Business Associations (3 absences allowed) Chapter 1 – Agency

o Section 1 – Who is an Agent?o Agency is the manifestation of consent by one person to another that the other shall

act on his behalf and subject to his control, and consent by the other so to act Must be an agreement, but not necessarily a contract between the parties

(circumstantial evidence to show principal consent to agency)

o Gorton v. Doty, 1937 Coach of a football team borrowed car from Doty and accident occurred

injuring Gorton. TC held for Gorton. Issue – Was Garst the agent to appellant while and in driving her car from

Soda Springs to Paris and in returning to the point where the accident occurred

Agency indicates the relation which exists where one person acts for another 3 principal forms

o Principal and agento Master and servanto Employer or proprietor and IC

Affirmed – Doty was an agent

o Gay Jenson Farms Co. v. Cargill, Inc., 1981 P group of farms brought suit against Cargill and Warren for losses sustained

when Warren defaulted on the contracts made with P’s for sale of grain. Jury trial found for P, Cargill appealed Issue – whether Cargill by its course of dealing with Warren became liable as a

principal on contracts made by Warren with P’s Factors in determining if Cargill had control over Warren

Constant recommendations Right of first refusal

Supplier versus a Agent 1 – he is to receive a fixed price for the property 2 – acts in his own name 3 – independent business in buying and selling similar property

Affirmed – Cargill did have control

o Mill Street Church of Christ v. Hogan, 1990 Mill Street petition for review from a decision the New Workers Compensation

Board which reversed a decision that ruled Hogan was not an employee of the MISC and not entitled to any workers comp benefits, the New Board reversed and ruled that Hogan was an employee

Brother hired Sam Hogan to help, fell from ladder and suffered injury. Church elders hired Sam’s brother and were unaware that Bill Hogan asked Sam to help. Sam filed claim under workers compensation act with the church

Sam relied on payment, and was even paid Affirmed

o Dweck v. Nasser, 2008

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Class Notes – 1/13 – Overview and Intro to Agency Restatement 3rd §1.01 - Agency defined – fiduciary relationship that arises when 1) one

person manifests assent to another person (an agent), 2) that the agent shall act on the principals behalf and subject to the principals control, and 3) the agent manifests assent or otherwise consents so to act

Gorton v. Doty, 1937 o Court looked a lot at controlo Dissent says agency is more than passive permission. o The objective was to push insurance policieso Sovereign immunity – cant sue school or countyo Analysis

Dissent says the agency test was not met, it was more passive, but majority said there was a condition put on it

Who was he really the agent for? For the school, but also Doty since she loaned the coach the car

All you need is an agreement by both parties, not an official contract (payment isn’t necessary either)

Advice to Doty to avoid liability? o Principals remedy is to sue the agent

Gay Jenson Farms v. Cargill o Supplier v. Buyero Creditor v. Debtoro Security agreement – loaning of money and a interest in collateralo Cargill did have financial control and was an agent o Analysis

Why did Cargill keep extending more credit? They probably wanted to keep that supply of grain

Farmers to protect themselves from nonpayment? Insisted on cash Deal directly with farmers

Four Types of Authority

o Actual Authority (look at what the principal tells agent to do)– Restatement 3rd §2.01 – an agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believe, in accordance with the principals manifestations to the agent, that the principal wishes the agent so to act

Restatement 2.02 – an agent has actual authority t take action designated or implied in the principals manifestations to the agent and acts necessary or incidental to achieving the principals objectives

Express –agent has been told by principal to do something Implied – principal has made manifestations to what the agent needs to do to

carry out the task (can arise by previous course of dealing among parties)

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o Apparent Authority (look at communications between principal and 3rd party) – restatement 3rd §2.03 – is the power held by an agent or other actor to affect a principals legal relations with 3rd parties when a 3rd party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations

Custom, communication directly from A to Po Ratificationo Inherent Agency Powero NOTE: Authority is authority. Any type of authority suffices to bind Principal

Mill Street Church v. Hogan o Analysis

Sam’s belief that his brother Bill had authority relevant? More to apparent than actual

Paul owns apt. building and hires Ann to manage it Paul tells Ann to hire a company to cut the grass, Ann does it, is Paul

bound? Yes, Actual Express Without express, Ann hires janitor to clean building, is Paul bound?

Actual Implied Paul specifically instructed Ann not to hire a janitor but that local

custom gives manages power to hire janitors, is Paul bound? Apparent because of business custom (even if principal says not to do something, custom overrides principals)

HYPOS: Pam owns Blackacre. Alan is real estate agent. Ted claims Alan entered into contract on Pam’s behalf to sell Blackacre to Ted. Evidence of an email from Pam to Alan telling him to sell Blackacre

o What type of authority? Actual express authority – Pam told Alan to sell Blackacre by email

o If Pam did tell Alan to sell, may he advertise the property in MLS? Yes, Actual Implied Authority

o Suppose Alan tells Ted that he is Pam’s agent, does Alan have apparent authority? No, manifestation from Pam

o Suppose Pam had been present when Alan made his statement to Ted, but didn’t say anything. Now, does Alan have apparent authority? Yes, Pam’s conduct(silence) was her manifestation of not denying it

