Question 1

There are items that cannot be taken control of by the bankruptcy trustee. These items are often known as exempt property. The 2005 Bankruptcy Reform Act tightened up the exemption of “household goods and furnishings” by specifically excluding which of the following from the “household goods and furnishings” term? I. Works of art, such as paintings and sculptures II. Antiques in the home valued over $650 III. Wedding rings IV. Lawn mowers, tractors, and similar yard items A. I only B. II only C. III only D. I, II, and IV only

Accepted Answer

D. I, II, and IV only The 2005 Bankruptcy Reform Act seriously tightened up the term “household goods and furnishings” to exclude high-value items that had previously been considered exempt under the older Bankruptcy Acts. The logic was that higher-value items should not be exempted merely because they were “home related.” Of the choices shown, the only item that is still included in the term “household goods” after the 2005 Act is a wedding ring. All of the other items were specifically excluded from the term: works of art, such as paintings and sculptures; antiques in the home valued over $650; and lawn mowers, tractors, and similar yard items. Under the 2005 Bankruptcy Act, exemption amounts may change every 3 years. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 313; 11 USC Section 522(f)

Question 2

Tork purchased restricted securities that were issued pursuant to Regulation D of the Securities Act of 1933. Which of the following statements is correct regarding Tork's ability to resell the securities? A. Tork may resell the securities so long as the sale does involve interstate commerce. B. Tork may resell the securities as part of another transaction exempt from registration. C. Tork may not resell the securities if the certificates contain a legend indicating that they are unregistered securities. D. Tork may not resell the securities unless Tork obtains a written SEC exemption.

Accepted Answer

B. Tork may resell the securities as part of another transaction exempt from registration. Generally under Regulation D various “minor” dollar value securities may be sold under the “small offerings” exceptions. Further, these securities can be resold without being registered if sold by an average investor, or if the transaction falls within the safe harbors of Rule 144 and Rule 144A. Rule 144 exempts registration if there is sufficient current public information about the company issuing the stock and if the seller has held the stock at least a year. Under Rule 144A, the stock may be resold to qualifying investors, and the seller must make it clear to the buyer they are relying on the Rule 144A exception. In this question, the seller is relying on Rule 144A.

Question 3

White, who owned a small business that operated as a sole proprietorship, filed for bankruptcy on October 1, 20X1. Among his creditors was his sole employee, who was owed $3,000 for wages earned within the previous two months ($1,500 each month). In this case, the employee is: A. a priority creditor in the amount of $1,500. B. a priority creditor in the amount of $2,000. C. a priority creditor in the amount of $3,000. D. not a priority creditor.

Accepted Answer

C. a priority creditor in the amount of $3,000. Under the Bankruptcy Reform Act of 2005 as adjusted by the indexing provisions, employees have priority status for wages earned within the prior 180 days, up to a maximum of $12,475 (indexed for inflation). In this case, the employee is given priority status for the full amount of wages earned ($3,000).

Question 4

Data, Inc., intends to make a $750,000 common stock offering under Rule 504 of Regulation D of the Securities Act of 1933. Data: A. may sell the stock to an unlimited number of investors. B. must make the offering through a general advertising. C. must offer the stock for a period of more than 12 months. D. must provide all investors with a prospectus.

Accepted Answer

A. may sell the stock to an unlimited number of investors. Under Rule 504, small closely-held companies may offer stock with very few restrictions if the offering is for no more than $1 million. Regulation D is a combination of the private placement and small issue exemptions. Issuers must file Form D, which lists minimal information, with the SEC. Regulation D has three separate thresholds with differing requirements: SEC Rule 504 can only be used by companies not reporting to the SEC, usually closely-held companies. No registration is required if no more than $1 million of securities are sold within a 12-month period with the following: No limit on the number of investors No general public offering or advertising No restrictions on resale by the investor If the securities are registered exclusively under a state bl

Question 5

The statute of limitations for an alleged breach of contract: A. does not apply if the contract was oral. B. requires that a lawsuit be commenced and a judgment rendered within a prescribed period of time. C. is determined on a case-by-case basis. D. generally commences on the date of the breach.

