Agency & Partnership
Professor
L. Carson
512-232-1355
I. Introduction to Firms
A.
Intro
1. Agency
deals with representation and involves the principal and the agent. The principal appoints someone known as the
agent who in turn represents the principal in dealings with a 3rd
party.
2. The
Restatement 3rd of Agency, § 1.01 defines agency as:
[T]he fiduciary relationship that
arises when on person (the “principal”) manifests consent to another person
(the “agent”) that the agent shall act on the principal’s behalf and subject to
the principal’s control, and the agent consents so to act
3. Once
a fiduciary relationship is established you have several duties - the failure
of which may lead to liability
4. The
fiduciary has an obligation to act for the agent
5. There
is a strict duty of loyalty, a duty of care, a strict duty not to profit
secretly, etc…
1. Sole
Proprietorships
a. This is a business owned by a single
individual
b.
The
business has no legal existence independent of the proprietor
c.
There
is no entity which can sue or be sued, or which can shield the proprietor from
personal liability for debts arising out of the business
d.
Sole
proprietorships are governed by general state laws and regulations, and general
principles of agency and employment law when hiring agents or EEs
e. A sole proprietorship has no separate tax
status, rather it is treated as an extension of the owner
f. This is the simplest type of firm – there
are no formalities. There are advantages
to this simplicity
g. However, choosing one of the other options
may not add much to your burden
2. Partnerships
a. The Revised Uniform Partnership Act of
1997 defines partnership as:
“[A]n association of
two or more persons to carry on as co-owners a business for profit…”
b. According to Section 201 of the RUPA
of 1997, a partnership is an entity distinct from its partners
c. Section 202 of the RUPA of 1997
discusses the formation of partnerships
i. According to Section 202 no formalities
are required to form a partnership
ii. There is no filing requirement; the
agreement does not have to be in writing; etc…
iii. The partnership may be formed inadvertently,
w/out the intent of the parties
iii. Section 202(c) sets forth factors to
determine whether a partnership has been formed
d. Partnerships are generally governed by
agreement but if there is no agreement state partnership statutes provide
default rules.
i. According to default rules, absent
an agreement to the contrary all partners have equal management authority and
are entitled to share equally in the profits and losses of the enterprise
(after a return of each partner’s initial contribution).
e. One of biggest drawbacks of a partnership is
that all partners have unlimited personal liability for all debts of the
partnership (i.e., not only is the partnership liable but the partners are also
liable as individuals)
f. Another drawback is that a partnership is
an association of persons and this sometimes poses problems when one or more
persons w/draw from the partnership
i. This problem is usually solved by
dissolution provisions in the partnership agreement
g. The two principles of a partnership are:
i. The sharing of profits
ii. The sharing of burdens
3. Limited Partnerships
a.
The
Uniform Limited Partnership Act (“ULPA”) defines a limited partnership
as:
A partnership formed by two or more
person under the laws of the state and having one or more general partner and
one or more limited partners
b. The general partner has unlimited liability
– they may be held personally liable for acts of partnership
c. Article 2 of the ULPA sets forth the
formalities for the creation of a limited partnership
i. A limited partnership is formed by filing
a certificate of limited partnership with appropriate state officials
a. The certificate must set for the name of the
limited partnership (the name must contain the words “limited partnership”
without abbreviation)
b. See
Section 201 for other requirements of certificate
d. Limited partnerships are mainly governed by
the partnership agreement
e. The limited partnership is taxed as a
partnership (unless partners elect to be taxed as a corp.) and is subject to
many of the same rules as a general partnership
f. Management of limited partnership is vested
in general partners – limited partners have not management authority.
