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MANUAL ON COMMERCIAL LAW A. Lincoln Lavine, A.B., LL.B., J.D. PROFESSOR OF LAW AND CHAIRMAN OF THE LAW DEPARTMENT ST. JOHN'S UNIVERSITY, SCHOOL OF COMMERCE MEMBER OF THE NEW YORK BAR NATIONAL EDITION NEW YORK PRENTICE-HALL, 1948 INC. Copyright, 1948, by A. Lincoln Lavine All rights reserved PRINTED IN THE UNITED STATES OF AMERICA PreFace to National Edition It is hard to practice law actively for a third of a century, and to teach and write on this subject for a large part of this period, without acquiring a profound distaste for such legal clich6s as "authorities differ,". "the law is unsettled," "the cases are in conflict" and "the states are not in accord." Authorities do differ, the law is unsettled, the cases are in conflict and the states are not in accord; but the student of business and of business law today is in pressing need of a com- posite picture of what the law is, not how it differs. He wants this information, not in terms of general principles, but of spe- cific situations; and so far as possible, he wants these situ- ations interpreted in the light of the law of his own state, rather than that of a state two thousand miles away. A growing sense of this need has been borne in on the author ever since the first edition of his Manual, based in large part on New York law, first saw the light some fifteen years ago. This feeling was fortified as succeeding editions of the Manual spread across the country and even traveled to Puerto Rico and the Philippines. The feeling finally grew into a decision to abandon entirely any further editions of the original work, and to re-write the Manual in toto as a National Edition, with emphasis on uniform principles, and with extensive footnote references to the decisions of our courts throughout the forty- eight states of the Union, so that the reader and student may think in terms of the law of his own state. It is with this thought, also, that the author has presented the various nationwide tables which appear throughout the book, for example, the table on uniform statutes which ap- pears on pages 12 to 13; the table on the statutes of limitation which appears on pages 45 to 46; summaries such as those which appear in the footnotes on page 80, showing the law in the various states as to the necessity of consideration in con- tracts under seal; the table on the statutes of frauds governing contracts for the
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word as to text treatment. If there is one thing that the author has learned in his thirty years' experience in teaching commercial law, it is that legal rules may flow swiftly through the mind of reader or student without leaving a trace, but legal situations stick, and the legal principles which they entail usually stick along with them. And that, of course, accords with our natural experi- ence in learning anything. The author has endeavored, as far as possible, to present the law as it is presented in real life: problems and situations, and how they were resolved under established rules of law. This, the author is convinced, is far superior, from the educational standpoint, to the orthodox method of presentation, which consists in summarizations of legal rules, with or without supporting citations, examples or cases. In adopting this form of presentation, the author has found ready to hand a vast storehouse of problems and situations which present superbly a complete panorama of the entire field of commercial law. For the past thirty years or more, experts in their particular field have devoted careful thought and painstaking effort to preparing examination questions for candidates for CPA degrees throughout the United States. These questions touch on almost every conceivable field of commercial law. Regularly, twice a year, examinations in commercial law have been held in the different states through- iv PREFACE out the country as part of the official tests which candidates must pass before they can be admitted to practice as CPAs. The examination questions most widely given are those which are prepared by the experts on behalf of the American In- stitute of Accountants. These are now given in every state of the Union except Maryland, Ohio, Pennsylvania and Wis- consin. New York State has prepared its own examinations during these years, through its board of certified public ac- countant examiners, until May 1946, when it joined the other states in adopting the American Institute's questions and problems. These combined American Institute and New York questions and problems in commercial law-some 1600 in number-prepared by these experts represent about every conceivable type of legal situation that is likely to arise in the course of business experience. The author, before writing a line of text, examined and closely analyzed each of these ques- tions a