Accepted Answer

D. generally commences on the date of the breach. The “running” of the statute of limitations for an alleged breach of contract generally commences on the date of the breach. Statute of limitations bars filing of a lawsuit if the action is not brought before the court within a certain time period. Different types of lawsuits have different statute of limitations requirements. The purpose of the law is to prevent people from bringing lawsuits so long after the cause of damages or injuries that witnesses might not be available or may have forgotten about the incident. There is no requirement that a contract be in writing to fall under the provisions of the statute of limitations. The statute of limitations bars the filing of a petition past a certain period of time. Often, cases are filed within the time period, but get tied up in court for years. The statutes have specific time periods running from one year to four years for most causes of actions

Question 6

A tombstone advertisement: A. may be substituted for the prospectus under certain circumstances. B. may contain an offer to sell securities. C. notifies prospective investors that a previously offered security has been withdrawn from the market and is therefore effectively “dead.” D. makes known the availability of a prospectus.

Accepted Answer

D. makes known the availability of a prospectus. A “tombstone” advertisement (so described because of its traditional unique shape, which somewhat resembles a tombstone) makes known the availability of a prospectus. The ad is generally placed during the “waiting period,” and thus cannot contain an offer to sell. It is attempting to generate interest in the security which will soon be offered for sale. Securities Act of 1933

Question 7

One of the elements necessary to recover damages if there has been a material misstatement in a registration statement filed under the Securities Act of 1933 is that the: A. issuer and plaintiff were in privity of contract with each other. B. issuer failed to exercise due care in connection with the sale of the securities. C. plaintiff gave value for the security. D. plaintiff suffered a loss.

Accepted Answer

D. plaintiff suffered a loss. The purpose of the Securities Act of 1933 is to protect the unsophisticated investor by requiring full and fair disclosure prior to a public offering. Consequently, under the Act, all the plaintiff/investor must prove is that the registration statement contained a material misstatement and resulted in a loss to the plaintiff. Privity with the issuer (rare), lack of due care exercised by the issuer, and value paid by the plaintiff are neither material nor relevant to the plaintiff's claim and are not necessary to recover damages. (Remember, due care is a standard applied to the professional, e.g., the CPA and underwriter, not the issuer.) Securities Act of 1933, Section 11

Question 8

Under the Clean Air Act, the best available control technology (BACT) is the emission limitation that achieves the maximum reduction of pollutant without considering which of the following factors? A. Energy factors B. Population factors C. Environmental factors D. Economic factors

Accepted Answer

B. Population factors The BACT is the emission limitation that achieves the maximum reduction of pollutants considering energy, environmental, and economic factors.

Question 9

Under the Negotiable Instruments Article of the U.C.C. (Article 3), an instrument will be precluded from being negotiable if the instrument: A. fails to state the place of payment. B. is made subject to another agreement. C. fails to state the underlying consideration. D. is undated.

Accepted Answer

B. is made subject to another agreement. A negotiable instrument can be freely transferred by negotiation. It must be in writing, be signed, be an unconditional promise to pay on demand or at a definite time, be payable to someone, and not state any other undertaking or instruction by the person promising to pay. An instrument that is made subject to another agreement is not fully negotiable. A negotiable instrument does not have to state the place of payment, be dated, or state the underlying consideration in order to be negotiable.

Question 10

After serving as an active director of Lee Corp. for 20 years, Ryan was appointed an honorary director with the obligation to attend directors' meetings with no voting power. In 20X1, Ryan received an honorary director's fee of $5,000. This fee is: A. reportable by Lee as employee compensation subject to Social Security tax. B. reportable by Ryan as self-employment income subject to Social Security self-employment tax. C. taxable as “other income” by Ryan, not subject to any Social Security tax. D. considered to be a gift not subject to Social Security, self-employment, or income tax.

Accepted Answer

B. reportable by Ryan as self-employment income subject to Social Security self-employment tax. Ryan is clearly not an employee of Lee Corporation. Thus, Ryan should report the director's fee as self-employment income, having provided professional services for compensation. This income is subject to Social Security self-employment tax as well as personal income tax. (A gift would be a donation out of detached and disinterested generosity which is not the case here.)

