I

Business Organizations- Rousseau

I. Introduction

A.Corporate Structure:

1. Profit Corporations

a.) Publicly Held Corporations

b.) “Closely-held” Corporations

2. Non-profit Corporations

3. Public Corporations

a.) State-controlled public corporations

b.) Federally-controlled public corporations: (FDIC, Fanny May, etc…)

II. AGENCY LAW

Qui facit per alium, facit per se: He who acts through another acts himself.

A.Introduction:

1. Agency law is designed to balance the rights and needs of persons in charge with those who work for them and with those who deal with those who work for them. The primary goal of Agency is efficient economic conduct. Agency law makes business more efficient; this division of labor allows everyone within the economic system to do what they do best. The drawback = interdependence.

2. Agency Terms:

a.) Principals: the real or legal person(s) that governs and directs, and from whom the authority originates. The person acting or accomplishing some task with the assistance of another who consents to act for and on behalf of the person and subject to the person’s control. This person appoints the agent and gives the agent his authority, as well as controls the agent’s actions.

b.) Agents: the worker directed and controlled by the legal or real principal. This person accepts his agency from the principal and deals with the third party.

c.) Third Party: the person with whom the agent transacts business for the principal.

NOTE: In privately owned businesses, a real person is often the principal, with all those working for and with the principal being his agents.

3. Louisiana Agency Law: gradually, but certainly evolving toward common law agency principles.

a.) As of 1998, Louisiana no longer uses the term “agency.” Passed mandate laws. We call what is referred to everywhere else as agency, “representation.”

b.) La. C.C. Art. 2985; Representation.

“A person may represent another person in legal relations as provided by law or juridical act. This is called representation.”

c.) La. C.C. Art. 2986; The authority of the representative.

“ The authority of the representative may be conferred by law, by contract, such as mandate or partnership, or by the unilateral juridical act of procuration.”

d.) La. C.C. Art. 2987; Procurations defined; person to whom addressed.

“A procuration is a unilateral juridical act by which a person, the principal, confers authority on another person, the representative, to represent the principal in legal relations.

The procuration may be addressed to the representative or to a person with whom the representative is authorized to represent the principal in legal relations.”

Not effective until the other person accepts. So, unilateral as used here just means simplistic.

e.) La. C.C. Art. 2988; Applicability of the rules of mandate.

“A procuration is subject to the rules governing mandate to the extent that the application of those rules is compatible with the nature of the procuration.”

f.) La. C.C. Art. 2989; Mandate defined.

“A mandate is a contract by which a person, the principal, confers authority on another person, the mandatary, to transact one or more affairs for the principal.”

Not called a representative because this term is used for procuration.

g.) The Principles of La. Representation:

i. Principal is ALWAYS in control of the agent, regardless of a contract to the contrary.

ii. Agency is always terminable at will. (with one exception) (also does not fit the general rules of contract). New law says that if the parties want the mandate to be irrevocable, they must agree and specify. We don’t know what the courts will do with this.

iii. No recovery for termination of agency (also different from the general rules of contract where you get damages for breach).

h.) Agency Coupled with an Interest = “Mandate in rem suam”; these agreements are non-terminable and are exceptions to the general principle stated above.

i. Example: You tell your broker to buy stock. Broker is simply an agent,

you make the call and he buys for you. But, when you sign a margin

agreement, the broker is a co-principal. The broker under a margin

agreement has the power to sell if you don’t meet the margin. This is an

example of agency coupled with an interest. (also called leverage).

4. Common Law Agency Principles:

Restatement (2nd) of Agency § 7

a.) When an agent is acting accordance with the authority given by the principal, the agent is said to have the right to bind the principal.

i. third party can sue principal but not agent when the agent manifests his status.

b.) When the agent is acting without authority or even in direct contravention of instructions by the principal, and the law nevertheless imposes liability on the principal because of estoppel (Bekins case), apparent authority, unjust enrichment, detrimental reliance, the agent is said to have power to bind the principal.

NOTE: The agent’s power to bind is broader than his right to bind the principal.

c.) Liability for undisclosed agency relationships: The third party can sue both the principal and the agent; while the principal can sue the third party even though his name was never mentioned by the agent in his transaction with the third party.

5.Types of Agency Arrangements

a.)With Actual Authority

i.) Expressed Authority: what the principal told the agent.

· There must be expressed authority when an act of ownership is sought. Follows the “equal dignity rule”: If the document must be in writing, then the power of attorney must be in writing also. Some of these agreements must be in writing(land sales, mineral transactions, compromises), but not all.

ii.) Implied Authority: this authority is implied from a general grant of authority to the agent. This is real authority flowing directly from a grant of power by the principal to the agent. Art. 2995. Ex: I appoint you as my attorney. I don’t have to say that you have the authority to make motions and pleadings and conduct depositions. The powers that the attorney will undertake go under implied authority.

b.)Without authority, but the principal is still bound to the third party. The purposes of these doctrines are: (1.) Protection of the third party from the principal; (2.) Protection of the agent from a suit by the principal.

i.) Apparent authority

ii.) Estoppel

iii.) Detrimental Reliance

(1) alternative theory to apparent authority

(2) Breaux v. Schlumberg – third party recovers where an agent without authority tells a third party that he has authority. But, a third party cannot always blindly rely upon the assertions of an agent. Focus is on what the agent said.

iv.) Inherent agency power

(1) used where apparent authority is weak.

(2) Criticized by commentators, but recognized by courts

v.) Emergency power:

(1) example: guy who pulls in cotton from a fire wants to be paid

vi.) Unjust Enrichment and Negotiorum Gestio: in Louisiana, the elements are:

(1) no other remedy at law

(2) one is enriched

(3) one is harmed

(4) example: lawyer is hurt in car wreck and a friend comes in and helps by filing briefs making motions, etc. The friend is not an agent because he is not appointed. Civil Code calls it mandate without authority.

6. Master; Servant; Independent Contractor.

a.)Master: A master is a principal who employs an agent to perform services in his affairs and who controls or has the right to control the physical conduct of the other in the performance of the service.

i.) This is the concept behind “Respondeat Superior”: whereby the principal is responsible for the servant-agent’s torts.

b.)Servant: A servant is an agent employed by the master to perform service in his affairs whose physical conduct in the performance of the service is controlled or is subject to the control by the master. Note: a lawyer is a non-servant agent.

c.)Independent Contractor: An Independent Contractor is a person who contracts with another to do something for him, but who is not controlled by the other not subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking. He may or may not be an agent. An Independent Contractor relationship exists when:

1. There’s a valid contract between the parties;

2. The work being done is of an independent nature such that the contractor may employ non-exclusive means in accomplishing it;

3. Contract calls for specific piecework as a unit to be done according to the I.R.’s own methods without being subject to the control of the P, except as to the result of the services to be done.

4. There is a specific price for the overall undertaking; and

5. Specific time duration is agreed upon & isn’t subject to termination at the will of either side without liability for breach.

Relationship:

The agreement:

Scope of Control:

Agency:

Principal/Agent

The principal (P) manifest consent that the agent (A) shall act on the P’s behalf. The A consents to act for P. Not necessary to have a contract.

The A is subject to the P’s control or right of control.

Master/Servant

Employment by master of servant to perform services in master’s affairs. The Servant agrees; contract unnecessary.

The servant is subject to the master’s control or right of control of physical conduct or performance.

P / Indep. Contractor

P contracts with I.R., who contractually agrees to do something for P.

I.R. is subject to P’s control but not subject to P’s control of physical conduct of performance.

Non-agency:

Owner or employer/ I.R.

Owner or employer contracts with I.R., who contractually agrees to do something specific for employer or owner.

I.R. is not subject to employer or owner’s control: contract provisions are determinative.

7. Disclosed; Partially disclosed; Undisclosed Principals:

a.)If, at the time of a transaction conducted by an agent, the other party thereto has notice that the agent is acting for a principal and of the principal’s identity, the principal is a disclosed principal.

b.)If the other party has notice that the agent is or may be acting for a principal but has no notice of the principal’s identity, the principal for whom the agent is acting is a partially disclosed principal.

c.)If the other party has no notice that the agent is acting for a principal, the one for whom he acts is an undisclosed principal.

i.) NOTE: The undisclosed P is liable when he authorized A to act or when it is within the scope of the Agent’s employment. The undisclosed P can sue the third party; while the third party can sue the undisclosed P and the agent.

