Legal and Regulatory Environment of Business 16th Edition Pagnattaro Solutions Manual Download

Chapter 07 - The Property System
Solution Manual for Legal and Regulatory

Environment of Business 16th Edition
Pagnattaro Reed Shedd Morehead 0077437330
9780077437336
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Chapter 7
The Property System
Learning Objectives
The objective of this chapter is to instill an appreciation for the institution of property and its role
in encouraging the maximum production of what people want and need. It reaffirms the assertion
in Chapter 1 that property—the state’s recognition of a private individual’s right to exclude
others from legitimately acquired resources—is fundamental to the modern private market and is
conceptually intertwined with the idea of liberty. The chapter describes the basic divisions of
property, the topics of bailment, security interests, and nuisance.
References
• Bernhardt, Roger, Real Property in a Nutshell, 3d ed. West (1993).

• Burke, Barlow, Personal Property in a Nutshell, 2d ed. West (1993).
• De Soto, Hernando, The Mystery of Capital. (2000).
• Elias, Stephen, Patent, Copyright & Trademark, 3d ed. Nolo.com (1999).
7-1
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
• Epstein, Richard A., Takings. Harvard (1985).

• Hardy, Trotter, Project Looking Forward: Sketching the Future of Copyright in a
Networked World. U.S. Copyright Office (1998).
• Johnston, David, et al, Cyber Law. Stoddart (1997).
• Merrill, Thomas W., “Property and the Right to Exclude,” 77 Neb.L.Rev. 730 (1998).
• Singer, Joseph William, Property Law: Rules, Policies, and Practices Aspen Pub. (2006).
Teaching Outline
I. Introduction to the Property-Based Legal System (LO 7-1)
Emphasize:
• The definition of property.
• Some additional definitions of property.
• Sidebar 7.1 discussing property as a foundation of the private market.
II. Rationale for the Property System
Emphasize:
• That as long as people need or want more resources than they have available to them,
society will order how people relate to each other in acquiring and possessing these
resources.
A. The Problem of Limited Resources
Emphasize:
• That in Western political theory, the state comes into being in response to the problem
of limited resources.
• That there are two basic legal frameworks and the state responds to the problem through
state planning at one end and private property (property) at the other.
• That for the property system to function most effectively in promoting prosperity, it
should be applied according to the rule of law, which means it should be applied
generally and equally to everyone.
• Sidebar 7.2—“The Three Faces of Property”
Additional Matters for Discussion:

• Property is often taught as a “bundle of rights,” such as the rights to possess, use, and
transfer (exchange) resources. But, property can also be envisioned primarily as a
negative blanket right, the right to exclude others, including the state. As Professor
Merrill wrote (see References), “Give someone the right to exclude others from valued
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resources… and you give them property. Deny someone the exclusion right and they do
not have property.”
• Point out that the term “property” comes from the Latin proprius, referring to that
which is appropriate or proper to one. In an abstract sense, property is a legal sphere
within which one can freely make choices about, use, and produce resources.
B. Property and Prosperity (LO 7-2)
Emphasize:
• That property creates some of the maximum conditions known for producing and
sustaining prosperity.
• That private property establishes maximum conditions for wealth creation through
promoting incentive.
• How property helps establish the conditions necessary for capital formation, which
refers to that quality of resources that produces new or different resources, e.g., turning
a business idea of physical assets into money through incorporation or a mortgage loan.
• That property divisibility relates to capital formation and refers to how property permits
resources to be broken into parts and used in many ways while the owner still retains a
property interest in each part.

• Since the institution of property promotes individual prosperity and permits unequal
accumulation of resources, it is easy to see why some students may associate property
with greed and materialism. Students may not appreciate that the resources that property
protects are usually limited only at a point in time, not over time, and that the function
of the private market is to generate new resources, new wealth.
• Point out the poverty of Russia and North Korea as examples of what happens to
incentive in the absence of property.
• Tom Bethell’s The Noblest Triumph (1999) is an excellent book to recommend to
students on the importance of property.
• Discuss Sidebar 7.3, regarding the mystery of capital.
• Observe that property need not be viewed as a normative good in order for it to be
appreciated as a condition for maximum production of resources and as a necessary
foundation of the modern private market.
III. Defining Property in the Legal System
A. Two Basic Divisions of Property
Emphasize:
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• The difference between real and personal property.

