REG - Notes Chapter 7

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Agency
Agency legal relationship in which one person or entity (the principal) appoints another person or entity (the
agent) to act on his behalf
To create an agency the principal must have capacity (not a minor or incompetent) and consent
Writing not required unless impossible to perform in 1 year, or purchase or sale of land
Agent need not have capacity minor can be an agent
onsideration not required
!ower of attorney written authori"ation of agency by principal
#uties of agent to principal fiduciary duty
#uty of loyalty act solely in principals interest
$ no %ic%bac%s&self dealings, avoid conflicts of interest, do not disclose confidential information
#uty of obedience obey reasonable instructions' #o not e(ceed your authority
#uty of reasonable care liable id negligent to both principal and third party
)f agent breaches the duties, the principal can recover damages from the agents
ontract damages principal collects the money&consideration that was paid to agent
#uties of principal to agent
ompensation is an implied duty
*eimbursement&indemnification an implied duty to reimburse the agent for all e(penses incurred in carrying
out the agency
+ither party generally has the power to terminate the relationship at any time' ,owever, the parties don-t
necessarily have the right to terminate at any time
+(ception. Agency coupled with an interest (agent is a creditor of the principle)
$ !rincipal cannot terminate an agency, only the agent can terminate
An agency relationship arises when the principal appoints an agent to act to his behalf' /y this appointment, the
agent can bind the principal in contract'
Agency power can arise through
Actual authority
Apparent authority or estoppel, or
*atification
Type 1: Actual authority agent reasonably believes he possesses because of the principals communications to
the agent' Actual authority can be either e(press or implied.
Express actual authority oral or written instructions
Implied actual authority the authority to do things reasonably necessary (in the ordinary course of
business) to carry out the agency
$ )mplied authority to hire&fire employees, purchase inventory and pay business debts
$ 0o implied authority to sell business fi(tures or borrow money on the principals behalf
Termination of actual authority is automatic by operation of law due to the following events
#eath
)ncapacity of the principal
#ischarge in ban%ruptcy of the principal
1ailure to acquire a necessary license
#estruction of the sub2ect matter of the agency
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3ubsequent illegality4
0ew employees are sub agents, who owe a fiduciary duty to both principal and primary agent
Type 2: Apparent authority an agent might not have actual authority, but still has the power (not the right) to
bind the principal
Title&position carries apparent authority
1ailure to give notice to 5
rd
parties after agent is terminated
A principal-s secret limiting instructions, while effect to limit the agents actual authority, are not effective to
limit the agents apparent authority' (6wner tells manager not to buy inventory over 789:, supplier offers
inventory for 75:: and manager buys it' The owner must pay the supplier)
Apparent authority is based on the third party-s reasonable belief' that the agent has the power to bind the
principal' While actual authority arises from the agent-s reasonable belief that he has the power to bind the
principal
To terminate apparent authority, principal must give notice to third parties who might have %nowledge of the
agency.
Actual notice must be given to terminate apparent authority to old customers
onstructive notice must be given to terminate apparent authority to new customers
There are situations where apparent authority is terminated by operation of law, and no notice is required.
#eath of principal or agent
)ncapacity of the principal, or
!rincipal receives a discharge in ban%ruptcy
Type 3: Ratification allows principal to choose to become bound by a previously unauthori"ed act of his
agent
All material facts must be disclosed to the principal
The principal must ratify the entire transaction there can be no partial ratification
;enerally any act may be ratified unless
!erformance would be illegal
Third party withdraws prior to ratification
0ot fair to the third party
Agents liability to 5
rd
party for contract duties
#isclosed principal agent is not liable if authori"ed
!artially disclosed and undisclosed principal agent is liable (principals identity is not disclosed to 5
rd
party)
$ 5
rd
party can hold either principal or agent liable, but not both
$ There is no apparent authority with an undisclosed principal
$ There is no effect on actual authority
$ !rincipal is bound if the agent had authority, regardless of the principals disclosure
$ )f the agent did not have authority, the principal is bound only if he ratifies
Tort liability wrongful act' an be either intentional or negligent
As a general rule a principal is not liable for the torts committed by his agent
+(ception. Respondeat superior doctrine an employer can be liable for an employees torts committed within
the scope of employment
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$ The in2ured party may sue both the employer and employee under this doctrine
An employer is liable for only for torts of an employee and is usually not responsible for torts of independent
contractors, determine by.