Dweck v. Nasser - Apparent Authority o Issue – whether Shiboleth reasonably believed he had authority to settle the case

based on Nasser’s actionso Had actual express authority, as well as implied and;o Apparent authority also, his statements to Dweck’s husband about he wasn’t going to

read it, but just sign ito If Nasser wanted to avoid this, he should have been in more control, not so

ambiguous and back and forth

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1/18 – p. 31-54

Three Seventy Leasing Corp. v. Ampex Corp., 1976 – APPARENT AUTHORITY case o 370 formed by Joyce and had contract with Ampex (Kays/salesman and Mueller) for

purchasing hardware. Joyce and Kays are friends. Joyce needs to get these memory units to EDS (3rd party company)

o Held there was apparent authority – led a reasonably prudent person to suppose that the agent had the authority he purports to exercise

o Problem with apparent authority is if Kay just tells Joyce he has authority to enter into the agreement – the memo was strong evidence

o The entire manifestation of setting Kay up to deal with Joyce which was set up by Mueller and the memo

o No authority by principal is not enough, just saying they have authority is insufficient, but here, the memo was enough

o Analysis: 1. 2. Salesman 3. Salesperson probably doesn’t have the authority to lend such money 4. D manifestations were the memo and was reasonable for Joyce to believe

o Planning and Economic Efficiency 1. Ampex could have made it clear on the form contract making it clear an

officer has to sign off on such a thing 2. What could Joyce have done? When she got the contract back and it wasn’t

signed, a reasonable person would have talked to someone of higher authority 3. Business resolution – company says they are going to take a certain action

Inherent Agency Power – extension of UDP rule and only applies when there is an UDPo General rule for undisclosed principal: UDP is personally liable for debts incurred by

agents within the scope of their authority IAP applies when there is an undisclosed principal to make the principal

personally liable for debts incurred by agents for acts that are prohibited by the principal, but are within the scope of authority for agents engaged in similar business activities

Watteau v. Fenwick, 1892 o Any manifestations of new owners for apparent authority? No, everyone assumed it

was Humble’s business, not Fenwicko Defendant is liable for damages. Humble was acting with an authority that was

inherently reasonable for an agent in that position. The situation is analogous to a partnership wherein one partner is silent but is still liable for actions of the partnership as a whole.

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o Not apparent authority because the principal is disclosed under that doctrine, the principal is liable for actions by an agent that are expressly forbidden, but the case limits a principal to actions of an agent are reasonable under the circumstances

If you choose to be undisclosed, you will be liable If there is disclosed principle, you can try to argue under apparent authority

o Review Problems p. 30 - Authority 1. Actual express? By Paula telling Allie to hire a research assistant with

conditions, so probably not. Actual implied? Told to hire for 9 an hour and the assistant was okay with it so maybe if Allie thinks Paula is mistaken, there may be implied actual. Apparent authority? If Paula told Allie she has the authority to hire on her behalf, then there is a manifestation of authority

2. Worried about apparent authority, what the principal can do to control. Make a form contract that Millie has to sign for control.

Ratification - Rest. 3rd. 4.0? - Acceptance of the results of the act with an intent to ratify, and with full knowledge of all the material circumstances

Ex . My agent didn’t have the right to enter into this contract, but I’m glad she did soo 2 important questions

1. What types of acts constitute an affirmation by the principal? 2. What effect should we give to that affirmation?

o Obviously one can expressly affirm a contract (ex. “Gosh, what a wonderful deal. Ill go forward with it.”

Botticello v. Stefanovicz, 1979 - Ratificationo Husband and Wife conflict with Botticello purchase provision for 85,000. Wants to

exercise option to buy and Mrs. S was unwilling to sell.o Botticello’s mistake was that he should have had his attorney do a title searcho B argues ratification by conduct (collecting rent and benefits) and the husband was

an authorized agento Marriage is not in and of itself authorization, still need manifestation and elements of

agencyo Ratification? Court said she did not ratify by accepting benefitso Analysis and Problems:

1. She impliedly confirmed it by cashing the checks and accepting the benefits, ABC wins because she ratified

2. Pam wins, she didn’t know (no intent or knowledge of material circumstances)

3. For ratification to occur, it has to come at a time when you have a choice, Pam would win because she knew nothing about it because it already occurred

4. Al wins, Paula had intent and knowledge because of the first statement and she took a wait and see attitude

5. Hoddeson v. Koos Bros., 1957 - ESTOPPEL

o Went to purchase furniture and pays cash, sales guy says it will be delivered later. (impostor)

o Court held the law cant allow these people to get away but it is the responsibility of the store to ensure this doesn’t happen

o Remanded to see if the store took precautions or not

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o Rest. 3rd 2.05 – person who has not made a manifestation that an actor has authority as an agent and who is not otherwise liable as a party to a transaction purportedly done by the actor on that persons account is subject to liability to a 3rd party who justifiably is induced to make a detrimental change in position because the transaction is bleived to be on the persons account, if