• That all property that is not realty is personality and that the possible range of types of
resources in which an owner can have personality is infinite.
• How tangible personal property can become a fixture.
• What intangible personal property is.
B. Property Boundaries in the Physical World
Emphasize:
• That land is not fully contained when owned or transported when sold, law rather than
intuition must provide the physical boundaries.
• Sidebar 7.4—“Defining Intangible Property”
Defining Land
Emphasize:
• That it is important to understand that land ownership consists of more than the
surface of the property.
Air Rights
Emphasize:
• That the owner of real property also possesses the air above the land to the extent that
the owner can occupy or use it in connection with the land.
Subsurface Rights
Emphasize:
• That a landowner also owns the rocks and minerals beneath the land.
• That subsurface rights have additional complications in that many belowground
substances are not static.
• Case 7.1: Coastal Oil & Gas Corp v. Garza Energy Trust Et Al., 268 S.W.3d 1 (Tex.
2008).
Fixtures on Land
Emphasize:
• What a fixture is.
IV. Interests in Property with Respect to Others and Time

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A. Types of Ownership
Emphasize:
• That the law allows division of resource ownership into various types, or degrees.
• The resource divisions suggested by fee simple, life estate, leasehold estate, and
concurrent ownership.
V. Specialty Applications of Property
Emphasize:
• That the private legal fence of property allows an owner to exclude others from interfering
with (1) the possession of an object or resource, (2) the transfer of the object or interest by
gift or through exchange with other owners, and (3) all uses of the object that do not harm
other owners in what belongs to them.
A. Easements
Emphasize:
• That an easement places a particular use of land behind the exclusive legal fence, which
usually involves the right of passage across the land.
• Easement by reservation, natural easement, negative easement, and easement by
prescription.
B. Bailments
Emphasize:
• That an owner puts an object protected by personal property into the intentional
possession of another person with the understanding that the other person must return
the object at some point or otherwise dispose of it.
• The three categories that bailments fall into.
• Sidebar 7.5—“Follow Instructions or Else”
• Case 7.2: Semoon v. The Wooster School Corp., 2010 Conn. Super. LEXIS 1816
VI. Acquiring Resources in a Property System
A. Acquiring Resources through Exchange
Emphasize:
• The most common way of acquiring resources is through exchange. The private market
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is based on exchange.
• The rules under which people voluntarily exchange resources in a property system are
called the rules of contract. (Reference Chapter 8.)
• That a nation’s capacity to observe legally enforceable contracts is considered the single
most significant indicator that the nation’s economy is ready for international trade.
B. Acquiring Resources through Possession
Emphasize:
• That the rule of first possession is that the first person to reduce previously unowned
things to possession becomes their owner.

• Note that Hernando de Soto (see References) points out the importance of possession in
the formation of the U.S. property system. The importance of the Homestead Act aside,
de Soto asserts that much land in the New World that had been granted to favorites by
the British king was in fact possessed by squatters who eventually were granted formal
ownership—or property—in their possession.
• Have the class discuss Sidebar 7.6 regarding the Barry Bonds’ home-run ball.
Lost Items
Emphasize:
• The marginalia and how it applies to lost property.
• The difference between lost and mislaid property and the rights and responsibilities
of the finder of each.
Adverse Possession
Emphasize:
• The concept of adverse possession.
• How the famous Homestead Act of 1862 illustrates how ownership can be acquired
through adverse possession.
• Sidebar 7.7—“Curing Blight through Adverse Possession?”
C. Acquiring Resources through Confusion
Emphasize:
• The meaning of fungible.
• The doctrine of confusion.
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• The importance of boundaries to the concept of property.
D. Acquiring Resources through Accession
Emphasize:
• That accession refers to something “added.”
• The implication of wrongful accession.
• That much of the property foundation of the modern private market depends on the right
to exclude others legally from what one owns what one adds to that.
E. Acquiring Resources through Gift
Emphasize:
• The terms donor and donee.
• That to transfer ownership by gift, a donor must both intend to make the gift and deliver
the gift by physical transfer to the donee.
• What testamentary gifts are.
F. Title and Property Registration
Emphasize:
• That ownership is frequently referred to by the term title.
• That someone who owns something has title to it. When an owner transfers ownership,
the owner is said to “pass title.”
• That a deed is the document of title that transfers ownership of land.
• The different kinds of deeds and why and when should each type be used.
VII. Property and Security Interests (LO 7-4)
Emphasize:
• That the two principal types of security interests are mortgages and secured transactions
under Article 9 of the Uniform Commercial Code.
A. Security Interests in Land
Emphasize:
• The similarities and differences among mortgages, land sales contracts, and deeds of
trust.
Recording Statutes
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Emphasize:
• The importance of registration (recording) of the security interests.
• The legal perils of the mortgagee failing to record the mortgage.
Foreclosure, Deficiency, and Redemption
Emphasize:
• The meaning of foreclosure, deficiency, and right of redemption.
• Sidebar 7.8—“Financial Collapse and Recession”
B. Secured Transactions
Emphasize:
• The meaning of collateral.
• How attachment takes place.
Perfection
• Perfection give a creditor a secured interest in the collateral.

