds.
B)   The contract is enforceable because of the parol evidence rule.
C)   The contract is enforceable because of the underlying reference rule.
D)   The contract is unenforceable because it is unconscionable. D

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?

Accepted Answer

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 the above may be correct. The answer depends on the particular state law. D

Question 4

Mabel,an 85-year-old widow who is in poor health,signs a contract with the only nursing home in Anytown (the nearest alternative facility is 75 miles away).The contract obligates Mabel to pay $4,000 per month for the rest of her life and for her estate to pay the same amount for the period of time that the unit sits empty upon her death.Mabel's daughter believes this agreement amounts to an adhesion contract.What is an adhesion contract? What factors will a court look at in determining whether an adhesion contract exists?

Accepted Answer

The answer of Mabel,an 85-year-old widow who is in poor...

Question 5

In the case of Worldwide Insurance v.Klopp,the Supreme Court of Delaware found that:

Accepted Answer

A)   a contract provision requiring arbitration and then permitting appeal by either party was void as unconscionable.
B)   the contract provision requiring arbitration was clear, unambiguous, and fair to both parties.
C)   the arbitration clause in Klopp's auto insurance contract was valid because it furthered the state policy favoring the use of arbitration to resolve disputes.
D)   the automobile insurance policy was governed by UCC, Article 3.

Question 6

A gambling contract is legal unless it is specifically prohibited by state statute.

Accepted Answer

A) True 
 B)False

Question 7

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?

Accepted Answer

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 interests to enforce contracts with unlicensed doctors.
C)   It depends on whether Wendell's injury healed properly.
D)   No, but the doctor could probably recover under quasi-contract.

Question 8

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?

Accepted Answer

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 9

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.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

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.Isaac,John's next-door neighbor,owed John $2000 for medical services.John will be able to enforce the contract he made with Isaac.

Accepted Answer

A) True 
 B)False

Question 12

Mark works as a bartender at The Little Nipper,a local bar.Under state law,bartenders are required to be licensed.The licensing requires filling out an application and submitting a $50 application fee.The application does not require any special education or experience,just the $50 fee.Craig enters Mark's bar,orders a round of drinks for the house,then notices that Mark's license is not on display behind the bar.Craig learns that Mark is not licensed and refuses to pay for the round of drinks.The Little Nipper sues.What result?

Accepted Answer

A)   Since this is an illegal contract, the courts will not enforce it.
B)   Since Mark violated a regulatory statute, the contract is unenforceable.
C)   Since this is a revenue-raising statute, The Little Nipper wins.
D)   Since this is a revenue-raising statute, the licensing law is unconstitutional. Craig wins.

Question 13

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 noncompete clause.What is the most likely result?

Accepted Answer

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 14

Which of the following relationships will ordinarily not create an insurable interest?

Accepted Answer

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

Question 15

To raise revenues,the City of St.Cloud required restaurants to purchase a special permit if they wanted to serve food in an open-air patio.(This is in addition to he sanitation inspection license.)While at Hola Taco,a restaurant in St.Cloud,a customer notices that Hola Taco's permit expired.This mean the customer is not legally required to pay for her food.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

When Mohammed was hired by Pomico,Inc.,he signed the following agreement,"Upon termination of my employment with Pomico,I agree not to work for a competing company within 30 miles of Pomico's headquarters for one year." This agreement,important to protecting secret information developed in the employer's business,is:

Accepted Answer

A)   an unenforceable exculpatory agreement.
B)   an unenforceable usurious agreement.
C)   an enforceable bailment agreement.
D)   an enforceable agreement not to compete.

Question 18

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?

Accepted Answer

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 19

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 noncompete clause restricting Judith from opening a similar business for two years 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:

Accepted Answer

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 noncompete clause was illegal.
D)   refuse to enforce the noncompete clause, as it is unreasonable regarding time and geographic area.

Question 20

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.

Accepted Answer

A) True 
 B)False

Exam 13: Legality

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?

In the case of Worldwide Insurance v.Klopp,the Supreme Court of Delaware found that:

A gambling contract is legal unless it is specifically prohibited by state statute.

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.

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.Isaac,John's next-door neighbor,owed John $2000 for medical services.John will be able to enforce the contract he made with Isaac.

Which of the following relationships will ordinarily not create an insurable interest?

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

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?

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.