*ight to control control the manner is which the person performs' An employer has the right to control
employees, but has little control over the methods used by independent contractors
6ther factors. provides his own tools and facilities, length of employment, basis of compensation, degree of
supervision
+(ception. an employer can be liable for torts when the independent contractor-s wor% involves ultra
ha"ardous activities (blasting)
The employer is usually liable only for an employees negligence and is not liable for intentional torts
Bankruptcy
hapter < liquidation available to individuals, !&3, and corps
A trustee is appointed and collects the debtors assets, liquidates them, and uses the proceeds to pay off
creditors to the e(tent possible
#ebtors debts are discharged
hapter 11 reorgani"ation available to individuals, !&3, and corps
Trustee not required, so the debtor remains in possession of the estates assets
0o liquidation
#ebtor files a plan that must be accepted by creditors holding between 1&8 8&5 of allowed claims
$ must be accepted by equity security holders with at least 8&5 of allowable claims
$ the court will confirm the plan
hapter 15 Ad2ustment of debts of individual with regular income individuals only
#ebtor repays all or a portion of his debts over a 5$9 year period
Trustee oversees the handling of a chapter 15 proceeding
hapter < is preferred to chapter 15
A chapter < case by an individual consumer debtor may be dismissed if there is abuse&means' =eans&abuse test.
1' #etermine avg monthly salary over the previous > months prior to filing
$ if equal or less than state median income hapter < permitted
$ if debtors income e(ceeds state median income means test applied to determine whether debtor has
sufficient income to repay debts using chapter 15
8' urrent monthly income ? >: (social security payments not included and certain e(penses deductible)
$ if less than 7>,::: chapter < permitted
$ if 71:,::: or more presumption of abuse, either chapter 15 or dismissed
$ if between 7>,:::$71:,::: a presumption of abuse will arise only if this amount equals at least 89@
of the debtors unsecured claims not entitled to priority
*ailroads, insurance companies, ban%s, saving institutions, and small business investment companies may not
file for chapter <' 0o *)/33
/ro%ers, companies, ban%s, saving institutions, and small business investment companies may not file for
chapter 11' 0o /)/33
#ebt relief agencies agencies paid to assist consumer debtors in filing ban%ruptcy petitions
=ay not advise a person to incur more debt in anticipation of a ban%ruptcy filing
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When a ban%ruptcy petition is either voluntary or involuntarily filed, an automatic stay (stops collection
efforts) becomes effective against most creditors
After a petition is filed, if the debtor is an individual, a certificate from the non$profit budget and credit
counseling agency that provided the debtor counseling service, along with any plan of repayment developed by
the agency
hapter < and 11 may file voluntary or involuntary (h 15 is voluntary only)
Aoluntary cases
#ebtor files for order of relief (for debts of any amount not capable of paying when due)
#ebtor need not be insolvent to file, but must pass means&abuse test
3pouses may file 2ointly to avoid duplicate fees
)nvoluntary cases
Bnsecured creditors may petition a debtor into ban%ruptcy proceedings when the debtor is defaulting (not
paying debts when due)
6nly creditors who are owed, individually or in aggregate, at least 718,5:: in unsecured, undisputed debt
may petition debtor for ban%ruptcy
$ )f debtor has fewer than 18 creditors, at least 1 creditor must be owed 718,5:: to file a petition
$ )f debtor has more than 18 creditors, at least 5 creditors owed 718,5:: in aggregate may petition
Section 341 meeting within 8:$C: days after the order for relief, a meeting of the creditors is held
!roperty of the ban%ruptcy estate
The estate also includes rental, royalty, interest and dividend income
)t also includes property the debtor receives from divorce, inhereitance or insurance within 1D: days after
filing the petition
!roperty e(cluded from estate
!ost petition earnings
;enerally things necessary to live (homestead, vehicle, household goods, unmatured life insurance
contracts)
These e(emptions do not apply if the creditor is a !=3), mortgage on the property, or ta( liens
1raudulent transfers any transfer with intent to hinder, delay, or defraud creditors' 8 year loo%ing period
$ concealing assets, selling below 1=A, gifting items, sell it but %eep equitable interest
referential transfer rules prevents one creditor from receiving an unfairly large repayment relative to other
creditors' When the payment is Eset asideF by the trustee, the payment is ta%en bac% from the creditor who
received it and becomes part of the ban%ruptcy estate' A preferential payment is.
