PROBLEM
1.1 (pg.
14) The Firm and its Agents and
Servants
While swimming behind a boat in
(a) Mercury Marine sells its
products to Dealer for resale. Dealer is free to sell products made by other
manufacturers.
(b) Dealer gives Mercury
Marine’s warranty to all buyers of Mercury Marine products.
© Dealer
performs warranty svc on Mercury Marine products. Mercury Marine honors
warranty claims “made
by purchaser through Dealer” and reimburses Dealer for warranty svc it
performs “on behalf of Mercury Marine.”
Answer:
The TEST for
determining whether an “agency” existed is three-pronged: YOU NEED ALL OF THEM
TO SATISFY THE AGENCY RELATIONSHIP; in order for agent/principle relationship
to exist here A would have to only exclusively sell those goods and not any
other goods (From Green v. HR Block). For example: If dealer buys the good and
gets title such as best buy’s computers and then resells this is not a PA
relationship but merely a buyer seller relationship. If you work at Gateway and only sell the certain
products and don’t get title this will be PA relationship. REMEMBER: if close
cases the courts will find an agency relationship to not deter commerce.
(1)
“Agent” must hold a power to
alter legal relations btwn the principal and 3rd persons and btwn
the principal and himself. (if element one is satisfied then 3 is clearly
satisfied since if you have the power to alter legal relationship between P and
third party then he obviously has the power to control conduct of the agent).
a.
The warranty here was
specific in the warranty and the dealer cannot alter it, therefore they cannot
change the warranty. Because the K is very specific the dealer is not able to
alter the legal relationship so that would elude us to fact that there is not
an agent relationship here.
(2)
The agent is a fiduciary
with respect to matters within the scope of his agency.
a.
Res 2nd 13 (pg
165 Supp)
(3)
The principal has the right
to control the conduct of the agent w/ respect to matters entrusted to him.
a.
Res 2nd 14 (pg
165 supplement)
§ Agency; Principle; Agent
(1) Agency is the fiduciary
relation which results from the manifestation of consent by one person (P) to
another (A) that the other (A) shall act on his (P) behalf and subject to his
(P) control, and consent by the other so (A) to act.
(2) The one for whom action is
to be taken is the principle.
(3) The one who is to act is the
agent.
The absence of ANY one of these three elements of
agency defeats a claim that agency exists. HERE, the dealer does not sell
Mercury Marine products principally for the benefit of Mercury Marine. The
Dealer is independent of Mercury Marine, is permitted to sell products of
competing companies, and purchases Mercury Marine motors primarily for the
purpose of reselling them for its own profit. The relationship btwn the dealers
and Mercury Marine for the sale of Mercury Marine products is, THEREFORE, that
of buyer and seller, NOT agent and principal. THE BUYER SELLER RELATIONSHIP
ALONE WOULD NOT CREATE AN AGENCY RELATIONSHIP!! (See class notes pg 16).
Answer:
Agency does not exist unless the dealer has the
“power to alter the legal relationship” btwn Mercury Marine and the ultimate
purchaser.” HERE, the dealer agrees to extend the warranty to any subsequent
purchaser of the motor and notify Mercury Marine of the new holder of the
warranty. This contractual obligation is NOT the same as a power to alter a
legal relationship btwn the manufacturer and the purchaser. WHY? B/c the
manufacturer
(1)
Sells the product to the dealer for resale;
(2)
Unilaterally imposes the terms of the warranty prior to the sale to the dealer;
(3)
Forbids the dealer from
altering the terms of the warranty in any way;
(4)
Requires the dealer to
extend the warranty as part of the sale and notify the manufacturer of the new
holder of the warranty; AND
(5)
Makes the warranty a part of
the purchaser’s bargain when he or she purchases the product.
UNDER THESE
CIRCUMSTANCES, there is no agency btwn the manufacturer and the dealer as there
is no power in the dealer to alter the legal relationship btwn the manufacturer
and the purchaser.
Answer:
NO. Although “control” over the dealers’ warranty
work is a necessary element of agency, it nevertheless does not exist UNLESS
both of the remaining elements of agency are also present. The dealer’s
obligation to perform warranty work is NOT tantamount to a power to alter
Mercury Marine’s legal relationship w/ a third party. Even here when you kick
in control you are not satisfying the
first prong from above.
_____________________________________________________________________________________________________
PROBLEM
1.2 (pg.
30) The Firm and its Agents and
Servants – (Same as Problem 4.3 – see below)
ABC Corp. sold mobile homes and developed mobile
home parks. ABC employed Agent, a
licensed real estate broker, to acquire land for development as mobile home
parks, at a weekly salary of $125. Agent told ABC that Parkacre was available
for purchase. ABC asked Agent to purchase the land as a “straw man,” and then
to convey the land to ABC. Agent told ABC that the land would cost $30,000, and
ABC gave Agent that amount.
Unknown to ABC, Agent had an interest in Parkacre.
Before he had been employed by ABC, Agent had paid $1,000 for an option to buy
Parkacre for $15,000. When ABC gave Agent the $30,000 he asked for, Agent
exercised his option to buy Parkacre. Agent then used $14,000 of the $30,000 to
complete the purchase, and kept the remaining $16,000.
ABC has now sued Agent for breach of fiduciary duty,
asking that Agent be required to give ABC the entire $15,000 profit on the transaction.
Agent argues that ABC’s sole remedy is to rescind the transaction – return
Parkacre in exchange for the $30,000 purchase price.
Answer:
The Fiduciary
Principle entails that an agreement to act on behalf of the principal
causes the agent to have a DUTY imposed on him, created by his undertaking, to
act primarily for the benefit of another in matters connected with his
undertaking. Among the duties to the principal are:
a.
the duty to account for profits arising out of the employment,
b.
the duty not to act as, or on account of, an adverse party without the
principal’s consent,
c.
the duty not to compete w/ the principal on his own account or for
another in matters relating to the subject matter of the agency, AND
d.
the duty to deal fairly w/
the principal in all transactions between them.
Restatement
§387 states that an agent’s duty
as a fiduciary requires the agent “to act SOLELY for the benefit of the
principal in all matters connected w/ the agency.” (one cannot serve two
masters, including oneself)
Restatement §389 An agent must
give profits of a transaction to the principal unless there is an agreemt.
Restatement
§389 An agent is subject to a
duty not to deal w/ his principal as an adverse party in a transaction
connected w/ the agency w/o the principal’s knowledge.
Restatement
§390 An agent who, with the
knowledge of the principal, acts on his own account in a transaction in which he is employed has
a duty of deal fairly and disclose everything to the principal unless the
principle manifest that he knows the facts or does not care. (so even if the agent
disclosed the option , he still had a duty to deal fairly)
Restatement
§403 states that where “an agent
receives anything as a result of his violation of a duty of loyalty to the
principal, he is subject to a liability to deliver it, its value, or its
proceeds, to the principal.” (The traditional equitable remedy is the Constructive Trust.)
Note: Remember Judge Cardozo (in Meinhard v. Salmon) – “Not honesty alone
but the punctilio of an honor most sensitive is the standard of behavior.”
Remedies
that Principal has:
______________________________________________________________________________________________________
Equipment owner Kapperman was negotiating the
possible sale of his broken road grader to Schladweiler for about $8500.
Kapperman authorized Schladweiler only to obtain three bids to have the engine
repair work done (so that Kapperman could then decide whether the repair was
affordable). Instead, Schladweiler represented to Truck Repair that he had
authority from Kapperman to obtain the repair on behalf of Kapperman, as long
as the cost of the repair did not exceed $3500. Schladweiler did not get any
other bids and ordered the work done by Truck Repair. Truck Repair did the work
for $6400, released the road grader to Schladweiler, but has not been paid.
Schladweiler is insolvent. Who is liable for the repair bill?
Answer:
The principle is only liable if there is actual or
apparent authority. (R)
The Principal is not liable at all – since there was
no authority. P gave actual authority to give bids only. P did not authorize
the work done, he just authorized him to get bids. But here in this situation A
is liable for the whole amount.
Caveat: if he was authorized for repait then P would
only be authorized for the exact amount. P expressly authorized (Actual authority:
see 7 below) to spend 3.5k. Therefore, since the agent went above that he would
be liable for the rest.
Restatement §7 – Authority is defined as the power of the
agent to affect the legal relations of the principal by acts done in accordance
with the principal’s manifestations of consent to him. (Here
there were no such manifestations)
Restatement §164(1) – Where an agent enters
into an unauthorized contract w/o having the power to bind the principal, the
principal is NOT bound by the contract as actually made by the agent, or as it
would have been made if the agent had acted w/in his or her authority. Since A
was given actual authority as to amount he is liable for that amount.
Restatement
§§8, 8A, and 8B – However, under certain
circumstances agents may have power to bind the principal by unauthorized
acts, such as where the agent has apparent authority or inherent
agency power, or where the principal is estopped (b/c a 3rd party
relied) from denying the agent’s
authority. (None of which are
present in this case) (see page 164 supplement)
The Principal
must have the capacity to give legal consent, as well as capacity to do the act
that he or she is authorizing his agent to do.
The Agent, however, must
only have the physical or mental capability to do the act (not legal).
Therefore, a minor can act as an agent AND can bind a principal to a
contract.
_____________________________________________________________________________________________________
PROBLEM
2.2 (pg.88)
Undisclosed Principals
Answer:
Pace: P. Acton A, Tab: 3rd party
If P sues T:
then T is not L since P was undisclosed (303), but under 302 T would be liable
unless 3 exceptions are met (however 302 is not met since the second of prong
of fraud was met here).
If T sues A: A is liable (306)
If T sues P:
1. Ordinarily an agent
is not liable for a disclosed principal, but if the principal is
undisclosed then agent is on the
hook. It is as though the agent is the
only one involve until the principal is disclosure. The agent is completely off the hook
post-disclosure.
2. If principal contracts with the agent to keep disclosure, unwarranted
disclosure does not preclude the ability of the 3rd to sue the
principal.
3. Agents continued exposure – any trust or confidence in the agent will
bind the agent. So you cannot shift
responsibility to the principal if the 3rd party was relying on the
ability of the agent. The 3rd
party has remedy here against the agent. The remedy here might be that
4. Restatement §4 – Disclosed
Principal; Partially Disclosed Principal; Undisclosed Principal – if the other
party has no notice that the agent is acting for a principal then the on for
whom he acts is undisclosed.
5. Common Law – an
undisclosed principal is bound by the acts of the agent, Accordingly, they can also sue 3rd
parties (since they are on the hook)
6. Restatement §302 – 3rd
parties are bound to the undisclosed principal unless (3 exceptions):
i.
