Agency, Bankruptcy, and Legal Liability Flashcards Preview

Regulation CPA > Agency, Bankruptcy, and Legal Liability > Flashcards

Flashcards in Agency, Bankruptcy, and Legal Liability Deck (65):


Legal Relationship in which one person or entity appoints another or entity to act on its behalf.


Agency Contract

1) Generally not required in writing, unless it is to buy or self land or impossible to perform in one year.
2) Agent need not have capacity-minors can be agents
3) Consideration not required


Power of Attorney

1) A written authorization of agency
2) Agent is referred to as an attorney in fact. But agent need not be a lawyer.
3) Only the principal is required to sign the power of attorney.


Duties of Agent to Principal

1) Duty of Loyalty-Act solely in Principal's interest
2) Duty of Obedience-Obey reasonable instructions
3) Duty of Reasonable Care-Liable if negligent
4) Duty to Account-has to account for all property and money received.
5) Subagent-has duty to both agent and principal.


Duties of Principal to Agent

1) Principal has an implied duty to give the agent reasonable compensation.
2) Principal has an implied duty to reimburse the agent for all expenses incurred.
3) Agent Remedies includes the agent can bring an action against the principal for any damages caused. Agent also has a duty to mitigate damages.


Power to Terminate Relationship

Generally terminable at Will

Exception to this is the principal cannot terminate an agency coupled with an interest. Only the agent can terminate an agency coupled with an interest.


Actual Authority

The authority the agent reasonably believes he possesses because of the principal's communications to the agent.

Includes all powers that the principal expressly grants within the four corners of the agency agreement.

Includes any other authority that the agent could reasonably believe is implied along with the express grant. Includes the authority to do things necessary to carry out the agency.


Termination of Actual Authority

1) Anything that violates term of agreement between parties.
2) Agent is used for limited purpose and purpose is fufilled.
3) Agency is for a stated period which has elapsed.
4) Death of principal or agent
5) Incapacity of the principal
6) Discharge in bankruptcy
7) Failure to acquire license.
8) Destruction of subject matter
9) Subsequent Illegality


Apparent Authority

A situation when an agent may not actual authority, but will have the power to bind the principal, either because the principal's conduct has caused third parties to reasonably believe the agent had authority

1) Requires a holding out by the principal or negligent inaction by the principal
2) Apparent authority is based on the 3rd party belief that the agent has the power to bind the principal


Termination of Apparent Authority

To terminate an agent's apparent authority, there must be some act that prevents the third party in question from reasonably believing that the agent has authority.

Also the following:

1) Death of principal
2) Incapatity of a principal
3) Principal receives a discharge in bankruptcy



Allows a principal to choose to become bound by a previously unauthorized act of his agent.
1) Agent must have indicated that he or she was acting on behalf of the principal
2) All material facts must be disclosed to the principal
3) Principal must ratify the entire transaction.

May ratify expressly or impliedly

Only a disclosed principal may ratify. Only the purported principal may ratify.


Contractual Liability

Principal will be bound by the agent's acts if the agent acted with actual authority or apparent authority, or if the principal ratified the transaction.


Agent's Liability

1) If an agent discloses the existence and identify of a principal the third party cannot hold an authorized agent liable on the contract.
2) If an agent implies authority when in fact he does not the third party can hold the agent liable for any damages caused based on breach of this implied warranty.


Partially Dislosed and Undisclosed Principal

Principal's identity not disclosed to the third party or neither the existence nor the identity of the principal is disclosed to the third party the agent is liable.

Third party must elect whom to hold liable in breach.
No apparent authority with an undisclosed principal
No effect on actual authority


Third Party's Liability

Generally only principal can Hold Third Party Liable.

1) Principal's identity was fraudulently conceled.
2) Performance to the principal would increase the burden on the third party.


Tort Liability

1) Principal is not liable for the torts committed by his agent-only the agent is liable
2) An employer can be liable for an employee's torts committed with the scope of employment.
3) Injured person may sue both the employer under respondent superior and the agent.


Scope of Employment

Not liable to an injured party merely because an employee caused the injury- the injury must also have occrued with the scope of the employment.


Employer Liability for Independent Contractors

An employer can be liable for the torts of an independent contrator if the employer authorized the tortious act or if the worked involved an ultra hazardous activity.