g. Limited partners do not have the unlimited
personal liability of general partners
h. Section 303 of the ULPA discusses a
limited partnerships liability to third parties
i. Section 702 of the ULPA allows
assignment of partnership interest (i.e., free transferability)
j. Under Section 801, a limited
partnership does not have perpetual existence
4. Limited Liability Partnerships (LLPs)
a. An LLP is a general partnership where all
partners have limited liability as to certain partnership debts
b. An application must be filed with the
appropriate state official (this is a procedural difference). Another formality is that you must use the LLP
designation in your name to put others on notice
c. Most significant operational difference is
that partners in LLPs have no liability for certain debts of the entity beyond
their capital contribution
d. All partners have equal management authority
and equal rights to share in profits and losses unless otherwise agreed
5. Limited
Liability Limited Partnerships (LLLPs)
a. General partners in an LLLP have the same
protections against personal liability that general partners in an LLP have
b. W/ the exception of the registration
requirement (requiring indication in its name that it is an LLLP) and the
change in the personal liability of the general partners, an LLLP is virtually
indistinguishable from a limited partnership
6. Limited
Liability Corporations
a. Generally speaking an LLC is an entity
formed by filing a very brief document usually referred to as articles of
formation
b. The LLC is governed by agreement or default
rules contained in relevant state s tatutes
c. An LLC is a very flexible form of enterprise
– flexibility is more characteristic of the partnership form rather than the
corporate form
d. The biggest advantage to the LLC when
compared to a general partnership is that members in an LLC do not have
unlimited personal liability
7. Corporations
a. A corporation is formed by filing
articles of incorporation
b. The equity owners of a corp. are the
shareholders
i. All shareholders have limited
liability for corporate debt
c. For the most part, the day-to-day
decisions of a corp. are made by the Board of Directors
d. The positive aspect of corps. is
that there is no personal liability
e. Negative aspect of corporations is
that they are subject to double taxation – corporate tax for income to corp.
and regular income tax for profits from stock.
This is only for C Corporations with specific number of employee’s.
8. Problem 1 - Handout
See handout and answer attached to
handout
C. The Firm and Its Agents and Servants
1.
Intro
a. According the Restatement agency is
the fiduciary relation, which results from the manifestation of consent by one
person to another that the other shall act on his behalf and subject to his
control, and consent by the other so to act.
i. The
principal is the one for whom the action is to be taken
ii. The
agent is the one who is to act
a. EX:
The Dean of STCL is an agent of the school but not a servant.
iii. An
agent has some authority to bind a principal and a servant does not.
iv. The
transfer of $ is not required to establish that one is an agent
v. An
agency relationship does not have to be express
vi. There is a lot of gray area - it is difficult to draw the line b/w being
an agent and not being an agent
b. Also according to the Restatement, all
masters are principals but not all principals are masters and all servants are
agents but not all agents are servants
c. According
to the Restatement
i. A master is a principal who employs
an agent to perform service in his affairs and who controls or has the right to
control the physical conduct of the other in the performance of the service
ii. A servant is an agent employed by a
master to perform service in his affairs whose physical conduct in the
performance of the service is controlled or is subject to the right to control
by the master
iii. An independent contractor is a person
who contracts with another to do something for him but who is not controlled by
the other nor subject to the other’s right to control w/respect to his physical
conduct in the performance of the undertaking. He may or may not be an agent.
d. Under the principal of respondeat
superior if the servant commits a tortious act w/in the course and scope of
their employment the master will be held liable
e. There
are three basic relationships b/w principals and agent
i.
Principal
– Agent
ii. Principal
– 3rd Party
iii. Agent
– 3rd Party
2. Problem
1.1 – “Is There a Principal-Agent Relationship”
While swimming behind a boat in
(a) MM sells its products to Dealer for
resale. Dealer is free to sell products
made by other manufacturers.
(b) Dealer gives MM’s warranty to all buyers of
MM products.
(c) Dealer performs warranty service of MM
products. MM honors warranty claims
“made by purchaser through Dealer” and reimburses Dealer for warranty service
it performs “on behalf of MM.”
Is Dealer MM’s
agent for the purposes of determining venue?