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Substance of the Law................. 11 C. Governmental Powers and Limitations 25 D .Procedure........................... 34 E. Bars to Recovery.................... 43 II. CONTRACTS. ............................ 55 A. Formation and Requisites............. 55 B. Classification and Form of Contracts .. 84 C. Statute of Frauds.................... 88 D. Operation and Effect of Contracts ...... 96 E. Discharge of Contracts ............... 102 F. Arbirration and Award ............... 118 III. NEGOTIABLE INSTRUMENTS. .. 6........... 140 A. Nature and Requisites of Negotiability 141 B. Types of Credit Instruments .......... 148 C. Issue ............................ 152 D . N egotiation......................... 154 E. Holder in Due Course ................ 158 F. Liabilities of Parties.................. 161 G .D efenses............................ 168 H .Presentm ent......................... 173 I. Dishonor and Protest ................. 179 J. D ischarge........................... 184 K .C hecks............................. 186 IV .SALES................................. 218 A. Nature and Elements ........ ........ 218 B .Passing Title........................ 221 C .W arranties.......................... 227 D . R em edies........................... 230 E. Conditional Sales.................... 238 Vii TABLE OF CONTENTS CHAPTER PAGES IV. SALES (Continued) F. Trust Receipts..................... 242 V. BAILMENTS AND CARRIERS .............. 250 A. Nature and Essentials ................ 250 B. Classification of Bailments............ 252 C. Rights, Duties and Obligations Common to All Bailments.................. 253 D. Rights, Duties and Obligations Depend- ent upon Nature of Bailment ........ 255 E. Mutual Benefit Bailments............. 258 F. Carriers: Classification ............... 265 G. Common Carriers of Goods ............ 267 H. Common Carriers of Passengers........ 275 I. Carriers by Water................... 277 J. Regulation of Carriers................ 279 VI. AGENCY ................................. 284 A. Agency Relationship and Parties Con- cerned Therein ................... 284 B. How Agency May Be Created......... 288 C. Duties and Obligations of Principal to A gent . ........................... 292 D. Duties and Obligations of Agent to Prin- cipal............................. 2 9 5 E. Agency and Third- Parties............. 297 F. Termination of Agency ........
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Property: Nature and Classi- fication ......................... ?. 524 G. Personal Property: Acquisition and Dis- position......................... 540 XII. LANDLORD AND TENANT . ................ 546 A. Nature and Essentials of Landlord and Tenant Relation.................. 546 B. Kinds of Tenancies.................. 548 C. Rights, Duties and Incidents of Land- lord and Tenant Relation........... 550 D. Leases............................ 560 E. Termination of Tenancy .............. 562 XIII. LIENS............. .. 566 A. Nature and Classification ............. 566 B. Common Law, Equitable and Statutory Liens........................... 567 C. General and Special (Particular) Liens. .568 D. Possessory Liens.................... 568 E. Nonpossessory (Charging) Liens....... .572 XIV. WILLS, INHERITANCE AND ESTATE ADMIN- ISTRATION ......................... 584 A. Decedent Estates Generally ........... 584 B. Wills............................. 585 C. Inheritance: Descent and Distribution. .590 D. Executors and Administrators....... ..593 E. Estate Administration................ 595 XV. TRUSTS. ..... ................. ........... 610 A. Definitions and Distinctions........... 610 B. Classification of Trusts............... 613 C. Express Trusts: Requisites and Restric- tions.. ......................... 614 x TABLE OF CONTENTS xi CHAPTER PAGES XV. TRUSTS (Continued)' D. Express Trusts: How Created......... 618 E. Express Trusts: Purposes............. 620 F. Implied Trusts: Resulting and Construc- tive............................ 624 G. Trustees and Trust Management....... 625 H. Accounting and Settlement: Principal and Incom e....................... 630 XVI. BANKRUPTCY. ... .......................... 644 A. Nature and Purpose of Bankruptcy .... 644 B. Petitions in Bankruptcy .............. 647 C. Acts of Bankruptcy ................. 649 D. Custody of Property Pending Proceed- ings ............... ............... 652 E. Administration of Estate.............. 653 F. Rights, Duties and Liabilities of Bank- rupt.............................. 657 G. Proof, Allowance and Payment of Claims 661 H. Discharge of Bankrupt ............... 668 I. Bankruptcy Offenses. ................ 671 J. Corporate Reorganization............. 672 K. Arrangements ...................... 675 Part II Questions and Answers. I-A. Law in General...................... 695 II-A. Contracts.................
