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.
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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:
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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.
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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.
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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) &n