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 came from another firm and
brought a client who had conflicting interest w/liberty mutual
iv. In this case Liberty Mutual seeks injunctive
relief and money damages against G & W, Nabors, and Woods for alleged
breaches of fiduciary duty and conflicts of interest arising out of activities
regarding
i. Generally, non-equity/income partners are
considered employees of the partnership
ii. Partners in equity share in profits and
control and are not considered EEs
iii. G&W moved to dismiss on the grounds that
there were not an entity and thus all the partners had to be sued
iv. Under TRCP suits are permitted against
the partnership and in the firms name
v.
TX, like most jurisdictions has adopted the LLP as an entity
vi.
To
do this another way would be very burdensome for law firms with very many
attorneys.
vi. In an LLP - The partnership is still
liable, but partners in their individual capacity are only liable for their own
misconduct
c. Note 4 on p. 68 – LLP Partner Liability
in TX
Suppose you are a partner in a law
firm organized as an LLP in TX. A
partner who happens to work in your area of expertise, and in the very next
office, commits malpractice by failing to comply w/the statute of limitations
for filing an action.
(a)
Are you liable for your partner’s acts
on these facts?
Under TX LLP Act 3.08(a) you would
not be liable. TX law provides a shield
against personal liability for partners in an LLP that prevents a partner from
being liable for the misconduct of others so long as the were not worker
under the supervision or direction of the first partner.
However, the partner can be liable
if he was directly involved in the specific activity or had notice or knowledge
of the errors and then failed to take reasonable steps to prevent or cure the
errors. No facts here shows partner was
directly involved or actually had notice or knowledge, thus there is no liability.
(b) Would it make any difference if you had also
represented the same client on a related matter?
It would depend on the relationship
– the closer the relationship the more likely you will be sued
(c) Would it make any difference if you were the
billing attorney for that client?
P’s attorney would say you are
responsible for that client’s interest if you are the billing attorney.
Defense attorney would argue you did not
know the details of the representation.
D would prove this up by establishing that it is the practice of billing
attorneys in the community not to know details of representation.
(d) What if you are a senior partner, and the
partner who committed malpractice is one of you junior partners who your are
responsible for reviewing for bonuses.
Here, you are most likely liable.
Senior partner could possibly argue that
the malpractice took place b/w reviews.
(e) What if you are the chair of the litigation
department?
Rarely are these persons severed in a
summary proceeding
(f) What if you are on the firm’s executive committee?
Same as (e)
(g) What if you are the firm’s managing partner?
Same as (e)
5. Limited
Liability Companies
a.
Intro
i. LLCs
exist solely through statutes
ii. It is a business form that blends the most
desirable attributes of partnerships and corporations
iii. Like a partnership it is extremely flexible
and can avoid taxation at the entity level
a. All non-corporate forms have conduit tax
treatment – there is no taxation at the entity level for all non-corporate
forms
iv. As w/a corporation, the owners are provided
w/limited liability for debts created by the entity.
a. Participation in the management activities
of the company will not take away you limited liability protection, b/c 303(a)
of the ULPA does not apply
v. Unlike limited partnership there is no
requirement that at least one owner be subjected to unlimited personal
liability, or prohibition on at least some members participating in control
vi. An LLC is not subject to double taxation
unless its interests are publicly traded
vii. Professionals are not allowed to organize
as an LLC
b. Elf
Atochem North America, Inc. v. Jaffari
i. Elf brought a purported derivative suit
against limited liability company and its manager (Jaffari), alleging, inter
alia, breach of fiduciary duty.
ii. The Court of Chancery dismissed suit for
lack of subject matter jurisdiction. Member appealed.
iii. The
i.
A
derivative suit is a suit brought on behalf of the corporation but usually by
someone who is not a part of the controlling management (done when controlling
management does not bring suit, usually b/c there is wrong doing by that
management)
ii.
The
LLC agreement superseded what would otherwise be the operation of the law –
thus the arbitration clause superceded the ability of courts to exert
jurisdiction over the company.
iii.
In
iv.
You
get to participate in the control and management of the company, without
exposing yourself to liability (like can happen in LP’s).
v.
In
LLC’s, participation is not a reason to establish liability.