A transfer made to or for the benefit of the creditor
6n account of an antecedent (e(isting) debt of the debtor
=ade within G: days
=ade while the debtor was insolvent, and
*esults in the creditor receiving more than the creditor would have received under the ban%ruptcy code
To have a claim against an estate, unsecured creditors must file a proof of claim
There are certain things that will prevent a party from getting a discharge in ban%ruptcy. #*AW)0;
D ischarge within D years
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R ecords, failure to %eep
A ssets, failure to e(plain whereabouts
W illfully concealing assets
0ot an individual
N ot obeying court orders
G uilty of a ban%ruptcy crime
Bnder chapter < and 11, not all debts are discharged' WA1T+#
W illful and malicious in2ury liabilities
A limony
F raud
T a(es
E ducational loans
D ebts undisclosed in ban%ruptcy petition
#istribute the assets of debtors estate in the following order
1' 3ecured claims
2. !riority claims (G categories 3A; W+; T))
5' ;eneral creditors
!ayments are made in full to secured claimants to the e(tent of the value of the collateral securing claims' )f
there is not sufficient money to pay all creditors at a particular level, the creditors share pro rata
The order of payment for the G priority creditors. 3A; W+; T)
S upport obligations to spouse and children
A dministrative e(penses of ban%ruptcy proceeding
G ap creditors (claims that accrue between in ordinary course of business between order of relief and invol')
W ages up to 71:,::: if earned within 1D: days prior to filing
G rain farmers and fisherman up to 7C,G89
C onsumer deposits for goods paid but not delivered
T a(es
I n2uries caused by drun% driving
There are 5 restrictions on priority payments for unpaid wages and unpaid employee benefit plans.
6nly unpaid wages and benefit plans that arose within 1D: days prior to filing are entitled to priority' Those
that arose after filing are general creditors and receive no priority
)t is only unpaid wages and unpaid employee benefit plans up to 71:,::: that receive priority
Bnpaid employee benefit plans are reduced by any amount paid to the employee for a priority wage claim
Securities Regulation
Securities Act of 1!33 regulates original issues of securities ()!6-s)
Securities Exchange Act of 1!34 regulates purchases and sales after initial issuance
Security any investment contract
Securities act of 1!33 purpose is to provide investors with sufficient investment information to ma%e an
informed investment decision' The 3+ does not guarantee the accuracy of this information or evaluate the
financial merits
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The 1G55 act applies only to issuers, underwriters and dealers
The registration statement contains two parts
!art ). the prospectus a written offer to sell securities
!art )). information about the securities being issued
$ Audited /&3 and )&3
$ ontact info on directors and officers, amount of security being issued, principal purposes of proceeds
from issuance, pending litigation
3helf registration registration statement for future issuances
/lue s%y laws state laws governing stoc% sales
Timetable
/efore registration no sales activity allowed
/etween registration and filing date (8: day waiting period) some sales allowed
After registration is effective securities may be sold
Two types of e(emptions from the 1G55 act.
3ecurities e(emptions. securities issued by
$ /an%s and savings H loans (#-s)
$ 0ot$for$profit, charitable organi"ations
$ The government (municipal bonds)
$ *egulated common carriers (railroads)
$ 3hort term commercial paper (G months or less)
$ )nsurance policies
Transaction e(emptions
$ asual sales
$ +(changes with e(isting stoc%holders&corp reorgani"ations (stoc% dividends, stoc% splits)
$ )ntrastate sales (offered and sold only to persons who are residents of the issuers state
$ *egulation A partial e(emption, simplified registration for firms with less that 79 mil in sales over 1
yr' ;enerally unaudited 1&3 o%
$ Regulation " private offering e(emption' 0o advertising allowed, purchasers must hold for 8 yrs I
Rule #$4 $ 71 million limit' 0o limitation on the type of purchaser
Rule #$# $ 79 mil limit' 0o limit on accredited investors and 59 or less unaccredited investors
)f any unaccredited investors, all investors must be given at least annual report with 1&3
Rule #$% no 7 limit' 0o limit on accredited investors and 59 or less sophisticated investors
)f any unaccredited investors, all investors must be given at least annual report with 1&3
Jiability under the 1G55 Act
3ection 11 imposes civil liability for misstatements in registration statements, regardless of intentionality
3ection 18 registration not made, prospectus not given to all investors, false statements were made
3ection 1< fraud
3ection 18 and 1< are anti$fraud provisions which also apply to unregistered e(empt securities (not for profits)
3ection 11 ma%es anyone who signed the registration statement liable for all damages caused by any
misstatement of material fact in the registration statement' A person wishing to sue need only show.