1. The person intentionally or carelessly caused such a belief, or having notice of such belief and that it might induce others to change their

positions, the person did not take reasonable steps to notify them of the facts

Agents Liability on the Contract Atlantic Salmon A/S v. Curran

o Issue is whether there is personal liability of an agent who at the relevant times was acting on behalf of a partially disclosed or unidentified principal

o Rest. 2nd §4(2) if the other party has notice that the agent is or may be acting for a principal but has no notice of the principals identity, the principal for whom the agent is acting is a partially disclosed principal . . . unless otherwise agreed, a person purporting t make a contract with another for a partially disclosed principal is a party to the contract

o Rest. 3rd § 6.04 – Principal Does not Exist or Lacks Capacity Unless the 3rd party agrees otherwise, a person who makes a contract with a

3rd party purportedly as an agent on behalf of a principal becomes a party to the contract if the purported agent knows or has reason to know that the purported principal does not exist or lacks capacity to be a party to a contract

o * Gold standard of how to sign on behalf of a corporation – disclose agent, principal, and capacity of agent

o Rest. 3rd § 6.10o Reversed, D is liable for specified amountso Analysis

1. The result would have changed if Marketing Designs was reinstated, would be disclosed

2. Does it seem that the P got more than they bargained for? 3. What should Curran have done to protect himself from liability? Signature

(gold standard capacity) 4. What should the P have done to protect against the need for litigation to

enforce their claims? Tried to see if the company was in existence. One of the first thing to do is look to see if it is a domestic or foreign corporation and in good standing

o Rest. 3rd § 7.07 –Employee Acting Within Scope of Employment 1. An employer is subject t vicarious liability for a tort committed by its

employee acting within the scope of employment 2. An employee acts within the sope of employment when performing work

assigned by the employer or engaging in a course of conduct subject to the employers control……..

3. A) employee is an agent who’s principal controls or has the right to control the manner and means of the agents performance of work, and

b) the fact that work is performed gratuitously does not relieve a principal of liability

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Section 3 – Liability of Principal to 3 rd Parties in Tort o Servant versus ICo Humble Oil v. Martin, 1949

Rest. 2nd §§1 and 2 – a master servant relationship exists whether the servant has agreed a) to work on behalf of the mater and b) to be subject to the masters control or right to control the physical conduct of the servant (that is, the manner in which the job is performed, as opposed to the result alone)

Humble was in control and liable

o Hoover v. Sun Oil Company, 1965 SJ granted, Barone was an IC Day to day operation of the service station was under Barone’s control – Sun

had no control over day to day operation

o Murphy v. Holiday Inns SJ granted and affirmed because the franchise contract did not constitute

control within the definition of agency Critical test is the nature and extent of the control agreed upon – Holiday Inn

was not deemed the employero Analysis

1. Rest. 3rd § 7.07 – Scope of Employment Rest. 2nd §219 – a master is subject to liability or the torts of his servants

committed while acting in the scope of their employment General rule – a principal is not liable for the torts of his non-servant agents 2. IC can be liable if inherently dangerous 3. A narrower test of control and nature, McDonalds isn’t in control because

they weren’t in control of the instrumentality of what caused the harm (security) – different than the other cases where it was a broad test of control

Would Humble have been liable under this test? Depends because they didn’t have control over the instrumentality of what caused the harm but, she left car to get repairs, station did repairs and sold gas, and court never talked about the repair business and if Humble exercised control over that business

4. Franchisors make money by uniformity (charge fee to franchisees), franchisees make money on the name that franchisors portray

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1/25 – p. 54-64 Tort Liability and Apparent Agency Miller v. McDonalds Corp., 1997

o P seeks damages from D when she bit into a stone while eating a big mac. Was a sign that said it was owned and operated by 3K, and assumed it to be owned by McDonalds because of all the signs, etc.

o Issue: is there the necessary typical agency relationship?o Issue 2: apparent agency, whether 3K was an agent of McDonaldso TC granted SJ on grounds that it did not own or operate the restaurant; owner was a

non-party, 3K Restaurants, that held a franchiseo Reversed, jury could find that a consumer would reasonably believe they owned and

operated because they hold their employers out to resemble McDonalds as uniformo Apparent agency and apparent authority distinguished – common element is the

manifestations coming from the principal, but as the court points out, agency creates an agency relationship that does not otherwise exist, while apparent authority expands the authority of an actual agent… In this case, the precise issue is whether 3K was D apparent agent, not whether 3K had apparent authority

o Analysis: Why is franchisor fighting this case? Want to set a precedent With tort cases, better to make apparent agency argument 3. Should McDonalds reduce the amount of control it exercises over its

franchisees, so as to avoid the risk of liability in cases such as this one? Franchisor allow franchisee exercise more control Express contracts

4. Imposing liability because they benefit economically 5. Yes, ER visits, apparent agency

o Problem p.58 Control over day to day operations, name, signage, somehow convey they are

independent (similar lobbies but not all the same) Ex. Best western uses different names to avoid liability and customer

confusion

Scope of Employment Ira S. Bushey and Sons v. US, 1968 - forseeability

o Whether this was in the scope of employmento Court looks at reasonable foreseeabiity of what may happen while on the jobo Affirmed, Government was responsible because it is foreseeable damage will be doneo Rest. 3rd §707(2) - Most courts look at whether they were serving any “purpose” of

the master, not foreseeabilityo Analysis:

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Manning v. Grimsley, 1983

o Must be shown that employees response to P conduct which was presently interfering with the employees ability to perform his duties successfully

o Rest. 2nd §231 – within scope although criminally or tortuous but serious crimes are outside the scope

o Res. §228(2) Arguello v. Conoco, Inc., 2000

o Scope of employment when Conoco owned the store? Yes, transaction Liability For Torts of Independent Contractors Majestic Realty Associates, Inc. v. Toti Contracting Co.

o Exceptions to IC rule of no liability 1. Landowner retains control over work done 2. Hires incompetent contractor

if hired an insolvent contractor, liable due to their own negligence 3. Per se nuisance * Inherently dangerous activity – peculiar risk of harm to others and takes

special precautions – principal will remain liable o Ultra hazardous – serious risk of harm

Fiduciary Obligations of Agents o Duties During Agency – 3 ways to breach DOL:

1. Agent getting a kickback (agent says to 3rd party, I will make sure my principal gives business to you if you give me some kind of payment)

2. Conflicts of interest by Agent (if agent is secretly dealing with principal and making money)

3. Use your position to make a profit – Regem case (sargeant escorted smugglers trucks through Cairo using his status in uniform)

*Rest. 2nd §387 – agents shouldn’t act against their principalo Reading v. Regan

Rest. 3rd §8.02 – duty not acquire material benefit from 3rd party in connection with transactions connected with principal or use of the agent position

Duty to act solely for principal as an agent Analysis: when the agent acquires some type of secret benefit, there is a trust

held for benefit of the principal, and the remedy will be a trust imposedo P.78 Problems

1. Same facts as Regan case, result would not change because they used their position to reap the benefit if sergeant was discharged 30 days before leaving on smuggler truck in uniform

2. Cashing in on fame is not a breach usually, doesn’t rise to the level, its more notoriety than using his position

3. Not use of position, not even in uniform, just royalties from a book

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2/1 – p. 79-111Chapter 1 - Fiduciary Relationships; Obligation of Agents Rash v. J.V. Intermediate, Ltd., 2007

o Issue: fiduciary relationship, if so, was there a breach (scope)? Yeso Rest. 2nd §387 – unless otherwise agreed, an agent is subject to a duty to his principal

to act solely for the benefit of the principal in all matters connected with his agencyo Held Rash was an agent of JVIC – hired to start Tulsa division from scratch, Rash

contractually agreed to perform the duties of an agent (full-time), and Rash doesn’t deny he was an agent but didn’t include scaffolding related ventures

o Court held Rash did breach because he failed to disclose his interest in TIPS to JVIo * Rest 2nd §13 – employee duty to deal openly with the employer and to fully

disclose to the employer information about matters affecting the company’s business

o Would have been okay if Rash had specific permission to do thiso Rest3rd §8.06 – principals consent

Fully disclose to principal and obtain consent is the safe harbor o Analysis: rest. 3rd §8.03 – Acting on Behalf of an Adverse Party

Duty not to deal in transactions questioning duty to principal * disclosure is huge, just disclose and you will avoid litigation

General Auto Manu. V. Singer, 1963o Singer hired as GM and when Singer realized Auto couldn’t do some of the work, he

would do it on his own by finding another company and keep the difference in price. He never disclosed this to Auto and they brought suit for breach of fiduciary duty

o Court affirmed lower court decision that by receiving secret profits from these orders, Singer violated his duty to act solely for the benefit of Auto

Duties During and After Termination of Agency: Herein of Grabbing and Leavingo Town and Country v. Newbery, 1958

Brought for an injunction and damages for unfair competition – assembly line of cleaners, special way of doing such business

Group of former employees targeted only former clients and nobody else to get business with a new company they started after leaving TandC.

Court held they would not solicit its customers any longer because they had special knowledge and access to the customer list that could not be obtained by just looking in the phone book

Presidents wife found all the customers over 3 years of work (240 customers after the time) only 13 went to the employees after leaving

* Different than a breach of fiduciary duty, because its more like a trade secrets case

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* Rest. 3rd §8.05 – use of principals property; use of confidential information Duty not to use property of the principal for the agents own purpose or

those of a 3rd party; and Duty not to communicate confidential info of principals information for

agents own purposes Analysis

1. What could D’s do to avoid liability? Go to the phone book, go to the contract (confidentiality)

2. Good reason why the D’s should not be permitted to hire a detective to do the same sleuthing and then use the list put together by the detective as a basis or telephone solicitation? 2 arguments but authors think it would be okay

Chapter 2 – Partnerships p. 87 Fundamentals

o Association of 2 or more persons to carry n a business for profit UPA §6o Default rules

See slideso Taxes: partnerships v. Corp’s.