6. Corporations
a. Characteristics of a Corporation:
i. Personality
a. The corp. is a legal person – it has its own
separate existence
b. It has the rights regular persons have
c. It is also regarded as a separate person for
tax purposes (corp. as an entity is taxed).
d. This is different than partnership were
there is no entity to tax
e. In short, corporations are subject to dual
taxation, and this factor cuts against the use of corporations as the preferred
form
f. The characteristic of personality is
important in determining which form to use, where liability rest, and taxation
ii. Transferability of Interest
a. Default rule in partnerships is that
individuals cannot become a partner w/out the unanimous consent of all the
partners
b. In larger partnerships (e.g., V&E) it
will probably be by a majority and not unanimity
c. W/corporations the default rule is that your
shares are freely transferable
d. There may be, however, an agreement
providing that the corporation has the right of first refusal (i.e., default
rule can be changed by K)
iii. Limited Liability
a. Problem w/general partnership is that all
the partners are liable for the debts of the partnership
b. W/corporations there is generally no
personal liability
c. Note, however, that you can pierce the
corporate veil if the limited liability protection is abused
d. The corporate charter is in essence a
standard K and one of its aims is to guard shareholders against unlimited
liability – shareholders liability is limited to the amount they invest
iv. Perpetual Existence
a.
The
default rule is that the corporation lives on forever – the death of one of its
members is not the end of the corporation
b.
W/partnerships
the default rule is that the death of a partner is the death of the partnership
v. Centralized
Management
a. Control is primarily left to Board of
Directors
E. Tax Consequences
1. AB
Corp. (assuming 50% tax rate)
100
Corp.
Taxed
50
Distribution
to A&B (A&B get 25 each)
A
and B are taxed and left w/ 12 ½ in pocket
2. AB
Non-Corp. (assuming 50% tax rate)
100
Non-Corp
not taxed
100
Distribution
to A-B (50 to A and 50 to B)
A
and B are taxed and left w/25 in pocket
3. W/corporations you have dual taxation
1. Problem
2.1 – Contractual Liability of Principal for Acts of Agent
Equipment owner Kapperman was
negotiating the possible sale of his broken road grader to Schladweiler for
$8,500. 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 form Kapperman to obtain the repair on behalf of
Kapperman, as long as the cost of the repair did not exceed $3,500. Schladweiler did not get any other bids and
ordered the work to be done by Truck Repair.
Truck Repair did the work for $6,400, released the road grader to
Schladweiler, but has not been paid. Schladweiler
is insolvent. Who is liable for the
repair bill?
Answer
to Problem 2.1
Here, there was no authority to
contract, only authority to quote. Section 7 of the Restatement (Second) of
Agency defines authority 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,
the principal manifested no consent to the agent to contract. Accordingly, the principal is not liable at
all b/c there was no authority given the agent to bind the principal. There
would have had to have been either actual authority, or implied authority.
Note, however, that if there was
acceptance of the grader it would constitute ratification and the principal
would be liable.
2. Kasselder v. Kapperman
a. Prospective buyer of road grader appealed
from a judgment of the Circuit Court in favor of truck repair business ordering
prospective buyer to pay $3,441.06 of $6,441.06 repair bill on the grader.
Here, Schwadweiler approved the purchase of the engine but specified that he would
not pay more than $3,000. Court found
Kapperman had authority to bind Schwaeweiler for the $3,000 but no more.
a. An agent acting outside the scope of his
power is liable to the 3rd party for the excess based on the breach
of an implied authority.
b. 3rd party may rely on the ability
of an agent to bind the principal (3rd party is allowed to make
reasonable assumptions)
c. This is a rule to facilitate the use of
commerce – the use of agents benefits commerce
d. The law protects the 3rd party as
well as the principal
e. Note, the assumption must be reasonable
(e.g. there is prior course of dealing etc…).
If it was not reasonable then the 3rd party must show some
additional information that led him to believe the agent had the authority
1. Intro
a. A 3rd person dealing with an
agent may not know they are dealing w/an agent
b. According to the Restatement 2nd § 4(3), where the third person has no
notice that the agent is acting for a principal, the principal is “undisclosed”
c. Where a person knows they are dealing w/an
agent, they may not have notice of the identity of the principal, and in such a
situation the principal is “partially disclosed” (Restatement 2nd
§ 4(2))
d. Where the third person has notice both that
the agent is acting for a principal and of the principal’s identity, the
principal is “disclosed” (Restatement 2nd § 4(1))
e. The issue is to what extent does the
degree of disclosure of the principal affect the principal’s ability to enforce
a K entered into by the agent on the principal’s behalf.