Answer to Problem
1.1
a. To determine if there is a
principal-agent relationship you must look to three factors: (§§ 12-14 of
Restatement (Second) of Agency)
i. The agent’s power to alter the legal
relationship of the principal,
ii. The
agent’s duty to act primarily for the benefit of the principal, and
iii. The
principal’s right to control the agent
b. You must also look to the jurisdiction to
determine if these factors are exclusive or not. If they are exclusive and one factor cannot
be established then there is not principal-agent relationship
c. Under Koehr, which follows the
approach that the factors are exclusive you could conclude that there was no
principal-agent relationship, b/c the 2nd factor does not exist
i. The relationship between Mercury
Manufacturer and the Dealer is one of buyer and seller and not agent-principal
because Dealer was not working primarily for the benefit of Mercury
ii. Generally retail dealers are not
agent-principal relationships.
iii. Note, however, that if dealer buys them from
manufacturer and never gets title and is selling on behalf of dealer then this
is agent-principal relationship
d. Some
may argue that even under Green it would be difficult
f. In Bunting v. Koehr, the
Supreme Court of Missouri held that boat motor dealer was not agent of the
manufacturer for purposes of establishing venue in products liability action in
the county in which the dealer was located.
3. Green
v. H&R Block, Inc. (Part 1)
a. Customer brought class action against tax
preparation and refund service arising from service's failure to disclose its
financial stakes in the portion of rapid refund program through which customers
obtained bank loans secured by anticipated refunds, alleging breach of
fiduciary duty.
b. Part 1 of this case dealt with whether there
was a principal agent relationship
c. After grant of writ of certiorari, the Court
of Appeals held that: genuine issues of material fact as to existence of agency
relationship precluded summary judgment
Class
Notes
a. A fundamental principal is that the agent
cannot benefit from the relationship by any means not expressly agreed upon
b. This places a duty on the agent to disclose
c. Here, H&R did not disclose certain loan
arrangements it had with other banks
d. H&R moved to dismiss on the grounds that
no principal-agent relationship existed and as such it had not duty to disclose
e. There are three factors that must be
considered when determining whether a principal-agent relationship exists:
i. The
agent’s power to alter the legal relations of the principal,
ii. The
agent’s duty to act primarily for the benefit of the principal, and
iii. The
principal’s right to control the agent
f. There are two approaches to the elements:
i. Some courts hold that they are significant
but not exclusive (Green approach)
ii. Other
courts hold that these factors are exclusive (Koehr approach)
iii. The trend is that they are significant but not exclusive
4. Problem 1.2 – Fiduciary Duty of Agent
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 $30k, and ABC gave Agent that amount.
Unknown to ABC, Agent had an
interest in Parkacre. Before ABC had
employed him, Agent had paid $1k for an option to buy Parkacre for $15k. When ABC gave Agent the $30k he asked for,
Agent exercised his option to buy Parkacre.
Agent then used $14k of the $30k to complete the purchase, and kept the
remaining $16k.
ABC has now sued Agent for breach of
fiduciary duty, asking that Agent be required to give ABC the entire $15k
profit on the transaction. Agent argues
that ABC’s sole remedy is to rescind the transaction – return Parkacre in
exchange for the $30k purchase price.
Answer
to Problem 1.2
a. Here, the principal was willing to pay a
certain price, so the D argued that the principal was not harmed b/c they were
willing to pay the purchase price
b. The court did not agree and ruled in favor
of the principal b/c the agent impliedly stated that it was the best/lowest
price, when it was not
a.
Here
we have the principals of the Gussin case - if the agent is to
receive any benefit from a transaction in which he is serving his principal,
the agent must fully disclose any interest he has in the transaction and
receive the consent of his principal to proceed, even if the principal
ultimately was to benefit from the transactions
e.
Pursuant
to Section 387 of the Restatement (Second) of Agency 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 and pursuant to Section 388 an
agent has a duty to account for all profits arising out of the principal agent
relationship
f.