8. Agency relationships distinguished from other relationships.

Agency is the fiduciary relationship created by mutual consent of principal and agent in which the agent agrees to action primarily on behalf of and for the benefit of the principal subject to the principal’s control.

a.) Party providing benefit is a fiduciary but isn’t subject to control:

i.) Trustee – Beneficiary

ii.) Administrator (Executor) – Heirs

iii.) Tutor – Minor

iv.) Corporate Director – Corporation

b.) Party providing benefits isn’t a fiduciary & isn’t subject to control:

i.) Lessor – Lessee

· Control is the determining factor for determining if an agency agreement exists between parties who generally are not considered to be in that relationship.

ii.) Bailor – Bailee

iii.) Creditor – Debtor

· A controlling creditor runs risks of becoming a principal. See Cargill, 309 N.W.2d 285.

iv.) Escrow Holder – Parties to the escrow agreement

v.) Sellers – Buyers

9. Agency Relationship defined: “the fiduciary relation which results from 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.” ( §1.

a.) Three elements of Agency: (agency law is sui generis).

i.) Consent of the Principal and Agent

ii.) Control of the Agent by the Principal

iii.) Agent’s action on behalf of the principal

b.) Agency is consensual, but it is not contractual in essence. Rousseau: The relationship of principal and agent doesn’t fit neatly into a contractual relationship.

c.) Control of the agent by the principal.

i.) Principal must exert some meaningful control over the agent; but the control need not be all embracing or present at each moment.

ii.) As between the P and the A, the A’s consent to the P’s control is an essential element.

ii.) From an evidentiary point of view, control can be used to prove the existence of an agency relationship where it has not been formally pronounced.

d.) Agent’s acting on behalf of the Principal:

i.) LSA CC Art. 2991; Interest served.

The contract of mandate may serve the exclusive or the common interest of the principal, the mandatary, or a third person.

10. Distinctive Doctrines:

a.) Vicarious Tort Liability of the Principal: Respondeat Superior

i.) Urbeso v. Bryan (La. 4th Cir.1991)

· Facts: ( alleged that the sheriff was vicariously liable because Bryan towed vehicles as an employee/agent for the Sheriff’s Office. ( also alleged that the sheriff was negligent because he permitted his agent to be uninsured. The sheriff chose Bryan’s company to do its towing; they had to answer when the sheriff requested a tow; the sheriff’s office determined the charges imposed for towing; the sheriff determined the location to which the towed vehicle was to be towed. The sheriff argued that the contract said that Bryan was an IR; Bryan handled all of the “hook-up” details on the job; social security was not withheld from his checks; Bryan owned the tow-truck, not the sheriff.

· Holding: Remanded to the lower courts, finding that summary judgment was inappropriate and Bryan might be an agent for the sheriff, who may be liable for Bryan.

b.) Apparent Authority: An equitable doctrine under which the principal is liable to good faith third parties for the unauthorized acts of an agent under circumstances in which the principal has made a sufficient manifestation or indication that the agent does have authority upon which the third party can reasonably rely.

i.) For the doctrine of apparent authority to apply:

1. The apparent principal must act to manifest the agent’s ostensible authority to an innocent third party.

2. The manifestation must reach the third party.

3. The third party must be reasonably caused to believe that the apparent principal has authorized the agent to act for her/him.

4. The third party is thus caused to act or not act to his/her detriment.

ii.) Generally, the Civil law does not subscribe to the doctrine of apparent authority, but Louisiana has cases that reference apparent authority, and rely on it to resolve disputes.

iii.) Rousseau Question: Where does La. get apparent authority from? Article 3021 captures apparent authority. Basically the same as common law.

iv.) Sometimes there is a duty for the third party to inquire into the agent’s authority, but it is a fact sensitive determination.

A. What happens when you don’t have actual authority, but the agent does something & the third party thinks the principal is responsible?

1. Ratification = “affirmance by person of prior act did not bind him but was done or professedly done on his account, whereby the act, as some or all persons is given effect as if originally authorized by him.” Found in thirty articles in the restatement of agency (82-104).

a. This applies if the principal likes what the agent has done.

b. In order to ratify, the agent must have been a true agent.

c. Failure to repudiate may manifest the consent of the Principal to be a party to the transaction and retention of benefits can constitute affirmance.

2. Elements of Ratification:

a. There must be some unauthorized act by someone purporting to act as the principal’s agent.

b. At the time of the unauthorized act the principal must have existed with capacity to act.

c. The principal must objectively affirm (consent) the unauthorized act, based on full knowledge of the facts pertaining thereto.

i. The principal must accept the whole deal.

ii. The acceptance must take place before the third party withdraws the offer.

3. Effects of Ratification

a. Liability of the principal and the third party to the contract, or the principal’s liability for the agent’s tort or act.

b. The liability dates back to the time of the original unauthorized act of the agent, Except:

i. When the situation has so materially changed that it would be inequitable to hold the third party accountable; or

ii. When rights of other parties would be affected because the third party has taken action without knowing of ratification.

c. The agent, upon ratification, is neither liable to the principal nor is the agent liable to the third party.

i. However, if the principal ratifies the agent’s tort or wrongful act the agent is not liable to the principal but remains liable in tort to an injured third party.

d. Ex: Stock broker is told to buy 1,000 shares. Broker buys 10,000. If buyer waits to see how it does, then the stock goes well, then tells the broker that he ratifies. There are two theories that try to bring in equity:

i. if there is a changed circumstance, the third party can refuse.

ii. It can be seen as a counter offer.

e. ratification is actual authority.

B. What happens when the agent acts without authority & the principal doesn’t want to ratify, but the court uses a legal doctrine to hold the principal responsible- Power to bind by operation of law.

NOTE: Agency power is the power to bind the principal even though the agent has no right to bind because of lack of authority or ratification.

Apparent Authority = Legal responsibility of the principal because he has made some manifestation which put the agent in the position to induce third parties to believe and reasonably rely upon the agent’s authority to act, even where such authority does not exist. (See La. C.C. Art. 3021).

Interstate Electric Co. v. Frank Adam Electric Co.

Facts: The manufacturer (P) had a long-standing agreement with a regional distributor (A1) under which A1 would accept orders on behalf of P from third parties. Then P fired A1 and hired a new agent (A2), and told the new agent that he must submit all orders to P for approval and P would then accept orders in direct dealing with the third party. A2 chose to accept without submitting the third party’s offer to the P, and the P later rejected the offer.

Issue: Whether the P is bound by A2’s actions in derogation of their agreement?

Holding: Yes; The P should have notified the third party that there was no longer authority for the agent to accept orders without P approval. Because of the past course of dealing and conduct between the parties, the P was responsible for the new A’s actions with the third party.

Boulos v. Morrison (La. 1987)

Facts: Plaintiffs dealt with Mike at a store. Mike failed to deliver on the deal and the plaintiffs sued the store on the theory that Mike was an agent of the store. The owner and the manager testified that Mike was not an employee, but was just “hangin’ around” the store. Mike was not allowed to go behind the counter, operate the cash register, or write up an official sales slip. Mike was simply paid a 5% commission for any business he brought to the store. He was not authorized to have a business card, and the fact that he had one was denied by the defendants. The plaintiffs were “sophisticated” business people who had dealt in jewelry sales before.

Issue: Whether plaintiffs carried their burden of proving that Mike had apparent authority, on which they reasonably relied, to act on behalf of the store?

Holding: No; under the “clearly erroneous” standard applicable when reviewing a trial court’s factual findings, the plaintiffs have not met their burden.

Rationale: (1.) The plaintiffs failed to prove that the actions of the owner and manager manifested an intent to make Mike an agent. (2.) The facts and circumstances should have caused the plaintiffs to question Mike’s authority and good faith. (3.) The crucial factor is plaintiffs’ failure to prove that they reasonably relied upon Mike’s purported authority.

Rule: a third party has the duty to inquire into the nature and extent of an agent’s power.

Independent Fire Insurance Co. v. Able Moving and Storage Co. (La. 1995)

Facts: Mary Hebert planned to move some furniture. She looked in the telephone directory and saw a familiar name, Bekins. The ad was designated and purchased by Bekins. At the bottom of the add, printed in small type, was the name Able Moving and Storage. Mary could not read the small print and thought the entire add was for Bekins. When she called the number, nothing indicated that she had reached Able’s office. She made the check out and it was endorsed to Bekins. When the movers got there, their shirts, caps, and vans said Bekins. One of the movers lit a cigarette and caught her house on fire. When Hebert sued Bekins, she found out that Able went bankrupt. Bekins had interstate moving authority and Able had only intrastate.

