R8-M1 Bankruptcy Part 1

• 6 types of bankruptcy cases

o *Chapter 7: Liquidation
o Chapter 9: Municipal Debt Adjustment (municipality goes bankrupt, farmer)
o *Chapter 11: Reorganization
o Chapter 12: Family farmers with Regular Income
o *Chapter 13: Adjustment of Debts of Individuals with Regular Income
o Chapter 15: Ancillary and other Cross-Boarder Cases (Multi-national org around the
world goes bankrupt)
• When an individual you can do 7, 11, or 13
• Chapter 7: Liquidation: Trustee Appointed (IPC)
o There is no hope for the business to continue
o You can be an Individual, Sole Proprietorship, Partnership or Corporation, voluntary or
involuntary
o Trustee collects assets, liquidates, and sells them off
o No RIBS: Railroad, Insurance companies, Banks, Small business investment companies
and Savings institutions
• Chapter 13: Adjustment of Debts of Individuals with Regular Income
o Available to only the I: Individual (sometimes won’t allow you to go to Ch 7)
o Voluntary only
o Debts don’t go away, but you repay them over a period over 3-5 years
o Also have a trustee overseeing
• Chapter 11: Reorganization: No Liquidation, Trustee Not Required
o There is hope for the business, it is not dissolved/liquidated
o Trustee is not required (but court may appoint)
o Available for IPC, voluntary or involuntary
o Debtor remains in possession, works with creditors who have some say
o No BIBS: Brokers, Insurance companies, Banks, Small business investment companies
and Savings institutions
• Dismissal or Conversion of a Chapter 7 Case:
▪ Step 1: If the avg income (6 months) is lower than the state median then
Chapter 7. If more than state median go to step 2
▪ Step 2: Means Test
• (Average monthly income – allowed living expenses) X 60 = $
• If $ is less than $7,700 you are lucky to stay in Ch 7
• If $ is more than $12,850 (almost 13,000) then you go to Ch 13 and you
can’t go Ch 7. Can either do Ch 13 or case dismissed.
• If in between $7,700 – $12,850, if the $ is at least 25% of your
unsecured claims then go Ch 13
▪ General Abuse Test: asserted by the court, trustee, or bankruptcy administrator
but NOT A CREDITOR
• Common features of Chapter 7 (no hope) or Chapter 11 (hope):
 o Voluntary Cases (Ch 13 only and Ch 7 & 11): where the debtor themselves files in order
to get relief from debt, they are not forced
▪ You don’t have to be insolvent but the individual must pass income tests
▪ *Spouses may file jointly to avoid duplicating fee
▪ Automatic order for relief
▪ *You have a certain 45 days to file follow up paperwork
o Involuntary Cases (Ch 7 & Ch 11): the creditors want you bankrupt
▪ Debtor is “in default” debts are not being paid when due
▪ *Who can petition: you must owe $15,775 (on exam usually amt over $20,000)
• Debt must be unsecured and undisputed
• If it says “secured” they can’t push debtor into bankruptcy just like you
can’t when less than $15,775
▪ *If there is less than 12 creditors, you only have to owe one unsecured creditor
more than $15,775
▪ *If you owe more than 12 creditors, you have to owe 3 unsecured creditors
collectively more than $15,775
▪ Not an automatic order for relief
▪ Court gap period to check out the petition ~ 20 days
o Section 341 Meeting is a creditor meeting 20-40 days after the order of relief to decide
what bankruptcy chapter
▪ Property you own on the “time of filing” or any income you generate on the
property for the following 6 months after the petition is filed can be taken
• Also includes DII generated within 6 months (180 days): property from
Divorce, Inheritance, or Insurance
• Preferences: when debtor pays off antecedent (existing) debt, creditors will get paid with the
limited amount of money you have. Not up to you but the bankruptcy court/code.
o Insolvent at the time the loan is paid, not when the loan is made
o *Only a preference if the creditor got more than they would have gotten under
Bankruptcy Code
• Make a claim to the court to let them know about your existence when you know someone who
owes you money goes bankrupt