The agreement states to the contrary
ii.
Existence of principal is fraudulently
concealed
iii.
There is a set off or
similar defense against the agent.
7.
See also Restatement §303,
§304
i.
303: A person (3rd party) with whom an agent makes a
contract on account of an undisclosed principle is not liable in an action at
law brought upon the contract by such principle:
i.
If the contract is in the form of a sealed or negotiation instrument OR
ii.
If the terms of the contract exclude liability to any undisclosed
principle or to the particularly principle.
(4) 306(1) : The principle is on the hook unless limits exposure. One the
agent is liable he cant throw it onto the principle and the A would be liable.
However here, Tab found out who the principle was so therefore this section
drops out of the anaylsis.
______________________________________________________________________________________________________
PROBLEM
2.5 (p.99)
– skipped – no notes – “Outcome in Clark Case”
______________________________________________________________________________________________________
Grace and Alice were starting their own record
label, “White Rabbit Records.” Grace’s father, Lewis, agreed to invest in the
business. The three of them agreed to organize the business as a limited
liability company, in which Grace, Alice and Lewis were to be the only members.
Lewis gave Grace and Alice $100,000, which they
deposited in a bank account under the name “White Rabbit Records.” Grace
started looking for a place to put the recording studio and offices.
White
Rabbit Records
By:
/S/
Using forms she downloaded from the Internet, Grace
prepared Articles of Organization for a limited liability company to be named
“Whit Rabbit Records, LLC.” On April 1, the three signed the Articles of
Organization, and mailed them to Secretary of State of the State of
Lewis invested in the business, but was not active
in its operation. Grace and Alice both invested in, and were active in running
the business. While
White
Rabbit Records
By:
/S/ Grace
Grace,
member
On April 15, Grace received a letter from the
Confusion Secretary of State, returning the Articles of Organization of White
Rabbit Records, LLC, and advising that the Articles were being returned without filing, b/c the name “White
Rabbit Records, LLC” was not available w/o a letter of consent from White
Rabbit Magic, Inc. Grace, Alice and Lewis obtained the letter of consent, and
mailed the consent, and the Articles of Organization for White Rabbit Records,
LLC, to the Confusion Secretary of State. The Confusion Secretary of State accepted
the Articles of Organization for filing, and issued a Certificate of
Organization for White Rabbit Records, LLC, effective as of April 22.
Questions:
(1) Please advise each of Grace,
Alice, Lewis and White Rabbit Records, LLC as to their respective responsibilities
w/ respect to
(a) the recording contract w/
Artist, and
(b) the lease w/ Landlord. You
may assume that, except as set forth above, the Lease has no provisions that
would affect your answer.
(2) Suppose that, instead of a
limited liability company, the parties had formed a limited partnership, w/
Grace and Alice as general partners, and Lewis as a limited partner. Would that
change the responsibilities of the parties on the Lease? Why or why not?
Answer:
(1) Advice to Grace, Alice, and Lewis as to their responsibilities w/
respect to:
(a) The Recording Contract w/ Artist –
Alice acted as a
promoter of the corporate enterprise, White Rabbit Records, LLC, when she
signed the recording contract. The legal
relationship between a promoter and a not-yet formed entity is analogous to
that of agent/principal. As such,
promoters are at least initially liable on any contracts they execute in
furtherance of the corporate entity prior to its formation. The promoters are
released from liability only when:
(i)
The contract provides that
performance is to be the obligation of the corporation (novation)
(ii)
The corporation is
ultimately formed (de jeure)
(iii)
The corporation then
formally adopts the contract (ratification and affirmation).
Pre-incorporation agreements merely indicate that it is undertaken on behalf of a corporation and the corp will not be exclusively liable in the event of a breach – the promoter remains liable on the contract.
Promoter
Liability – The promoter will only be released from liability IF:
(i)
The corp is ultimately
formed AND
(ii)
the corp subsequently ADOPTS
the contract and
(iii)
there is subsequent NOVATION.
However, in order for the liability to shift to the later-formed corp, the
contract must explicitly state that the performance thereunder is solely the
responsibility of the corp.
THEREFORE,
You can argue
that
304a Analysis:
see pg 340 in supplement (Alice and Grace: GPs and Lewis LP)
(b) The Lease w/ Landlord
Grace,
like Alice, acted as a promoter to the corp/ptshp entity when she signed the
lease.
Restatement
§326 – There is an inference
that a person intends to make a present contract w/ an existing person. If, therefore, both parties know that there
is no principal capable of entering into such a contract, there is a rebuttable
inference that, although the contract is nominally in the name of the
nonexistent person, the parties intend that the person signing as agent should
be a party, unless there is some indication to the contrary. (see pg 182 supp).
LLC Liability – The LLC
will not be liable UNLESS:
(i)
The contract provides that
performance is solely the responsibility of the corporation.
(ii)
If it doesn’t, then the LLC
must make an affirmative act that shows that it has ADOPTED the contract after
formation. There are two ways in which an entity can ADOPT a contract:
(A)
Expressly, or
(B)
By Conduct (accepting the
benefits and fruits of the contract) – like RATIFICATION.
The key in
advising Grace and Alice is to tell them to have an express provision in the
contract that states that the LLC is assuming sole liability and responsibility
and that they are merely acting as agents for the LLC. Ultimately, Grace is
bound personally by the lease she signed with the landlord. Under a LLP both Grace and Alice are liable
for the lease. There may be some
estopell argument if there was reliance.
(2) If partners had formed as a Limited Partnership –
Yes the
formation of a limited partnership would change the responsibilities of the
parties on the lease that Grace signed. The parties would be held to different
standards of liability on the Lease. In
order to have an LP, certain steps need to be taken and as long as there is
substantial compliance with the statute, the LP will be recognized. However, if
there has been no compliance yet, the default rule is to take it as a general
partnership. As such, both Alice and Grace will be held liable as general
partners on the Lease. The general ptshp
default rules are found RUPA §202.
On the Lease, Lewis would be held to a different
standard and he would probably win under the next section:
ULPA §304 (P.340)– A person who makes
a contribution to a business enterprise and erroneously but in good faith
believes that he has become a limited partner in the enterprise is not a
general partner in the enterprise and is not bound by its obligations by reason
of making the contribution, receiving distribution from the enterprise, or
exercising any rights of a ltd partner, if, on ascertaining the mistake, he or
she:
o
Causes an appropriate
certificate of limited partnership or a certificate of amendment to be executed
and filed; or
o
Withdraws from future equity
participation in the enterprise by executing and filing in the office of the
Sec of State a certificate declaring withdrawal under this section.
Artist, however, could argue that since no attempt
had even been made yet as to filing the Articles of Organization, that it
should be a general partnership rendering Lewis personally liable too. The general rule is that 3rd party’s knowledge
regarding the status of a ltd partnership is irrelevant when at the time of
contracting, the partners have made no attempt to comply w/ the filing
requirements. Since they were de facto (meaning they made a good faith
colorable attempt to comply with the statutory requirements) they would not be
de jeure and therefore not an LLC. Then the default rules for GP would apply.
If now they were GPs,
Lewis could then argue that b/c he had no active control or participation in the company he
is a limited partner and as such, not liable. The rebuttal, however, by Artist
would be the opposite – since he shared in the profits he should be personally
liable. AND Artist might win b/c of the non-compliance w/ the filing
requirements.
IF an LLC had
in fact been formed properly, by definition of an LLC each member has actual
authority to bind the LLC. If a member does not agree that member may withdraw
or mediate. Since Lewis did neither, he would therefore become liable under the
K that bound the LLC. (pg 137
supplement)
Def:
(1) De facto: (1) There is a statute permitting incorporation, (2) bonafide
attempt to incorporate, (3) actual use or attempted use of corp powers (4)
third party reliance on the corp.
i.
Result: if you deal with de
facto the corporation can be bound by acts of its agents (320 pg 182);
disclosed agents and shareholders are not L- L would be imputed to corp.
(2) De jeure: a matter of strict compliance with statutory requirements
(3) Corporation by estoppel: when parties are estopped from denying corp.’s
existence.
PROBLEM
3.2 (172) –
[Formation of Firms]
Contracts Entered into before Formation of a Limited
Liability Firm / Interaction of Statutes and Common Law
Investor invested money in Widgets, Ltd. At the time of the investment, Investor
signed a Certificate and Agreement of Limited Partnership that specified that
Investor would be a limited partner in Widgets, Ltd. Unknown to Investor, Widgets, Ltd. Began
doing business without filing the Certificate.
After six months, Widgets, Ltd. Distributed $1,000 in profits to
Investor. After Investor received the
profits distribution, Investor learned that Widgets, Ltd. was not a limited
partnership.
Despite learning that Widgets, Ltd. was not a
limited partnership, Investor took no action to procure the filing of the
Certificate of Limited partnership for Widgets, Ltd., nor did Investor withdraw
from equity participation in the business.
In fact, Investor continued to take distributions of profits after
Investor learned the business was not a limited partnership.
Widgets, Ltd. is now insolvent, and two of its
creditors have sued Investor, seeking to hold Investor personally liable for
Widgets, Ltd.’s debts. Alan sold on open
account goods worth $10,000 to Widgets, Ltd. after Investor had received the
first distribution of profits, but before Investor learned there was no limited
partnership. Betty loaned Widgets, Ltd.
$25,000, after Investor had learned there was no limited partnership, and after
Investor had received further distributions of profits.
Assume that neither Alan nor Betty knew of
Investor’s involvement with Widgets. Ltd.
Under the ULPA, is Investor liable to either Alan or Betty? Under the RULPA?
Answer:
The issue is
whether Investor in a limited partnership believing to be a limited partner is
liable to Alan or Betty for debts owed by Widget. Two rules can answer this question: ULPA §11
and RULPA §304
RULPA
§304(a) [see (b) below]: “Person
Erroneously Believing Himself Limited Partner.
“A person who makes a contribution to a business enterprise and
erroneously but in good faith believes that he has become a limited partner in
the enterprise is not a general partner in the enterprise and is not bound by
its obligations by reason of making the contribution, receiving distributions
from the enterprise or exercising any rights of a limited partner, IF, on
ascertaining the mistake, HE/SHE:
(i)
causes an appropriate
certificate of limited partnership or a certificate of amendment to be
filed; OR
(ii) withdraws from future equity participation…by declaring withdraw with the sec of state”.
