business organizations

PARTNERSHIPS,CORPORATIONS

AND THE VARIANTS

LECTURE 3, PGS. 58-108

Business Organizations

AGENCY

Lec.3. pp. 58-108 Corporations Prof. McCann

A relationship whereby one person or entity ( a principal) empowers another person or entity to act on behalf of the principal with the same force and effect as if the principal was acting herself.

AGENCY

Elements of relationship:

1. Principal manifests assent that agent act for principal and be subject to principal’s control

2. Agent manifests consent or otherwise consents to act.

Lec.3. pp. 58-108 Corporations Prof. McCann

Scope of Authority of Agent Derived From

Actual authority: that authority which principal has expressly granted to the agent or which agent reasonably believes was granted based on understanding of principals intentions or circumstances. NOTE: Perspective is that of the agent.

Apparent authority: that authority vested in agentwhich principal has informed or manifested to third party has been so vested. NOTE: Perspective is that of third person– did the principal somehow indicate agency

Implied authority: that authority reasonably required to accomplish the objectives of the agency

Lec.3. pp. 58-108 Corporations Prof. McCann

Agent Is a Fiduciary

An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship. Restatement 3rd Agency § 8.01.

A fiduciary duty is the highest standard of care at either equity or law. A fiduciary is expected to be extremely loyal to the person to whom he owes the duty (the "principal"): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents. The word itself comes originally from the Latin fides, meaning faith, and fiducia, trust.

Lec.3. pp. 58-108 Corporations Prof. McCann

The Fiduciary Duties of Agents

Lec.3. pp. 58-108 Corporations Prof. McCann

1. The Duty of Loyalty A. The Duty Not to Compete with Principal B. The Duty Not to Exploit Relationship with

Principal to Obtain Benefit from Third Party C. The Duty Not to Use Confidential Information of the

Principal to Benefit Agent or Third Party

The Fiduciary Duties of Agents (Cont’d)

Lec.3. pp. 58-108 Corporations Prof. McCann

2. The Duty of Care The Care, Competence and Diligence Normal to

Agents in Such Circumstances

3. The Duty to Communicate Material Information to Principal

4. The Duty to Account and Not to Co-mingle Assets

5. The Dut y to Act with “Utmost Good Faith”

Huong Que Inc. v Luu

Lec.3. pp. 58-108 Corporations Prof. McCann

Issue: Should the court imply an intent to waive the unlimited duty of loyalty owed by the agent where an agreement between the parties seems to limit the scope of the duty?

Tarnowski v Resop

Lec.3. pp. 58-108 Corporations Prof. McCann

What are principal’s rights where agent takes secret profit?

Principal’s Duty to Agent

Lec.3. pp. 58-108 Corporations Prof. McCann

To compensate the agent as agreed.To provide information material to the agency.To indemnify and protect the agent against claims,

liabilities, and expenses incurred in discharging the duties assigned by the principal.

To abide by the covenant of good faith and fair dealing. To act in accordance with the express and implied terms

of any contract between a principal and an agent.When an agent acts within the scope of actual authority,

the principal is liable to indemnify the agent for payments made during the course of the relationship irrespective of whether the expenditure was expressly authorized or merely necessary in promoting the principal’s business.

FYI : California and Agent Liability

Lec. 3, pp. 75-119 Corporations Prof. McCann

… California courts generally do not employ the Restatement analysis, but appear to hold the agent liable, regardless of his or her disclosure of the fact of agency, unless the name of the principal is disclosed so as to make it appear on the face of the instrument that the parties intended to bind the principal and not the agent. (See Patterson v. John P. Mills Organization (1928) 203 C. 419, 421, Gambord Meat Co. v. Corbari (1952) 109 C.A.2d 161, 162, 240 P.2d 342 [agent liable on personal check sent in payment of principal's obligation];

And a disclosure only of the principal's trade name is not a sufficient disclosure of identity to relieve the agent of personal liability. (W.W. Leasing Unlimited v. Commercial Standard Title Ins. Co. (1983) 149 C.A.3d 792, 796.)