2. Woodlawn Park Limited Partnership v.
Doster Construction Co., Inc
a. Limited partnership, which owned shopping
center, brought suit against contractor and testing engineers who tested soil
conditions to recover damages for construction defects.
b. The district court maintained exception of
no right of action. Partnership appealed.
c. The Court of Appeal affirmed, and Certiorari
was granted.
d. The
Class
Notes
a. Under civil law jurisprudence where the
agent lends his name to the principal by contracting in the agent’s name then
the principal is not bound and thus has no right to enforce the K
b. The lent name reserves all liability to the
agent and the 3rd party
c. The common law rule is the opposite – an
undisclosed principal is bound by the acts done by his agent on his behalf in
the scope of the agency
d. It is consistent with the common law
principal that principal be allowed to bring a cause of action (if he can be
held liable he can sue)
3. Problem
2.2 – Rights of Principals Under Ks Entered into By Agent – Principal Undisclosed
A was in business in
Answer to Problem
2.2
This problem deals with the issue of
what rights, if any, does a principal have against a third party under Ks
entered into by the principals agent and third party, when the principal was
undisclosed. Section 302 of the Restatement (Second) of Agency sets down
the general rule for this type of situation.
Pursuant to 302, a person who makes a K with an agent of an undisclosed
principal, intended by the agent to be on account of his principal and w/in the
power of such agent to bind his principal, is liable to the principal as if the
principal himself had mad the K with him.
Here, T made a K with A and A’s principal was undisclosed. A intended the K to be on account of P and A
had the power to bind his principal in this regard. Accordingly, under 302 T would be liable to P
under the K.
However, 302 does provide for an
exception if the principal’s existence is fraudulently concealed or if there is
a set-off or a similar defense against the agent. Here, T could argue that P’s existence was
fraudulently concealed. However, the
fraud exception would not apply b/c T did not ask for the identity of the
principal, and you need an affirmative misrepresentation to constitute fraud (Kelly
Asphalt case). The other exception
may apply. The facts also show that T has already argued the he has a set off
against A. Since T does have a set off then T would fit under the exception of
302 and not be liable to P.
Moreover, Section 306 of the
Restatement 2nd states that if the agent has been authorized to
conceal the existence of the principal, the liability of a the third person to
the principal is diminished by any claim the third person may have agent at the
time of making the K. That is to say, where there is an undisclosed principal
the 3rd parties has all the rights against the agent as if the agent
was the principal until the time of disclosure.
4. Kelly Asphalt Block Co. v. Barber
a. This case deals with the exception to the
general rule
b. Section 302 of the restatement sets
forth the general rule
i. A person who makes a K with an agent of
an undisclosed principal is liable to the principal as if the principal made
the K himself
c. One exception provided under 302 is that the
general rule will not apply if his identity is fraudulently concealed
d. Here, the parties were competitors but it
did not fit under the fraud exception b/c they did not ask for the identity of
the principal
e. As a party to a K you have the right to
request disclosure
f. Rule: You need an affirmative representation to
constitute fraud
5. Problem 2.3 – Contractual Dealing by
Agents & Undisclosed Principles
Big
amusement the operator of a world famous amusement park in
(1) Has there even been a misrepresentation?
There is no
fraud/misrepresentation. According, to Kelly
Asphalt Block Co. v. Barber, you need an affirmative representation to
establish fraud. Agent’s silence is not
an affirmative misrepresentation. Silence will only constitute a
misrepresentation/fraud where there is a duty to speak. Here, there was no fiduciary relationship b/w
the agent and the third party, establishing a duty to speak. Had there been a fiduciary relationship,
there would have been a duty to disclose and if there is a duty to disclose you
do not need an affirmative representation to constitute fraud.
(2) Owner sues for rescission, claiming that
Owner would have insisted on a higher price if Owner had know this. What result?
Owner would not be able be able to
succeed on a rescission claim. Section 304 of the Restatement 2nd
provides that a third party contracting with the agent of an undisclosed
principal may rescind the K if he was induced to enter into it by a
representation that the agent was not action for a principal and if, as the
agent or principal has notice, he would not have dealt with principal. Here, there was no misrepresentation inducing
Owner to enter into the agreement.
Note, the court might find fraud if
there was a little widower because we assume facilitation of business and
commercial actors may be held to a higher standard.