R8-M2 Bankruptcy Part 2

Features of Chapter 7: Liquidation (no hope, IPC, Voluntary or Involuntary, individuals must pass test)
• Bankruptcy is a privilege not a right
• Two ways a debtor will be discharged from receiving Chapter 7 Liquidation:
o Objections to Discharge: none of the debts will be discharged
▪ Commit fraud and/or bankruptcy crime
▪ Failed to keep books and records: can’t explain what happened
▪ Within the past 8 years have already been discharged
o Nondischargeable Debts: prevents discharge of specific debts
• Trustee will be appointed for Ch 7 & 13
o But certain debts of an individual will never go away (FAT WED)
▪ Fraud, Fines and Penalties
 ▪ Alimony or child support
▪ Taxes due within 3 years of filling
▪ Willful and Malicious Injury (you hurt someone and they sue you), however if
your accident was negligent then it can be discharged
• Driving While intoxicated
▪ Educational Loans (you would have to show “undue hardship” to get out of it)
▪ Debts Undisclosed in the Bankruptcy Petition: debtor gives court a list of all
their creditors, if you forget them then you still owe them
▪ Luxury goods
• Reaffirm Debts: if the debtor does not want a certain debt discharged before the granting of the
discharge, the court wants to make sure the debtor is not being threatened by that creditor.
Court will question you.
• Revocation of Discharge (Bad faith – dishonest): after the court discharged you of your debt
and then finds out you were dishonest they can come back and make you pay the debt back
• **Distribution of the Debtor’s Estate
o First, Secured Claimants (if not fully secured and you are owed more than the collateral,
then you go to the back of the line = claims of other general creditors)
o Second, Priority Claimants (*9 subcategories SAG WEG CTI)
1. Support: child support and alimony
2. Administrative Expenses: trustee fees, filing fees, attorney and accountant fees
from the bankruptcy
3. Gap Claims: any creditors who come in during the 20 days after the involuntary
petition with the court
4. Wage Claims up to $12,850, if you are owed more then you go to the back of
the line, earned within 180 days prior to filing
5. Employee Benefit Plan up to $12,850 and is reduced by the amt paid to the
Wage #4, earned within 180 days prior to filing (total has to be $12,850 or less)
6. Grain Farmers & Fishermen up to $6,325
7. Consumer Deposits up to $2,850 (put deposit on furniture & never got $ back)
8. Tax Claims
9. Injury claims arising from Intoxicated Driving (Intentional)
o Third, General Unsecured Creditors who filed their claims on time (nonpriority claims)
• If there is not sufficient money to pay all creditors at a particular level, the creditors share pro-
rata
• Payment is made according to the priority rules, any remaining debts are discharged unless they
are an exception to discharge (FAT WED)

Features of Chapter 11: Reorganization (hope, IPC, Voluntary or Involuntary, generally no trustee)
• Creditors Committee: try to get the willing creditors of the 7 largest unsecured claims against
the debtors and, if a corporation, the 7 largest holders of the equity securities (stockholders)
• Trustee is generally not appointed because the debtor usually remains in possession of the
estate’s assets
• Reorganization Plan to be saved:
o Debtor, unless a trustee exists, has 120 days to create a plan
 o In the plan, classify all claims (secured, SAG WEG CTI, Unsecured) and their treatment
for full payment
o Only the court can confirm the plan if it is accepted by the stockholders & creditors,
provide for payment in full for administrative expenses & gap claims, and is feasible
o Will discharge the debtor form all pre-confirmation debt except those that are not
dischargeable (FAT WED)

Features of Chapter 15: Multinational

• Petition is filed by a foreign representative telling the US that there is a foreign proceeding
• The US court will have a hearing to see if the foreign proceeding the main proceeding or is it not
the main proceeding
• The foreign representative is authorized to operate the debtors business and can later choose to
file a case under Chapter 7 or 11
• Can’t show US citizens any preference and is governed by a treaty and should cooperate