Partnerships are pass through entities meaning that the partnership reports gains and losses to the individual partners who then report gains or losses on their individual returns

Corporations pay tax on their net profits No tax to owners until dividend or other distribution (but then double

taxation) Partnerships arise in 3 ways

o Partner or employee (Fenwick v. Unemp. Comm’n)o Partner or lender (Martin v. Peyton)o Partnership by estoppel (Young v. Jones)

Relevant factors: see UPA § 7o Intent of the partieso Sharing in profits/losseso Initial contributions to the businesso Conduct towards each other (control)

S corporationso Limited to 75 shareholders or lesso No corporate or alien shareholderso Limited to one class of stocko Requires SHs to include corporate income on their individual returns, like a

partnership, which helps investors in the early years because usually the corp will lose money in the early years

o But some restrictions on allocation of profits, and losses apply the way they do to corps

What is a Partnership and who are the Partners?

Partners Compared with Employees Fenwick v. Unemployment Compensation Commission, 1945

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o Whether Chesire was a partner or employee of Fenwick (Beauty Shop) because it would determine if he would have to pay money to the commission

o SC held she was not a partner, giving great weight to the fact the contract called themselves partners – not a lot of control, Fenwick liable for losses, controlled all the capital and Chesire had no right to share in capital upon dissolution

o UPA – partnership as an association of 2 or more person to carry on as co-owners a business for profit

Partners compared with Lenders Martin v. Peyton, 1927

o KNK trying to get bank loan for 2.5. PPF provide collateral for bank loan in securities. Bank wouldn’t accept KNK securities because they fluctuate.

o Issue: whether this was a partnershipo PPF would get 40% of KNK profits up to 2 years, rights to inspect, veto rights, etc.o Held that absence of a partnership agreement they would not be held partners, it’s a

loan agreement, not a partner – AFFIRMEDo Notes:

Some things that could have changed the decision were veto power, couldn’t buy in, took resignations of partners of KNK

Why wasn’t it enforced? They wouldn’t veto anything speculative because they want to make money

Was Hall PPF’s agent or KNK?

Partnership versus Contract o Southex Exhibitions, Inc. v. Rhode Island Builders Association, Inc., 2002

DC ruled non partnership Southex has control to put on the shows and bear the risk of loss UPA §6 Partnership defined as 2 or more persons to carry on as co-owners a

business for profit The contract had expired and basically was an at will contract from then on Looks as they are an IC for one show a year Why doest it matter if they re legally partners under UPA §24 and 25; they are

entitled to their share of the partnership assets Should have drafted more precisely if they wanted to be partners; sharing

profits and more control with RIBA, include sharing of losseso Young v. Jones, 1992

Unqualified audit – clean opinion, don’t really see any problems with the company, but here there was really a falsified financial statement

For estoppel, the court requires that one party holds itself out as a partner, or who expressly or impliedly consents to representations that she is such a partner, is liable to any 3rd person who extends credit in good-faith reliance on such representations - UPA §16

Held – no partnership, P’s did not extend reliance part to PW-USo * Meinhard v. Salmon, 1928

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To help finance the building and make improvements, Meinhard as a joint venture was to help Salmon. Near end of lease, Gerry wanted to level the building and put up a new building. Gerry approached Salmon and entered into a lease on all the ground (renewable up to 80 years), eventually calling for the destruction of the hotel and the building of a new, larger building. Meinhard found out about it and demanded he be held as an asset of their joint venture.

TC held Meinhard was entitled to ½ interest in the new lease and assume half of obligations – affirmed by reducing shares to keep Salmon in control

Duty owed? Salmon should have at least disclosed it to Meinhard, and some say at least include him in the opportunity to go broader/longer

UPA §404(b)

o Fiduciary Duties of Partners o Sandvick v. LaCrosse, 2008

JV is more limited in scope and limited duration Defined business as a series of acts directed toward an end Found a JV, not partnership

UPA 404(b) Held - Breached their duty of loyalty by taking advantage of a JV

opportunity when they purchased top leases without informing Bragg and Sandvick

Reads Meinhard as not just telling, but including them in the activity The business was the intent to buy and sell when they entered into them

o Grabbing and Leaving o Meehan v. Shaughnessy, 1989

Group of partners at a law firm attempting to leave firm. Supposed to give 3 months notice but gave 30. They leased a building and prepared for new firm.

Fid. breach claim by taking clients, secretly competing with the partnership, improperly handling cases for their own, not partnerships benefit

Obligation to render on demand true and full information of all things affecting the partnership to any partner – UPA §20

By not truthfully answering people in the firm questioning if they were going to leave was a breach

o Lawlis v. Kightlinger and Gray, 1990 Alleged wrongfully expelled Court said there was a partnership agreement and allowed the expulsion, it

was part of the agreement and no bad faith was present, they gave him a 2nd chance when the initial agreement said no second chances

Case brings up the point of what you would do if a partner begins to have a problem like this? Would you take away all their client files? Look at the impact it would have on clients

Class Discussion: Can you waive FD? If you don’t set forth in the agreement, go back to

default rules

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What if Lawlis was expelled right away? After looking at the agreement, it says no second chances, so it would have been okay because they can expel you under the 2/3 majority vote in the agreement

o Partnership Property o Putnam v. Shoaf, 1981

P and D shared gin business. Husband dies and P argues that her conveyance was personal property, not her actual interest, but the court found that she conveyed everything and will not get anything back after the fact

It belongs to the partnership and P is out of it because she conveyed everything to D’s

P can get what is in her capital account for her interest at that time Class discussion:

UPA §25 and 26 – using assets for the business, not for their personal benefit

UPA § 27 – if you just assign it, the assignee gets profit share only

2/8 – The Rights of Partners in Management – p.40-60 National Biscuit Company v. Stroud, 1959

o Partnership bound, all partners liable.o What either party does, they are bound on the parnership because there was nothing

in the statement to indicate Freemans power and authority was restricted or limitedo UPA §15 – J and SLo Derives from apparent authority in agency lawo If in a 2 party partnership, you could dissolve it

Class Notes:o * 2 party partnerships are dangerous; be careful how you draft ito What to do to prevent this?