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from international law which deals with the conduct of nations and their respec- tive peoples in their intercourse with one another. Municipal law is defined by Blackstone as "a rule of civil conduct pre- scribed by the supreme power in a state, commanding what is right, and forbidding what is wrong." The word "municipal" in this sense is derived from the Roman "municipium," and is intended to convey the idea of a complete, self-sustained gov- ernmental unit. The law of the land is an expression commonly used to indi- cate the rules of human conduct by which a civilized com- munity hears before it condemns, proceeds upon inquiry, and renders judgment only after trial, thereby safeguarding each person's life, liberty and property. 3. Substantive and adjective law. Substantive law tells us what our rights and duties are and what constitutes a violation of such rights and duties; adjective law tells us how we may enforce our rights and duties and redress our wrongs. If you and I enter into an oral agreement by which I am to render 3 SUMMARY OF COMMERCIAL LAW services and you are to pay me $500, the question of whether such an agreement is enforceable is one of substantive law. If we assume that I could enforce such an agreement, the ques- tion of how I should go about enforcing it-how one brings the matter to suit, trial and judgment-would be a question of adjective law. 4. Origin and evolution of law. In the history of law, we perceive a common tendency. First we have custom, usage and tradition, reflecting an existing state of morality, followed by an effort to codify and crystallize the accumulated mass of custom and usage into codes or statutes. This is illustrated by the ancient Hebrew law, which re- flected current custom, was crystallized into The Ten Com- mandments, and was subsequently amplified in the Talmud. The same tendency characterized the development of law in the civilized states of Greece: first we have custom and prece- dent established by centuries of habit and tradition growing out of the ancient Greek concepts of morality and religion-habits of life imposed by belief in a hierarchy of virtues and vices em- bodied in mythical gods-followed by efforts to codify these rules of life and to give them permanence in written form. It was largely from this source that the Romans, great law givers, derived their Twelve Tables. As times changed, cust
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now takes the form of judicial decisions. Actually, what we call "unwritten" law is today not only written, but printed and published, so that all may consult it. But in less enlightened times, unwritten law was in very truth unwritten. This was particularly so in the dark ages, when justice was administered by appeal to the supernatural. Ex- amples were trial by combat and trial by ordeal. In the for- mer, a trial consisted of physical combat between two litigants, and the verdict went to the strongest lance or the mightiest club; in the latter, guilt or innocence was determined by hold- ing a hot iron with the bare hands (whoever dropped it first was guilty); or, as in the case of witchcraft, by the simple test of ducking the accused in a body of water: if she came out dead, she was innocent, and if she came out alive, she was guilty and burned at the stake. When, however, reason began to dawn in the administration of justice, and some royal judge, in trying an issue between two litigants, pronounced a principle applicable to the facts and founded in logic, common sense, or a sense of fair play, a true legal precedent was established, to be followed subsequently if the same set of facts transpired. As these precedents or legal principles grew, they furnished a pattern of unwritten law, inscribed at first only in the memo- ries of judges and lawyers, and either recalled from personal experience, or transmitted by word of mouth. Mere memory, however, became insufficient, and notes of these cases and legal principles found their way into the mem- oirs and private records of bench and bar. Some of these notes were compiled and published in the form of commen- taries, such as those of Coke, Lyttleton, Blackstone and-in our own country-Kent. By means of these commentaries, together with various digests, Year Books, and so forth, the "unwritten" law took on more definite and coherent shape. Not only were these precedents thus clarified and given permanence, but they came to be reported and published by 5 SUMMARY OF COMMERCIAL LAW official reporters from the transcribed opinions of the judges. Today they are to be found on our law shelves in the form of volumes published, bound and numbered in sequence, so that they may easily be referred to by volume number and page as a source of law and a guide for determining the application of legal principles to a given set