Six Types of Bankruptcy Cases

1) Chapter 7 Liquidation
2) Chapter 9 Muncipal Debt Adjustment
3) Chapter 11 Reorganization
4) Chapter 12 Family Farmers with Regular Income
5) Chapter 13 Adjustments of Debts of Individuals with Regular Income
6) Chapter 15 Ancilliary and other Cross Border Cases


Chapter 7 Liquidation

1) Trustee is appointed and collects the debtor's assets, liquidates them, and uses the proceeds to pay off debts.
2) If the debtor is an individual, debts are discharged with certain exceptions.
3) If debtor is an artificial entity, entity is dissolved and debts are wiped out.


Chapter 13 Adjustments of Debts of Individuals with Regular Income

Debtor repays all or a portion of his debts over a three year period to a maximum of five years.


Chapter 11 Reorgranization

1) Trustee usually is not appointed.
2) Debtor remains in possesion of his or her assets and a plan of reorg is adopted.
3) Creditors are paid to the extent possible and the business continues.


Chapter 15 Ancilliary and Cross Boarder

Adopted to promote a uniform and coordinated legal regime for cross-boarder insolvency cases.


Means or Abuse Tests for Chapter 7 Cases

1) Average of 6 months Preceding Income
a) If equal to or less than state median income-Chapter 7 permitted
b) If exceeds state median income-means test is applied.


Means Test Formula

Current Monthly Income Multiplied by 60-SS not included.
1) If less than $7,025-Chapter 7 permitted.
2) If more $11,725 or more-Presemption of abuse.
3) If less than 11,725 but more than 7,025-abuse only if amount equals 25% of nonpriority claims.


Deductions allowed from Monthly Income

For the means test the following items are allowed to be deduct:
1) Living expenses in Amounts set by the IRS.
2) Health and Disability Insurance and Health Savings Accounts.
3) Care of Elderly, Disabled and Chronically Ill
4) Expenses to keep Debtor safe from Family Violence
5) Expenses to administer Chapter 13 Plan
6) Expenses for Dependents to Attend Elementary or High School-Up to $1,775.
7) 1/60th of Payments Due Secured Creditors..
8) 1/60th of Priority Claims Payments.


Rebutting Presumption of Abuse

1) Rebuttal by showing special circumstance
2) Additional Expense Must Place Debtor Below Threshold.
3) No abuse presumption for veterans.


General Abuse Test

1) Requires bad faith or totality of circumstances indicates abuse
2) Raised by the Court, Trustee, or Bankruptcy Adminstrator.


Qualifications of a Debtor and Bankruptcy

Railroads, savings institutions, insurance companies, banks, and small business investment companies may not file for Chapter 7.


Features of Chapter 7 and 11

1) Automatic Stay-Stops almost all collection efforts.
2) May be Voluntary or Involuntary- Does not need to be insolvent, just needs to pass income test.
3) Spouse may file


Duties of Debtor

1) A list of Creditors
2) Schedule of Asset and Liabilities
3) Schedule of Current Income and Expenditures
4) Statement of Financial Affairs
5) Copies of Pay Stubs received within 60 days of filing
6) Itemized stmt of monthly income
7) A disclosure of any reasonably anticpated increase income or expenditures.
8) Copies of PY tax returns


Involuntary Cases

1) Grounds-Generally not paying debts when due
2) Farmers and charities are ineligible
3) If owed at least 14,425
a) Fewer than 12 creditors- 1 or more owed $14,425
b) 12 or more creditors-3 owed $14,425
4) Involuntary petition does not constitute an order for relief.
5) Dissmissal of Petition- If filing is filed incorrectly debtor can be awarded compensatory damages.
6) Section 341 Meeting-Meeting of creditors 20-40 days after order of relief to all creditors.


Property of Bankruptcy

Property Included:

1) Debtor's estate
2) Estate also includes income generated from estate property.
3) It also includes property the debtor receives from divorce, inheritance or insruance
4) Leases of property may be assumed and retained.


1) Post Petition Earnings, Spendthrift trusts, Educational IRAs, and state tuition programs.
2) Exempt Property- Things necessary to live


Trustee's Powers as a Lean Creditor

Trustee is a Hypothical Lien Creditor as of Filing, means trustee has priority over all creditors. PMSI in noninventory may have priority.


Power over Fraudulent Transfer

Can set aside fraudulent transfers made within 2 years of filing date. Any transfer made with intent to hinder, delay or defraud creditors.