Applying §304
to the facts presented, Investor made contributions to Widget erroneously, but
in good faith he believed that he was a limited partner. He should not be liable to Alan. Alan’s sale of 10lk worth of product to
Widget (even after Investor receipt of profits) was accomplished before Investor learned there was no
limited partnership. Conversely, under
§304, Investor may be liable to Betty because Investor knew that there was no
limited partnership (which is an act of bad faith) when Betty lent the money to
Widgets. But Investor might not be
liable to Betty (3rd party) because she may have extended the credit
without believing in good faith that Investor was a general partner. The applicable section §304(b) reads, “But in
either case, only if the third party actually believed in good faith that the
person was a general partner at the time of the transaction”. Betty has a pretty strong reliance argument,
that is, that the credit was extended in good faith. After he found out that they were not a
limited partnership (he would now be a GP)
Under ULPA §11:
investors in a defective limited partnership will not be treated as
general partners so long as (I) they exercised only the rights of limited
partners and (ii) they renounce all interest in the business “promptly” on
learning that no limited partnership exists. there are no facts indicating that
Investor exercised rights beyond his limited partnership but Investor did not
renounce interest in the business upon learning that there was no limited
partnership because he continued to take distributions of profits after he knew
there was no limited partnership. In
other words, Investor would be liable as a general partner to Betty not Alan. Not to Alan, because he did not know at the
time Investor received distribution that there was no limited partnership,
however Investor knew of this at the time Betty lent money to Widget, Ltd. ULPA reasons that because persons in such a
position never actively participate din the control of the business; they were
not co-owners of the business, but rather only investors. Therefore as investors, they could involve
section 11 and retain any profits received before they learned they were not
limited partners. [This is not bolded because he
said only answer with respect to RUPLA.]
PROBLEM
4.1 (pg.
203) Express Actual Authority
You are an associate in a law firm. Your supervising
partner assigns you two client files.
A. Leslie Owner owns a small
printing shop. Owner is married, and has two young children. Owner is also a
member of the National Guard. Owner’s unit has just been called into active
duty, and is being assigned to
B. Grandpa Jones is retired,
and has substantial assets that greatly exceed the current exemptions for the
imposition of estate taxes. Grandpa is 80 yrs old, and has just been diagnosed
w/ Parkinson’s disease. Grandpa is too preoccupied w/ his health to pay proper
attention to his assets. He also knows that, with his advanced age, and his
Parkinson’s, it is likely that, in the next year or so, he will become unable
to manage his affairs. To ensure that his property will be managed properly,
Grandpa wishes to give his daughter a general power-of-attorney.
What should be you concerns in drafting the
powers-of-attorney? Are the concerns in drafting Owner’s power-of-atty
different from those in drafting Grandpa’s? Would further info be helpful in
drafting the powers-of-atty? If you think it would, what info would you like,
and why?
Answer:
(1) The general rule is that
Powers of Atty are “strictly construed and are held to grant only those powers
which are clearly delineated. However, this rule of strict construction is
subject to a more important rule: that the court must determine the intention
of the parties.
(2) Another accepted rule is to
discount or disregard, as meaningless verbiage, all-embracing expressions found
in POAs.
(3) Ambiguities are to be resolved against the party who made it or cause
it to be made, b/c that party had the better opportunity to understand and
explain his meaning.
(4) Finally, general words used in an instrument are restricted by the
context in which they are used, and are construed accordingly. Terms are given
technical and not popular definitions.
(a) For Leslie Owner, language such as “such power as may be used in the
ordinary course of business” is boilerplate and will probably suffice except if
there are unforeseen circumstances. For
example, the right to sell, declare bankruptcy, merger, etc. would not be
covered in boilerplate language. These
things would likely need specific consent.
(b) For Grandpa there are other issues.
Such as continuation on life support and disabilities. For those decisions you would want to get the
family’s consent ahead of time. Another
concern might be Grandpa’s competency.
Important information, the existence of a will.
Other powers (e.g. power to make gifts of the
principal’s prop) are NOT included UNLESS
a.
it is expressly conferred
b.
it arises as a necessary
implication from the conferred powers, OR
c.
it is clearly intended
by the parties, as evidenced by the surrounding facts and circumstances.
2.
Guardians of incompetents
a.
Do not have authority to
maintain an action for divorce of grandfather absent explicit statutory
authorization due to personal nature of the relationship.
The issue then
arises, whether the husband has the power to hire someone to manage the
printing store. (See PROBLEM 4.2 – Implied
Actual Authority)
___________________________________________________________________________________________________
When its building need painting, Church hired Bill to paint it. Church has hired Bill on various projects, including the last painting of the Church building. While working those projects, Bill had often asked his brother, Sam, to help out as needed. In fact, Sam had helped Bill with painting portions of the building that were very high and difficult for one person to paint. When it came time to paint those portions of the building, Bill asked for permission to hire another worker. Although the Church suggested that Bill might use Gary, who was hard to contract, Bill asked Sam to help out again. The morning that Bill and Sam came in to paint, Bill discovered that there wasn’t enough paint, and sent Same to the hardware store to purchase more paint. Does Sam have either express or implied authority to purchase the paint on behalf of the Church? How would you characterize such authority?
Answer:
1. Sam: he would have apparent authority to work on the church since he
has done projects in the past and they have allowed him to do them. Sam doesn’t
have actual, but he has apparent. One could argue that he also has inherent
since having paint to paint is inherent in the job as a painter.
2. Note: Sam is a subagent (see class notes pg 56): subagent has the same
powers as an agent and has the duties of fidelity and care. So there is a line
of continuity of agent to subagent.
i.
Two possible views
1. The appointing agent has completed his task once the subagent is
appointed and the subagent is now the only agent of the principle
2. The appointing agent remains an agent of the principle but stays on as
a principle to the subagent.
ii.
Termination: is made based
upon manifestations of the parties, customs of the business, and all other
circumstances.
iii.
L of agent for acts within
authority: (duties)
1. Restatement 2d 377: contractual duties: a person who makes a contract
with another to perform services as an agent for him is subject to a duty to
act in accordance with his promise.
2. Restatement 2d 379: duty of care and skill: (see pg 185 supp):
a.
A paid agent is subject to a
duty to the principle to act with a standard care, standard skill in the
locality for the kind of work done, and exercise any special skills.
b.
An unpaid agent is under a
duty to act with the same care and skill of nonagents performing small tasks.
3. Implied: type of actual authority circumstantially proven which are
practically necessary to carry out duties actually delegated. Bill was hired to
complete the paint job and had been allowed to get help from another person in
the past. Arguably, he has implied actual authority for this paint job since
the ceilings are high in some areas may require the work of two persons.
However, the church suggested the use of
4. Sam may not have expressed actual authority but implied actual
authority
5. So once we determine Sam or Bill is w/in the church’s authority, then
that is the consent of the church.
Agents have the incidental authority if it is w/in the scope of their employment. An extraordinary amount of paint or a truck
would be different.
6. Test for determining implied actual authority:
iv.
Rule: Whether the agent
reasonably believes because of the present or past conduct of the principle
that the principle wished him to act in a certain way or to have certain
authority.
v.
Factors:
1. Nature of task
a.
It is difficult to paint
ceiling by oneself, therefore it would seem logical to hire a subagent for
help.
2. Needed to carry out expressed authority
a.
Bill had expressed authority
to paint church
3. Similar past position
a.
He did in the paint before
and he got helped before
4. Specific past conduct by principle
a.
The principle allowed him to
hire someone else
5. Note: FYI: There is virtually always some implied authority
(4) Types of authority
i.
Actual: (26 pg 166 Supp): (1) an
objective manifestation by the principle, (2) followed by the agent’s
reasonable interpretation of the manifestation, (3) which leads the agent to
believe that it is authorized to act for the principle.
1. Implied/incidental: authority to do acts which are incidental to it, usually accompany
it, or are reasonably necessary to accomplish it. (35 pg 169 supp)
2. Express: (26) also
ii.
Apparent: (8, 27): 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.
iii.
Estoppel: (8b pg 165 s):
iv.
Inherent: (Catchall
doctrine): neither actual nor apparent, estoppel doesn’t apply. (8a pg 164
Supp)
1. Two situations
a.
Certain unauthorized acts by
agents
b.
Certain false
representations of agent or apparent agent
v.
Ratify: (82 pg 169): the
affirmance by a person of a prior act which did not bind him but which was done
or professedly done on his account, whereby the act, as to some or all persons,
is given effect as if originally authorized by him.
______________________________________________________________________________________________________
ABC Corp. sold mobile homes and developed mobile
home parks. ABC employed Agent, a licensed real estate broker, to acquire land
for development as mobile home parks, at a weekly salary of $125. Agent told
ABC that Parkacre was available for purchase. ABC asked Agent to purchase the
land as a “straw man,” and then to convey the land to ABC. Agent told ABC that
the land would cost $30,000, and ABC gave Agent that amount.
Unknown to ABC, Agent had an interest in Parkacre.
Before ABC had employed him, Agent had paid $1,000 for an option to buy
Parkacre for $15,000. When ABC gave Agent the $30,000 he asked for, Agent
exercised his option to buy Parkacre. Agent then used $14,000 of the $30,000 to
complete the purchase, and kept the remaining $16,000.
ABC has now sued Agent for breach of fiduciary duty,
asking that Agent be required to give ABC the entire $15,000 profit on the
transaction. Agent argues that ABD’s sole remedy is to rescind the transaction
– return Parkacre in exchange for the $30,000 purchase price.
Answer:
(Same as Problem 1.2 – see above)
Restatement
§390 – An agent who, to the
knowledge of the principal, acts on the agent’s own account
in a
transaction in which the agent is employed has a duty to deal fairly w/ the
principal and to disclose to him all facts which the agent knows or should know
would reasonably affect the principal’s judgment, UNLESS the principal has
manifested to the agent that the principal knows such facts or that the
principal does not care to know them.
Additionally:
a.
Pay attention to Restatement
§388, & §389 they are important.
b.
Under §390 the agent may
with the consent of the principle may be able to disclose. But the agent still must disclose all
material conduct.
c.
So in this problem the
principle should prevail in almost any circumstances
Two Prongs to Fiduciary
Duty:
(1)
Duty of care: skillfulness
(2) Duty of loyalty: honesty (see below; see pg 57 class
notes)
a.
Note: you cannot contract
away the duty of loyalty. We can make specific exceptions but a general
declanation is void against public policy.
I.
Duty
of Loyalty
a.
Res. 2d. § 387
i.
Agent must act solely for the benefit of the principal in all matters
connected w/ the agency
ii.