Issue: Can a national moving company have liability for a fire caused by its insolvent agent?

Holding: Mary Hebert reasonably believed she was dealing with Bekins rather than Able, creating liability under the doctrine of apparent authority.

Rationale: Bekins and Able had a full service agency contract. This is one type of mandate in Art. 2986. court looked to § 8 of the Restatement of Agency which defines apparent authority as the power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other’s manifestations to such third persons. Here, Able had actual authority from Bekins, and also had apparent authority manifested by Bekins’s advertising and Able’s use of Bekins’s name. When the apparent scope of an agent’s authority is relied upon by innocent third persons to their detriment, the principal is liable. Here, the principal published and paid for an advertisement which gave the erroneous impressions that third parties actually dealing with Able were dealing with Bekins.

1.In summary, apparent authority requires two things:

a. a representation by the principal and

b.detrimental reliance by a third party.

2.Distinguished from Boulos because there, the Ps did not convince the trial court that the principals manifested apparent authority to their claimed agent or that Ps reasonably relied on that purported authority.

3.See notes in supplement page 112.

Title XV:Representation and Mandate.

Chapter 1. Representation

La. C.C. Art. 2985: Representation.

A person may represent another person in legal relations as provided by law or by juridical act.

This is called representation.

Comments:

Representation is used to convey the same meaning as the word “agency” in common law systems.

La. C.C. Art. 2986: The authority of the representative.

The authority of the representative may be conferred (1) by law, (2) by contract, such as

mandate or partnership, or (3) by the unilateral juridical act of procuration.

Comments:

The word “mandate” applies exclusively to contracts of mandate whereby a person called principal, authorizes another person, called mandatary, to transact an affair on behalf of the principal.

La. C.C. Art. 2987: Procuration defined; person to whom addressed.

A procuration is a unilateral juridical act by which a person, the principal, confers authority on another person, the representative, to represent the principal in legal relations.

The procuration may be addressed to the representative or to a person with whom the representative is authorized to represent the principal in legal relations.Comments:

The civilian term “procuration” is used instead of the colloquial term “power of attorney,” which is a common law term of art.

A procuration is a unilateral juridical act that confers on the representative authority to represent the principal in legal relations. It differs from a contract of mandate which is a “contract” that confers on the mandatory authority to transact one or more affairs for the principal.

The procuration is not required to be in a particular form. Nevertheless, where the law prescribes a certain form for the authorized act, a procuration authorizing the act must be in the same form.

La. C.C. Art. 2988: Applicability of the rules of mandate.

A procuration is subject to the rules governing mandate to the extent that the application of those rules is compatible with the nature of the procuration.

Chapter 2. Mandate

Section One: General Principles

La. C.C. Art. 2989: Mandate defined.

A mandate is a contract by which a person, the principal, confers authority on another person, the mandatary, to transact one or more affairs for the principal.Comments:

A mandate is a contract; a procuration is a unilateral juridical act.

1)Common law says, however, that agency is not a contract.

2) Contract law really only governs the contract of hire.

La. C.C. Art. 2990: Applicability of the rules governing obligations.

In all matters for which no special provision is made in this Title, the contract of mandate is governed by the Titles of "Obligations in General" and "Conventional Obligations or Contracts."

La. C.C. Art. 2991: Interest Served.

The contract of mandate may serve the exclusive or the common interest of the principal, the mandatary, or a third person.

La. C.C. Art. 2992: Onerous or gratuitous contract.

The contract of mandate may be either onerous or gratuitous. It is gratuitous in the absence of contrary agreement.

La. C.C. Art. 2993: Form.

The contract of mandate is not required to be in any particular form.Nevertheless, when the law prescribes a certain form for an act, a mandate authorizing the act must be in that form.

Comments:

Ex: The law requires that a donation be made by authentic act. Therefore, a mandate authorizing the mandatory to made a donation must be made by authentic act.

La. C.C. Art. 2994: General Authority.

The principal may confer on the mandatary general authority to do whatever is appropriate under the circumstances.

1)This is implied authority in Louisiana

La. C.C. Art. 2995: Incidental, necessary, or professional acts.

The mandatary may perform all acts that are incidental to or necessary for the performance of the mandate.

The authority granted to a mandatary to perform an act that is an ordinary part of his profession or calling, or an act that follows from the nature of his profession or calling, need not be specified.

La. C.C. Art. 2996: Authority to alienate, acquire, encumber, or lease.

The authority to alienate, acquire, encumber, or lease a thing must be given expressly. Neither the property nor its location need be specifically described.

La. C.C. Art. 2997: Express authority required.

Authority also must be given expressly to:

(1) Make an inter vivos donation.(2) Accept or renounce a succession.(3) Contract a loan, acknowledge or make remission of a debt, or become a surety.(4) Draw or endorse promissory notes and negotiable instruments.(5) Enter into a compromise or refer a matter to arbitration.

(6) Make health care decisions, such as surgery, medical expenses, nursing home residency, and medication.

a.Ex: If the contract of mandate states, “you shall be the manager of our store,” this is actual authority. Also implied authority because he had the right to buy and sell specific goods. But, if the manager goes to the bank and tries to borrow money to buy the merchandise, they cannot do this because it requires express authority.

La. C.C. Art. 2998: Contracting with one’s self.

A mandatary who represents the principal as the other contracting party may not contract with himself unless he is authorized by the principal, or, in making such contract, he is merely fulfilling a duty to the principal.

La. C.C. Art. 2999: Person of limited capacity.

A person of limited capacity may act as a mandatary for matters for which he is capable of contracting. In such a case, the rights of the principal against the mandatary are subject to the rules governing the obligations of persons of limited capacity.

La. C.C. Art. 3000: Mandatary of both parties.

A person may be the mandatary of two or more parties, such as a buyer and a seller, for the purpose of transacting one or more affairs involving all of them. In such a case, the mandatary must disclose to each party that he also represents the other.

Section Two: Relations between the Principal and the Mandatary.

La. C.C. Art. 3001: Mandatary’s duty of performance; standard of care.

The mandatary is bound to fulfill with prudence and diligence the mandate he has accepted. He is responsible to the principal for the loss that the principal sustains as a result of the mandatary's failure to perform.

La. C.C. Art. 3002: Gratuitous mandate; liability of a mandatary.

When the mandate is gratuitous, the court may reduce the amount of loss for which the mandatary is liable.

La. C.C. Art. 3003: Obligation to provide information.

At the request of the principal, or when the circumstances so require, the mandatary is bound to provide information and render an account of his performance of the mandate. The mandatary is bound to notify the principal, without delay, of the fulfillment of the mandate.

La. C.C. Art. 3004: Obligation to deliver; right of retention.

The mandatary is bound to deliver to the principal everything he received by virtue of the mandate, including things he received unduly.

The mandatary may retain in his possession sufficient property of the principal to pay the mandatary's expenses and remuneration.

La. C.C. Art. 3005: Interest on money used by mandatary.

The mandatary owes interest, from the date used, on sums of money of the principal that the mandatary applies to his own use.

La. C.C. Art. 3006: Fulfillment of the mandate by the mandatary.

In the absence of contrary agreement, the mandatary is bound to fulfill the mandate himself.

Nevertheless, if the interests of the principal so require, when unforeseen circumstances prevent the mandatary from performing his duties and he is unable to communicate with the principal, the mandatary may appoint a substitute.

La. C.C. Art. 3007: Mandatary’s liability for acts of the substitute.

When the mandatary is authorized to appoint a substitute, he is answerable to the principal for the acts of the substitute only if he fails to exercise diligence in selecting the substitute or in giving instructions.

When not authorized to appoint a substitute, the mandatary is answerable to the principal for the acts of the substitute as if the mandatary had performed the mandate himself.

In all cases, the principal has recourse against the substitute.

La. C.C. Art. 3008: Liability for acts beyond authority; ratification.

If the mandatary exceeds his authority, he is answerable to the principal for resulting loss that the principal sustains.

The principal is not answerable to the mandatary for loss that the mandatary sustains because of acts that exceed his authority unless the principal ratifies those acts.

La. C.C. Art. 3009: Liability of multiple mandataries.

Multiple mandataries are not solidarily liable to their common principal, unless the mandate provides otherwise.

La. C.C. Art. 3010: Performance of obligations contracted by the mandatary.