• The meaning of financing statements and purchase money security interest.
C. Priority Problems and Examples
Emphasize:
• The nine priority problems and, especially, the significance of a buyer in the ordinary
course of business.
• How artisan’s and mechanic’s liens arise and their priority significance as security
interests. Refer to Sidebar 7.9.
VIII. Limitations on Property and the Common Good (LO 7-5)
A. Property, the Use of Resources, and the Equal Right of Others
Emphasize:
• That in law, property is not a thing. It is an owner’s right to exclude others from
resources.
• The use of things by owners is limited by the equal right of others, i.e., owners are
prohibited from using their resources in ways that harm or injure the resources of other
owners.
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• Sidebar 7.10 and how the property system effects corporate governance.
B. Nuisance and Zoning
Emphasize:
• That a public nuisance arises from some use of land that causes inconvenience or
damage to the public.
• That a private nuisance is any unreasonable use of what belongs to one, usually land, so
as to cause substantial interference with the enjoyment or use of another’s land. Courts
issue a variety of remedies for nuisance-creating activity.
• That zoning ordinances are publicly established limitations on an owner’s use of
resources that protect health, safety, morals, and general welfare.
• Sidebar 7.11—“Hot Sauce or Fresh Air?”
• Case 7.3: Cook v. Sullivan, 829 A.2d 1059 (N.H. Sup. Ct. 2003).
C. Property Limitations and the Common Good
Emphasize:
• The variety of limitations on property illustrate that the purpose of property is to
promote the common good.
Duration Limitations on Property
Emphasize:
• The rule against perpetuities limits all exercise of property over resources to a
duration of “lives in being plus twenty-one years.”
• The rule against perpetuities prevents an owner from controlling resources through
many future generations by setting up trust arrangements, under which trustees are
legally required to carry out the wishes of the owner for extended duration.
D. Taxation
Emphasize:
• That federal taxation is a specified power of Congress, contained in Article 1, Section 8
of the Constitution.
• That taxation is a limitation on property and is used to promote the general welfare
(common good).
• The controversial nature of progressive income taxation and that the top 1% of federal
income tax payers pay more dollars tax than the bottom 60% do, according to the
Congressional Budget Office.
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• Whether or not the benefits of individuals having the property system justify unequal
taxation when some individuals end up with much greater resources than others.
E. Property: A Conclusion and Comment
Emphasize:
• How property law founds the private marketplace in the modern nation by establishing
an essential framework for the voluntary and certain exchange of identifiable resources.
• That business students need to appreciate the fundamental role of law in business even
if they oppose specific rules or regulations.
• James Madison’s concern about an excessively unequal distribution of resources.
Answers to Review Questions and Problems
The Property System
1. The Problem of Limited Resources
The former Soviet Union expected and when necessary it required citizens to contribute the
fruits of their efforts to society and to share accordingly. People contributed and benefitted
at different levels, so incentive to excel was not a factor.
2. Property and Prosperity
a. Property provides greater incentive to develop resources.

b. When resources are visible and attainable, the incentive to work toward obtaining
resources allows for the nation to benefit from their accumulation through trade and
taxes.
Defining Property in the Legal System
3. Two Basic Divisions of Property
a. Real property is land and the interests in land. Personal property is essentially anything
other than real property.
b. A chandelier is a piece of personal property that has become attached to the real
property and as a fixture, it becomes part of the real property. One must look to the
sales contract to determine whether it is permissible for Martin to remove the fixture.
Property Boundaries in the Physical World