The plaintiff acquired the stoc% (need not be the initial purchaser
!laintiff suffered a loss&damages
The registration statement contained a material misrepresentation or material omission of fact
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!laintiff need not prove an intent to deceive (scienter), negligence or reliance
6fficers, directors, corporate lawyers, underwriters and auditors can be liable
!laintiff need not be in privity with the defendant under federal law
#efendants, other than issuers, are not liable if they can prove they used due dillegence
1or auditors, use ;AA!, ;AA3 defense by showing wor%papers
Another defense is to show that misstatement was not material or the plaintiff %new of the omission at the time
they purchased the securities
The securities act of 1!34 regulates subsequent trading, reporting requirements
Anti$fraud provisions apply to all purchasers and sellers
6ne 8 types of companies must register their securities
ompanies whose shares are traded on a national e(change
ompanies that have at least 9:: shareholders in any outstanding class and more than 71: mil in assets
*eporting requirements
1:K filed annually within G: days of the end of the fiscal year, certified&audited auditors
1:L filed within C9 days of the end of the first three quarters, reviewed by auditors
DK filed within 19 days after a ma2or change in the company
Any person acquiring 9@ must file a report with the 3+
$ The report must include bac%ground information about the purchaser, the source of funds, and the
purpose in buying
)nsiders (officers, directors, 1:@ stoc%holders, accountants, attorneys) must file a report with the 3+
disclosing their holdings and ma%e monthly updates
Tender offer an offer to all shareholders to purchase stoc% for a specified price for a specified period of
time
roxy solicitation&statements a written request for permission to vote a shareholder-s share at a
shareholder meeting
Antifraud provisions *ule 1:/$9 prohibits fraud in connection with the purchase or sale of any security
To recover damages under 1:/$9 plaintiff must prove.
The plaintiff acquired the stoc% (need not be the initial purchaser
!laintiff suffered a loss&damages
The registration statement contained a material misrepresentation or material omission of fact
3cienter (intent to deceive or rec%less disregard for the truth)
*eliance
The 3+ investigates but does not prosecute' They send evidence to B'3' attorneys office
CPA Legal Liability
!A legal liability can arise in any of the following ways. breach of conduct, commission of a tort (negligence,
fraud, or constructive fraud), violation of a statute
)f !A breaches the contract, the client or third party beneficiary is entitled to recover compensatory damages
(money to compensate for the contract not having been performed)
$ defenses. client failed to cooperate, hindered our performance
1or negligence, plaintiff must prove.
#efendant owed a duty
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#efendant breached that duty
/reach caused plaintiff-s in2ury, and
#amages
+(amples are failure to warn the client about %nown internal control wea%nesses or failure to have critical
review at every level of supervision
To whom is the duty owedM
'a(ority rule any person or limited foreseeable class of persons whom the !A %nows will be relying on the
!A-s wor%
)ltramares decision limits !A liability to persons in privity of contract with the !A and intended third
party beneficiaries
;ross negligence fraud and constructive fraud, bad faith
3ame elements as actual fraud, e(cept instead of intentionally deceiving, the defendant acts rec%lessly
!A can be held liable to anyone who proves the above elements
!rivity is not a defense to fraud
$ best defense to fraud. lac% of scienter and&or good faith
!A is liable to general public for fraud and negligence
)f the auditor detects information of illegal acts, he should inform the clients audit committee of the act
The clients board is to report to the 3+ the receipt of any such notice within 1 day after receiving it and must
furnish the auditor with a copy of the notice'
)f the !A fails to receive a copy of the notice within 1 day, the !A is to furnish the 3+ with a copy of the
report within 1 day
Keep all wor%papers for at least < years
0o accountant$client privilege under federal law
!A can be forced to disclose client information, including wor%papers, if subpoenaed and relevant to a
federal court case
Wor% papers belong to the accountant and is prohibited from showing them to anyone without the clients
permission' +(cept.
3ubpoenaed
Aoluntary quality control review
#efend a lawsuit brought by a client
A)!A&state trail board
+(am tric%. if the !A sells his practice, still need clients permission to disclose the wor%$papers to new owner
Property Insurance
!ublic policy requires an insurable interest (must own it) in order to purchase insurance' 0ote that the
substantial economic interest need not e(ist when the policy is ta%en out' )t only must e(ist at the time of loss
A general creditor has no insurable interest
*ecoverable amount N O1ace value of policies P (coinsurance @ ? 1=A of property at time of loss)Q ? loss
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When there is a total loss, recovery amount&pay out is according to the policy not the coinsurance formula
3ubrogation is the right of the insurer, upon paying the loss, to recover the amount paid from third party who
is at fault (third party started a fire, insurance company paid the damages, then sues third party)
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