The principal is bound to the mandatary to perform the obligations that the mandatary contracted within the limits of his authority. The principal is also bound to the mandatary for obligations contracted by the mandatary after the termination of the mandate if at the time of contracting the mandatary did not know that the mandate had terminated.

The principal is not bound to the mandatary to perform the obligations that the mandatary contracted which exceed the limits of the mandatary's authority unless the principal ratifies those acts.

La. C.C. Art. 3011: Advantageous performance despite divergence from authority

The mandatary acts within the limits of his authority even when he fulfills his duties in a manner more advantageous to the principal than was authorized.

La. C.C. Art. 3012: Reimbursement of expenses and remuneration.

The principal is bound to reimburse the mandatary for the expenses and charges he has incurred and to pay him the remuneration to which he is entitled.

The principal is bound to reimburse and pay the mandatary even though without the mandatary's fault the purpose of the mandate was not accomplished.Comment:

Indeed, the mandatary may be entitled to remuneration not only under the terms of the mandate, but also in accordance with usages, customary law, or even under the law of enrichment without cause.

La. C.C. Art. 3013: Compensation for loss sustained by the mandatary.

The principal is bound to compensate the mandatary for loss the mandatary sustains as a result of the mandate, but not for loss caused by the fault of the mandatary.

La. C.C. Art. 3014: Interest on sums expended by the mandatary.

The principal owes interest from the date of the expenditure on sums expended by the mandatary in performance of the mandate.

La. C.C. Art. 3015: Liability of several principals.

Multiple principals for an affair common to them are solidarily bound to their mandatary.

Section Three: Relations between the Principal, Mandatary, and Third Persons.

Subsection A: Relations between the Mandatary and Third Persons.

La. C.C. Art. 3016: Disclosed mandate and principle.

A mandatary who contracts in the name of the principal within the limits of his authority does not bind himself personally for the performance of the contract.Comments:

When a mandatary enters into a contract with a third person in the name of a principal and within the limits of his authority, the contract binds the principal to the third person and the third person to the principal. The mandatary does not bind himself personally

La. C.C. Art. 3017: Undisclosed mandate.

A mandatary who contracts in his own name without disclosing his status as a mandatary binds himself personally for the performance of the contract.

La. C.C. Art. 3018: Disclosed mandate; undisclosed principal.

A mandatary who enters into a contract and discloses his status as a mandatary, though not his principal, binds himself personally for the performance of the contract. The mandatary ceases to be bound when the principal is disclosed.

La. C.C. Art. 3019: Liability when authority is exceeded.

A mandatary who exceeds his authority is personally bound to the third person with whom he contracts, unless that person knew at the time the contract was made that the mandatary had exceeded his authority or unless the principal ratifies the contract.

Subsection B: Relations between the Principal and Third Persons.

La. C.C. Art. 3020: Obligations of the principal to third persons.

The principal is bound to perform the contract that the mandatary, acting within the limits of his authority, makes with a third person.

La. C.C. Art. 3021: Putative Mandatary.

One who causes a third person to believe that another person is his mandatary is bound to the third person who in good faith contracts with the putative mandatary.

La. C.C. Art. 3022: Disclosed mandate or principal; third person bound.

A third person with whom a mandatary contracts in the name of the principal, or in his own name as mandatary, is bound to the principal for the performance of the contract.

La. C.C. Art. 3023: Undisclosed mandate of principal; obligations of third party.

A third person with whom a mandatary contracts without disclosing his status or the identity of the principal is bound to the principal for the performance of the contract unless the obligation is strictly personal or the right non- assignable. The third person may raise all defenses that may be asserted against the mandatary or the principal.

Comments:

An undisclosed principal may demand performance of the contract from the third party with whom the mandatary contracted unless the obligation is strictly personal or the right unassignable.

Section Four: Termination of Mandate and of authority of the Mandatary.

La. C.C. Art. 3024: Termination of the mandate and the mandate’s authority.

In addition to causes of termination of contracts under the Titles governing "Obligations in General" and "Conventional Obligations or Contracts," both the mandate and the authority of the mandatary terminate upon the:

(1) Death of the principal or of the mandatary.(2) Interdiction of the mandatary.(3) Qualification of the curator after the interdiction of the principal.

The curator must be appointed after a principal is interdicted, but before the mandate is terminated.

La. C.C. Art. 3025: Termination by the principal.

The principal may terminate the mandate and the authority of the mandatary at any time. A mandate in the interest of the principal, and also of the mandatary or of a third party, may be irrevocable, if the parties so agree, for as long as the object of the contract may require.

This flies in the face of all agency law. At common law, agency was terminable at will because it is a fiduciary relationship. A principal should not be bound to keep the agent or vice versa if the parties lose faith in the other. The only exception was agency coupled with an interest.

La. C.C. Art. 3026: Incapacity of the principal.

In the absence of contrary agreement, neither the contract nor the authority of the mandatary is terminated by the principal's incapacity, disability, or other condition that makes an express revocation of the mandate impossible or impractical.

La. C.C. Art. 3027: Reliance on public records.

Until filed for recordation, a revocation or modification of a recorded mandate is ineffective as to the persons entitled to rely upon the public records. McDuffie v. Walker.

La. C.C. Art. 3028: Rights of third persons without notice of revocation.

The principal must notify third persons with whom the mandatary was authorized to contract of the revocation of the mandate or of the mandatary's authority. If the principal fails to do so, he is bound to perform the obligations that the mandatary has undertaken.

La. C.C. Art. 3029: Termination by the mandatary.

The mandate and the authority of the mandatary terminate when he notifies the principal of his resignation or renunciation of his authority.

Comments:

This provision is applicable even if a mandate is given for a specified period of time.

In the case of a gratuitous mandate, the court may reduce the amount of loss for which the mandatary is liable.

La. C.C. Art. 3030: Acts of the mandatary after the principal’s death.

The mandatary is bound to complete an undertaking he had commenced at the time of the principal's death if delay would cause injury.

This is contrary to common law which holds that death terminates mandate.

La. C.C. Art. 3031: Contracts made after termination of the mandate’s authority.

If the mandatary does not know that the mandate or his authority has terminated and enters into a contract with a third person who is in good faith, the contract is enforceable.

La. C.C. Art. 3032: Obligation to account.

Upon termination of the mandate, unless this obligation has been expressly dispensed with, the mandatary is bound to account for his performance to the principal.

Tedesco Case (La. 1995) (distinction between apparent authority and estoppel)

Facts: Bank with five lots hired real estate agent sell lot numbers 2 and 3. President authorized agents in writing to sell lots 4 and 5. The agent sold these lots, yet the board of directors of the bank said that they never authorized the sale. Ps demanded specific performance.

Issue: Whether the doctrine of apparent authority is applicable in a case involving a contract to sell immovable property.

Holding: The court held that apparent authority does not apply to real estate sales. Agency by estoppel applies if the third party changed position.

Rationale: Court recognizes that apparent authority is not expressly provided for by La. code or statutes, but it is an important concept to the law of agency. Apparent authority operates only when it is reasonable to believe the agent is authorized and the third person actually believes this. Agency by estoppel is based on tort principles of preventing loss by an innocent person. The third person not only must show reliance on the conduct of the principal, but also must show such a change of position on his part that it would be unjust to allow the principal to deny the agency. Just as testimonial proof cannot be used to prove the sale of immovable property (or the agreement to sell such property), testimonial proof cannot be used to prove the agent's authority to execute the contract, whether that authority was actual or apparent. Nevertheless, the principal may be estopped from asserting the defense of lack of written authority if the third person can show a change of position in reliance on the representation.

Here, Ps cannot recover under apparent authority because the principal gave no written authorization to sell. Ps cannot recover under estoppel because they did not change their position.

III. Major Types of Business Associations

Agency law goes through all types of businesses. To decide which form of business to use, get a team consisting of attorney, CPA, bank officer, insurance agent, to determine the best course for your client. For each business, know mandatory rules, default rules, and what rules can be contracted to.

OUTLINE OF BUSINESS ISSUES TO KEEP IN MIND

1.What kind of entity

2.Name and form problems

a.example of name problem: cannot include the name of a limited partner in the partnership name.

b.example of form problem: not filing limited partnership with Secretary of State

3.Law (what is the default rule)

4.The agreement

5.Ownership and Control Issues

6.Sharing of profits

7.Sharing of losses

8.Capital Investment

9.Creditor’s Rights

a.Example: a creditor has no right to hold membership in an LLC

10.Information Rights

a.Example: does a partner have the right to information, does the principal

11. Fiduciary Duties

12.Sale of Interests

a.Example: in a closely held corporation, may have to offer your interest to the other shareholders first.