R8-M3 Federal Securities Regulation

• The Securities Act of 1933:

o Regulates original issuance of securities (IPO)
o Requires most issuers to register new issues with the SEC before they sell securities
o Registration Statement:
▪ Part I: Prospectus: written offer to sell securities, provided to potential
investors with summarized material information regarding the company to
make a decision
▪ Part II: Information that must be included about securities being issued
• Detailed information that was summarized in Prospectus
• Audited Balance Sheet & Profit & Loss Statement for past 5 yrs (certified
by a CPA firm)
• Who is the officers & directors who owns more than 10%
• The purpose of raising capital, what are you going to do with it?
o Shelf Registration: prepare one registration statement for all securities they will offer in
the future if the issuer will continue to file under the 1934 Act
o 30 days before Registration (haven’t even filed): no sales activity allowed, just negotiate
with an underwriter
o After you registered it is generally effective for 20 days after the filing, during this time
you can make oral offers, advertise, send a preliminary prospectus (red herring)
o After the 20 day waiting period, then you can start selling
▪ Well Known Seasoned Issuers (WKSIs) don’t follow the normal timetable and
they follow a “Free-Writing” Prospectus
o Not every sale of securities act is covered under the 1933 Act
▪ Securities that are exempt from the registration requirements process under
the 1933 Act (BRINGS):
• Banks
• Railroads
• Insurance Policies
 • *Not-for-Profit Organizations (charity)
• *Government (Bonds issued by municipalities for govt purposes)
• Short-term Commercial Paper with a maturity of 9 months or less
o Transactions that are exempt:
▪ Casual sale (Not an issuer, underwriter, or dealer)
▪ Stock dividends or stock splits
▪ Intrastate Sales: securities offered and sold only to persons who are residents
of the issuer’s state (Blue Sky Laws)
• Rule 147: Issuer is a state resident (sell and do most of your business in
that state), the entire stock and bonds must only be sold to residents of
that state, and you must do 80% of your business in that state, anyone
who buys the stock in your state can’t sell it to someone else in your
state for 6 months, no solicitation allowed
• Rule 147 A: still intrastate, but the issuer does not have to be a state
residents, and solicitation/advertisement is allowed (must include a
disclosure stating it can only be made to people who live in the state)
▪ Regulation D: private offering
• Limit general advertising
• Immediate resale to public is prohibited, have to wait 1 year
• Bad Actor Disqualification (fraud): a covered person who has been
convicted or subject to sanctions for fraud or violations
• Only have to notify SEC that you are selling within 15 days after the first
sale
• Rule 504: you can raise up to $5 Million limit and can sell to any investor
you want and to any number, no disclosure required (buyer beware –
they should know what to ask if they need more info)
• Rule 506: no limit on the money you can raise, but you have to know
who you are selling for
▪ Regulation “Crowdfunding:” File Form C
• Got wide spread internet solicitation of small amounts from lots of small
investors
• All transactions are done through one online intermediary
(broker/dealer), only advertisement allowed
• Simplified form of Registration Statement but you don’t need to have
audited F/S → Form C Offering Statement
• Can’t turn around and resell until after 1 year
▪ Regulation A: Simplified Filing
• If you are raising less than $20 M you only need a review of F/S
• If you are raising between $20 – 50 M you need audited F/S
• Can’t file this if you are already an SEC reporting company
o *Liability under the 1933 Act
▪ Section 11: Civil liability for Misstatement – money damages
• You buy a company’s securities that should have filed with SEC but
didn’t and you want to sue them. You have to prove LAM*
 o Loss was suffered
o Acquired stock
o Material Misrepresentation or omission of fact
• MID in the MAIDS
▪ Section 12: Fraud – money damages
▪ Section 17: Criminal Penalties for Fraud – go to jail
• The Securities Exchange Act of 1934:
o Regulates all purchases and sales after initial issuance, reporting provisions for certain
companies, and anti-fraud provisions that applies to everyone
o SEC only investigates criminal violations, the Department of Justice will prosecute
o *If your securities are exchanged on the national exchange or if you are a large privately
held company ($10M in assets and $2,000 shareholders or 500 shareholders who are
not accredited) then you need to Register under the 1934 Act
o In registration statement you need to have audited F/S
o Reporting Requirements companies need to report 5% TIP”
▪ Apply to any company registered under the 1933 or 1934 Acts
▪ Business Reports:
• Form 10-K generally due 60 days after year, that is audited by
independent accountant
• Form 10-Q generally due 40 days after the year, reviews of interim F/S
• Form 8-K due 4 days after a major change in the company
• Want to keep track of anyone who owns 5% or more of your stock and
info about them
• Tender Offers: didn’t buy stock yet, just made an offer to buy 5% or
more and want info on you
• Insider Trading: officers, directors, stockholder who own 10%+,
accountants, attorneys have to file monthly holding updates. If you
make a profit by buying or selling stock within a 6 month period you
have a liability
• Proxy Statement Solicitations: get in the mail a written request (along
with audited F/S) for permission to vote at a shareholder meeting, SEC
wants to see the proxy before it gets mailed out
o Antifraud Provisions: “Rule 10b-5”
▪ Prohibits fraud from the sale of ANY security (registered company or not)
▪ *Suing for fraud under the 1934 Act:
• *Have to prove all 5 MAIDS (Section 11 only has to do LAM=MID: Loss,
acquired stock, material misrepresentation )
• Material Misrepresentation or Material Omission of Fact
• Actual Reliance on the misrepresentation
• Induce Plaintiff to buy or sell securities by giving them false info
• Damages: plaintiff suffered loss
• Scienter: they did it with intent (ordinary negligence is not enough to
sue)
• Prove intent not negligent
 ▪ Section 18 under the SEC Act of 1934: subjects a defendant to liability for false
or misleading information in the registration statement or other required
reports