“punctilio of an honor most sensitive” (Meinhard Case)
b. Res. 2d. § 388
i.
Agent must disclose all incidental profits to the principal from a transaction made for
the principal and the principal has a right to these profits.
ii.
Comment. b allows the agent to keep these if there is a custom or
agreement.
iii.
Notion that all funds that A hold in trust for P and must give over
money. HE can deduct costs but here he did more than that since he made a large
profit of 16k. This is where he breached his duty.
c.
Res 2d. § 389
i.
An agent cannot deal with the principal as an adverse party in any
action connected with his agency without the principal’s knowledge
ii.
Harm to the principal is not relevant to this section
d. Res. 2d § 390
i.
If the agent does act on his own account in a transaction with the
principal he is under a duty
to deal fairly with the principal and reveal all information which he should
know would affect the principal’s judgment unless the principal says he does
not care
e.
Res. 2d § 391
i.
Must disclose whether the agent represents an adverse party
f.
Res. 2d § 392
i.
If agent does represent an adverse party they must disclose all
relevant facts unless the principal says he knows or doesn’t care to know
g. Res. 2d § 393
i.
Agent can’t compete with the principal on his own time
h. Res. 2d. § 395, 396
i.
Agent cannot use confidential information of the principal even after
the agency relationship is terminated
i.
Res. 2d § 401
i.
Agent is liable fro any loss caused by a breach of duty
j.
Res. 2d. § 403
i.
If agent receives anything due
to a violation of the duty of loyalty the principal has a right it to its
value, or its proceeds
k.
Res. 2d. § 404
i.
If a principals asset is used for the profit of the agent he is liable
to the principal for the value of its use.
l.
Res. 2d. § 407
i.
Remedies
1.
if the agent benefits, the
principal can receive the benefit itself (he can get the money back itself),
its value or proceeds and any additional damages caused by the breach.
2.
if property is wrongfully disposed of the principal can only recover
either its value or what the agent received
3.
if the principal recovers from a 3rd person he can also
recover any profit the agent improperly received
ii.
these provision generally allow
the principal to be put back to a place better than where they started
PROBLEM
5.1 (pg.
236) Apparent Authority – (class notes pg 72)
Palmer was planning to establish a dealership to
sell farm machinery. He hired
Answer:
1. 3 sources of Apparent
Authority (Section 27 pg 166 Supp)
a.
Direct communications from
the principle to the 3rd party
b.
Appointment of an agent to a
position by the principle – which stands for the notion that this person has
the authority of persons who normally hold such position [CEO].
c.
Prior Act or Course of
Dealing – notion in community that agent may establish reputation in community
to have authority.
2. There is no actual
authority,
m.
Conclusion:
i.
Remedies: Res. 2d 407
1.
if the agent benefits, the
principal can receive the benefit itself (he can get the money back itself),
its value or proceeds and any additional damages caused by the breach.
II.
Agent Binding Principal Through Unauthorized Acts
a.
Apparent Authority Res. 2d. §27 (pg 166 supp)
i.
Principal holds out or indicates to 3rd party that agent has
authority to act
1.
3rd party has a duty to reasonably interpret principal’s
conduct, and actually, reasonably believe agent has the authority
a.
the reasonable belief might require inquiry if odd action
b.
Bank should have interpreted P’s
overdrafted account as being conspicuous and should have put P on notice as to
the overdrafts.
2.
holding out by principal
a.
a stmt
b. message to community at
large
c.
letting agent carryout
unauthorized acts and not acting
i.
The manager had a duty to
inquire about the account which he didn’t do.
d. not possible with an
undisclosed principal
e.
agent showing 3rd party a written stmt by principal
i.
Agent had authority to write checks, but still he was expressly forbidden
to borrow money on Palmer’s credit.
ii.
can be created by position Res. 2d § 49, 195
1.
applies to agents in the corporate context (officer)
2.
must show ordinary habits of persons in the locality and
trade/profession
3.
will not cover extraordinary transactions
iii.
test focuses on 3rd
parties belief
1.
Third party must know, must
rely, and must reasonably interpret.
iv.
agent can’t create this unless they make a truthful stmt about
authority and the authority is later changed
v.
the Res. does not require detrimental reliance but some jurisdictions
do
vi.
creates a valid and fully enforceable contract from all sides
vii.
hiring an attorney does not create this
b. Inherant Agency Power
i.
Res. 2d. § 8A—derived solely from the agency relationship and exists to
protect those who deal w/ agents
ii.
§161 gives elements
1.
Must be an agent of a partially or fully disclosed principal
a.
P is on the account and obviously principle
2.
Act done on principal’s behalf
a.
A is authorized to write checks
3.
Act is incidental to or usually accompanies the authorized conduct
4.
3rd party must reasonably believe agent was authorized
a.
The bank did believe.
5.
3rd party must have no notice of lack of authority
a.
The facts do not indicate that Palmer expressly let the bank know that
the agent could not borrow credit on his account.
If Palmer wouldn’t have expressly forbidden the overdrafts, A might
be okay in the sense that principle should have given explicit instructions
since lots of time the agent lacks financial wherewithal. Therefore, the
principle would be in a better position to educate the agent. This would impose
a duty to monitor.
Merchant is in the business of selling, and of
repairing used stereos. In the ordinary course of business, Buyer buys stereo
from Merchant. Buyer pays Merchant the purchase price, and takes delivery of
the stereo. Merchant later discovers that the stereo sold to Buyer was not
owned by Merchant, but rather was owned by Owner. Suppose that Merchant
acquired possession of the stereo in one of two different manners:
(1) Thief stole the stereo from
Owner, and sold it to Merchant.
(2) Owner left the stereo with
Merchant to be repaired.
Did Merchant have power to transfer to Buyer Owner’s
title to the stereo? If you believe that Merchant did have that power, what was
its source – express authority, implied authority, apparent authority or
estoppel to deny power? Explain.
Answer:
Since Owner
never authorized Merchant to sell the stereo, Merchant never had actual
authority (express or implied). Furthermore, there was no affirmative act
on behalf of Owner to suggest that Merchant had apparent authority to
sell the stereo. And lastly, since there was no misleading omission or conduct
on behalf of Owner w/ the subsequent detrimental reliance by Buyer, there is no
estoppel.
What can Owner do
if the stereo was Stolen?
Owner can try going after Merchant b/c he had no
better title than the thief and therefore couldn’t convey it. There was also no
appearance of authority conveyed by Owner to sell the stereo. If M knew then M would be liable if he had
reason to believe it was stolen. As a
preventative measure M could have asked for a serial number and valid ID (they
were in the best position to mitigate; he had the power to prevent).
Buyer, however, could argue estoppel b/c
there was arguably an appearance of authority to sell the stereo since Merchant
sold stereos in the ordinary course of business. But the estoppel
argument also fail b/c there was no conduct or affirmative act that can be
traced to Owner that gives Merchant the authority to sell. Therefore, O is estopped from going beyond
merchant because we protect the BFP in good faith. We don’t want to have to go
after the person who bought in good faith.
What can Owner do if he left
the stereo to be Repaired and
Merchant sold it?
“Although mere possession and control of personal
property are not ordinarily sufficient to estop the real owner from asserting
his title against a person who has dealt w/ the one in possession on the faith
of his apparent ownership, slight additional circumstances may turn the scale
against the owner and estop him from asserting title against one who has
purchased the property in good faith.”
UCC 2-403 – any entrusting of possession of goods to a merchant
who deals in goods of that kind gives him power to transfer all rights of the
entrustor to a buyer in the ordinary course of business. This protects
the Good Faith Buyer. This provision is
harsher for the owner in (1).
So in either case the innocent buyer is ok. The real issue between the two boils down to
the voluntary entrustment if the stereo was being repaired.
Although under UCC 2-403 we have protection of a BFP
in good faith, M is also liable to O under the CL principles of bailor-bailee.
The true owner would have the best title against the world. The true owner has
highest claim against others unless true owner abandons the right.
PROBLEM 5.11 (pg.271) Agent Diversion of Funds (see class notes pg 75)
Lawyer
is a trial lawyer employed by Firm, which, through its lawyers, is engaged in
the practice of law, specializing in general civil litigation. Lawyer is senior enough that Lawyer has the
authority to accept new cases on behalf of the Firm.
Client
hired Lawyer to represent her in a suit against Defendant. Even though Firm policy required only a $1500
retainer before accepting a new case, Lawyer asked for a $5000 retainer. When Client asked how to fill out the check
Lawyer said that the Firm would stamp its name in as payee, so Client should
leave the payee blank.
Unknown
to Client, Lawyer was planning to leave the Firm, and didn’t want Firm to know
about Client’s suit. Lawyer filled in
the check by putting Lawyer’s own name as payee. Lawyer then deposited the check in his
personal bank account. Lawyer used the
$5000 to finalize the arrangements for Lawyer’s new office by paying the first
month rent and security deposit. As
Lawyer was driving home from signing the lease, he was killed in a car
accident.
When
Client inquired of the Firm about the status of the case, the Firm told her
that it could not start work until Client paid the $1500 retainer. Client objected that Client had already paid
$5000. May the Firm require Client to
pay the $1500 retainer that it never received?
If not, is the firm also subject to liability to Client for the
additional $3500 demanded by lawyer solely for Lawyer’s own purposes?
Answer: Lawyer (A) Firm (P),
Client (3rd party)
This is a close case. Investing is not what law firms do. But a retainer is part of the legal practice. From the plaintiff’s side argue apparent authority (see sources under problem 5.1 above). We know there was actual authority to collect $1500 but not all $5000, so no actual authority. There is also a suggestion of inherent authority because of his position in the firm. Argue agency power, estoppel (that Client relied), or other variants. He did not spend must time on this one. [See other sections]
Firm (principle) is responsible for the $1500. Firm expressly gave lawyer $1500 to retain as a retainer.
The trickier part is the difference of $3500.
Firm will argue $3500 was outside the scope of employment. However, client will argue apparent authority because lawyer (agent) could take money and deposit that is within the scope. Additionally, L’s position as a firm representative gave him authority to take such money for a case and that this amount would not be extraordinary. The client (3rd party) must know that L had authority to take money, client relied on that authority, and 3.5k in excess will likely be reasonable. Reasonable reliance by the client. The firm however, could argue that the client hired the lawyer and not the firm.
Pertinent Code Sections
c.
Apparent Authority
Res. 2d. §27 (pg 166 supp)
i.
Principal holds out or indicates to 3rd party that agent has
authority to act
1.