§
389 --
e. It is public policy to keep the agent
focused on the business of the principal!!!
f. Defosses v. Notis
i. Mobile home park developer brought action
against real estate broker, hired to purchase land for development, to recover
difference between amount given to the broker for purchase of the land and the
amount actually paid by the broker. The Superior Court entered judgment in
favor of developer for such difference and awarded broker a commission and both
parties appealed.
iii. The Supreme Judicial Court held that broker,
who had been hired at a weekly salary to obtain land for developer, was not
entitled to a commission; that broker and developer were in a principal and
agent relationship; that broker had breached his fiduciary duty to the
developer; that developer was entitled to recover difference between the actual
purchase price and the amount entrusted to the broker, even though broker had
allegedly acquired a $1,000 interest in the land prior to entering into the
agency relationship; and that developer was not required to reconvey the land. Appeal denied and cross appeal sustained.
5. Green v. H&R Block, Inc. (Part
2)
a. This part of the case dealt with whether,
assuming their was an agency relationship, that there was a breach of the
principal-agent relationship for failing to disclose various financial
relationships
b. The court of appeals held that a showing of
harm was not required for claim of breach of fiduciary duty
a. With agency cost there are three variants:
i. Monitoring
a. It is one of the fundamental concerns of any
relationship where agents are used
ii. Bonding
cost
a. This is borne by the agent
iii. Irreducible expenses
a. Marginal cost that agent will have
b. Section 13 of the Restatement (Second)
states that an agent is a fiduciary with respect to matters w/in the
scope of his agency
c. Pursuant to Section 387 of the
Restatement provides that the agent owes a strict duty of loyalty to the
principal - no person can serve two masters
i. This means you cannot prefer the interest
of one you do not owe a duty to over the interest of one you do have a duty to
ii. Most importantly, if you have a fiduciary
duty you cannot prefer your own interest
d. Also according to Section 390 of the
Restatement you must disclose to the principal all material facts (any info
the principal may reasonably want to know)
i. The
obligation to disclose is even stronger when the agent has a conflict
ii. Accordingly, under 390 the agent may only
profit with the consent of the agent and only if the agent disclose the facts
of his interests and all the material facts that the agent knows will
reasonably affect the principals judgment as to whether they would wish to
consent
e. Here, the court also cited Gussin v.
Shockey, in stating that if the agent is to receive any benefit from a
transaction in which he is serving his principal, the agent must fully disclose
any interest he has in the transaction and receive the consent of his principal
to proceed, even if the principal ultimately was to benefit from the
transactions
i. If
an agent makes a profit in connection w/the transactions conducted by him on
behalf of the principal is under a duty to give such profit to the principal
i. Section 403 of the Restatement (Second)
of Agency discusses liability for things received in violation of the duty
of loyalty
a. If
an agent receives anything in 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
j. All
these principals go to ensure that the agent pursues the best interest of the
principal
6. Professor’s Hypo:
Principal
ask agent to buy 20 lotto tickets and the agent buys the 20 and 1 for
himself. One of the tickets wins. Who gets the profits from the ticket – agent
or principal?
a. This
is a close case so be able to argue both sides
b. Most
likely it would end up being settled
1. Intro
a. Here we look at the type of relationships
created not by agency rules, but by the choice of persons to be associated
w/one another in a business
2. Partnerships
a. Background Info
i. Historically partnerships have been
disfavored as the form of a firm b/c its derivative personality has not been
viewed consistently by the courts (i.e., in some cases they are viewed as an
aggregate of individuals w/out separate identity and in some cases as a
separate entity)
ii. When in doubt we are to assume entity
status for the partnership
iii. The UPA also has conflicting views (its an
entity for some purposes and an aggregate for others)
a. Section 201(a) of the RUPA defines a
partnership as an entity distinct from its partners
b. The import of 201(a) is to establish that
when there is doubt the partnership will be treated as an entity
b. Note on Entity versus Aggregate Theories
of Business Forms
i. At common law a partnerships was
generally viewed as a relationship among the partners (i.e., the
partnership was considered to be the aggregate of its partners)
ii. Unlike the corporation, the partnership was
not generally regarded as an entity – a legal person separate from the
partners
iii. Under the UPA, partnerships are part
aggregate and part entity.
iv. On the other hand, the RUPA specifies that a
partnership is “an entity resulting from the association of 2 or more person to
carry on as co-owners a business for profit.” (RUPA §101(6))
c. Problem 1.3 – Liability of Partnership
and Its Partners
Costa and Head are partners in Costa
and Head Land Company (“LC”). LC and
Henry Tyler Construction Corp. (“HTCC”) entered into a construction K, under
which HTCC was to be compensated on a time and material basis. During the course of construction, HTCC had
submitted bills, all of which were paid.