13.Causes of Cessation

a.How do you get out?

b. What are the effects?

14.Termination

15.Winding Up

A.Sole Proprietorships

1.Easiest to form

2.Least government intervention

3.Need:

a.License from city

b.File with the IRS to get FICA

c.File with Department of Labor

4.No separate tax return

5.Personal liability for debts.

6.Death, retirement, bankruptcy of owner may terminate it.

B.Ordinary Partnerships

1.In LA, a juridical person, separate and distinct from its partners. Elements:

a.Created by contract between two or more persons.

b.to combine resources or efforts

c.determined proportions

d.collaborate

e.mutual risk (time or money)

f.for profits

2.Continues to exist even if there is a complete change in the persons of the partnership by substitution of new partners.

3.History under common law: see outline page 62 for complete comparison of the three.

a.UPA (Uniform Partnership Act)

1)No entity

2)But, recognizes that the partnership has assets that should be used to pay partnership creditors before individual creditors. Called tenancy and partnership.

b.RUPA (Revised Uniform Partnership Act)

1)Adopted by ½ of states

2) Juridical person theory, same as LA

4.In all partnerships, there is personal liability.

C.Limited Partnerships (Partnership in Commendam) – an entity consisting of one or more general partners who have the rights, powers, and obligations of partners, and one or more partners in commendam who have no personal liability beyond the amount contributed to or agreed to be contributed to the partnership.

1.Limited liability of a partner depends upon:

a. filing for registry with the Secretary of State the articles which set out the partner’s limited liability status. Failure to properly comply means that partner loses limited partner status.

1)Unlike the Registered LLP, this entity only pays the filing fee once.

b.Limited partner also loses status if he participates in the management or control of the ordinary affairs of the business.

c.Partner loses limited status if he holds himself out as a general partner and the person transacting business reasonably believed that the limited partner was a general partner.

1)If the limited partner allows his name to used in the business as if a general partner, a third party does not have to show specific proof of reliance to recover.

2. Flow through entity for tax purposes

3. Contract must be in writing.

D.Registered Limited Liability Partnerships

1.If the proper registration requirements with the Secretary of State are followed, along with a filing fee of $100 per year, the partners are not individually liable for the liabilities or obligations of the partnership entity arising from errors, omissions, negligence, incompetence, malfeasance, or willful or inadvertent misconduct committed in the course of the business by another partner, agent, or representative of the partnership. La. Rev. Stat. 9:3431.

a.Filing requirements: application stating name of partnership, address of principal office, number of partners, and brief statement of the type of business. Registration valid for one year. § 3432.

b.the name shall contain the words “registered limited liability partnership” or the abbreviation LLP. §3433

2.Partners remain individually liable for their virile share of all other types of debts of the partnership such as contracts, contractual warranties, etc. Id.

3.Each partner is personally liable for his own torts

4.A flow through entity for tax purposes

E.Limited Liability Companies

1.Limited liability of the members, like a corporation

a.no personal liability for any debt, in tort, contract, or otherwise

1)Unlike the registered LLP, members of the LLC do not have personal liability for contract debt by heads.

b.Members are personally liable for their own torts or personal guarantees.

2.Less formal internal structure, like a partnership

3.Does not pay tax at the entity level, like a partnership. Income flows through to members. “Check the box” provisions

4.Need two documents:

a.articles of organization

1)name

2) Purpose (or the “any lawful business purpose” clause)

3) Fee

4) More information can be included, but not madatory

b.Initial report

1)address of the registered office

2) name and addresses of registered agents

3) name and addresses of those who will manage the LLC’s business

4) affidavit of acknowledgement and acceptance signed by each registered agent of the LLC.

5.Members may elect to have an operating agreement (this is optional though)

a.Not filed

b.but, default rules will apply without it.

c.can be oral

F.“S” Corporations

1.designed for the small company

2.limited number of shareholders (75)

3.Only one class of shares

4.Non-resident alien cannot be a shareholder

5.Special rules for undistributed profits

6.no taxation at entity level, flow through entity

7.File with Secretary of State

a.articles of incorporation

b.initial report

c.affidavit signed by the agent for service of process accepting appointment as a registered agent.

G.“C” Corporations

IV. Louisiana Partnership Law (La. CC Arts. 2801- 44; 3431- 35; & 3401 – 08)

A.LA C.C. Art. 2801: A partnership is a juridical person, distinct from its partners, created by a contract between two or more persons to combine their efforts or resources in determined proportions and to collaborate at mutual risk for their common profit or commercial benefit.

Trustees and succession representatives, in their capacities as such, and unincorporated associations may be partners.

Comments:

Serious implications to the juridical person distinction: for instance, if you sue the partners but not the partnership, your suit will be dismissed.

The contract does not have to be in writing unless the partnership owns real property.

LA C.C. Art. 2802: The contract of partnership is governed by the provisions in the Title: Of Conventional Obligations, in all matters that are not otherwise provided for by this Title.

LA C.C. Art. 2803: Each partner participates equally in profits, commercial benefits, and losses of the partnership, unless the partners have agreed otherwise. The same rule applies to the distribution of assets, but in the absence of contrary agreement, contributions to capital are restored to each partner according to the contribution made. (Default rule).

LA C.C. Art. 2804: If a partnership agreement establishes the extent of participation by partners in only one category of either profits, commercial benefits, losses, or the distribution of assets other than capital contributions, partners participate to that extent in each category unless the agreement itself or the nature of the participation indicates the partners intended otherwise.

LA C.C. Art. 2805: A partnership may adopt a name with or without the inclusion of the names of any of the partners. If no name is adopted, the business must be conducted in the name of all the partners

LA C.C. Art. 2806: An immovable acquired in the name of a partnership is owned by the partnership if, at the time of acquisition, the contract of partnership was in writing. If the contract of partnership was not in writing at the time of acquisition, the immovable is owned by the partners.

As to third parties, the individual partners shall be deemed to own immovable property acquired in the name of the partnership until the contract of partnership is filed for registry with the Secretary of State as provided by law.

LA C.C. Art. 2807: Unless otherwise agreed, unanimity is required to amend the partnership agreement, to admit new partners, to terminate the partnership, or to permit a partner to withdraw without just cause if the partnership has been constituted for a term.

Decisions affecting the management or operation of a partnership must be made by a majority of the partners, but the parties may stipulate otherwise.

LA C.C. Art. 2808: Each partner owes the partnership all that he has agreed to contribute to it. If they don’t pay, the partnership or a creditor can bring suit.

LA C.C. Art. 2809: A partner owes a fiduciary duty to the partnership and to his partners. He may not conduct any activity, for himself or on behalf of a third person, that is contrary to his fiduciary duty and is prejudicial to the partnership. If he does so, he must account to the partnership and to his partners for the resulting profits

LA C.C. Art. 2810: The provisions of Articles 2808 and 2809 do not prejudice other rights granted by law to recover damages or to obtain injunctive relief in appropriate cases

LA C.C. Art. 2811: A partner who acts in good faith for the partnership may be a creditor of the partnership for sums he disburses, obligations he incurs, and losses he sustains thereby.

LA C.C. Art. 2812: A partner may share his interest in the partnership with a third person without the consent of his partners, but he cannot make him a member of the partnership. He is responsible for damage to the partnership caused by the third person as though he caused it himself.

Comment: Hard to determine the worth of one partner’s interest. Could put a price in the

partnership agreement.

LA C.C. Art. 2813: A partner may inform himself of the business activities of the partnership and may consult its books and records, even if he has been excluded from management. A contrary agreement is null.

He may not exercise his right in a manner that unduly interferes with the operations of the partnership or prevents other partners from exercising their rights in this regard.

LA C.C. Art. 2814: A partner is a mandatary of the partnership for all matters in the ordinary course of its business other than the alienation, lease, or encumbrance of its immovables. A provision that a partner is not a mandatary does not affect third persons who in good faith transact business with the partner. Except as provided in the articles of partnership, any person authorized to execute a mortgage or security agreement on behalf of a partnership shall, for purposes of executory process, have authority to execute a confession of judgment in the act of mortgage or security agreement without execution of the articles of

partnership by authentic act.

LA C.C. Art. 2815: A provision that a partner shall not participate in losses does not affect third persons.

