Fiduciary folly leads to fiasco: the case of Consolidated Pipeline and Equipment Corporation (CPEC).(Instructor's Note)

Sullivan, Laura ; Stretcher, Robert ; Robertson, Joey 等

INSTRUCTORS' NOTES

Suggested Teaching Approach

We suggest using this case after course coverage of agency theory to enhance understanding of agency theory, fiduciary duty and fraud.

We assign this case to students in the class time prior to the class scheduled for discussion. For the first business law course, we limit our coverage to questions 1-3 (below) but for higher level courses we often utilize questions 4-6.

To get maximum mileage from the case, we suggest that the students prepare their answers to the questions prior to any class discussion.

DISCUSSION QUESTIONS

1. What duty does an accountant owe his client?

An accountant owes his or her client a fiduciary duty. The accountant--client relationship is at its most basic an agency relationship. Any agency relationship creates the requirement of a fiduciary duty owed to the master (the client in this case).

2. What is an agency relationship?

An agency is a consensual relationship between two parties. In which one, the agent, acts on behalf of the other, the master or principal. The agent's action is subject to the master's control.

a. How does an agency relationship begin?

Agency requires a meeting of the minds between the parties. In addition, there must be some act of appointment of the agent. The key is the agreement of the parties. The agent must agree to act on behalf of the master or principal. Once the agency relationship begins the agent owes a higher duty to the master. The agent must not: 1) compete with the master; 2) relate all matters regarding the subject matter; 3) to deal openly and provide full disclosure; 4) duty of loyalty; 5) duty to obey instructions and 6) duty to act with care and skill which is standard or based on the skills of the agent.

In essence, the agent must put the master's best interests above his own. He owes this duty to the master.

b. Who bears the burden to prove that an agency relationship existed?

The law does not presume agency. The alleged master has the burden to prove than an agency relationship existed. The evidence presented by the alleged master must establish that he had the right to assign the agent's task and control the details and process by which the agent completes the task.

c. What liability does that pose to the agent?

If the agent does not hold the master's interests above his own he can be found liable for breach of his fiduciary duty to the master.

3. What is a fiduciary duty?

A duty of utmost loyalty and good faith.

a. When does one owe a fiduciary duty?

An agent owes a fiduciary duty to his or her master/principal. The fundamental element of a fiduciary duty is that the agent subordinate his or her self-interest to the interest of the master or principal. If this duty is breached the master/principal can sue the agent.

b. Can one owe a fiduciary duty even if one is not paid for his or her services?

Yes.

c. If "yes" what is the name for this duty?

Gratuitous Agency theory. A gratuitous agent is one who receives no compensation for his or her efforts.

4. Did Jim appoint Steve as his agent?

No. There was no meeting of the minds. Steve did not agree to serve or act as Jim's agent. Jim was well aware that Steve was in fact Paul's agent and acting solely for his benefit.

5. If Steve was, in fact, Jim's agent--what type of agent was he?

Gratuitous Agent.

6. If Steve was not Jim's agent, was there any relationship between the accountant and son at all?

Yes. If Steve is Paul's agent and not Jim's the relationship between Steve and Jim is that of an agent and a third party. Since Steve represents Paul, and Jim in his dealings with the agent/principal pair has changed his position by relying on Steve's representation of Paul, Jim has rights and recourses against Steve even though Steve is not his agent.

7. What is fraud?

Deceitful conduct designed to manipulate another person to give something of value by (1) lying; (2) by repeating something that is or ought to have been known by the fraudulent party as false or suspect or (3) by concealing a fact from the other party which may have saved that party from being cheated. The existence of fraud will cause a court to void a contract and can give rise to criminal liability.

8. Is there any evidence of fraud on Jim's part?

Yes. Jim may have committed fraud against CPEC when he was embezzling money from the company during his service as the company's president.

9. Is there any evidence of fraud on Paul's part?

Yes. When Paul agreed to purchase the parcel of land from Jim paying far more than the actual value of the land Paul may have committed fraud against the government in an effort to avoid paying certain inheritance taxes.

10. If the sale of the parcel of land from Jim to CPEC for 3 times its actual value is fraud, who is liable?

It depends, but most likely Paul and Steve. A principal is generally liable for the actions of their agents, but when it comes to criminal activity a principal is only liable if they approved the activity or conspired with the agent to commit the crime.

11. If Paul relied on Steve's expertise in setting up the sale of the land, does Paul have any recourse against Steve?

Yes. Although Paul may be liable for an improper sale of the land he may be able to recover from Steve through indemnification. Although a principal is generally liable for the actions of his agent, a principal can also rely on the expertise of his agent. The facts of this case indicate that the sale of the land for an inflated value was the agent's idea. If Steve knew of should have known this sale was improper, and Paul relied on Steve's expertise, Paul may be able to recover any fines or expenses he is forced to pay through indemnification. Indemnification allows either an agent or principal to recover from the other if they are subjected to legal obligations due to the fault of the other.

12. Is it possible that a court could find there was no agency relationship in the sale of land in excess of its true value?

Yes. Agency agreements can be entered into for any legal purpose. If the sale of the land for an inflated value was an illegal purpose, there may not have been an agency relationship for that specific purpose.

EPILOGUE

This case demonstrates an example of the type of liability an accountant might face. There are serious consequences for even the best intended actions. It is important to realize when an individual is acting as an agent for another person and the potential liability for such actions. In the real life scenario this case represents, Jim lost his case against Steve. The jury decision was 11 to 1. Steve continues to practice as an accountant.

REFERENCES

Clarkson, Kenneth, et al. (2006). West's Business Law Text and Cases (Tenth Edition). Mason, Ohio: Thompson West.

Laura Sullivan, Sam Houston State University

Robert Stretcher, Sam Houston State University

Joey Robertson, Sam Houston State University