When HTCC submitted its final bill, LC paid only a portion of the bill,
leaving and outstanding balance of $39,639.98.
HTCC has filed suit for breach of K against LC and against Costa and
Head, individually.
You have been engaged by LC, and by
Costa and Head, to represent them in the litigation w/HTCC. Please advise them as to the following:
(a)
May
HTCC sue LC in its name?
i.
(b) Are Costa and Head liable for LC’s
obligations?
i.
(c) May HTCC sue Costa and Head w/first
exhausting remedies against LC?
i.
Head
v. HTCC
i. In action brought by construction company
for balance due on a construction contract and for enforcement of material
man's or mechanic's lien, the Circuit Court rendered summary judgment against
partners, and partners appealed.
ii. The Supreme Court held that partnership
creditor need not first exhaust remedies against partnership before initiating
action against individual partners.
Judgment Affirmed.
Allgeier,
Martin & Assoc. v. Ashmore
i. In an action by a partnership seeking
money judgment against several defendants, the Court of Appeals held that
partnership could not sue in the firm name, and that defendants could not
counterclaim against partnership in its firm name only.
d. Swiezynski
v. Civiello
i. Employee who had received workers'
compensation benefits for injury received in the course of employment brought
negligence action against individual partners who owned the work premises for
the same injury.
ii. Without consulting the partnership
agreement, the Superior Court,
iii. The N.H. Supreme Court, held that unless
partnership agreement provided that individual partners did not retain their
legal rights of management, partners were employers under the Workers'
Compensation Law and therefore immune from employee's negligence suit.
i. Under workers comp we will allow recovery
but we will limit the amount.
ii. Every one gets paid but not much at
all. Accordingly, you should be able to
pursue compensation out side of worker’s comp, but it is difficult to elude the
coverage or restraints of worker comp schemes b/c they make the coverage so
broad
iii. Here, Ps tried to sue in their individual
capacity as landowners
iv. Under the state’s workers comp laws in this
case an ER was defined as a person, partnership, association…
v.
The
court stated that a partnership had no legal identity distinguishable from its
partners – partners and partnership are one and the same
vi.
Since
partners are liable for the debts of the partnership, they should also get the
benefit of the W/C restrictions.
vii.
Where
the partners retain the partnership rights to control the partnership, then they
would have to have a specific agreement restricting the control.
Bottom Line: Whether a partnership is given
entity status will depend on the jurisdiction.
When in doubt assume entity status for the partnership.
3. Limited
Partnerships
a. Background Info
i. Limited partnerships were unknown at
common law; they are exclusively a creature of statute – their main purpose is
to permit a form of business enterprise, other than a corp., in which persons
could invest money w/out becoming liable as general partners for all debts of
the partnership.
ii. Section 101(7) of the Uniform Limited
Partnership Act (1976) w/ 1985 Amendments defines a limited partnership as
“a partnership formed by two or more persons…, having one or more general
partners and one or more limited partners.”
iii. Subject to certain limitations a general
partner in a limited partnership “has the rights and powers and is subject
to the restrictions and liabilities of a partner in a partnership w/out limited
partners.” (RULPA §404)
iv. Limited partners, on the other hand, have
both limited rights and limited obligations
v. Limited partners have no general right to
participate in the management of the business, except for voting rights given
under the limited partnership agreement. (RULPA §302)
v. Limited partners generally are not
personally liable for partnership obligations. (RULPA §303(a)). But if
limited partners act as they are in control they will be liable to the persons
they deal with in that manner. (RULPA
§303(a) - last sentence).
viii.