Arbitration clause Summers v. Dooley, 1971

o The 2 parties entered into a trash collection business, when one couldn’t work, they would find a replacement at their own expense

o UPA §18(e) and (h) – any difference be decided by a majority of partnerso * Court held that it would be unjust to permit recovery of an expense which was

incurred individually and not for the benefit of the partnership but rather for the benefit of one partner

o Agency principle – Summers argues Dooley ratified by accepting profitso Analysis: what should Summers have done? Dissolve the partnership

On the front end, Summers could have tried to gain more control on paper Why could Freeman bind his partnership but Summers couldn’t? Between

partners and 3rd parties they will honor it as a partnership (J and SL) but between 2 parties they must have majority

Day v. Sidley & Austin, 1977o Day resigned after a merger and move to a new office. He would no longer be in

charge of the office; he wanted to stay in charge. Alleges fraud, breach of FDo No legal cause of action, he signed papers, no breach because D did not benefit in any

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o Executive agreements controls all affairs and has more interest, Days interest is not as great as the other exec members

o Provision for exit; buyout formulas are helpful to consider on how to get people out/get rid of people

Section 6 – Partnership Dissolution Owen v. Cohen

o Issue: whether or not the evidence warrants a decree of dissolution of the partnership

o * Affirmed: UPA §32(b) – rule – willful breach, not reasonably practicalo Reasoning: breach was in large part due to the D’s persistent endeavors to become

the dominating figure of the enterprise and to humiliate the P before the employees and customers of the bowling-alley

o Partnership for a termo Analysis:

Legal effect of the order for dissolution? Sell the business, practical effect may be that one partner may buy out the other and continue

Collins v. Lewis, 1955o Lewis obtained commitment conditioned upon financial backing from Brown-

Bellows-Smith Corporation for lease on a basement under then the San Jacinto Building for purpose of constructing and operating a large cafeteria. Lewis contracted Collins proposing he (Lewis) would furnish the lease and Collins would furnish with money and profits would be divided equally between Lewis and Collins. Never happened because Lewis couldn’t come to terms with building owners. Eventually came to terms and the formed partnership, splitting control evenly.

o Court affirmed TC denying all relief sought by appellantso Reasoning: Lewis paid out of earnings of the business during the first year of its

operation. Lewis met his obligation, and the TC properly denied foreclosure of the mortgage. Also Collins failed to protect Lewis from any demand for payments as long as Lewis met his obligation

o Analysis: Power v. Right?

Partnership for a term and he can get out of the partnership because he has the power to get out, but may not have the right since it is a term (could be wrongful dissolution)

What does Collins do now? Keep going, stuck with each other and see how to make it work

What could Collins have done to protect himself? Some kind of cap or limit on the cost/expenses

Page v. Page, 1961o Partners in a linen supply company. Oral partnership, within 2 years each contributed

43,000 for land, machinery, and linen needed to begin the business. From 49-57 it was unprofitable, losing close to 62,000.

o P appeals from judgment declaring this partnership to be for a term rather than at will. Reversed.

o For a term factors in argument: previous partnerships, previous terms. Court rejects this because it wasn’t a definite term or particular undertaking

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o * Rule: show mutual understanding that there is a definite term or particular undertaking that can be accomplished a certain time

o Problems If you want to bring a new partner, what should Page do? Appraisal remedy –

buy out to bring in another Liquidate and pick up its better accounts, what to do? Good faith and FD

2/10 – Business Associations – p.161-181 - missed Consequences of Dissolution

o Prentiss v. Sheffel, 1973 Whether

2/15 – p.286-309 – Limited Liability CompaniesSection 1 – Formation

* To form an LLC, you must file “articles of organization” with the Secretary of State – members own part (managers) – operating agreement

Corps file articles of incorporation – shareholders own part - bylaws Partnerships file certificates of limited partnership sometimes – partners own part (GP and

LP) – partners agreement Water, Waste and Land Inc., v. Lanham, 1998

o Whether members or managers of a LLC are excused from personal liability on a contract where the other party to the contract did not have notice that the members or managers were negotiating on behalf of a limited liability company at the time the contract was made

o Court says that company would have to disclose they were an LLC under the statute and replaces common law agency. Lanham and Clark didn’t disclose they were working for the LLC and they are liable

o The agent has to disclose they are acting on behalf of the principal and the capacity in which you are acting (as manager, secretary, etc)

o Analysis If you work for a principal who doesn’t want his identity known, agent should

contract for indemnification provision from principal

Section 2 - The Operating Agreement Elf Atochem North America, Inc. v. Jaffari, 1999

o Derivative suit is a suit brought by members or shareholders of the LLC on behalf of the company or corporation(usually against a 3rd party)

o Elf was a PA corporation and Malek was a CA corporation, and they formed Malek, LLC

o LLC statute is more flexible than Corp. statutes – courts leave it to the parties to draft agreements they want to make

o Agreement is binding on the LLC as well as the members on the basis of freedom of contract and arbitration clause is valid

o You can set standards but cannot not be immune from all liabilityo Corporations would allow provisions to do away with liability – indemnification