3rd party has a duty to reasonably interpret principal’s
conduct, and actually, reasonably believe agent has the authority
a.
the reasonable belief might require inquiry if odd action
2.
holding out by principal
a.
a stmt
b. message to community at
large
c.
letting agent carryout unauthorized acts and not acting
d. not possible with an
undisclosed principal
e.
agent showing 3rd party a written stmt by principal
ii.
can be created by position Res. 2d § 49, 195
1.
applies to agents in the corporate context (officer)
2.
must show ordinary habits of
persons in the locality and trade/profession
3.
will not cover extraordinary
transactions
iii.
test focuses on 3rd parties belief
iv.
agent can’t create this unless they make a truthful stmt about authority
and the authority is later changed
v.
the Res. does not require detrimental reliance but some jurisdictions
do
vi.
creates a valid and fully enforceable contract from all sides
vii.
hiring an attorney does not create this
1.
Hiring an attorney does not mean that an attorney can do everything an
attorney always does. Even though client hired lawyer and lawyers are allowed
to get retainers but he was only supposed to take 1.5k. Just because L was
hired doesn’t mean that L can argue he had authority of any lawyer. He is still
limited to ordinary matters in the locality limited by any instructions from
the principle. Here he was authorized for 1.5k. But the client could reasonably
rely on 5k as ordinary.
d. Inherant Agency Power
i.
Res. 2d. § 8A—derived solely from the agency relationship and exists to
protect those who deal w/ agents
ii.
§161 gives elements
1.
must be an agent of a partially or fully disclosed principal
2.
act done on principal’s behalf
3.
act is incidental to or usually accompanies the authorized conduct
4.
3rd party must reasonably believe agent was authorized
5.
3rd party must have no notice of lack of authority
e.
Estoppel
i.
Based on 3rd party who changes position
1.
principal must have intentionally or carelessly caused belief , if
principal knew of belief and its ramifications and fails to take reasonable
steps to fix
2.
failure to act by principal is always enough
3.
can only be asserted by 3rd party
f.
possession of goods does not give power to transfer goods
Section
219 (pg 76 notes, code pg 178
When master is liable for the
torts of his servants. (master: firm), lawyer (servant)
(1) A master is subject to
liability for the torts of his servants committed while acting in the scope of
their employment
(2) A master is not subject to
liability for the torts of his servants acting outside the scope of their
employment, unless:
1.
the master intended the conduct or the consequences, or
2.
The master was negligent or reckless, or
3.
The conduct violated a non-delegable duty of the master, or
4.
The servant purported to act or to speak on behalf of the principle and
there was reliance upon apparent authority, or he was aided in accomplishing
the tort by the existence of the agency relation.
Section
228 (scope pf employment) code
pg 179
(1) Conduct of servant is within the scope of
employment if, but only if:
a.
It is a kind he is employed to
perform;
b.
If occurs substantially within
the auhtroized time and space limits;
c.
It is actuated, at least in
part, by a purpose to serve the master, and
d.
If force if intentionally used
by the servant against another, the use of force is not unexpected by the
master.
(2)
Conduct of the servant is not
within the scope of employment if its is different in kind from the authorized,
far beyond the authorized time or space limits, or too little actuated by a
prupose to serve the master.
Section
229 (Kind of Conduct within scope of employment) same page
(1) To be within the scope of
employment, conduct must be of the same general nature as that authorized, or
incidental to the conduct authorized.
(2) In determining whether or
not the conduct, although not authorized, is nevertheless so similar to or
incidental to the conduct authorized as to be within the scope of employment,
the following matters of fact are to be considered:
a.
Whether or not the act was one commonly done by such servants;
b. The time, place and purpose
of the act;
c.
The previous relations between the master and the servant.
d. The extent to which the
business of the master is apportioned between different servants.
e.
Whether or not the act is outside the enterprise of the master or, if
within the enterprise, has not been entrusted to any servant;
f.
Whether or not the master has reason to expect that such an act will be
done;
g. The similarity in quality of
the act done to the act authorized;
h. Whether or not the
instrumentality by which the harm is done has been furnished by the master to
the servant;
i.
The extent of departure from the normal method of accomplishing an
authorized result; and
j.
Whether or not the act is seriously criminal.
______________________________________________________________________________________________________
PROBLEM 6.1 (pg.303) Partners as Agents (class notes pg 79)
Randy,
Gus and Susan are partners conducting business under the name “Randy’s Grocery
Store.” Because Randy and Susan have
strong moral objections to the sale of alcoholic beverages, the partners agreed
that Randy’s would not do so. For many
years Randy’s never sold beer wine or liquor.
Recently,
Randy’s sales have been down. One day,
Gus was in the store and noticed a lot of college T-shirts and Sweat-Shirts. Gus decided that Randy’s could sell a lot of
beer. Gus called up Spoetzel Brewing Co.
and ordered several cases of “Shiner Bock” beer.
When
the beer was delivered, Randy was on the loading dock, and refused to accept
the delivery. Spoetzel Brewing Co. sued
Randy’s and its partners for breach of contract. Randy’s, Randy, Susan defend on two
grounds. First, they argue that the
partner’s agreed that Randy’s would not sell alcoholic beverages. Second, the argue that Randy’s had never
bought beer, wine, or liquor. What
result? Would either of the following
make any difference in your analysis?
(1) Spoetzel Brewing did not know that Gus was a partner
in Randy’s.
(2) It is common (or uncommon) for groceries in the area
to sell beer.
Why or
why not?
Answer:
1. The rule is partners can conduct businesses in the course of
dealing. Here we see §301(1) pg 246 in supplement. Stores in this area do sell beer, so just
because this store does not does not preclude liability. So it looks as though there is actual authority. But where there are specific limitations on
obtaining actual authority, there is no actual authority. Randy and Susan
expressly provided that there would not be alcohol sold. There is a good argument for
apparent authority, even though there was not actual. 3rd parties are entitled to rely
in apparent authority. Express partnership agreements are usually not asked for
by third parties. In this case, there is
no prior course of dealing so THERE CAN BE NO RELIANCE. There is a burden generally to check to see
if a partnership exists. Public policy puts the burden on the party relying on
authority (beer), however the beer company is only required to offer a rational
basis for the assumption of authority.
Either under implied actual authority or under apparent authority
(because Gus was a general partner), there was express agreement that they
would be partners. So Randy and Susan
are liable on the contract. The
statement of the ptshp in the RUPA solidifies the authority. So in this statement it may enlarge the
covered actions by the partner. So a 3rd
party could order the statement.
2. The character of business is an important variable; here it was a
grocery store. The issue is whether selling beer is an ordinary part of the
business:
(1) For this business: if the county was dry then it
wouldn’t be a part of the business.
(2) If the county is not dry, being that the grocery
sells college merchandise it might be reasonable for the beer company to rely
on the fact that it would be ordinary business were the grocery to sell beer.
Since the grocery never bought beer before, they may have been on notice that
this was a new product for the grocery. However, if the beer company didn’t
know it is likely that a court will be view this as reasonable reliance,
especially since the beer company is not required to know about Randy’s
grocery, specifically only the general grocery business in which it is normal
to sell beer. This policy enhances the flow of commerce.
(3) 301(1): Each partner is an agent of the partnership
for the purpose of its business. An act of a partner, including the execution
of an instrument in the partnership
name, for apparently carrying on in the ordinary course the partnership
business or business of the kind carried on by the partnership binds the partnership,
unless the partner has no authority to act for the partnership int eh
particular matter and the person with whom the partner was dealing knew or had
received a notification that the partner lacked authority.
a.
Comment: 301(1) effects
two changes from UPA Sec 9(1). First, it clarifies that a partner’s apparent
authority includes acts for carrying on in the ordinary course “Business of the
kind carried on by the partnership,” not just business of the particular
partnership in question. The UPA is ambiguous at this.
______________________________________________________________________________________________________
PROBLEM 6.3 (pg.303) Management and Conduct of Firm Business/Estoppel (Class notes pg 82)
Ole
consents to
a.
Is Ole subject to
liability to Finn for the loan to
b.
Would it make any
difference in your answer if
Answer:
[See my notes
below first]
UPA section 7
Rules for Determining the Existence of a partnership
UPA section 16
Partner by Estoppel (pg 213
supplement)
§ 16. Partner by Estoppel
(1)
When a person, by words
spoken or written or by conduct, represents himself, or consents to another
representing him to any one, as a partner in an existing partnership or with
one or more persons not actual partners, he is liable to any such person to
whom such representation has been made, who has, on the faith of such
representation, given credit to the actual or apparent partnership, and if he
has made such representation or consented to its being made in a public manner
he is liable to such person, whether the representation has or has not been
made or communicated to such person so giving credit by or with the knowledge
of the apparent partner making the representation or consenting to its being
made.
(a)
When a partnership liability
results, he is liable as though he were an actual member of the partnership.
(b)
When no partnership
liability results, he is liable jointly with the other persons, if any, so
consenting to the contract or representation as to Incur liability, otherwise
separately.
(2)
When a person has been thus
represented to be a partner in an existing partnership, or with one or
more persons
not actual partners, he is an agent of the persons consenting to such
representation to bind them to the same extent and in the same manner as though
he were a partner in fact, with respect to persons who rely upon the
representation. Where all the members of the existing partnership consent to
the representation, a partnership act or obligation results; but in all other
cases it is the joint act or obligation of the person acting and the persons
consenting to the representation.
SECTION 308. LIABILITY OF
PURPORTED PARTNER.
(a)
If a person, by words or
conduct, purports to be a partner, or consents to being represented by another
as a partner, in a partnership or with one or more persons not partners, the
purported partner is liable to a person to whom the representation is made, if
that person, relying on the representation, enters into a transaction with the
actual or purported partnership. If the representation, either by the purported
partner or by a person with the purported partner’s consent, is made in a
public manner, the purported partner is liable to a person who relies upon the purported
partnership even if the purported partner is not aware of being held out as a
partner to the claimant. If partnership liability results, the purported
partner is liable with respect to that liability as if the purported partner
were a partner. If no partnership liability results, the purported partner is
liable with respect to that liability jointly and severally with any other
person consenting to the representation.
(b)
If a person is thus
represented to be a partner in an existing partnership, or with one or more
persons not partners, the purported partner is an agent of persons consenting
to the representation to bind them to the same extent and in the same manner as
if the purported partner were a partner, with respect to persons who enter into
transactions in reliance upon the representation. If all of the partners of the
existing partnership consent to the representation, a partnership act or
obligation results. If fewer than all of the partners of the existing
partnership consent to the representation, the person acting and the partners
consenting to the representation are jointly and severally liable.