Trustee Can Disaffirm Preferences-Preferential Payment

1) Transfer made to or for the benefit of a creditor
2) On account of an antecedent of the debtor
3) Made within 90 days prior to the filing of petition.
4) Made while the debtor was insolvent.
5) Results in creditor receiving more than the creditor would have received.

Purpose is to prevent one creditor being preferred over others.


Transfers that cannot be set aside by Trustee

1) Transfers in the Ordinary Course of Business
2) PMSI perfected within 30 days
3) Consumer Payments under $600
4) Domestic Support Payments


Features of a Chapter 7 Liquidation

1) Goal of Federal bankruptcy law is to give an honest debtor a "fresh start" financially by discharging most debts to the owner.
2) Bankruptcy trustee is appointed, Trustee collects all of the debtor's nonexempt property, liquidates it and pays off all debtor's creditors.


Will prevent a Discharge

1) Debtor not an individual
2) Fraudulent Transfers or Concealment of Property
3) Unjustifably Failed to Keep Books and Records
4) Prior Discharge Within 8 Years
5) Commission of a Bankruptcy Crime
6) Failure to Explain Loss of Assets
7) Refusul to Obey Orders or to Answer Questions
8) Improper conduct in an Insider's Case
9) Waiver
10) Failure to complete Financial Management Course


Exceptions to Discharge

1) Tax Due Within 3 years of filing
2) Debts Incurred by Fraud
3) Luxary Goods
4) Open-Ended Credit to Consumers
5) Debts Undisclosed in a Bankruptcy Petition
6) Embezzlement, Larceny, and Fidicuiary Fraud
7) Settlements from Marital Separation
8) Willful and Malicious Injury
9) Operating a Vehicle While Intoxicated
10) Fines and Penalties
11) Educational Loans
12) Denial of Discharge in a Prior Bankruptcy
13) Debts Incurred to Pay Taxes
14) Debts Incurred to Pay Securities Laws.
15) Condo, Co-op, and Homeowners' Association Fees
16) Restitution to Federal Crimes
17) Prisoner's Court Fees
18) Fines for Violation of Electorial Laws
19) Debt Owned to Pension or Profit Sharing


Reaffirmation of debt

1) Reaffirmation was made before granting of discharge
2) Contains a clear and conspicious provision that the debtor has a right to rescind the agreement within 60 days of filing.
3) Upon discharge, debtors attorney or the court informs reaffirmation is not necessary.


Revocation of Discharge

1) Fraudulent Activity
2) Failed to obey court or answer material questiosn
3) No satisfactory answer for reason not making documents available to connection with an audit.


Order of Distribution in Bankruptcy

Order of Priority
A) Secured Claimants
B) Priority claimaints
1) Support Obligations to Spouse and Children
2) Adminstrative Expenses
3) Involuntary Case Gap Claims
4) Wage Claims up to $11,725
5) Employee Benefit Plans up to $11,725
6) Grain Farmers and Fisherman up to $5,775
7) Consumer Deposits up to $2,600
8) Tax Claims
9) Personal Injury Claims Arising from Intoxicaed Driving
10) Non Priority Claims
C) General Creditors who file Claims On Time


Features of Reorganization of Chapter 11

A) Creation of Creditor's Committee- Committee of unsecured creditors is appointed, usually consisting of willing person holding the seven largest creditors.
B) Equity Security's Holders' Committee
C) Power of Committees
D) Debtor remains in possession


Chapter 11 Reorganization Plan

Debtor has exclusive right to file a plan during the first 120 days after the order for relief is effective.

Plan should include:

1) Classify all claims
2) Describe treatment according to impairment class
3) Treat each claimaint within a particular class identically
4) Establish ways to implement a plan


Acceptance of Plan

1) Any creditor or security claimiant must be given opportunity to accept plan.
2) Impaired claims- accepted by creditors holding at least 2/3 of amounts and more than one-half in number of allowed claims.
3) Class of impaired interets is deemed to have having at least 2/3 in amount of allowed claims.


Confirmation of Plan by Court

Will confirm plan if::

1) Accepted by all impaired classes
2) Provides payment for all second priority and all priority creditors in cash.
3) Provides payment in full in cash of third through seventh priority claims unless the class has accepted the plan.
4) Regular cash installements of eighth priority claims
5) Provides for payment in full of all domestic support obligations that first became payable
6) Debtor is an individual and unsecured creditor objects to claim, provides the value of property to be distributed, or at least equals the debtor's projected disposable income for the greater of five years
7) Plan is feasible.