BUILDING ON THE AGENCY FOUNDATION

PARTNERSHIP

Aggregation of Charged Colloidal Systems

Aggregation

Lec. 3, pp. 75-119 Corporations Prof. McCann

Aggregation vs Entity Theories

Commonlaw (Aggregation)

Partners held undivided but separate interests in property

Partnership was not an entity distinct from its partners

Withdrawing partner entitled to piece of each asset (as is her estate)

Unanimous consent to admit new partner

Partnership meant one exact constellation of partners. Any change resulted in dissolution.

Lec. 3, pp. 75-119 Corporations Prof. McCann

Aggregation or Entity Theories

Lec. 3, pp. 75-119 Corporations Prof. McCann

Under Uniform Partnership Act, 1997

Partnership is an entity distinct from the partners

Withdrawing partner has no interest in partnership assets but only right to receive pro rata share of the value of assets

Entity may continue on despite withdrawal or death of partner

Under UPA, Modern P/S a Hybrid

Still an aggregation of partners in sense that:

Each partner individually (jointly and severally) liable for debts

Pass through entity, invisible to taxing authorities – each partner pays on her own income from the partnership

Lec. 3, pp. 75-119 Corporations Prof. McCann

Under Entity Theory

Lec. 3, pp. 75-119 Corporations Prof. McCann

CAL. CORP. CODE § 16502 : California Code - Section 16502

The only transferable interest of a partner in the partnership is the partner's share of the profits and losses of the partnership and the partner's right to receive distributions. The interest is personal property.

Types of Partnerships

Lec.3. pp. 58-108 Corporations Prof. McCann

GeneralLimitedLimited Liability Partnership

General – One for all and all for one.

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Limited Partnership

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Limited Liability Partnership

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Response to problem that an attorney cannot shield herself from liability for her own negligence (so cannot be a limited partner in a limited partnership)

BUT doesn’t want to incur liability for negligence of other attorneys (as would be true in general partnership).

(NOTE: For similar reasons, LLC form is not available to professionals in California and other states.)

Holmes v Lerner

Lec.3. pp. 58-108 Corporations Prof. McCann

When do you have a partnership?

Formation

Lec. 3, pp. 75-119 Corporations Prof. McCann

UPA (1997) § 202; CAL. CORP. CODE § 16202

(a)Except as otherwise provided in subdivision (b), the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership. (Emphasis added.)

* * *

Meinhard v Salmon

Lec.3. pp. 58-108 Corporations Prof. McCann

The punctilio of an honor the most sensitive

Primacy of the Partnership Agreement

Lec. 3, pp. 75-119 Corporations Prof. McCann

 UPA (1997) Sec. 103 (a) Except as otherwise provided in subsection

(b), relations among the partners and between the partners and the partnership are governed by the partnership agreement. To the extent the partnership agreement does not otherwise provide, this [Act] governs relations among the partners and between the partners and the partnership.

The Default Rules

Lec.3. pp. 58-108 Corporations Prof. McCann

On dissociation: § 601On right to particular asset: §501Standards of Conduct: § 404

The Partnership Agreement

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What does it need to cover?

Kansallis Finance Ltd. V Fern

Lec.3. pp. 58-108 Corporations Prof. McCann

To impose liability on a partnership for the acts of a partner must there be either (a) apparent authority in the agent or (b) an intention by the agent to benefit the partnership?

RECAP OF PARTNER LIABILITY

Restatement of Agency A Principal is liable for torts of employee if they are

committed within the course and scope of employment “Course and scope” requires that there be some intent

in the mind of the agent to serve the purposes of the principal

NO REQUIREMENT of actual or apparent authority.Uniform Partnership Act

Partnership is liable if partner is carrying on in the usual way the business of the partnership and has actual or apparent authority (UPA § 305)

NO REQUIREMENT that the partner is motivated to benefit the partnership

Lec. 4; pp. 119 -154 Corporations Prof. McCann