Fisk Ventures, LLC v. Segal, 2008o Class A – 55% Segal (patents)o Class B – Johnson/Fisk LLC (money)

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o Class C – passive members (o Convertible debt is debt that is convertible into equity, generally at the option of the

holder of the debt (that is, the lender)o Put right – would subrogate what would otherwise be senior claims of new investorso Court held that the mere exercise of ones contractual rights, without more, cannot

constitute…a breach of the implied covenant of good faith and fair dealing Negotiating forcefully and within the bounds of rights granted b the LLC

agreement does not translate to a breach of the implied covenant on the part of the Class B members

o The operating agreement here was not to front all the money, they were limited

Piercing the LLC Veil Kaycee Land and Livestock v. Flahive, 2002

o P trying to pierce the veil of LLC to hold Flahive personally liable o Some states specifically authorize piercing the veil but the LLC statute does noto Court said they would treat LLC’s as Corp.’s and individually as members they can be

liableo Analysis

Differences between LLC and corporation relevant to piercing? LLC can be managed by members while corp.’s usually have a board of

directors Failure to observe formalities (organizational things) is a factor to be

considered but there needs to be more (unjust practices, etc.)o Problem p.297

There was not enough to rise to the level of unjust McConnell v. Hunt Sports Enterprises

o Parties trying to get an NHL team but everything fell througho Operating agreement allowed competition between parties, they both signed ito Members of an LLC can define their scope of fiduciary duty, therefore it was not

violated since both signed away on it

Dissolution New Horizons v. Haack

o Members of an LLC can be held personally liable for the debts of their LLC if they fail to properly dissolve the LLC under the relevant statutes

2/17 and 2/22 p.182-213 Chapter 3 – Nature of the Corporation Created and governed by state, not federal law (Congress could adopt federal laws of corps

but haven’t) Complex mix of federal and sate laws cover:

o The issuance of securities by corporations (“primary market”)o Trading securities (secondary market)o See slideso COA - certificate of authority – foreign companies register within a state

Promoter refers to a person who identifies a business opportunity and puts together a deal, forming a corporation as the vehicle for investment by other people

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o Considered to owe a fiduciary duty to corporation they work for (they are agents) Owner/manger model – close corporation, shareholders also manage Publicly traded corporation – many shareholders, no managers Hypos:

o No agency duty but she cant lie

Southern Gulf Marine Co. No. 9, Inc. v. Camcraft, Inc., 1982o 1978 – letter signed B individually signed and president of SGMo 1979 – VCC signed by president of SGMo 1980 signed letter by B individually and president of SGM (now a Cayman corp.)o Breach of contract issueo D claims lack of corporate existence at the time of entering into the contract – TC

sustained motion for no cause and this court reversedo Letter of agreement to purchase 156 boat; presidents of both parties signedo *Court reversed saying there was a contract in place, the boat had been partially built

and financing by the buying party had occurred *A corp. is present when you plan on doing so – other theory *De facto corp. - A court may treat it as a corp. act in good faith try to

incorporate but unsuccessful – other theoryo P legal status is not germane to any cause for contract and should not be grounds for

avoidance of contract

Walkovsky v. Carlton, 1966o P injured by cab owned by D, P alleges negligently owned and defraud members of

the general public because these 10 corporations are all run as oneo Lower court granted motion, appellate reversed on grounds there was a cause of

actiono 3 legal doctrines o Can you get to Carlton individually by piercing the corporate veil? No, its common

in the industry and run normally Factors in piercing analysis

Comingling funds – if personal funds are comingled with corporate funds then it could lead to trouble

Not following corporate filings Undercapitalization -

o Enterprise liability – breaking down the horizontal barriers of a corporation to make them all liable

Factors for enterprise liability Common name, services, pay Undocumented transfers between companies Same telephone number Same building

o Respondeat superior – he is entitled to hold the whole enterprise responsible for his acts

o Piercing and enterprise liability as possible P arguments

Sea-Land Services, Inc. v. Pepper Source, 1991

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o Sea Land shipped peppers on behalf of Pepper Source, PS stiffed Sea Land on the freight bill, Sea Land filed diversity suit for money it was owed

o DC entered judgment for Sea Land for 86K, but PS had been dissolved for failure to pay state franchise tax, and PS had no assets, Sea Land then brought this against business owner

o Sea Land sought to pierce the corporate veil and hold Marchese personally liable for the judgment of 86K and reverse pierce so all entities he owned would be on the hook for 87K (reverse pierce you can get to assets of other corps. And first in line to get them)

o **A corporate entity will be disregarded and the veil o limited liability pierced when two requirements are met (2 parts)

