You are probably familiar with a principal and agent arrangement. The most common is where a person designates another to be his agent for a general or specific purpose using a power of attorney. The principal allows the agent to bind the principal in certain transactions making the principal legally liable for the acts of the agent on behalf of the principal. For example, A designates B to buy a house for A. In pursuit of the power of attorney given to him, B signs a purchase contract on behalf of A for a house in Arcadia for $2.0 million. B agrees further to pay the seller $1.0 million within 10 days of signing the purchase contract, with the balance $1.0 million payable within 30 days of signing. A only has $1.5 million to give to seller in 30 days. Seller sues A for the balance of half a million. A answers that he is not liable for the half million because it was B, his agent, who signed the contract, not him. Is A liable to seller for half a million even though A did not sign the contract, and it was B who signed the contract as agent for A? Of course A is liable because the actions of an agent bind the principal. This is basic agency and contract law.

But let’s change the situation a bit. Let’s say that A is a realtor, B his sales agent. B defrauded a client of the realty office resulting in a judgment of $2.0 million against B. A files for Chapter 7 relief. Plaintiff files an adversarial complaint against A asking the court to find that the $2.0 million judgment against B should be excepted from discharge in A’s bankruptcy because B was an agent of A when A defrauded client. A responds to the complaint saying the $2.0 million should be discharged because he had no knowledge of B’s fraudulent activity. Can B’s fraudulent action bind A such that the $2.0 million judgment against B is not dischargeable in A’s bankruptcy?

In Re Huh was decided by the 9th Circuit court of appeals last month. Benjamin Huh was a licensed real estate broker. He operated as a sole proprietorship using dba America Realty & Investment. In August 2004, he incorporated his business as Amerity, Inc. but did not cancel his personal registration of ARI. Jay Kim, relying on Huh’s license, was Amerity and Huh’s sales agent from 2004 to 2005. Anil Sachan met with Kim in September 2004 at the ARI office to discuss a potential acquisition of La Mexicana Market. Kim represented that the market generated $35,000 in monthly profits from a monthly gross of $340,000. Sachan signed a purchase contract that identified ARI as the selling agent and broker. After the sale closed, Sachan discovered that the market generated sales at a far lower rate than Kim had represented. Alleging fraud, Sachan successfully sued Kim and ARI in state court. The state court granted Sachan’s motion to add Huh as a defendant, and entered an amended judgment determining that Huh was jointly and severally liable to pay Sachan $913,867.

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