C. Agent’s Liability for Contractual Dealings
1. Agent’s Duty to Fully Disclose Principal
a. Intro
i. Over the years one issue has been whether
the agent has a duty to disclose the identity of the principal
ii. Ordinarily a principle requires business to
be conducted in its name – could be b/c of reputation, creditworthiness, etc…
iii. On the other side persons also wish to know
whom they are doing business with
iv. However, there are other instances where a
principal may decide that they do not want to be disclosed – could be due to
cost, fear, credit problems, etc…
iv. Section 320 (Principal Disclosed) of
the Restatement provides that “unless otherwise agreed, a person purporting to
make a K w/another as agent for a disclosed principal does not become a party
to the K
a. Here,
it is the principal who is bound, not the agent
vi. Section 321 (Principal Partially
Disclosed) provides that unless otherwise agreed, a person purporting to make a
K with another for a partially disclosed principal is a party to the K
a. Here,
the agent is bound
vii. Section 322 (Principal Undisclosed)
provides that where an agent purporting to act upon his own account, but in
fact making a K on account of an undisclosed principal, is a party to the K
a. Here,
the agent is also bound
b. Problem 2.4 – Agent Liability for Ks
entered into w/ Third Parties
Answer to Problem
2.4
Given the facts,
The only way Burbank
(the agent) could escape liability would be to prove that
c.
Medical doctor brought action
against lawyer to recover fee for review of medical information in connection
with medical malpractice case. The trial court entered judgment for the doctor,
and attorney appealed. The Appellate Court held that where doctor retained by
attorney to review medical records in medical malpractice case was told that
attorney was acting on behalf of client and in representative capacity in the
case, and attorney was, in fact, authorized to secure doctor's services, disclosure
of client as principal precluded personal liability of attorney for doctor's
charges.
Rule: When the principal is disclosed the
agent is not liable on the K.
d. Copp
v. Breskin
Expert witness hired by law firm on
behalf of client brought action against law firm to recover fees for his
services. The trial court entered judgment in favor of witness, and law firm
appealed. The court of appeals held that law firm that hired expert witness on
behalf of client was liable for witness' fees after client refused to pay
entire bill, although firm had advised witness before hiring him that fees were
to be paid by client.
*This case imposed liability on
agent even though principal was disclosed.
*The principal to learn from this is that when in doubt have express
disclosure
e. Water, Waste & Land, Inc. v. Lanham
Third party brought suit against
agents of a limited liability company (LLC) and the LLC itself to recover an
amount due on contract for engineering services. The county court dismissed first agent, on
theory that he had disclosed that he was acting as agent, and entered judgment
against second agent, on theory that he had not disclosed agency for LLC. On appeal, the district court reversed
judgment against second agent. Third party appealed. The Colorado Supreme Court held, on matter of
apparent first impression, that the notice provision of Limited Liability
Company Act did not relieve agents of their common law duty to disclose
existence and identity of their principals to avoid personal liability.
Chapter 10, § 292. 3rd party,
made by an agent for a P, disclosed or partially disclosed is liable to the P
as if he had contracted with the P.
§ 302 – K with agent with undisclosed P is liable for the K.
§ 320 – The agent isn’t liable when the P is fully disclosed. Requires the agency capacity and the identify
of the principle. Without this, the
agent is liable to 3rd persons.
i. Rule:
The limited liability statute only absolves from personal liability
members and managers as members and managers not as agents.
ii. Regardless
of the umbrella you work under you are still liable for your own actions and
certain persons are allowed to rely on your actions
iii. When doing business you must
disclose what capacity you are doing business in
iv. The C/L rule is valid for the suing
of individuals in an agency relationship, but to remove liability, you must go
to the statutory framework that creates the LLC, etc.
v. A staute in derogation of the C/L
should be interpreted narrowly. In this
case, they tried to use the public
filing as a constructive notice. This
was rejected by the court.
f. Robert
T. Reynolds Associates, Inc. v. Asbeck
i. The disclosure by Mr. Reynolds that he was
acting as president of “Acousticon Electronics” – a trade or assumed name used
by a corporation, J.S. Sales Corp. Int’l., was found to be insufficient to
relieve Mr. Reynolds of liability on the K.