1. Must be such unity of interest and ownership 2. Circumstances must be such that adherence to the fiction of separate

corporate existence would sanction a fraud or promote injustice To determine if corp. is controlled b another to justify disregarding their

separate identities 4 factors 1. Failure to maintain corporate records or comply with corporate

formalities 2. Commingling of funds 3. Undercapitalization 4. One corp. treating other assets as their own

Policy behind piercing veil If you’re going to disregard the veil then why should we make creditors

respect it; and promoting injusticeo Reversed to DC because Sea Land needed to prove more wrong for the injustice test

Found for Sea-Land against Marchese

Roman Catholic Archbishop of SF v. Sheffield, 1971o Alter ego rule – must be made to appear that the corp. is not only influence and

governed by that person, but that there is such a unity of interest and ownership that the individuality, or separateness, of such person and corp. has ceased, and the acts are such that an adherence to the fiction of the separate existence of the corp. would under the particular circumstances, sanction a fraud or promote injustice

o Cant hold separate liable because there not so related, commingled, holding another out as liable for others

In re Silicone Gel Breast Implants Products Liability Litigation, 1995o Bristol Myers is sole shareholder of Medical Engineering Corp., a major supplier of

implants, but never manufactured or distributed them Asserts evidence is insufficient for P to proceed through piercing the veil and

direct liabilityo Bristol sought SJ, not granted because of corporate control and direct liability

Fridgeaire Sales Corporation v. Union Properties, 1977o Fridgeaire appeals on a holding that limited partners do not incur general liability for

the limited partnerships obligations simply because they are officers, directors, or shareholders of the corporate general partner…affirmed appeals court

o P tried to get to limited partners of CI.

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o Limited partners would not be held liable, general partners would be liableo Limited partners cant be liable when acting in their official capacity even if they are

exercising control

2/24 – p.214 – 223 Section 3 – Shareholder Derivative Actions

o If they have personal injury then it should be brought as a personal suit

o Cohen v. Beneficial Industrial Loan Corp., 1949 Issue: The issue is whether New Jersey’s statute requiring the payment of

legal fees in the event of an unsuccessful derivative suit should be followed by the federal courts.

A shareholder’s derivative suit will follow state non-procedural laws regarding the derivative suits when possible.

o Eisenberg v. Flying Tiger Line When the injury suffered was personal, rather than an injury of the

corporation, the suit should not be considered derivative for the purposes of requiring a posting of security for opposing legal expenses.

Special injury test – determine if direct or derivative – separate injury

o A.P. Smith Mfg. Co. v. Barlow, 1953 Corporate gift-giving is an allowable method of increasing goodwill, but the

gift should be less than 1% of capital and surplus and directed to an institution owning no more than 10% of the company stock.

Courts aren’t going to second guess the judgment of the board of directors as long as its in the corporations interest like the business judgment rule

o Class Notes When there are few shareholders, what would you do to protect yourself?

o Dodge v. Ford Motor Co. The purpose of a corporation is to make a profit for the shareholders, but a

court will not interfere with decisions that come under the business judgment of directors

The purpose of the corporation is to make money for the shareholders, and Defendant is arbitrarily withholding money that could go to the shareholders. Notably, Ford did not deny himself a large salary for his position with the company in order to achieve his ambitions. However, the court will not question whether the company is better off with a higher price per vehicle, or if the expansion is wise, because those decisions are covered under the business judgment rule.

o Problems p.280 1.

Chapter 5 – Duties of Officers, Directors, and Other Insiders Kamin v. American Express Company, 1976

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o Hurt the company - Derivative brought by 2 minority stockholders of AmEx claiming a certain dividend is a kind of waste of corporate assets – Amex chose to distribute dividends to shareholders rather than sell it (it would look like a 25mil. Loss)

o With business judgment rule – doesn’t matter if directors make dumb decisions but don’t act selfishly or with gross negligence or egregious misconduct

o Issue: minus a showing of bad faith, fraud, oppression, or breach of trust, are the business judgment decisions of corporate directors judicially rescindable for alleged imprudence or mistaken judgment?

o Holding: (no)o No fraud, directors just overlooked facts called to their attention, they gave

consideration and attempted to view the total picture in arriving at their decision

Smith v. Van Gorkom, 1985o Harm is to the shareholders – direct class actiono Issue: did the directors act in accordance with the requirements of the business

judgment ruleo No, reversedo BJR presumes that directors act on an informed basis, in good faith, and in an honest

belief that their actions are for the good of the company You have to inform shareholders, directors were grossly negligent (failing to

provide info to shareholders) in the way they acted in the first board meeting that approved the merger – receiving premium price over market is not enough evidence of intrinsic value

Francis v. United Jersey bank, 1981o P’s did nothing and that violates their duty to act in good faith as ordinarily prudent

persons would under similar circumstances in like positions Generally should have a basic understanding of the corporations business and

knowledge about its ongoing activities, which require a general monitoring of its affairs and policies

o Directors and officers do not owe fiduciary duty to 3rd parties

1. LLC’s Guest Speaker2. Popular in the early 90’s3. Not large LLC’s because its so hard administratively (so many stockholders to take care of)

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