(c)
A person is not liable as a
partner merely because another in a statement of partnership authority names
the person.
(d)
A person does not continue
to be liable as a partner merely because of a failure to file a statement of
dissociation or to amend a statement of partnership authority to indicate the
partner’s dissociation from the partnership.
(e)
Except as otherwise provided
in subsections (a) and (b), persons who are not partners as to each other are
not liable as partners to other persons.
Under both of the statutes must have
(i)
Holding out or
representation by words or conduct that a particular person is a partner
(ii)
Holding out requires a 3rd
party extension of credit to the actual or apparent partnerships on faith of
such representation
(iii)
Requires a reliance on the
purported partnership relationship à must be relied on by the 3rd party credit extension
influenced by the credit extension of the 3rd party to the
partner. Partnership status is
determined by looking at one who held out to be a partner in a joint venture
then there is a purported partnership and a purported partner
Ole,
·
Finn lent money to apparent
partnership. Who is liable if a sports
car is purchased? Ole, Lina or
both. Contrast with office supplies on
open accountà go through Estoppel analysis.
Ole is estopped from saying that there is no partnership
·
As long as there is holding
out as partners then is it irrelevant the ordinary course of business.
·
Partnership by Estoppel
treat as if actually a partnership given same rule to apply partners are bound
with regards to usual and customary in the business. This puts the relationship in the nature of
an ordinary partnership but they are not bound in regards to transactions that
are outside the ordinary course of business
·
For the sports car that is
not reasonable part of business. The
Sports car is a stretch. Reasonable reliance relates to the ordinary business.
Here a law library and office supplies would be ordinary business however, a
sports car would likely not be in the ordinary business since lawyers do not
usually use partnership money to buy a firm car and even if they did a sports
car might be excessive and outside of scope, unreasonable to rely on, given the
business itself. RELIANCE IS WHAT IS THE
HOOK
·
Therefore, for part A: they
are all liable.
·
For part B:
·
This is arguably a private
representation and thus requires direct or actual reliance. The threshold for
public representation is not as high. If actual reliance cannot be shown, then
there will not be liability.
·
O can argue that he is not
liable because he only consented to the partnership and did not a role in
holding out.
My Notes
1. Ptshp by Estoppel –
a.
What are the legal
ramifications for purported partners?
b.
UPA §7(1) – p.211à§16(1) then to – RUPA at §308(e) is the same (p256)
1) Under the old statute it requires a holding out or representation by
words or conduct that a particular person is a partner. This older section also requires a 3rd
party extension of credit to the ptshp of faith of such representation made to
them. It requires a reliance on the
purported ptshp relationship by the party extending credit.
2) Under §308 – the purported partner (holding out is the joint venture of
the purported ptshp and the purported partner).
Now these principles both obtain to ptshp and purported ptshp. So you could have A & B be a ptshp. And they may hold out C as being a
partner. And C may participate. Or we could have A & B & C not
thinking they are a ptshp but they are holding out as such then the liability
principles are the same.
c.
So in this problem OLE
consents to
1) First go through estoppel analysis and say OLE is estopped from
asserting non-existence of the ptshp since Finn relied on the reason for
lending the money. But if they purchased
a sports car, that is not is the course of business.
This is a ptshp by estoppel, which means you treat
it as though it were a ptshp. So the
ptshp and partners are bound by obligations customary in their course of
business. The liability principles are
no broader under a ptshp by estoppel, they are the same. Here the sports car is a stretch.
______________________________________________________________________________________________________
PROBLEM 6.4 (pg 303)(pg 82 class notes)
Odo and Word are partners in the
investment banking business. Odo and Worf both consent to Basheer holding
himself out as their partners to Dax. Apparently acting for partnership
purporses, Basheer borrows money from Dax who thinks she is lending to the
partnership.
(1)
Who is liable on the loan?
(2)
Would it make any
difference to your answer if Odo, but not Worf, consented to being held out?
(3)
Would it make any
difference in your answer if Worf had consented to Basheer holding himself as a
partner to Quark, but had never consented to any holding out to Dax?
(1)
They all are liable.
·
This is arguably a private
representation and thus requires direct or actual reliance. The threshold for
public representation is not as high. If actual reliance cannot be shown, then
there will not be liability.
·
PROBLEM 6.5 (pg.311) Management and Conduct of Firm Business/Estoppel
With
the consent of Dick, Jane holds herself out to Emily as being a partner of
Dick’s. Emily signs a contract to sell widgets to what she believes is the Dick
and Jane partnership on open account. Before Jane delivers the widgets, Dick
tell her that there is no partnership and tells her that he will not be liable
for the contract. Assuming the transaction is one that would have bound the
partnership if made by a partner.
a.
Under UPA §16 may Emily bring an action for breach of contract
against Dick?
b.
Could Emily do so under RUPA §308?
Answer:
·
Partners can bind the
partnership with regards to ordinary partnership business and all partners are liable for ordinary business liabilities.
·
Jane is a purported partner
·
Issue: Is this engagement with Emily binding on Dick
·
This case analysis follows
section 308
The
statutory test for partnership by estoppel requires that:
(1)
Credit must have been
extended on the basis of partnership representation or
(2)
That the alleged partner
must have made or consented to representation being made in a public manner
whether or not such representations being made in a public manner or whether or
not such representations were actually communicated to the person extending
credit. This is the common law test as
codified.
·
However, the last part of
(a) seems to extend liability beyond the common law test of reliance if the
representation is made in a public manner.
·
Still, the court reasons
that even with the statutory enactment that such a departure from well a
developed common law doctrine as the foundation of estoppel is that one is bound
by saying or doing something upon which another relies to his or her detriment.
·
Looking again at 308 (a)
relating to public representation is seems that it does not remove the
requirement of reliance after consider the language of B. When a person has been thus represented to be
a partner in an existing partnership he is an agent of the person consenting to
such representation to bind them to the same extent as if he were a partner who
respect to any who rely on the representation.
·
The word thus is a reference
back to subsection (a) Accordingly, under subsection (b) even when the
representation has been made in a public manner the purported partners are bund
only to person who rely upon the representation. It would be remarkable to require reliance under
subsection B but not under A.
·
Still in the best reading of
(a) “if he has made such representation or consented to its being made in a
public manner he is liable to such person.
Who is such person? The obvious
candidate is the person described earlier in the sentence; a person “to whom
such representation has been made, who has on the faith of such representation,
given credit to the actual or apparent partnership. In other words such person is one who has relied
on the representation. The purported
partner is liable only to one who has relied
Section 16 UPA
elements
(i)
Hold yourself out as a
partner
(ii)
Purported partner has to
know that you are holding yourself out as a partner
(iii)
Reliance
(iv)
Given credit à has credit been extended here?
Before Jane delivers widgets he tells her that there is no
partnership. If delivery had to be paid
for then there would have been an extension of credit.
16
limitation à partner and purported partner liable on the contract as no partnership
has resulted see 16 (b) UPA
Only restates the UPA. Argument against literal interpretation with
such a firm well respected rule from common law is that before being made part
the legislature statement under section 16 comment that should expressly state
that a change in the law is meant. Can
be argued both ways as between the two if had to rule then rule that estopell
basis can be used in absence of extension of credit as otherwise there is no
liability. In the 308 section one only
need to enter into the transaction to have liability credit extension is not
needed.
My Notes
1. This is a purported ptshp question.
Jane is a purported partner. The
question is whether this engagement she entered into with Emily binds
Dick. Under §16 there are elements,
which must be satisfied. (See
above) Specifically, the extension of
credit is in question. Before Jane
delivers the widgets, there is no extension of credit. After deliver, there is an extension of
credit. This illustrates the difference
between a partner and a purported partner.
The purported partner cannot create liability for the ptshp or the
partner.
2. Under RUPA §308 – here entering into a transaction is enough to
bind. The comment in §308 says there
should be no change between the UPA and RUPA.
The second argument is that with such a firm and well-respected rule in
common law, the comment should express that there is a change.
So the answer here is that under §308 it could be
argued either way.
PROBLEM 6.6 (pg.348) Partners as Managers –
The
question is too long to write. It is
about Mathew Emily and Paul opening a new grocery store called MEP
Grocers. The have no ptshp agreement
except as to division of equal profits.
The issue centers on Matthew contracting to sell bread. Here our my notes (hope this is not on the
exam, but there should be several small questions):
Answer:
A. Problem 6.6 – p.311
1. MEP is liability to both stores under Apparent Authority. All P has to do is prove there is a ptshp,
then D shows that P knew, the P shows that did not have knowledge of the
agreement obtaining actual authority.
The Contract to Emily, they are liable.
2. “Partners vote 2:1 to buy bread….à must inform
-The contract to emily- they are liable.
The default rule is that they have authority since they are agents and
there is not agreement ot limit their authority. Buying bread in an ordinary businsess
transaction for the grocery. All
partners are liable for partner losses nad profits, so Emily would have a right
to indemnification. Because there is no
dispute at this time, they will not be liable to each other for any breach of
duties as partersn because all aprtners have an equal right to manage the
partnership unde UPA §18(e).
-Under p’ship law, you may dissolve
at any time even if contravention of the agrmt, but there would be a breach of
K claim against Matthew. This is
effective to all who have notice. You
cannot dissove retroactivley, you only stop liability for Future
transactions if you know you will resign & deal will come thru. If you are a partner at the time of the K,
you are bound. Thus, the only remedy is
to dissolve the p’ship & inform Wholesome.
B. Mattew
contract with Arrow who has no knowledge of the vote, is MEP liable? Yes, there is not actual authority, but there
is with regard to arrow if there is no vote, the basis for liablity will be the
apparent authority. Do we still have
breach of duty by Matthew?
4.
You have an argument of deniability, understanding that until we actually made a decision, the status quo would occur
PROBLEM 6.7 (pg.348) Limited Liability Companies
Lucy is
member of Belle’s Ice Cream Shop, LLC, a member-managed limited liability
company organized under the ULLCA. The LLC has two other members, Mary and
Paula.
The LLC
holds title in its name to a building just off the town square in Sealy, which
it has been using to operate a small ice cream shop under the name “Belle’s”.
Business had turned down in Sealy. Believing that Belle’s would do better in
nearby Brenham, Lucy asked the neighbor, who owner the store next door, if he
was interested in buying the building and lot. Lucy and Neighbor agreed to a
price of $250,000. Neighbor paid Lucy the $250,000, and Lucy signed,
acknowledged and delivered a Deed transferring the LLC’s interest in the
building and lot. Lucy had never
discussed a possible sale w/ Mary or Paula, and did not have their consent to a
sale of the property.