2. Agent’s Implied Warranty of Authority
a. Intro
i. When an agent discloses to a 3rd
party that the agent is acting on behalf of a principal, the agent might not
expressly represent that the he possesses the authority to so act
ii. The issue then becomes whether the agent
has impliedly warranted that he has the authority to act on behalf of the
principal when he discloses he is working on behalf of a principal
b. Farm Credit Bank v. FCB Limited
Partnership § 329.
Bank brought diversity action
against agent for breach of implied warranty of authority to contract on behalf
of principal for sublease of real property. Ps argued that a person who assumes
to act as an agent for another impliedly warrants that he has authority to do
so; and if therefore he in fact lacks authority he renders himself personally
liable on the warranty to one who deals with him in good faith reliance. FCB didn’t amend the agreement.
Court found every person purporting
to act for a principal has a duty toward 3rd parties to refrain from
making contracts for which he has not been granted authority to make – This
duty does not depend on the existence of a K; it may arise under the common law
(i)
Restatement Section 328 states that an agent, by making a K only on behalf of a
competent disclosed or partially disclosed principal whom he has power so to
bind, does not thereby become liable for its nonperformance
i.
ii. Restatement Section 329 states that
a person who purports to make a K on behalf of another who has full capacity
but whom has not power to bind, thereby becomes subject to liability to the
other party upon an implied warranty of authority.
iii. If 3rd party contracts with an
agent, and the agent really does not have authority to make the K, the 3rd
party can still hold the agent liable by showing there was implied warranty of
authority
c. Benner
v. Farm Bureau Mutual Ins. Co.
Bauman, an insurance agent for Farm
Bureau, told the Benners that their insurance policy would amended to cover
personal property the Benners were moving to
The Idaho Supreme Court reversed as
to Bauman’s liability for breach of the implied warranty of authority. The Court reasoned that the implied warranty
of authority was not intended to apply where the unauthorized act bound the
principal under the doctrine of apparent authority.
A.
Introduction
1. There are a number of different
organizational forms available to those who wish to set up a business
enterprise
2. The formalities required for formation
differ depending on the type of firm that is chosen
3. Also, w/in a firm a number of different
relationships may be created
B. Agency
Relationships
1. Estate of John Giannopoulos
a. Law firm sought to have a court entertain an
application regarding Albanian widow's alleged right of election to take
against decedent's will.
b. The Surrogate's Court held that power of
attorney allegedly executed by widow in
Class
Notes
1.
Power
of attorney did not satisfy legal requirements and as such it was not
sufficient to give widow actual authority to act
2.
Agents
are person who are authorized to act for another, and by so acting, to bind
that other person
3.
Actual authority
has been 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. (Restatement Section 7)
4.
Restatement 26 – Creation of Authority: General
Rule. The authority to do an act can be
created by written or spoken words or other conduct of the P which, reasonably
interpreted causes the agent to believe that the principal desires him to so
act on the principal’s account.
5.
At common law, there was the equal dignities
rule. If the contract required a
writing, the grant of agency authority to undertake the contract, then the
grant to create the agency was also required.
This is largely dead. Still alive
in
6.
Where there is a defect, then there is no authority
to act.
2. Maricopa Partnerships, Inc. v. Petyak
Class Notes
a. Agency is both a contractual, as well as a
fiduciary, relationship
b. Restatement 13 – An agent is a
fiduciary with respect to matter within the scope of his agency
c. Restatement 15 – An agency relations
exists only if there has been a manifestation by the principal to the agent
that the agent may act on the principal’s account, and consent by the agent to
so act.
d. Restatement 16 – Unlike traditional
Ks, creation of the agency relationship does not require a mutual exchange of
consideration
The P will assume some of the reesponsiblity since they have chosen the
agent. Unless there is fraud on the part
of the agent.
Restatement 377 Comment b -- contractual Duties – A person who makes a contract
with another to perform services is an agent for him is subject to a duty to
make reasonable efforts to achieve the desired result.