So,
limited partners who participate in the “control” of the limited partnership’s
business run the risk of becoming liable as general partners for obligations of
the limited partnership. (RULPA §303(a))
ix.
RULPA § 303(b)(1) – Just because you are a officer or
director in a corporation, and a LP, you do not lose your limitation of
liability.
b. Life Care Centers of America, Inc. v.
Charles Town Assoc.
i. After limited partnership's agent (Life
Care), which managed nursing home, was terminated by the limited partnership
(Charles Town), agent brought action against limited partnership, general
partner and the limited partners, alleging breach of contract/wrongful
termination, tortious interference with contract, and inducement to breach
contract.
Class
Notes
i. Sections 387 and 388 of the Restatement
(Second) of Agency set forth the duty of loyalty
ii. Section 387 – General Principle: 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 w/his agency
iii. Section 388 – Duty to Account for Profits
Arising Out of Employment: Unless, otherwise agreed, an agent who makes a
profit in connection with transactions conducted by him on behalf of the
principal is under a duty to give such profit to the principal
iv. Here, Life Care would want to argue that the
partnership was an entity and its duty was to the partnership and it could
therefore subordinate the interest of the individual partners to serve the
partnership
v. However, if it were an aggregate of
individuals rather than an entity then it breached its duty b/c it was
disobedient and disloyal – it entered into competition w/a person it owed a
fiduciary duty to
vi. A limited partnership is closer to the corp.
than a general partnership when it comes to the liability aspect (relationship
b/w limited partners and partnership closely mirrors relationship b/w
shareholders and corp.)
vii. In order to pursue the entity interest
over the interest of any partner the agent would have to show that there is
sufficient diversion of interest (waste, self-dealing, etc…) and that such
belief should be a justifiable belief well grounded in fact and law.
viii. When dealing w/ MRs of Professional Conduct –
a lawyer’s duty is to the entity rather than to the individuals
ix. The managing partner speaks for the entity
and must follow that direction unless it is clear that it would be contrary to
the interest of the organization
4. Limited
Liability Partnerships (LLPs)
a. Note on LLP and LLLP Forms of Business
i. An LLP is basically a general partnership
w/a few important modifications
ii. There is no model or uniform LLP Act, so it
is purely based on statutes that vary from state to state
iii. In order to become an LLP, the
partnership must file an application w/ an appropriate state official to
register as an LLP
iv. In many states an LLP must submit a renewal
application annually to maintain its status as an LLP (this filing requirement
is different from filing requirements of other limited liability entities)
v. The benefit of achieving LLP status is that
partners in an LLP are protected from certain sorts of liability, whereas
partners in an ordinary general partnership are liable for all debts of the
partnership
a. LLP status protects you from conduct of
others but not your own misconduct
vi.
vii. N.Y. Approach: A growing number of
jurisdiction, including NY, are taking a different approach. In these states partners in an LLP are
insulated from personal liability for any partnership debt, regardless of
whether the obligation was incurred as a result of wrongful conduct.
viii. These statutes basically provided partners in
an LLP w/the same type of limited liability that shareholders of a corp. enjoy.
ix. LLLPs are very similar to LLPs. The only significant difference is that the
basic structure of an LLLP is that of a limited partnership rather than a
general partnership.
x. The advantage of being an LLLP is that the
general partners of the limited partnership will be insulate from personal liability
b. Liberty Mutual Ins. Co. v. Gardere
& Wynne, L.L.P.
i. The defendant law firm, Gardere &
Wynne (“G & W"), is a Registered Limited Liability Partnership created
under the laws of the State of
ii. Defendant Nabors is an attorney licensed to
practice law in the State of
iii. G & W has long-represented and currently
represents Liberty Mutual in many such lawsuits brought against it and its
insureds, primarily, but not exclusively, in
iv. Nabors and Woods