R8-M4 Other Federal Laws and Regulations

• All the below are federal laws, not state law

• Federal Insurance Contributions Act (FICA): includes self-employed
o Provides workers and their dependents with benefits in case of death, disability, or
retirement
o Funding is unique to FICA and Affordable Care Act (ACA): funded by both employers and
employees
o Employer Responsibility:
▪ Match the employee’s contribution
▪ Have to pay & without the employees share
• If they fail to withhold the taxes from an employee’s wage is liable for
the employee’s portion. Once the employer pays both shares to the
government, he/she has the right to be reimbursed by the employee for
the employee’s share
o Employee Responsibility:
▪ Liable for 6.2% of their gross wages up to $128,400
▪ AND Medicare contributions is 1.45% of their entire gross wages
▪ Gross Wages = salary + bonuses + commissions
o Self-Employed Responsibility
▪ Board members are considered self-employed
▪ The % are related to net profit, not gross sales, in excess of $400
▪ Pay employer and employee percent = 15.3%
• Unemployment Compensation (FUTA)
o Federal Unemployment Tax Act (FUTA): Excludes self-employed
▪ A federal act, but a state-run system
▪ Insurance to provide income to workers who have lost their job at no fault of
their own
▪ All employers who have quarterly payrolls of at least $1,500 or employ at least
one person for 20 weeks in a year you have to participate (not every employer)
▪ Funding by employers only
• Percentage of the first $7,000 per year of compensation for each
employee
• It is deductible by the employers (not the employees) as an ordinary
business expense
▪ The benefit to the past employees are not limited to the amount that has been
paid by the employer on the employee’s behalf
▪ An employer having an experience unemployment tax rate of 3.2% in a state
having a standard unemployment tax rate of 5.4% make take a credit against a
6.0% federal unemployment tax rate of: 5.4%
 • May take a credit against the federal unemployment tax in an equal
amount to the state rate up to 5.4%
• Affordable Care Act (ACA):
o Can be provided by the employer, a plan purchased through a health insurance
marketplace, provided under govt sponsored programs or direct purchase by the
employee from an insurance company
o Participation required by both the employees and employers
o Employers have to provide health coverage or they will have to pay a penalty
o An individual must obtain health coverage for themselves, spouse, and dependents
o Funding (like FICA): the employer and employee must contribute
o Penalties (can only be hit with one or the other):
▪ Penalty Type 1: If you don’t offer minimum essential coverage to at least 95% of
your full-time employees and their dependents AND one of your full-time
employee goes out and they purchase insurance through health insurance
marketplace and they got a tax credit for it = $2,000
▪ Penalty Type 2: even if you offer an applicable large employer coverage is
offered to at least 95% of your full-time employees and their dependents, if an
employee receives a premium tax credit for purchasing coverage through the
marketplace (basically we don’t like your plan b/c it is so bad) = every employee
who gets this tax credit is $3,000 per employee
o Employer can not be deducted