LA C.C. Art. 2816: An obligation contracted for the partnership by a partner in his own name binds the partnership if the partnership benefits by the transaction or the transaction involves matters in the ordinary course of its business. If the partnership is so bound, it can enforce the contract in its own name

LA C.C. Art. 2817: A partnership as principal obligor is primarily liable for its debts. A partner is bound for his virile share of the debts of the partnership but may plead discussion of the assets of the partnership.

LA C.C. Art. 2818: A partner ceases to be a member of a partnership upon: his death or interdiction; his being granted an order for relief under Chapter 7 of the Bankruptcy Code; his interest in the partnership being seized and not released as provided in Article 2819; his expulsion from the partnership; or his withdrawal from the partnership.

A partner also ceases to be a member of a partnership in accordance with the provisions of the contract of partnership.

LA C.C. Art. 2819: A partner ceases to be a member of a partnership if his interest in the partnership is seized under a writ of execution and is not released within thirty days. The cessation is retroactive to the date of seizure.

LA C.C. Art. 2820: A partnership may expel a partner for just cause. Unless otherwise provided in the partnership agreement, a majority of the partners must agree on the expulsion.

LA C.C. Art. 2821: If a partnership has been constituted for a term, a partner may withdraw without the consent of his partners prior to the expiration of the term provided he has just cause arising out of the failure of another partner to perform an obligation.

LA C.C. Art. 2822: If a partnership has been constituted without a term, a partner may withdraw from the partnership without the consent of his partners at any time, provided he gives reasonable notice in good faith at a time that is not unfavorable to the partnership.

LA C.C. Art. 2823: The former partner, his successors, or the seizing creditor is entitled to an amount equal to the value that the share of the former partner had at the time membership ceased.

LA C.C. Art. 2824: If a partnership continues to exist after the membership of a partner ceases, unless otherwise agreed, the partnership must pay in money the amount referred to in Article 2823 as soon as that amount is determined together with interest at the legal rate from the time membership ceases.

LA C.C. Art. 2825: If there is no agreement on the amount to be paid under Articles 2823 and 2824, any interested party may seek a judicial determination of the amount and a judgment ordering its payment.

LA C.C. Art. 2826: Unless continued as provided by law, a partnership is terminated by: the unanimous consent of its partners; a judgment of termination; the granting of an order for relief to the partnership under Chapter 7 of the Bankruptcy Code; [FN1] the reduction of its membership to one person; the expiration of its term; or the attainment of, or the impossibility of attainment of the object of the partnership.

A partnership also terminates in accordance with provisions of the contract of

partnership.

A partnership in commendam, however, terminates by the retirement from the partnership, or the death, interdiction, or dissolution, of the sole or any general partner unless the partnership is continued with the consent of the remaining general partners under a right to do so stated in the contract of partnership or if, within ninety days after such event, all the remaining partners agree in writing to continue the partnership and to the appointment of one or more general partners if necessary or desired.

LA C.C. Art. 2827: A partnership may be expressly or tacitly continued when its term expires or its object is attained, or when a resolutory condition of the contract of partnership is fulfilled. If the object becomes impossible, the partnership may be continued for a different object.

Unless otherwise agreed, a partnership that is expressly or tacitly continued has no term.

LA C.C. Art. 2828: When a partnership terminates, the business of the partnership ends except for purposes of liquidation.

If a partnership terminates because its membership is reduced to one person, that person is not bound to liquidate the partnership and may continue the business as a sole proprietor. If the person elects to continue the business, his former partners are entitled to amounts equal to the value of their shares as of time the partnership terminated, and they have the right to demand security for the payment of partnership debts.

LA C.C. Art. 2829: A change in the number or identity of partners does not terminate a partnership unless the number is reduced to one.

LA C.C. Art. 2830: When a partnership terminates, the authority of the partners to act for it ceases, except with regard to acts necessary to liquidate its affairs.

Anything done in what would have been the usual course of business of the partnership by a partner acting in good faith, who is unaware that the partnership has terminated, binds the partnership as if it still existed.

LA C.C. Art. 2831: The termination of a partnership, for any reason, does not affect the rights of a third person in good faith who transacts business with a partner or a mandatary acting on behalf of the former partnership.

LA C.C. Art. 2832: The creditors of the partnership must be paid in preference to the creditors of the partners.

LA C.C. Art. 2833: The creditors of a partnership shall be paid in the following order of priority: secured creditors in accordance with their security rights; unsecured creditors who are not partners; unsecured creditors who are partners.

If any assets remain after the payment of all secured and unsecured creditors, the capital contributions shall be restored to the partners. Finally, any surplus shall be divided among the partners proportionally based on their respective interests in the partnership.

LA C.C. Art. 2834: In the absence of contrary agreement, a partnership is liquidated in the same manner and according to the same rules that govern the liquidation of corporations.

A partnership retains its juridical personality for the purpose of liquidation.

LA C.C. Art. 2835: The liquidation of a partnership is not final until all its assets have been collected and applied to its obligations and its remaining assets, if any, have been appropriately distributed to the partners.

La. Partnership in Commendam Articles

A.LA C.C. Art. 2836: The provisions of the other chapters of this Title apply to partnerships in commendam to the extent they are consistent with the provisions of this Chapter.

B.LA C.C. Art. 2837: A partnership in commendam consists of one or more general partners who have the powers, rights, and obligations of partners, and one or more partners in commendam, or limited partners, whose powers, rights, and obligations are defined in this Chapter.

C.LA C.C. Art. 2838: For the liability of a partner in commendam to be limited as to third parties, the partnership must have a name that appears in the contract of partnership; the name must include language that clearly identifies it as a partnership in commendam, such as language consisting of the words "limited partnership" or "partnership in commendam"; and the name must not imply that the partner in commendam is a general partner.

D.LA C.C. Art. 2839(A): A partner in commendam becomes liable as a general partner if he permits his name to be used in business dealings of the partnership in a manner that implies he is a general partner.

(B) If the name of a partner in commendam is used without his consent, he is liable as a general partner only if he knew or should have known of its use and did not take reasonable steps to prevent the use.

(C) If the name of the partner in commendam is the same as that of a general partner or if it had been included in the name of a predecessor business entity

or in the name of the partnership prior to the admission of the partner in commendam, its use does not imply that he is a general partner.

E.LA C.C. Art. 2840: A partner in commendam must agree to make a contribution to the partnership. The contribution may consist of money, things, or the performance of nonmanagerial services. The partnership agreement must describe the contribution and state either its agreed value or a method of determining it. The contract should also state the time or circumstances upon which the money or other things are to be delivered, or the services are to be performed, and if it fails to do so, payment is due on demand.

A partner in commendam is liable for the obligations of the partnership only

to the extent of the agreed contribution. If he does not make the contribution, or contributes only part of it, he is obligated to contribute money, or other things equal to the portion of the stated value that he has failed to satisfy. The court may award specific performance if appropriate.

F.LA C.C. Art. 2841: A contract of partnership in commendam must be in writing and filed for registry with the Secretary of State as provided by law. Until the contract is filed for registry, partners in commendam are liable to third parties in the same manner as general partners.

G.LA C.C. Art. 2842 A partner in commendam may not receive, directly or indirectly, any part of the capital or undistributed profits of the partnership if to do so would render the partnership insolvent. If he does so, he must restore the amount received together with interest at the legal rate.

If the partnership or the partners do not force the partner in commendam to restore the amount received, the creditors may proceed directly against the partner in commendam to compel the restoration.

H.LA C.C. Art. 2843: A partner in commendam does not have the authority of a general partner to bind the partnership, to participate in the management or administration of the partnership, or to conduct any business with third parties on behalf of the partnership.

I.LA C.C. Art. 2844(A): A partner in commendam is not liable for the obligations of the partnership unless such partner is also a general partner or, in addition to the exercise of such partner's rights and powers as a partner, such partner participates in the control of the business. However, if the partner in commendam participates in the control of the business, such partner is liable only to persons who transact business with the partnership reasonably believing, based upon the partner in commendam's conduct, that the partner in commendam is a general partner.

(B.) A partner in commendam does not participate in the control of the business within the meaning of Paragraph A of this Article solely by doing one or more of the following:

(1) Being a contractor for or an agent or employee of the partnership or of a general partner.

(2) Being an employee, officer, director, or shareholder of a general partner that is a corporation or a member or manager of a general partner that is a limited liability company.

(3) Consulting with and advising a general partner with respect to the business of the partnership.