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same applies to tort actions (sec. 29), such as actions for assault and battery, libel, slander, negligence, conversion, re- plevin, and so on. 8. Equity. Equity is that branch of unwritten law, founded in justice and fair dealing, which seeks to supply a more ade- quate remedy than that available at (common) law. Ordi- nary law actions, as stated, have for their object the assessment of damages for wrongs done, but a court of equity reaches be- yond mere damages: It seeks to prevent the wrong itself, or, if it has already been committed, to requite it more fully than would be possible by a mere payment of money damages. Among the more common equity actions, which provide reme- dies not available "at law," are the following: 6 LAW IN GENERAL Injunction suits (the most common remedy obtainable only in equity), wherein the court is asked to restrain a person from doing or continuing to do something that threatens or causes irreparable injury; Specific performance, wherein a party seeks to compel actual performance of a contract, instead of seeking money damages for the breach; Partition suits, wherein two or more persons own an undivided interest in lands and seek to have separate interests apportioned among them; "Bills of peace," wherein it is sought to unite several controversies be- tween the same parties to avoid a multiplicity of suits (as where a series of suits are threatened) all founded on the same facts and the same ques- tions of law, so that the decision of one will determine all; Reformation, wherein a bill in equity is brought to reform a contract so that it will express correctly the true intent of the parties; .Rescissiolt, wherein a court is asked to annul a contract entered into through fraud or excusable error; and Actions involving a trust, wherein one person has legal title to property which equitably belongs to another. 9. Maxims of equity. In the course of its development since the early days of English chancery, equity has established cer- tain fundamental principles, or maxims, among which are the following: He who seeks equity must do equity. One who seeks equitable relief must do what is equitable as a condition for that relief. If I seek -the return of a chattel which I was induced to sell through fraud, I must tender back the purchase price. If an infant buys an expensive watch and then decides he wants his money back, he must ten
Section 8
him for not having done it, as in the case of a common law judgment affecting his property. Thus, if a court of equity has jurisdiction of a trustee personally, but the property 7 SUMMARY OF COMMERCIAL LAW of the trust is outside the court's jurisdiction, the court may order the trustee to account for or dispose of such property, and for a failure to obey, may punish the trustee for contempt of court. Equity follows the 7aw. Except where the common law is clearly in- adequate, equity follows the rules and precedents of the common law and the provisions of a governing statute. If a deed or other instrument is void at law, or by statute, the mere fact that an innocent holder has given value for it will not render it valid in equity. Equity delights to do justice, and not by halves. Once equity acquires jurisdiction, it will retain it so as to afford complete relief. For example, if suit is brought for reformation (see. 8) of a contract, the court, if the facts warrant, will not only reform the contract but will compel its ob- servance as reformed. Equity will not suffer a wrong without a remedy. Unlike remedies at law, which are fixed and rigid, remedies in equity are flexible and are de- signed to tolerate no situation where one has a right without a remedy. Subject to statutory limitations, equity has jurisdiction "in the whole do- main of conscience." It can mold its remedies to meet any conditions. It is not dependent on precedent alone: If a party has a right which should be enforced in equity but no precedent for a remedy, equity will invent a remedy to protect the right. Equity regards that as done which ought to be done. Where necessary to promote justice, equity will treat an uncompleted bargain as if it were already completed. For example, under a land contract calling for delivery of title in the future, equity may regard the purchaser as having acquired the property, and the seller as owner of the purchase price. Equity regards substance rather than form. Common law is normally governed by legal form. Corporations, for example, are regarded in law as artificial beings, separate and distinct from their stockholders, directors, officers and employees. Equity, however, where necessary to circumvent fraud, to protect the rights of third parties and to accomplish justice, may disregard the corporate fiction and penetrate to the substance of the dispute.