R8-M5: Business Structures Part 1

• On exam if they say “partnership” assume it is a general partnership and if they say
“corporation” assume it is a C Corporation
• Every entity is a flow-through except C Corporation where you have double taxation
• Sole Proprietorship:
o Is not considered a separate entity
o No formality, nothing needs filled with the state
o Personal liability = disadvantage
o Duration is limited, when owner dies so does the entity
o Flow-through
o Is free to transfer
• General Partnership:
o 2 or more people who are trying to make a profit
o No formality, but nothing needs filed to the state
o Agreement can be implied from conduct (nothing oral or written)
o Joint Venture (JV): limited duration
▪ Similar to a partnership but a JV is formed for a single transaction or project or a
series of transactions or projects. It is not continuous
o Generally, a writing is not required. However, if you want partnership that you would
like to continue beyond a year should be in writing.
o Not a taxable entity, it is a flow-through entity, but besides tax purposes a partnership is
treated as an entity (ex. Being sued)
 o All partners have equal rights, it is not based on the amount contributed
o If in ordinary course of business, you need a majority vote
o Every partner is an agent
o Personal creditors cannot come after the partnership
o *Every partner is personally liable for partnership obligations (this is how a general
partnership is not the same as a LLP)
▪ Partnership is joint and several
▪ Even though you are only a 20% partner, you are 100% liable for the partnership
obligations. But exhaust the partnership first.
o All partners have equal rights to share in the profits and losses of the partnership
regardless of money or services contributed unless the specify otherwise (General
Partnership = LLP)
o Unless agreed otherwise, no partner is entitled to compensation/distribution
o Dissociation = a change in partners (added or lost)
▪ Agency Law: They have to give notice to old customers. If not, then they have
apparent authority to bind the partnership. Until notice is given, they could be
held liable for debts for up to 2 years after dissociation.
▪ A partner still remains liable for the debts incurred by the partnership unless the
creditors release them.
o Dissolution: only need one partner to give notice of withdrawal and the other partners
agree or a court order
▪ Meaning the partnership has a limited duration
▪ A partnership exists after a dissolution until its business is wound up, then it is
terminated
o Dissolution of Assets: when you terminate the operations
• Limited Liability Partnership (similar to General Partnership)
o To limit liabilities, you must file with the state
o The difference is personal liability. You are not personally liable for other partners,
employees, or agents (major advantage)
o But you are personally liable for your own negligence and those under your direct
control
o Not personally liable for debts and contractual obligations of the LLP
o You have to file with the state (a state fee and this is why people choose a general
partnership although they should just pay it and then you can limit your liability)
▪ Certificate of Limited Liability Partnership
• Limited Partnership:
o You have at least one general partner and at least one limited partner
▪ General partner: (agent) they have unlimited personal liability for all the debts
of the business but get to run the business
• A general partner can be a limited partner too
▪ Limited Partner: (not an agent) liability is limited to their investment
• Limited partners are similar to shareholders
• You don’t run day to day management, they do have partnership
interest with the right to vote on fundamental changes
 • Can review financial information and tax returns
• If your conduct appears to be a general partner then you can be liable
to any creditor who believes you are a general partner
o Have to file with the state → Certificate of Limited Partnership
o Management is responsible for the general partners
o If there is a loss only the general partner is held liable, not the limited partners
• Limited Liability Company:
o A hybrid between a corporation and partnership
o Owners are called members
o Limited liability, not personally liable for the obligations of the business
o Members may, but don’t need to, adopt operating agreement. If not follow the state
default rules
o File Articles of Organization with your state (no stock information)
o *Management is to be vested in managers
o You could have only one member to form an LLC
o Generally all members may participate in management = Member-Management state
in articles of organization
▪ Can be Manager-Managed. Members are not agents, but managers are agents
(spelled out)
▪ If you are a not an agent you don’t owe a fiduciary duty