(4) Acting as surety for the partnership or guaranteeing or assuming one or more specific obligations of the partnership.

(5) Taking any action required or permitted by law to bring or pursue a derivative action in the right of the partnership.

(6) Requesting or attending a meeting of partners.

(7) Proposing, approving, or disapproving, by voting or otherwise, one or more of the following matters:

(a) The continuation, dissolution, termination, or liquidation of the partnership.

(b) The alienation, exchange, lease, mortgage, pledge, or other transfer of

all or substantially all of the assets of the partnership.

(c) The incurrence of indebtedness by the partnership other than in the ordinary course of its business.

(d) A change in the nature of the business.

(e) The admission, expulsion, or withdrawal of a general partner.

(f) The admission, expulsion, or withdrawal of a partner in commendam.

(g) A transaction involving an actual or potential conflict of interest between a general partner and the partnership or the partners in commendam.

(h) An amendment to the contract of partnership.

(i) Matters related to the business of the partnership not otherwise enumerated in this Paragraph, which the contract of partnership states in writing may be subject to the approval or disapproval of partners.

(8) Liquidating the partnership.

(9) Exercising any right or power permitted to partners in commendam under this Chapter and not specifically enumerated in this Paragraph.

(C.) The enumeration in Paragraph B does not mean that the possession or exercise of any other powers by a limited partner constitutes participation by such partner in the business of the partnership.

V.LITIGATION TO DETERMINE WHETHER A PARTNERSHIP EXISTS

A.Two types of lawsuits in this area:

1.Inter se – partners disagree among themselves

2. Third party – creditors say they are partners

B.In Louisiana, if they hold themselves out as partners, the court will hold them liable as partners. This is true even if the parties expressly deny that they are partners. In summary, the factors the La. courts look to:

1.some kind of agreement or contract (can be oral)

2. Intention of the parties

3. joint contribution of efforts or resources

4. joint control as principals

5. a community of goods which each participant has a proprietary interest in.

6. risk sharing

a.There is no weight to the criteria

b. Different courts stress different things.

C.At common law, the UPA and RUPA define partnership as an association of two or more persons to carry on as co-owners a business for profit, whether or not the persons intend to form a partnership. § 202 of RUPA: The association of two or more persons to carry on as co-owners a business for profits forms a partnership, whether or not the persons intended to form a partnership. In summary, the Common law approach emphasizes co-ownership, control, intent , and profit sharing. Gives safe harbors: A person who receives a share of the profits of a business is presumed to be a partner in a business, unless the payments were received in payment:

1.of a debt

2. of services as an independent contractor or of wages to an employee

3. of rent

4. of an annuity to a beneficiary or retired partner

5. of interest, even if that amount varies with the profits of the business

6. for the sale of the goodwill of a business.

In fact, these are the relationships people claim exist when trying to avoid partnership classification.

D.Suggested litigation categories with dominant factors:

1.In the inter se case, the primary inquiry should be the intention of the parties and joint control as principals.

a.Intention can be shown from how they label themselves, their contracts, and how they share profits.

2.In the third party tort suit, the dominant factors should be joint control, profit sharing, and risk allocation.

3. In the third party contract suit: profit sharing, control, and joint ownership.

4. In procedural matters, the court should find a partnership where there is control, joint ownership, or profit sharing and where a full fair hearing can be given while avoiding a multiplicity of suits.

5. In tax avoidance cases, the intention or motive should be dominant

6. in the case of a creditor of a partnership seeking to be made a partner, the key element is extent and duration of control over the partnership debtor.

E.Discovery should be employed to determine:

1.who makes business decisions, who has a right to veto, who signs the checks

2. written agreements among participants.

3. contributions of capital by each participant

4. recorded title to property

5. tax returns

6. bank account information

7. license applications

8. insurance policies

9. advertisements

10. other suits against the entity

11. acts of ownership.

F.Cajun Electric Power v. McNamara (La. 1st Cir. 1984)

Facts: GSU and S&W enter into a contract for the construction of a nuclear power plant. GSU and Cajun agreed that Cajun would become a 30% owner, and executed an agreement that Cajun would pay the costs of construction retroactively. Cajun contended that, as an electric cooperative, it was statutorily exempt from sales and use tax, and claimed an exemption for all construction materials purchased. Cajun claimed that S&W was a purchasing agent.

Issue: Was S&W a purchasing agent for Cajun, thus statutorily exempt from sales and use tax?

Holding: S&W was an agent for Cajun, but neither were exempt from tax because they were a joint venture, not a coop.

Rationale: Joint venture is the same as a partnership for a specific task. When Cajun and GSU signed the agreement, a joint venture was formed, it does not matter that their contract specifically denies that they are a joint venture. The language of the statute shows that coops only were to be exempt from tax. The exemption cannot hold where the coop changes form into a joint venture. Thus, Cajun is responsible for 30% of the taxes.

G.Thibaut v. Thibaut (La. 1st Cir. 1972)

Facts: Some members of a partnership saw that the business was coming to an end. So they took the name, customer list, accounts receivable, employees, and assets and tried to form a new company without the other partners.

Holding: This was in violation of the fiduciary duty that each partner owes to the other.

Rationale: Fiduciary duty entails a high degree of trust and responsibility. When the Ds here took tangible assets and violated the going concern of the business, they violated their fiduciary duty.

1.RUPA allows a partner to contract away all fiduciary duties except for good faith and fair dealing. Ex: partners allow one of the other partners to conduct future activities without them. Then the non-participating ones will not be personally liable if the venture fails.

IV. Corporations Law.

1.CORPORATION LAW IN GENERAL

A."CORPORATION" DEFINED

a.) A corporation is a type of legal institution or process that defines relationships among people. It provides:

(1) limited liability for its owners;

(2) perpetual existence independent of its owners;

(3) centralization of management in persons who need not be owners; and

(4) free transferability of ownership interests.

b.) These characteristics may be modified to a significant extent by agreements among the participants. Several different theories have been developed to describe the corporate relationship:

i.) Entity or “Person” theory

A corporation can be envisioned as an artificial, fictitious entity created for the purpose of conducting a business. This theory was first enunciated in Dartmouth College v. Woodward (1819).

a.The artificial entity has the power to conduct its business entirely in its own name.

b.The artificial entity is formed by a grant of authority by a government agency.

c.The artificial entity must be generally recognized as such by persons dealing with the corporation, including the creating state, the United States, and private citizens.

d.However, courts may refuse to follow the artificial entity analysis to its logical conclusions, if it leads to fraudulent or significantly unfair consequences, frustration of clearly defined public policies, or other undesirable results.

e.The owners of the entity are the "shareholders," the managers are the "directors," and the persons carrying out the policies of the managers are the officers."

f.Corporation has no “purely personal” protections afforded to individuals, such as:

i.) 5th Amendment self-incrimination privilege;

ii.) Right to privacy;

g.Corporation does have:

i.) Rt. to Freedom of speech;

ii.) Protection a/g uncompensated takings;

iii.) Protection from unreasonable S&S;

iv.) No “double jeopardy”; and

v.) Due Process and Equal Protection.

ii.)Concession Theory

A second theory of corporateness is that a corporation is a "grant" or "concession" from the state. The theory is based on the role of the state in the formation of the corporation.

iii.)Contract Theory

A third theory of corporateness is that the charter of a corporation represents a contract (a) between the state and the corporation, or (b) between the corporation and its shareholders, or (c) among the shareholders themselves.

This theory is most likely to surface today in disputes between different classes of shareholders, or in disputes in which one class of shareholders claims that the class is being discriminated against in some way.

iv.)“Nexus of contracts“ theory

A fourth theory of corporateness is a "nexus of contracts." This theory, formulated by Judge Posner at the Chicago School of Ethics, is utilized by economists for analytic purposes. Rejects the notion that the shareholders are the ultimate owners of the corporation and treats them instead as contractual providers of capital in anticipation of receiving a desired return.

The corporate managers by contract provide for all the requirements of the corporation for capital, services, and goods. A corporation, therefore, is a "nexus of contracts."

a.Under this theory, state corporation statutes only provide standard rules suitable for the average corporation which may be modified as desired by contract.

b.The economist's concept of a "contract" differs from the legal definition in that it includes non‑consensual rational economic relationships.

· NOTE: Rousseau says that the problem with this theory is that the “nexus of contracts” is a fiction: the shareholders are not really protected by a contractual arrangement; the real protection is the “fiduciary duty”

v.)Process Theories

Scholars have also suggested that a corporation may be viewed as a process by which various inputs of capital, services, and raw materials are combined to produce desirable products. It may also be viewed as a form of private governance for persons involved in a business.