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sold; the clerk deposits half the proceeds in one bank and the other half in another which later fails. All ten owners would share equally in the funds of the solvent bank, as well as any dividends from the insolvent bank. Between equal equities, the law will prevail. If two parties have an equal claim in equity, and one of them also has a claim recognized at law, the latter will prevail. Example: I sell a house to Jones, who fails to record his deed (see. 1051). I then sell the house again to Smith, who is innocent of the prior sale, pays value for the house, and promptly records his deed (thereby acquiring rec- ognition as the legal owner). If Jones, the prior purchaser, sought to have Smith reconvey title, the court wbuld declare that both parties having equal equities, the law (Smith's legal title) would prevail. Between equal equities, the first in order of time shall prevail. If vari- ous persons acquire liens against property (sec. 1128), the one who ac- quired the lien first (other things being equal) has first claim upon the property. 10. Marshaling assets. One of the well-known rules of equity is that which relates to the marshaling of a debtor's assets where there are several classes of creditors. Where one claimant has two funds to which he may resort to satisfy his claim and another claimant has an interest in only one of the funds, equity may compel the first creditor to collect out of the fund in which the second creditor has no lien, so that both creditors may be paid. If the first creditor acted as a dog in the manger and exhausted the fund in which the other creditor also had a lien, the latter would have nothing and the former, everything. (See sec. 1356.) Example: Smith has two parcels of land. I hold a first mortgage on both parcels; you hold a second mortgage (subject to my first) on one of them. If I foreclosed on both parcels, I might wipe your mortgage out. The first parcel, on which you hold no mortgage, is worth more than enough to pay me off. A court of equity, marshaling those assets, might force me to foreclose on the parcel covered by my mortgage only, and thus would leave your security intact. The rule of marshaling assets is commonly applied in dis- tributing assets among creditors upon dissolution of a partner- ship (sec. 708) and in apportioning rights among several mort- gagees (see. 1158). 11. International law. Internati
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Further refer- ence to the law merchant appears in the chapter "Negotiable Instruments" (sec. 258). 13. Constitutions. A constitution is the basic law of the land, to which all other law must conform. Under our system of dual sovereignty (sec. 50), each state is sovereign except as to powers delegated to the Federal Government; and each state has a constitution of its own. Hence, the laws of each state must conform not only to the United States Constitution, but to the constitution of that particular state as well. The sub- ject of constitutionality is more fully discussed in this chapter under the heading "Governmental Powers" (sees. 50 to 70). 14. Treaties. Treaties are solemn contracts or "compacts" between or among two or more nations. Once adopted, they constitute international law so far as concerns the signatory nations and their respective citizens. Treaties between two countries are bilateral; among more than two countries, multi- lateral. The Constitution of the United States provides that treaties may be concluded only by the President with the ap- proval of two thirds of the Senate. 15. Statutes. A statute is a formal enactment by a legisla- tive body of some rule or rules of civil conduct. It is referred to as an act when adopted by Congress, a statute when adopted by a state and an ordinance when adopted by a municipal leg- 10 LAW IN GENERAL islative body, such as a board of aldermen or common council. Statutes are enabling, if they grant power; enlarging, if they extend power; restraining, if they limit power; disabling, if they take power away or extinguish it; corrective, if they re- move or correct hardships in existing law; or declaratory, if they declare the common law. Many statutes are substan- tially declarations in codified form of the previous common law on the subject (sec. 4). Statutory law is a term sometimes used to indicate that the law on a given subject is based on statute rather than on common law. 16. Uniform statutes. Confusion caused by conflicting judi- cial decisions and statutes has led to the adoption of uniform statutes in various states throughout the country. The mat- ters involved being of state, not Federal, jurisdiction, co-opera- tive state action was necessary to insure uniformity. Model statutes formulated under the direction of a committee of the American Bar Association have been adopted in numerous states,