7-10
4. Defining Land
a. Students’ answers will vary. With the advent of aircraft as well as subsurface drilling
for minerals, oil, gas, and water, it has become necessary to place reasonable limits on
a landowner’s rights.
b. Yes, it has infringed on her property. The owner of real property also possesses the air
above the land to the extent that the owner can occupy or use it in connection with the
land.
c. Students’ answers will vary. The strict rule of capture may be limited by additional
rules that preserve the rights of adjoining owners.
d. Students’ answers will vary.
5. Types of Ownership
a. The fee simple defeasible has a condition attached to its conveyance. If the condition
is met, the usual result is that the land returns to the original conveyor or is transferred
further according to the wishes of the original conveyor.
b. Upon one’s death the land reverts to the original grantor who is said to keep a
reversion interest in the land. If the land goes to someone other than the grantor upon
one’s death, that person has a remainder interest.
c. If either Arla or Jack dies, the surviving party becomes the sole owner of the house.
Specialty Applications of Property
6. Easements
a. An easement is a property fence because it protects easement owners from the world’s
interference with their right of use.
b. An easement by prescription arises when an owner of land fails to interfere with a
trespasser’s adverse use of land for a statutory period of time.
7. Bailments
a. The lease of a mowing tractor is a bailment because it fits the definition of someone
taking possession of an owner’s tangible, movable resource with the obligation to
return or dispose of it at the instruction of the owner.
b. A warehouseman is liable in this situation because the equipment has been used in a
way not specified by the bailment. If the equipment had been destroyed in warehouse
314, the warehouse might not have been liable if it was using reasonable care, the duty
7-11
owed by mutual benefit bailee. To prevent this kind of problem, the parties to a
bailment often insure the goods.
c. Common carriers are usually strictly liable except in limited circumstances for goods
that are destroyed in the possession of the common carrier. It is important to note that
common carriers often contract away much of their liability.
Acquiring Resources in a Property System
8. Acquiring Resources through Exchange
a. The law of contract is essential to the transfer of property between parties.

b. Contract law helps provide certainty in resource exchanges.
9. Acquiring Resources through Possession
a. The finder of lost property becomes the owner of the property after a statutory period
in which the true owner must be sought. If Lee has advertised the finding of the ring in
an appropriate manner and the statutory period has run, Lee keeps the ring. If the
statutory period has not expired or if Lee has not sought the original owner, the
original owner will have the ring returned.
b. If the building has existed for the state statutory period and all adverse possession
requirements have been met, the six inches will be owned by Downtown. If the
statutory period is not yet run, there may be a suit to have Downtown Condos torn
down. Most likely, Downtown may perhaps purchase the six inches of land or the two
owners will be urged to come to some sort of easement or licensing agreement.
10. Acquiring Resources through Confusion
a. Fungible goods are goods sold by weight or measure that when combined with
identical goods cannot be identified and separated. Examples will vary. Gasoline from
two sources mixed into one holding tank is one example.
b. Property is all about the legal right to exclude others from what is “proper” to a person
and another person. Without adequate boundaries to a resource, it would be impossible
to identify what is “mine” versus what is “yours.”
11. Acquiring Resources through Accession
a. Accession occurs when value is added to personal property. If the original property
was improperly taken, in most cases the original owner retains ownership including
the improvements. If the original property was not improperly taken, the property may
7-12
be forfeited with the original owner compensated for his or her loss.
b. Locke believed that people should own their work efforts and if the fruit of their
efforts results in something not previously owned becoming something new, then
those who labored should own that new thing.
12. Acquiring Resources through Gift
a. Typically delivery must include that the gift be intended and actually physically
transferred to the other party. Constructive delivery includes intention but physically
handing the gift over does not occur. The party is either told to retrieve it themselves
or something representing the delivery is transferred.
b. A testamentary gift is a gift made through will. The gift takes place upon the death of
the testator.
13. Title and Property Registration
a. The warranty deed guarantees to the grantee that the grantor owns the property and has
full power to convey the property. A special warranty deed specifies that some claims
to the property exist but guarantees against other unnamed claims. The quitclaim deed
makes no guarantees but says that the grantor transfers any rights he or she has to the
property to the grantee.
b. Recording or registration of the deed evidences ownership and title putting ones rights
on public notice.
Property and Security Interests
14. Security Interests in Land
a. The three types of security interests in land are deeds of trust, mortgages, and land
sales contracts.
b. Recording mortgages and deeds of trust are important because creditors holding such
security interests will not be able to enforce them against a subsequent buyer of the
land if these security interests have not been properly recorded. With a land sales
contract, however, the title and thus the recording of it remains with the creditor
granting the security interest until the buyer has paid off the debt.
15. Secured Transactions
a. The secured party must give value, the debtor must own the collateral, and a security
agreement must be given for attachment of a security interest under UCC, Article 9.
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b. Perfection of a security interest may be accomplished by filing a financing statement

or through a purchase money security interest.
16. Priority Problems
Yes, the perfected security interest would be applicable because he is a buyer in the normal
course of business.
Limitations on Property and the Common Good
17. Property, the Use of Resources, and the Equal Right of Others
It is important to have a property right in the uses of things because if one can only possess
but not use an object, it has little value.
18. Nuisance and Zoning
a. A public nuisance causes inconvenience or damage to the public. A private nuisance