B.CONSTITUTIONAL INCIDENTS OF THE CORPORATE "PERSONALITY"

A corporation is viewed as a "person" entitled to some but not all of the constitutional protections available to individuals. For example, a corporation is not a citizen of a state or of the United States for purposes of the privileges and immunities clause, but has constitutional rights of free speech; it does not have a privilege against self incrimination, but is protected against deprivations of property without due process of law and is entitled to equal protection of the law.

C.SOURCES OF LAW

The law of corporations is derived from several sources.

1.State Incorporation Statutes

Every state has a general incorporation statute. Two sources of statutes have been particularly influential in modernizing and liberalizing the state statutes. Louisiana’s Corporations Law in modeled after the MBCA (1984):

a.The Model Business Corporation Act (1984) prepared and maintained by the Committee on Corporate Laws of the Section on Corporation Banking, and Business Law of the American Bar Association; and

b.The Delaware General Corporation Law (GCL).2. State Common Law Principles

1. Has declined in importance due to increased statutory regulation, but still relevant in the area of duties of directors & officers.

3.Federal Statutes

· Securities Acts of '33 & '34.

· Other laws relating to publicly held corporations: Investment Company Act, National Securities Markets Improvement Act, etc..

4.Federal Common Law

· The U. S. Supreme Court has stated on numerous occasions that there is no general federal common law of corporations. Kamen v. Kemper Financial.

D.FUNCTIONAL CLASSIFICATION OF CORPORATIONS

The basic distinction underlying much of the law of corporations is between the closely held corporation and the publicly held corporation.

1.Definition of a Closely Held Corporation

A closely held corporation

a.Has a few shareholders, all or most of whom are usually active in the management of the business;

b.Has no public market for its shares;

c.Has never registered a public distribution of shares under the federal or state securities acts.

2.Definition of a Publicly Held Corporation

A publicly held corporation is a corporation with most of the following attributes:

a.Its shares are held by members of the general public and there is a public market for its shares;

b.It is subject to reporting and disclosure requirements under the securities acts and has made one or more registered public offerings under the Securities Act of 1933.

3.Significance of a Public Market for Shares

The presence of a public market for shares is the most important difference between a closely held and a publicly held corporation. In a closely held corporation minority shareholders may be "locked in" to an unsalable asset. In contrast, in a publicly held corporation an investor has power to "enter" or "exit" through the public market for shares.

4.Other Differences Between Closely Held and Publicly Held Corporations

Other important differences are: closely held corporations are usually managed by controlling shareholders while publicly held corporations are usually managed by professional managers with small shareholdings, and (2) there are few disclosure obligations for closely held corporations while publicly held corporations must operate in the "goldfish bowl" created by the disclosure obligations of the federal securities laws.

E.STATE COMPETITION FOR CORPORATIONS

Since the late Nineteenth Century, states have competed for businesses to incorporate under their state statutes. Today, the uncrowned winner of this competition is the state of Delaware.

1.Advantages of Incorporation Business

The incorporation business provides tax revenues for the state, fees for attorneys, corporation service companies, and local filing authorities.

2.Success of Delaware

More than half of all businesses & over one‑third of all the corporations listed on the New York Stock Exchange are incorporated in Delaware. The Delaware Legislatures and the Delaware Supreme Court are therefore an important source of modern corporation law today.

3.Reasons for Success of Delaware

The popularity and primacy of the state of Delaware may be explained partially by history of permissiveness WRT corporate governance, partially by the continued efforts by the bar of that state to provide an effective, flexible, and modern body of corporate law, and partially by the familiarity of corporate lawyers around the country with the Delaware GCL. Major contributors to Delaware's primacy also are the existence of a sophisticated judiciary and sophisticated filing office that assures reasonable and knowledgeable decision making and dispute resolution.

a. There is "more" corporation case and statutory law in Delaware today than in any other state. As a result, there are fewer areas of uncertainty in Delaware corporation law than in the law of any other state, and corporation lawyers may plan transactions with a relatively high degree of certainty.

· NOTE: Louisiana has great uncertainty in its corporations law, because it abides by statutory changes to the corporate law and there is no significant body of case law dealing with the relatively new Corporations law.

b.The Delaware Chancery Court is a respected and sophisticated commercial court. Other states have created similar courts but none have been as successful as Delaware.

c.Delaware case law generally permits corporations to adopt defensive tactics to combat unwanted takeovers.

4.Economic Analysis of the Reasons for Delaware's Success

The earliest explanations of Delaware's success was that the Delaware GCL was unduly permissive and permitted management to operate without constraint and thus profit personally directly or indirectly. In this view, Delaware had won "the race for the bottom."

a.Economists pointed out that if this explanation were accurate, corporations that reincorporate in Delaware should suffer a loss in the value of their publicly traded shares under the efficient capital market hypothesis. Empirical investigations do not reveal such a loss.

E. The Basic Characteristics of a Corporation.

1. Corporation Definition

1. a legal person by which business firms can enter into contracts, own property , sue in court and be sued.

1. Creature of law - a legal artifice; state enabling statutes

1. There are many gaps left by statutes and persons are filled by judicial norms

1. Other gaps == involving info for SH are filled by federal securities law.

1. Investment vehicle for the pooling of money and labor.

1. Money capital - SH and creditors

1. Human capital - executive sand employees.

1. both money and labor(human) capital expect a return of their investment thus there are conflicts of interest

1. Corporation Basics

1. Five Basic Attributes of a corporation

- Independent, Separate, and perpetual existence

- Centralized management

- Ownership interest tied to residual earnings and assets

- Tranferability of ownerships’ interests

- Limited liability for all participants

1. Independent, Separate, and perpetual existence

1. It is an entity distinct from those who contribute capital (sh and creditors) and those who manage

1. The corporation owns the assets of a company and is liable for any business debts

1. If ever SH dies in a Corp it continues

1. If every partner dies in a partnership then it is over

1. Centralized management

1. BOD manages and supervises the business but delegates power to officers who act and bind the corporation

1. BOD is subject to fiduciary duties

1. SH have limited role and power to initiate change == they have voting power to elect directors and approve fundamental changes

1. Ownership interest tied to excess earnings and assets

1. Creditors (bank lenders, bondholders, trade creditors, employees) are first in line and receive a return based on their contract.

1. SH are last in line and receive dividends as declared by discretion of BOD.

1. Creditors have priority and SH left-over claimants in event of liquidation

1. Free Transferability of ownerships’ interests

1. Hard to get out of LLC

1. not so easy to get out of closely held Corp

1. Easy to get out of publicly traded Corp (stock market)

1. Liquidity of mkts is what makes American economic system so strong. It rewards economic productivity and punishes inefficiency & laziness. Rewards businesses that can provide better, more efficient services.

1. Limited liability for all participants

1. Insiders (Directors, officers, SH and lenders) are not personally liable to outsiders on corporate obligations and risk only their personal investment

1. However Directors and executives usually have a fiduciary duty to SH and the entity

1. SH don’t owe any duty to other SH == they can sell stock. However majority SH may have a fiduciary duty.

1. Outsiders (contract creditors and tort victims) bear the risk of corporate insolvency.

1. partnerships have a fiduciary duty to investors

1. LLC some instances there are fiduciary duty

1. passive vs active investor

Keep in mind, closely held corporations may be exposed to different risks== SH can agree to manage the business, to pay themselves dividends, and to limit their ability to transfer stock. In some circumstances courts may hold SH personally liable for corporate debts beyond their investment or lenders may require SH to personally guarantee the corporations debt obligations

1. Corporate participants

1. many players - SH, managers, lenders, customers, employees, gov’t

1. employees are well represented where there are unions

1. national labor relations act protects unions

1. Corporate law sets up mandatory, permissible and default rules

1. Corporate law focuses on relationships between SH and managers

1. Outside relationships w/ creditors, suppliers customers, employees, government authorities are usually subject to legal norms that treat the corporation as a person

1. contract laws, debtor-creditor, antitrust, labor and tax

G.MODERN BUSINESS ALTERNATIVES TO CORPORATIONS

Traditional alternative business forms for closely held businesses are the partnership and limited partnership. In the last decade a new business form, the limited liability company, has achieved wide acceptance. The LLC provides limited liability for members, flexibility in internal operation similar to that provided by partnerships, and par