Mary and Paula have asked you if they may recover
the property.
a.
Assuming that the articles
of organization of the LLC have no provisions that might affect your answer,
please advise Mary and Paula, giving reasons to support your answer. (See ULLCA §§301, 404(c))
b.
Would your answer change
if Lucy, Mary and Paula had been operating Belle’s Ice Cream Shop as a
partnership under the UPA? (See UPA
§§9, 10, 18. As a partnership under the RUPA? See RUPA §§301, 302, 401).
Answer:
Under 404 (c)
12 would need consent from rest of members as this sale of property
Under 301 (c)
member under a member management company can transfer the property
404 (c) 12
trumps 301 (c) as one may not convert in this case w/o consent of the partners
as doing so would take away their investment.
A member may
convey real property pursuant to 301 (c) in light of the 404 c (12) prohibition
in transferring property without consent if the transfer of the property would
represent transferring all of the assets then must have consent of the
partners/members
Can the
partnership/company get the property back?
Section 301
(2) RUPA and UPA 9 (2) gives the same answer the partnership is not bound
Under ULLCA
member may convey the property even if violates the law and an agreement among
the parties Pursuant to 301 (c) this
provision provides actual authority for members to convey the property subject
to 404 (c) (12) exception and the transaction will be valid so long as they
don’t convey everything.
If third party
is given notice of the partners restriction as the partner has actual authority
to conduct the sale then the 3rd party might have to give the real
estate back but 3rd party is under no obligation to do so.
Managerial
Discretion and Fiduciary Duties
A. Business
Judgment Rule
1. General
Principal
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 agency
Unless
otherwise agreed, a paid agent is subject to a duty to the principal to act
with standard care and with the skill which is the standard in the locality for
the kind of work which the agent is employed to perform and, in addition, to
exercise any special skill that the agent has.
Fiduciary duty has two major prongs
(1) Care
(2) Loyalty
Fiduciary duty arises out of
(1) Relationship between the parties
(2) Control over property or other
interests that are to be exercised for the benefit others.
PROBLEM 7.2 (pg.355) Business Judgment Rule [Duty of Care]
Mt.
Hood Meadows, Oreg., Ltd. is a limited partnership established to carry on the business of
constructing and operating a winter sports development. Under the limited partnership agreement,
management of the business and affairs of Mt. Hood Meadows is the
responsibility of its general partner, Mt. Hood Meadows Development Corp. That agreement also provides that the limited
partners have no right to take part in the control of the business. For the year in which profits were earned
after 1974, the general partner elected to distribute only 50% of the limited
partner’s taxable profits. The remaining
profits were retained and reinvested in the business. Three of the limited partners have sued to
force the general partners to distribute the retained profits.
Assume
that the limited partnership agreement does not require the distributions, and
that they are not required under the applicable statute. On what basis, if any, should a court
interfere in the general partner’s decision as to the distributions of profits?
Answer:
-General
rule- general partner’s decision should stand in the absence of circumstance,
the limited partners have no
right of control over the partnership
1. Any relief in this case available for the Limited Partners? –
a.
The matter
is not dispositive under contract. That
is a better place for specific problems or concerns, like problems. MBCA – §7.32 – this applies, without it any K
trying to limit the B/D is void. It
initially has to be unanimous but it can be amended later. Control is among GP. With LLC, LP, LLP – those frame works are
default rules, the PTSHP agmt can provide otherwise. Now that is not unrestricted, but it is very
broad. Here we simply have a
disagreement about policy, but policy is to be dictated by the B of D. GP has fid duties to LP, but GP is
essentially under the Bz judgement rule.
There is a disagreement about policy, but that is set by GP. Find out who dictates policy, GP or B of D,
probably both, and specifically not LPs.
b.
The RUPA and
LPA (1976) – have commentary in several places, which expressly states that the
principles are borrowed from Corporate law.
c.
Is the
threshold issue who has authority to make distribution? Well 1st find out whether you are
dealing with the default rules. 2nd what are the default rules 3rd
what is the applicability of the bz judgement rule
d.
Under RUPA
§4.04(e) – A partner owes a duty of care to the partnership and the other
partners to act in the conduct of the business of the partnership in a manner
that does not constitute gross negligence or willful misconduct. An error in judgment or a failure to use
ordinary care is not gross negligence
e.
Note: Many
of the sources for the bz judgement rule are admittedly derived from corporate law. See Text page 359, “As applied in evaluating
the decisions of corporate officers or directors, the business judgment rule
protects them from liability on account of business judgements made in good
faith:
A director or officer who makes a business judgement in good faith
fulfills his duty [of care] IF:
(i)
he is not
interested in the subject of his business (no self-dealing)
(ii)
he is
informed with respect to the subject of his business judgment to the extent he
reasonably believes necessary; and
(iii)
he rationally
believes that his business judgment is in the best interest of the corporation
PROBLEM 7.4 (pg.367) Duty of Loyalty
Covalt
and High were corporate officers and shareholders in Concrete Systems, Inc.
(CSI). Covalt owned 25% of the stock and High owned the remaining 75% of the
stock. Both men received remuneration from CSI in the form of salaries and
bonuses.
In late
1971, after both High and Covalt had become corporate officers of CSI, they
formed a partnership. The partnership bought land and built an office and
warehouse building. In Feb 1973, CSI leased the building from the partnership
for a five-year term. Following the expiration of the initial term of the
lease, CSI remained a tenant of the building; the corporation and the
partnership orally agreed to certain rental increases. The corporation made
substantial improvements to the leasehold. Under the original lease any
improvements to the premises were to accrue to the premises were to accrue to
the partnership upon termination of the lease.
In Dec,
1978, Covalt resigned his position as an officer of CSI and went to work for
one of its competitors. Covalt, however, remained a partner w/ High in the
ownership of the land and the building rented to CSI. On
Question: Assuming that $2,850 was the fair rental value of
the land and building, has High breached his fiduciary
Duty as a partner?
Answer:
RUPA §404(b) & UPA §21
High owed his Covalt, his
partner, a fiduciary duty, which necessarily encompasses the duty of exercising
good faith, honesty, and fairness in his dealings with him and the funds of the
partnership. The fiduciary duty exists
concurrently with the obligations set forth in the partnership agreement
whether or not expressed in them. In any
fiduciary relationship, the burden of proof shifts to the fiduciary to show by
clear and convincing evidence that a transaction is equitable and just. Where
there is a question of breach of a fiduciary duty of a managing partner, all
doubts will be resolved against him, and the managing partner has the burden of
proving his innocence.
An agreement
entered into that results in no fiduciary duty of the managing general partner
is void as violative of public policy.
Fiduciary duty of loyalty remains and into not extinguished by contract
unless a specific matter is waived after full disclosure and the other parties
is notified of the ability to have counsel present.
Here, assuming
that the $2,850 was fair rental value, High had a duty of loyalty to the
partnership w/ Covalt and he breached that duty by not taking the offer. The
offer was in the best interest of the partnership.
PROBLEM
8.1 (398) –
Firm’s Accountability for Notification
to and Knowledge of the Agent
Tom and Paul are partners in Law Firm. Tom and Paul agree that Tom will act as
managing partner. As such, Tom handles
all administrative and personnel matters.
On repeated occasion, Paul sees Associate, during
the normal course of a working day, become unreasonably angry with secretaries
and paralegals. Paul always admonished
Associate to act in a more appropriate manner, but did not report Associate’s
conduct to Tom. Several months later,
Associate becomes angry, and hits Clerk.
Clerk has now sued Law Firm, claiming that Law Firm
knew of Associate’s explosive tendencies and negligently failed to either fire
or control Associate. In Clerk’s suit,
will Law Firm be responsible for Paul’s knowledge? See UPA §12, RUPA §102(f). Compare, ULLCA §102.
Answer:
UPA §12: Notice to any partner (in this case Paul) of
any matter relating to partnership affairs (Associate was unreasonably angry
with secretaries and paralegals), and the knowledge of the partner acting in
the particular matter, acquired while a partner or then present to his mind
(Paul actually sees Associate), and the knowledge of any other partner who
reasonably could and should have communicated it to the acting partner (Paul
could have told Tom but did not), operate as notice to or knowledge of the
partnership (therefore this acts as notice to Tom through Paul’s knowledge),
except in the case of a fraud on the partnership committed by or with the
consent of that partner (unless it can be shown that this was fraud on the
partnership done by Paul or consented by Paul).
Therefore in this situation, the Law Firm will be responsible for
Paul’s knowledge.
RUPA
§102(f): A partner’s knowledge (is
cognitive awareness), notice (is less than knowing and is based on a person’s
actual knowledge, receipt of a notification or reason to know based on actual knowledge
of other facts and the circumstances at the time), or receipt of a notification
of a fact relating to the partnership is effective immediately as knowledge by
(Paul, the partner had knowledge because he actually saw this), notice to, or
receipt of a notification by the partnership, except in the case of a fraud on
the partnership committed by or with the consent of that partner.
Therefore it is deemed that the Law Firm had knowledge through Paul,
and therefore may be liable.
ULLCA
§102:
(a) a person knows a fact if the person has actual knowledge of it.
(b) a person has notice of a fact if the person:
(1) knows the fact;
(2) has received a notification of the fact; or
(3) has reason to know the fact exists from al of the facts known tot he
person at the time in question.
(c) A person notifies or gives a notification of a fact to another by
taking steps reasonably required to inform the other person in ordinary course,
whether or not the other person knows the fact.
(d) A person receives a notification when the notification:
(1) comes to the person’s attention; or
(2) is duly delivered at the person’s place of business or at any other
place held out by the person as a place for receiving communications.
(e) An entity knows, has
notice, or receives a notification of a fact ... when the individual conducting
the transaction for the entity knows … or in any event when the fact would have
been brought to the individual’s attention had the entity exercised reasonable
diligence. An entity exercises
reasonable diligence if it maintains reasonable routines for communicating
significant information to the individual conducting the transaction for the
entity and there is reasonable compliance with the routines. Reasonable diligence does not require an
individual acting for the entity to communicate information unless the
communication is part of the individual’s regular duties or the individual has
reason to know of the transaction and that the transaction would be materially
affected by the information.
Therefore, had the entity performed reasonable diligence, then they will be deemed to have knowledge. But what is reasonable diligence, when they maintain reasonable routines for communicating significant information to the individual acting for the entity (Tom) and there is reasonable compliance. So had the entity established a routine where partners would communicate to the controlling partner like Tom, the Law Firm will be deemed to have known. So unless Paul had as part of his duties to communicate Associates behavior, the Law Firm will not be deemed to have knowledge.