1. Intro
a. Section 6 of the UPA defines a
partnership as “an association of 2 or more persons to carry on as co-owners a
business for [the purpose of] profit”
This is used as a test for the existence of a partnership.
b. Section 202(a) of the RUPA continues
this definition in a slightly altered form - “the association of 2 or more
person to carry on as co-owners a business for profit forms a
partnership” (TX uses word creates – this seemingly gets away from subjective
test)
c. Formalities are not required for a
partnership (it is a right not a privilege).
d. While the informality of a partnership is
sometime seen as an advantage, persons involved in a business relationship
sometimes discover that they have become partners w/out realizing it.
e. Becoming a partner has significant
implications:
i. Partners
are liable for partnership obligations (UPA 15, RUPA 306(a))
ii. Partners bear a share of the partnership loss (UPA 18(a), RUPA
401(a)(2))
f. Co-ownership is a crucial element of
the partnership
g. Co-ownership is a crucial element of
the partnership
h. Co-ownership control focuses on the
parties
i. Contribution is a critical part of
the partnerships.
j. Profit sharing: All they have to do is to “contemplate” the
profit sharing arrangement.
2.
a.
FACTS: oral agreement entered into by π and D to run a restaurant.. π then ran the business and contributed to it. Π thought it would eventually be a corp. The D thought it would be purchased by the P.
b.
Conversion
action was brought to recover certain financial contributions which plaintiff
had made to restaurant business that was originally operated by defendant (Austin)
as sole proprietor.
c.
The
Superior Court rendered judgment for defendant, and plaintiff appealed.
d.
The
a. A traditional principal of partnership law
is that one partner may not sue the partnership or another partner on a matter
arising out of partnership affairs until the partnership has been dissolved,
its affairs wound up, and there has been an accounting of such affairs
b. The rule is subject to numerous exceptions
i. The primary exception is a suit arising
out of a transaction sufficiently isolated from other partnership affairs and
that can be resolved w/out a review of all partnership affairs is allowed
RUPA § 405
specifically permits both partnership and partner suits against partners.
3. Chariton Feed & Grain, Inc. v.
Harder – “Is there a partnership?”
a. Livestock feed supplier brought
action against landlord, tenant, and others seeking recovery for supplies
furnished to tenant. The District Court entered judgment in favor of supplier,
and landlord appealed. The Court of Appeals affirmed by operation of law due to
a split decision.
b. The question is Apperant
authority. Did they actually have the
authority as partners. Did they hold
themselves out as partners? If they did,
then they would be estopped from claiming that they weren’t.
b. Upon grant of further review, the Supreme
Court held that:
(1) written agreement between landlord and tenant
did not create a partnership;
(2) substantial evidence did not establish that
landlord exercised control of farm operation or that conduct of parties
disclosed their intent to associate as partners;
(3) landlord was not liable on basis of agency
for feed tenant purchased from supplier; and
(4) landlord was not liable to supplier on ground
of unjust enrichment or quantum meruit, as supplier made no mistake as to party
with whom it dealt, and tenant ordered the grain, accepted delivery and
promised to pay
Notes
a. Under the common law tests used in both
1.
UPA 7(4) – The receipt by a person of a share of te
profits of a business is prima facie evidence that hs is a partner in the
business, but no such inference shall be drawn if such profits were received in
payment:
a.
As
a debt by installments or otherwise
b.
As
wages of an employee or rent to a landlord,
c.
As
an annuity to a widow or representative of
a deceased partner
d.
As
interest on a loan, through the amount of payment vary with te profits of the
business
e.
As
the consideration for the sale of a good-will of a business or other property
by installments or otherwise.
2.
RUPA 202(c)(3) – Comment – The sharing of profits is recast
as a rebuttable presumption of a partnership, a more contemporary construction
rather than as prima facie evidence thereof.
3.
b. In this case the agreement gave Davidson
full control
c. Harder participated in some control but it
was very limited
d. 202 of the RUPA is a carrying over of the
law in the UPA as it had evolved over the years
e. Under 202(c)(1) the co-ownership of property
does not establish a partnership
f. 202(c)(2) states that the sharing of gross
returns does not by itself establish a partnership
g. EVEN if we had profit sharing you must keep
202(c)(3) in mind, which states that where there is a sharing of profits there
is a presumption unless the profits were received (1) in payment of a debt by
installments or otherwise, (2) for services of an independent contractor, (3)
rent, (4) of an annuity or other retirement or health benefit, (5) of interest
or other charge on a loan, or (6) for
the sale of goodwill of a business
h.
Here,
there was an exception b/c the profits were received in payment of rent, so the
sharing of profits did not establish a partnership
i.
There
was also no reliance on the partnership by any 3rd parties.
j.
The
intent of the parties was not desposative of the esistance of the partnership
k.
If
there IS a sharing of profits, and unless there is other issues (in 202(c)(3),
then there is a presumption of a partnership).
l.