Section 11
I1 -o 0 0m m o c~~ C 0 3'-40 I I 4=== 0 -o 0 0 0 U) 0* C.) 0 0 0 00 00 *~0 -o OU) 0 +4 Ci) .0 ~0 0-0 0 0 +~ 0 So 0 0~ U) +4 .4.4 0 ~ +4 C/) S .~ +4 .0 0 0 0 -o 12 E-1 z 0) C 0 g - !t o .~ ;s Q c N-: - N ,: N Iq ~0U or- cccr w ~ ~~~~ t-.I- qt - 0 00 I0 D mt 00. I HI5 llll . 0a .. - .-.. r..u.4.A..P2 LAW IN GENERAL 13 .50 - 02H ~ (rZI -o -~ c q~ Iq li I X0 to t tr- 020 0,0 -41. - ~02 -,dq~ ~ C1 qI c60o ~ I I I ~C cI -cq cq (D , 4 bj I- Cd O 000x000 C CO 00 0 0' C x CO x CO x wO CO 00C 0 10 .0 z z*4 z o co mo EoS ( MO C Lo tO -(%o mO M -4 M - ' ' ~ ~ 0 t Lo -4 1- 40 -COh m O ~ ~ -~C - -,I 14 -,t' ~eoC c C> c0 m~0 ~0 ~O ~O ~O ~O~O ~O ~O ~0 ~O ~ -- 4- -4- -4-4 4-4 ----- - ---- -05 C) 0 -4 0 U H H H 0 z SUMMARY OF COMMERCIAL LAW purpose; for example, rights arising out of the so-called domes- tic relations, and rights created by contract. 19. Personal security. Personal security consists in the peaceable enjoyment of life, limb, body, health and reputation. It may be violated both criminally, as in homicide, arson, rob- bery, burglary, forgery and larceny (sec. 41); and civilly, as in negligence, assault and battery, libel, slander and malicious prosecution (sec. 29). 20. Personal liberty. Under our system of government, no man, save by express law, can be restrained of his liberty, pre- vented from going where he pleases, compelled to go where he does not want to, or be in any way imprisoned or confined. If an offender is apprehended, he must be given an immediate hearing before the proper magistrate. Only if reasonable probability of guilt appears may the offender be committed to prison and held for trial. Even then, pending trial, the of- fender (except in capital cases) may secure his liberty on bail, by the posting of a bond for appearance to stand trial. Safe- guarding the right of personal liberty is the writ of habeas cor- pus (literally, "have with you the body"): a court order avail- able at all times, requiring one having custody of another's person to produce him on short notice for inquiry into the cause of detention. 21. Property. The legal institution known as property, namely, the relationship of persons to things which gives per- sons exclusive control over things, is guaranteed by the United States Constitution, which provides that no person may be deprived of his property, even for a public purpose, save by due process of law and upon just compe
Section 12
have removed these common law disabilities. Married 14 LAW IN GENERAL women may now freely and in their own name make all manner of contracts and acquire, own, sell, mortgage, control, devise and bequeath their entire estate, real and personal. Still sur- viving in most states, are the following rights and duties: 1. The husband has the duty of support: the wife is by law her husband's agent in purchasing for herself and household, necessities as gauged by the husband's income. 2. Husband and wife have an interest in each other's property upon death. 3. A husband has the right to his wife's earnings under the same roof, on the theory that the husband is entitled to his wife's domestic services; and on same theory, if the wife is injured through another's negligence, the husband (apart from the wife's own suit) may sue the defendant for "loss of services." 24. Parent and child. A parent is natural guardian of his children. As such he may control and regulate their persons, but not their property. However, as he is liable for their sup- port until their majority, so he may until then collect their earnings unless they have been "emancipated" (thrown on their own resources). Age and status of infancy. An infant or minor is a person of either sex who has not attained the age of majority which marks the status of an adult. The age of majority varies in different states. At common law, and by statute in most states, the age is twenty-one years. 3 By common law precedent, which ignores a fraction of a day, an infant reaches the legal age of twenty-one the day before his twenty-first birthday. In some states, the female age of majority, at least for some purposes, has been fixed at eighteen. State statutes vary as to privileges accorded to infants at vary- ing ages, including those in relation to contracts, wills, marriage, voting, and so on. Infants of sufficient age to understand the nature of their acts are liable for their torts and crimes; and in the purchase of necessaries, for their contracts (sees. 29, 31, 136). 25. Guardian and ward. Besides the natural guardianship of parents, other forms of guardianship include: 1. Legal guardian. If an infant has property, the court appoints a legal guardian (usually, but not necessarily, the parent). The legal guardian must give bond for faithful management, must keep true accounts and file periodic reports with the cou