PROBLEM 8.3 (pg.403) Time from which Notification of Knowledge Affects
Principal
Owner
owns and operates Mall. Alan and Betty are leasing agents for the Mall and
share an office suite in the Mall. As such, each is authorized to negotiate and
to sign, on Owner’s behalf, leases covering space in the Mall. On Friday, Betty
leased space to Laser, who planned to open a laser-tag game in the Mall.
Unknown
to Betty, on Monday, Alan had leased space in the Mall to
Question: Assume that
Alan had authority to agree to the inclusion of the exclusivity provision, and
that Owner will be liable to
Alan, an agent for Owner, has complete authority to
bind Owner. Since Alan knew about the contract provision, that knowledge can be
imputed to Owner, the principal. The doctrine of Imputed Knowledge
involves holding a principal to the wrongs committed by his agent. This
doctrine draws its sources from the law of respondeat superior. The expectation
interest of the other party is irrelevant in an impute knowledge context b/c
the knowledge at issue is acquired by the agent through means other than a
deliberate effort by the other party to convey info to the principal.
R2d §381
This knowledge is “imputed” to the principal b/c the
agent has a duty to convey it to him. “Unless otherwise agreed, an agent
is subject to a duty to use reasonable efforts to give his principal info which
is relevant to affairs entrusted to him and which, as the agent has notice, the
principal would desire to have and which can be communicated w/o violating a
superior duty to a third person.”
The only EXCEPTION to the imputed knowledge doctrine
is the Adverse Interest doctrine. Under this exception, if an agent is
acting adversely to the principal and entirely for his own or another’s
purposes, his knowledge is not imputed. The fact, however, that an agent
has conflicting goals (like a desire to earn commission and thus keep silent
about an outstanding equity) will not rise to the level of an adverse interest.
It is only when the agent totally abandons the principal’s business, such as
taking a bribe to keep quiet, that the knowledge will not be imputed.
An EXCEPTION to the Adverse Interest Exception is
the Sole Actor Rule. This rule applies when the agent, even though
clearly acting as an adverse party to the principal by, for example, selling
some of his own property to the principal, also receives that property in the
capacity of agent for the principal and is the only agent acting in that
capacity. His knowledge as agent, is imputed to the principal but not his
knowledge pertaining to his adverse interest.
PROBLEM
9.1 (430) –
Ratification of Unauthorized
Transactions
Allen, purporting to represent Paula but without
authority or power to bind, leases Paula’s farm to Terry for a term of five
years. Allen tells Paula what he has
done, but does not tell her the term of the lease. Without inquiring as to the lease term, Paula
demands, and accepts from Terry, the security deposit and first month’s
rent. In view of Paula’s willful
ignorance of the lease term, may Paula avoid the lease after she learns the
term is five years? Did Paula know
enough facts that she should have investigated before affirming instead of
blundering ahead heedless of her ignorance?
Under Restatement 91 & comment e, Paula may be found to have assumed
the risk of proceeding with only generalized knowledge of the circumstances. Would it make any difference if the terms of
similar farm leases customarily range between three and five years? One to two years? See Restatement §91 comment e, illustration
15.
Answer:
A ratifier may elect to avoid an affirmance if at
the time of the affirmance the ratifier was ignorant of any material fact
involved in the affirm transaction.
Restatement §91. Material facts
are those which substantially affect the existence or extent of the obligations
involved in the transaction, as distinguished from those which affect the
values or inducements involved in the transaction. If the ratifier does not have actual
knowledge of material facts, but only reason to know them, then the ratifier
may avoid the affirmance.
PROBLEM 15.4 (pg. 728) Expulsion
Levy,
was a physician engaged in the practice of medicine as a partner in Nassau
Queens Medical Group. By a majority vote of the partnership executive
committee, Levy was expelled from the partnership on the ground that he was
more than 70 yrs of age. The partnership agreement provided that a partner who
was 70 yrs old or older could be terminated by a majority vote. Levy argues
that the partners terminated him in bad faith. Other partners over the age of
70 were not expelled from the partnership. Levy believes that the real reason
for the termination was Levy’s criticisms of partnership decisions.
Answer:
UPA §38(1)
Dissolution and Liquidation – any assets of the
ptshp must be turned over to the partners in accordance w/ the ptshp agreement.
“The right given to each partner, where no agreement to the contrary has been
made, to have his share of the surplus paid to him in cash makes certain an
existing uncertainty.” So expulsion of a partner who takes most of the assets
can force dissolution of the ptshp.
Must make certain the expulsion does not trigger dissolution.
The fiduciary duty remains even after expulsion although modified a bit.
Dissolution agreements must have dissolution provisions that specify if
expulsion can be done w/ or w/o cause.
o
The ONLY caveat of allowing for the agreement to state w/ or w/o cause,
the Court will require that expulsion be for good cause and in good
faith. (EX. firing your lawyer right before getting a big judgment – Ct will
not allow it b/c it is in bad faith.)
RUPA §601(3) – allows expulsion pursuant to partnership agreement.
RUPA §701 – uses the work “disassociate” to refer to
expulsion.
HERE, the purpose of the termination clause (in the
partnership agreement) was to provide a simple, practical and speedy method of
separating a partner from the partnership, and in the absence of undue penalty
or unjust forfeiture, the court may not frustrate this purpose. While bad
faith may be actionable, there must be some showing that the partnership
acted out of a desire to gain a business or property advantage for the
remaining partners. Policy disagreements do not constitute bad faith since “at
the heart of the partnership concept is the principle that partners may choose
w/ whom they wish to be associated.”
PROBLEM 15.4 (741) – [Skipped]
PROBLEM
15.5 (741)
– Dissociation of Owners from Firms
A general partnership for the operation of an
insurance business was formed for a five-year term in 1934 with ten
partners. Partner Brown held the
majority interest in the business, with the other nine partners sharing the
remainder. The partnership agreement
provided that Brown would set the salaries of the partners, that the admission
of a new partner would require the affirmative vote of a majority in number of
the partners, and that all other decisions would be made by an affirmative vote
of a majority in interest of the partnership.
Brown proposed the admission of
Answer:
UPA
§32(1)(c) & (d): A partner’s conduct is considered “wrongful”
when it is taken in derogation of the duties imposed either explicitly by the
partnership agreement or implicitly by virtue of the nature of the partnership
itself. The UPA empowers a court to
order partnership dissolution whenever, for example, a partner willfully or
persistently commits a breach of the partnership or agreement, or otherwise so
conducts himself in matters relating to the partnership business that it is not
reasonably practicable to carry on the business in partnership with him.
There was a partnership agreement that a majority of
a vote was needed. And Brown due to an
unfavorable result decided to cut salaries.
Because there was a decree of the court for dissolution based on the
forgoing reasons, under §31(6) is reason for causes of dissolution.
UPA §31 –
UPA §31(2) –
UPA §32 – allows you to ask the Court for a Judicial Decree
dissolving the ptshp notwithstanding the ptshp agreement.
RUPA §601(5) – On application by the ptshp or another partner,
the partner’s expulsion by judicial determination b/c:
§
the partner engaged in wrongful conduct that adversely and materially
affected the ptshp business;
§
partner willfully or persistently committed a material breach of the
ptshp agreement or of a duty owed to the ptshp or the other partners under 404;
OR
§
the partner engaged in conduct relating to the ptshp business which
makes it not reasonably practicable to carry on the business in ptshp w/ the
partner.
RUPA §801(1) – Judicial expulsion DOES
NOT dissolve the partnership (even in ptshp at will).
Default Rule – Expulsion allows the other partners to leave (to
dissolve the partnership) UNLESS the ptshp agreement provides differently (then
default rule doesn’t apply).
PROBLEM
15.7 (748) Dissociation
of Owners from Firms
George and H.B. are partners in Santa Maria Linen
Supply, which was formed in December, 1949, for the purpose of conducting a
linen supply business in
From 1949 to 1957, the partnership lost
approximately $62,000. During 1958,
Vandenberg Air Force Base opened nearby, and business began to improve. The partnership earned $3,824.41 in 1958 and
$2,282.30 in the first three months of 1959.
The partnership’s chief obligations are $47,610.32 owed to Mission Supply
Service on open account, and $12,794.21 owed to Bank of America.
Mission Supply Service, which is wholly owned by
George, has sold the partnership all linen and machinery used in the day-to-day
operation of its business form Mission Supply Service. Since 1949, the partnership has paid Mission
Supply Service a total of $234,114.34.
The proceeds of the loans from Bank of America was used to pay Mission
Supply Service.
In April, 1959, George dissolved the partnership,
and demanded that it be liquidated. H.B.
argues that George is acting in bad faith, and is attempting to use his
superior financial position to appropriate the now profitable business of the
partnership. H.B. believes tat the
amount owed Mission Supply Service may make it difficult to sell the business
as a going concern. He fears that upon dissolution he will receive very little
and that George will receive a business that has become very profitable because
of the H.B. charges that George was content to share the losses but now that the
business has become profitable, he wishes to keep all the gains. See Page v. Page,
Answer:
In insolvency law, we have principle of “bidding in”
– meaning that creditor can play w/ the paper entity of the debtor. So if
you’re a creditor and you’re owed $100 and an item is auctioned pursuant to
dissolution, you can bid $100 but not go into your own pocket for that $100
item. You can simply refer to the claim and the $100 item. This is why in lots
of business contexts, you find that the creditor ends up w/ the property.
There’s probably enough evidence where this is over the line.
Failure to
grant dissolution or ruling does not mean that the dissolution is unfair. As a
consequence there will be a settlement btwn the parties.
Looks like bad
faith. Upon liquidation the ptshp assets
will be sold, who will they be sold to?
George. Recall that in insolvency
law, the principle of Bidding in plays a role.
It means the creditor can manipulate the payment of ht debt. If you are cre4dirtoe or an items is
auctions, you can bid 100, and you can refer to the claims, and still get the
item. The creditor often ends up with
the property. There is probably enough
evidence that this is too much. So as a
court you would try to fashion a more equitable solution. The court can do they by failing to grant
that the dissolution is unfair. A
settlement among the partners is more likely.
This is an example of really Bad Faith.
Bad Faith Dissolution as already discussed asks if this expulsion is the
product of a plan to deny a partner what they have rightfully earned. You cannot take an action that is designed to
benefit yourself as opposed to those you have a duty to.