R8-M6: Business Structures Part 2

• C Corporations: (Inc)
o Distinct Legal Entity: distinct from its shareholders
o Corporation is owned by shareholders but managed by directors
o Formation: File Articles of Incorporation or Corporate Charter with state
▪ Corporations are governed by statute
▪ *Will have:
• Name of corporations
• Registered Agent (have legal documents served on it on behalf of the
corporation, if the corporation is sued)
• Name and address of each of the incorporators
• Stock information
o One or more classes must have unlimited voting rights (unlike S
corp)
• Purpose Clause: they could state why they are forming the business
(don’t have to)
o Bylaws: rules for running the corporation, not fundamental
▪ Not a part of the articles of incorporation
▪ Not required to be filled with the state
o Liability: everyone has limited liability, shareholders not generally liable beyond their
investment
▪ Usually the corporation is only liable for corporate obligations
 ▪ Shareholders, directors, and officers are generally not personally liable unless
you committed the tort
▪ **Piercing the Corporate Veil: courts will sometimes hold the shareholders,
officers, or directors of a corporation personally liable because the privilege of
conducting business in corporate form is being abused
• Shareholders commingle personal funds with corporate funds
• If the corporation was under/inadequately, thinly capitalized
• Formed the business with the intent to commit fraud on existing
creditors
o Transferability: shareholders are free to transfer ownership interest unless they agree
otherwise (don’t need unanimous consent)
o Taxation: double taxation
▪ Income tax at corporate level and taxed again to shareholders when dividends
are distributed
o Perpetual life, every other organization has limited life
o They remain liable until there is a Novation: an agreement that a 3rd party will release
the promoter and substitute the corporation
o Shareholders:
▪ *Not entitled to a distribution/dividend unless it is declared by the board of
directors. If it is declared, shareholders are both unsecured creditors and
owners
▪ Preferred Shareholders: (not allowed for S corp)
• *Can be cumulative (if there is no dividend distribution, then the
dividend carries over to be dividend in arrears. In later years, no
dividend can be paid to common shareholders until all cumulative
dividends are paid.) or noncumulative (if there is no distribution then
you don’t get a dividend)
o Cumulative: once a dividend is declared, a shareholder becomes
an unsecured creditor of the corporation for the amount of the
unpaid dividend
o Preemptive Right: a corporation proposes to issue additional shares of stock, the right
to purchase new issuances of additional stock in order to maintain current proportional
ownership, does not exist by state law
o Derivative Actions: the corporation has the right to sue somebody but for some reason
the officers or directors are not issuing a lawsuit on the behalf of the corporation. If you
demand a lawsuit and they don’t bring it, then the shareholders can bring a lawsuit on
behalf of the corporation
o Direct Action: shareholder is suing on their own behalf. They are suing the corporation.
o Directors: are not individual agents but do owe a fiduciary duty to the corporation
▪ Imitate fundamental changes “DAMS”
o Officers: individual agents and fiduciaries and an employee of the company
▪ Manage and run day to day business
o Fundamental change needs board and shareholder approval (not unanimous and unlike
a partnership)
 ▪ *DAMS: Fundamental Corporate Changes that often require shareholder and
board (not unanimous) approval for a Corporation
• Dissolution (terminating the corporation)
o After a dissolution, you end the business, and then liquidate
(creditors, preferred stockholders, then common stockholders)
• Amendments: to the articles of Incorporation that materially and
adversely affect the shareholder’s rights
o Bylaws need board or shareholders approval
• Mergers, consolidations, and compulsory share exchanges (exception)
o Merger: one corporation survives the merger (A+B=A)
▪ Exception: if it is a short-form merger then neither
entity has to go through fundamental change procedure
(already own 90% or more of your stock) so we only
need the board of the parent company has to approve
and the subsidiary corporation’s dissenting stockholders
must be given an appraisal remedy
o Consolidation: form a new corporation (A+B=C)
▪ Notice: Summary of plan of consolidation is given to
shareholders
o Share Exchange: one company buys all the stock of the other
company but both companies continue to exist, except it is a
wholly owned entity.
• Sale: of substantially all the corporation’s assets outside the regular
course of business (basically going out of business)
▪ Right to Dissent: vote against the fundamental change you have the right to
dissent. You get an appraisal remedy. I want you to buy me out at the FMV of
the stock before the fundamental change. You have to ask for the appraisal
remedy and vote against the fundamental change
o Foreign Corporation: corporate within a specific state. Any state you did not corporate
you are considered foreign. You don’t need to corporate again but you do need a
certificate of authority to do business in that state.
• S Corporations:
o A flow-through, no double taxation
o More restrictions on S-Corp
▪ No more than 100 persons
▪ Shareholders can only be individuals, estates, and certain trusts
▪ Only one class of stock
▪ Foreign shareholders are generally prohibited
• Business Judgement Rule: principle that protects corporate directors from personal liability for
acts performed in good faith on behalf of the corporation