Cram Down

1) At least one impaired class has accepted
2) Court finds plan is not discriminartory.


Securities Act of 1933

1) To ensure investors have sufficient information on which to make an investment decision.
2) Require issuers to register new issues with SEC and provide propesctuses
3) Does no Guaratee accuracy of information, evaluate the offering's financial merits, or give assurances against loss.


Required to Register

Issuers, underwriters, and dealer


Registration Stmt.

1) Prospectus
2) Audited B/S and I/S not more than 90 days before offering by a public firm register with PCAOB
3) Other Facts
a) Members of company who own 10% or more of shares
b) Amount of stock and debt the issuer has outstanding.
c) Prinicpal purposes for which the offering proceeds will be used
d) Anything effective value of securities.


Shelf Registrations

Registration of Future Issuances


Registration Laws

1) Stmt becomes effective on the twenty day after its filing.
2) Blue Sky Laws- State Laws Limiting stock slaes, which are premptied federal law.


Timetable of Sales Activity

1) No sales allowed 30 days before registration
2) 20 day waiting period between registration and filing date.
3) Once registration is effective (20 days after filing or when SEC authorizes), securities may be sold. Prospectus must be obtained prior to or when acquiring securities.


Exemptions from Registration

1) Securities issued by Banks
2) Issued by non-profits
3) Issued by governments
4) Issued by regulated common carriers
5) Shorterm commercial paper
6) Insurance polcieis
7) Securities under chapter 11 bankruptcy
8) Securities issued by a church plan


Liability Under Section 11, 12, 17 under the 1933 Securities Act.

Section 11- Imposes civil liability for misstatements, whether or not intentional, in registration stmts. Damages are the only remedy, rescission is not available. Need only show acquired the stock, suffered a loss, contained a material misstatement or fact. Anyone who signs a registration stmt is held liabile.

Section 12: Imposes civil liability if a required registration was not made, a prospectus was not given to all investors, may sue for damages need to prove scienter or reliance.

Section 17: Imposes criminal penalties against anyone who uses any type of fraud in connection with the issuance. Enforced by SEC and prosecuted by the Justice Department.


Securities Act of 1934

Sets regulations for initial issuance of securities or securities after issuance. Can seek revocation of a company's securities or suspension.


Required to Register under act of 1934

1) Companies whose shares are traded on a national exchange.
2) At least 500 shareholders and more than $10 million in assets.
3) Natioanl stock exchanges, brokers and dealers must also register.


Requirements of Registration Stmt.

1) Must include financial structure, nature of business, 10% shareholders
2) Must be adutied with public firm registered with PCAOB.


Exemptions from 1934 Act

1) Investment Companies
2) Savings and Loans
3) Charitable Organizations


Periodic Reports

8K-Major changes in company.


Reports to be made to SEC

1) 5% or More External Owners
2) Tender Offers Must be Reported to Acquire offer 5% or more of stock
3) Directors or officers owning more than 10% of stock
4) Proxy Soliciations and Statements


Rule 10b-5 of 1934 Act

Relates to any fraudelent misstatements made with registration act in accordance with 1934 act.

Must prove:

1) Bought or Sold Securities
2) Suffered a Loss
3) Material Misrepresentation or Material Omission of Fact
4) Scienter- Intended to pruposesly deceive.
5) Reliance
6) Interstate Commerce


Insider Trading Under Rule 10b-5

1) Any material non-public information about the security or issuer.
2) Members of company expected to uphold duty of loyalty.
3) Can bring action to seek actual damages (not puntivie) or seeking rescission of transaction. SEC can impose fines and seek penalties.


Breach of Contract CPA Liability

If A CPA does not honor the terms of his engagement, the client can hold the CPA liable for breach. Contract liability generally requires privity, so only a party to the contract can sue under a contract theory.


1) Client or third party beneficiary is entitled to recover compensatory damages.
2) If breach is material, CPA is entitled to payment for his or her services.
3) All defenses that apply to contracts apply to a contract made by a CPA.


Three types of torts a CPA can perform

1) Negligence
2) Constructive Fraud(Gross Negligence)
3) Fraud