unreasonably interferes with another property owner’s use and enjoyment of his or her
land. Nuisance law basically says that one’s legal uses, and thus the boundary of the
property fence, do not extend to harming the public interest or to “unreasonably”
crossing the proper fences of one’s neighbors. Saying that one can only use something
in a “reasonable” way is similar to saying one cannot use it in ways that harm the
common good.
b. Students’ answers will vary.
19. Property Limitations and the Common Good
The rule against perpetuities limits the rights over property after an owner’s death. This in
turn prevents the deceased from controlling or tying up resources. As society changes and
technology develops, society could be hurt if property is tied up indefinitely with no one to
respond to the changes. The rule indicates that the need for resource use may change in ways
that the dead hand should not control. This position ensures that new possible uses for land
and other resources serve the common good.
20. Taxation
At the federal level it is legal because it is authorized by the Constitution. At the state level it
is considered to be one of the general powers of governments.
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21. Property: A Conclusion and Comment
a. Madison thinks that the private property system can lead to unequal possession of
resources and jealousy, which in a democracy may lead to confiscatory taxation that
may kill the incentive that leads to the productive wealth justifying the system in the
first instance.
b. The original statement infers actual parcels of land and items of personal property. In
other words, it refers to things that are owned. The second statement refers to the
rights to ownership and the right to exclude others from one’s resources and
possessions.
Business Discussion #1
1. What do you say to this person in light of what you have read in this chapter?
Essentially, one could say that socialism will not be as productive as a private property
system. With little to no incentive to own property, progress is stifled.
2. What strategy might you suggest regarding getting more private land into the hands of the
poor in that country?
Taxation, purchase, and redistribution to the poor might be effective. Remember

homesteading was a way of getting the land into the hands of the poor in the United States.
Business Discussion #2
1. What does he mean by this statement? Discuss.
Richard Epstein means that the use limitations of the property fence are based on
reasonableness—meaning a thoughtful, measured, and public consensus about resource use.
2. Explain what it means to say that property is the central concept in our legal system.
It means that almost all of the U.S. laws can be expressed in terms of legal fences. Contract
law, tort law, most criminal laws, constitutional rights, and many statutory regulations of
uses can be explained through the concept of property boundaries.
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Chapter 07 - The Property System

Solution Manual for Legal and Regulatory

Download full test bank at:

• Bernhardt, Roger, Real Property in a Nutshell, 3d ed. West (1993).

• Epstein, Richard A., Takings. Harvard (1985).

I. Introduction to the Property-Based Legal System (LO 7-1)

II. Rationale for the Property System

A. The Problem of Limited Resources

Additional Matters for Discussion:

B. Property and Prosperity (LO 7-2)

Additional Matters for Discussion:

III. Defining Property in the Legal System

A. Two Basic Divisions of Property

• The difference between real and personal property.

B. Property Boundaries in the Physical World

IV. Interests in Property with Respect to Others and Time

V. Specialty Applications of Property

VI. Acquiring Resources in a Property System

A. Acquiring Resources through Exchange

B. Acquiring Resources through Possession

Additional Matters for Discussion:

C. Acquiring Resources through Confusion

• The importance of boundaries to the concept of property.

D. Acquiring Resources through Accession

E. Acquiring Resources through Gift

F. Title and Property Registration

VII. Property and Security Interests (LO 7-4)

A. Security Interests in Land

Foreclosure, Deficiency, and Redemption

• Perfection give a creditor a secured interest in the collateral.

C. Priority Problems and Examples

VIII. Limitations on Property and the Common Good (LO 7-5)

A. Property, the Use of Resources, and the Equal Right of Others

B. Nuisance and Zoning

C. Property Limitations and the Common Good

Duration Limitations on Property

E. Property: A Conclusion and Comment

Answers to Review Questions and Problems

The Property System

1. The Problem of Limited Resources

2. Property and Prosperity

a. Property provides greater incentive to develop resources.

Defining Property in the Legal System

3. Two Basic Divisions of Property

Property Boundaries in the Physical World

Specialty Applications of Property

Acquiring Resources in a Property System

8. Acquiring Resources through Exchange

a. The law of contract is essential to the transfer of property between parties.

9. Acquiring Resources through Possession

10. Acquiring Resources through Confusion

11. Acquiring Resources through Accession

12. Acquiring Resources through Gift

13. Title and Property Registration

Property and Security Interests

14. Security Interests in Land

15. Secured Transactions

b. Perfection of a security interest may be accomplished by filing a financing statement

16. Priority Problems

Limitations on Property and the Common Good

18. Nuisance and Zoning

a. A public nuisance causes inconvenience or damage to the public. A private nuisance

19. Property Limitations and the Common Good

21. Property: A Conclusion and Comment