Question 11

Before a person may file a petition for voluntary bankruptcy under the 2005 Bankruptcy Reform Act, the petitioner must: I. receive credit counseling from an approved for-profit credit counseling agency. II. receive credit counseling within 180 days preceding the filing. III. provide a certificate of receiving a group or individual briefing by an approved credit agency within the last 180 days to the court. A. I, II, and III B. I and II only C. I only D. II and III only

Accepted Answer

D. II and III only There is a requirement under the 2005 Act that the person receive credit counseling within 180 days preceding the filing. The answer regarding credit counseling is incorrect because the counseling must come from an approved not-for-profit agency, not a for-profit agency. Careful reading is important! The petitioner is required to include in his or her filing petition a certificate of receiving a personal or group briefing by an approved credit agency within 180 days of the filing. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 106

Question 12

On February 28, Master, Inc., had total assets with a fair market value of $1,200,000 and total liabilities of $990,000. On January 15, Master made a monthly installment note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment having a fair market value greater than the balance due on the note. On March 15, Master voluntarily filed a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment was sold for less than the balance due on the note to Acme. Master’s payment to Acme could: A. be set aside as a preferential transfer because the fair market value of the collateral was greater than the installment note balance. B. be set aside as a preferential transfer unless Acme showed that Master was solvent on January 15. C. not be set aside as a preferential transfer because Acme was oversecured. D. not be set aside as a preferential transfer if Acme showed that Master was solvent on March 15.

Accepted Answer

C. not be set aside as a preferential transfer because Acme was oversecured. A preferential transfer is a transfer of an interest by a debtor to any party within 90 days of filing the petition or with an insider (or family member) between 90 days and one year of filing the petition. The debtor was insolvent at the time of the transfer, the payment made allowed the creditor more than what the creditor would have received from the Chapter 7 bankruptcy, the payment was made on debt the debtor already owed, and the debtor paid more than $6,225 to one creditor. Therefore, since Master’s assets exceeded its liabilities at the time of the transfer, Masters was not insolvent and the payment to Acme could not be set aside.

Question 13

Which of the following transactions will be exempt from the full registration requirements of the Securities Act of 1933? A. All intrastate offerings B. All offerings made under Regulation A C. Any resale of a security purchased under a Regulation D offering D. Any stockbroker transaction

Accepted Answer

B. All offerings made under Regulation A Regulation A is an exemption from registration for public offerings. In March 2015, the SEC amended Regulation A by creating two offering tiers: Tier 1, for offerings of up to $20 million in a 12-month period, and Tier 2, for offerings of up to $50 million in a 12-month period. For offerings of up to $20 million, companies can elect to proceed under the requirements for either Tier 1 or Tier 2. To sell securities pursuant to Regulation A, the SEC must first issue a “notice of qualification” after staff review of the company’s offering materials filed in accordance with the requirements of Form 1-A. Not all “intrastate” offerings are exempt from registration requirements, since there are numerous limitations on the intrastate exception (for example, at least 80% of the issuer's assets must be located within the state of issuance). Stockbroker transactions and issuances under Regulation D that involve a resale are not exempt from registration.

Question 14

Green was adjudicated incompetent by a court having proper jurisdiction. Which of the following is correct regarding contracts subsequently entered into by Green? A. All contracts are voidable. B. All contracts are valid. C. All contracts are void. D. All contracts are enforceable.

Accepted Answer

C. All contracts are void. Incompetence questions generally revolve around when (if at all) the person was adjudicated incompetent. This adjudication of incompetence is critical in the determination of contractual validity. Any contracts entered into by an adjudicated incompetent person are by matter of law invalid or void.

Question 15

Integral Corp. has assets in excess of $10 million, has 650 stockholders, and has issued common and preferred stock. Integral is subject to the reporting provisions of the Securities Exchange Act of 1934. For its 20X1 fiscal year, Integral filed the following with the SEC: quarterly reports, an annual report, and a periodic report listing newly appointed officers of the corporation. Integral did not notify the SEC of stockholder “short swing” profits, did not report that a competitor made a tender offer to Integral's stockholders, and did not report changes in the price of its stock as sold on the New York Stock Exchange. Under SEC reporting requirements, which of the following was Integral required to do? A. Report the tender offer to the SEC. B. Notify the SEC of stockholder “short swing” profits. C. File the periodic report listing newly appointed officers. D. Report the changes in the market price of its stock.

Accepted Answer

C. File the periodic report listing newly appointed officers. Under SEC reporting requirements, the company is required to file the periodic report listing newly appointed officers. Under the Williams Act, which amended the Securities Exchange Act of 1934, it is the company that is making the tender offer that is required to file with the SEC and not the target company. “Short swing” transactions are illegal. It is the insider who bears the liability for failure to comply with the “short swing” rules under the Securities Exchange Act of 1934. The prices of stock traded on the New York Stock Exchange are a matter of public record—you only have to pick up a copy of the Wall Street Journal or most local newspapers! There is no reporting requirement by companies to report changes in their stock prices.

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Ch 2 2 Business Law Flashcards

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