In
the formation of the business documents, if you can identify one of the
202(c)(3), then you want to identify those.
Also, make sure it is clear where the control of the business
relationship lies.
m.
The
partnerships come into being quickly, but they can also dissolve quickly. It is a C/L
n.
When
would you want losses to be distributed
differently than the profits? For
tax reasons you might keep the losses.
4. P&M Cattle
a. Here,
P&M entered into a K with Holler – the landowner. Hollard was to pasture
cattle and P&M was to supply the cattle (including cost of freight, salt
and labor) and on the sale of the cattle the cost of freight, salt, and labor
would be paid first. After they suffered losses, P&M sued Holler to recover
some of their losses on the grounds that there was a partnership
b. The District Court entered judgment on
counterclaim, and partnership appealed.
c. The Supreme Court held that where written
agreement between parties made no mention of partnership, where division of
losses was never discussed between parties until partnership delivered bad news
to property owner following fall cattle sales in 1974, where no partnership
federal income tax return was prepared and submitted, there was no partnership
and, thus, parties were not obligated to split the losses.
a. A joint venture is a partnership for a
limited purpose – it is generally governed by partnership law
b. There is also common law dealing with the
establishment of joint ventures
i. The
test has several elements; (1) a community of interest in an undertaking, (2)
the right to share in profits and losses, (3) a mutual right of control,
and (4) an agreement, express or implied, with regard to the previous 3
elements
ii. Here,
again the emphasis is on intent
c. We look to conduct, transactions and
circumstances b/w and amongst the parties
d. The partnership is of broader scope and duration
and as such it seems it would have to be clearer – more evidence - to establish
a joint venture since a joint venture is limited in scope
e. The agreement is not dispositive either way,
but it is of course probative (however, if it is self-serving it will be given
little weight)
f. Here, there was some profit sharing but
profit sharing does not control if we can find a relation to those exceptions
listed in 202(c)(3) of the RUPA
g. Sharing of loses can be a factor – that was
one of the factors the court looked at here, as well as in
h. However, an agreement to share losses is not
necessary to find the existence of a partnership – this is also true for the
joint venture (i.e., an agreement with regards to losses is not dispositive
i. Here, importantly the division of losses
was never discussed until this claim
D. Firms with Limited Liability
1. Formalities of Formation
Limited
Partnerships
a. Section 101(7) of the ULPA defines a
limited partnership as one formed by 2 or more person under the laws of this
state having one or more general partners and one or more limited partners
b. Limited partner is only liable under last
sentence of ULPA 303(a) – if the limited partner participates in the
control of the business then they are liable
c. Section 201 of the ULPA deals with
certificate of limited partnership – there must be substantial compliance, with
good faith, filing a certificate of limited partnership with the appropriate
state office
d. Section 102 of the ULPA deals
with the name of the limited partnership
i. Under
Section 102, the limited partner’s name cannot be in the firm name
ii. According to the ULPA the name of the firm
must contain the words limited partnership
iii. In TX, you can have limited, limited
partnership, L.P., or Ltd., and whatever choice is used it must be the last
part of the name
Limited
Liability Partnerships
a. The limited liability partnership (LLP) is
also a creation of the state – this is relatively new
b. Formerly, there was no protection for
general partners, but the L.L.P sought to address this issue.
c. Section 1001 of the RUPA states the
qualifications to become an LLP
d. In order to remain a limited liability
partnership you must comply with the formalities set forth in sections 1001,
1002, and 1002
1.
The
name of the LLP must end with the LLP, or Limited Liability partnership to show
the nature of the LLP.
d. The TRPA 3.08b deals with filing, b(5) –
must be renewed annually and under 3.08d – you must have 100k either in
partnership assets or in insurance as a financial responsibility requirement
e.
Liability can depend on whether there has been compliance or substantial
compliance with the statutory formalities
f.
Uniform
Limited partnership Act: page 332 --.
a.
Section
101(7) Definition of the partnership.
b.
§
201 – The Requirements of the certificate.
c.
§
201(a)(2) – The organizations address.
This is where service will be attempted.
This is the responsibility of the lawyer to make sure this is correct.
Limited Liability Companies
a. Pursuant to section 18-201 of Del. LLC Act,
you only need one person to form an
LLC
i.
For exam, you are responsible for
Delaware Act.
(i)
This
is also a creation of the state, so a certificate must be filed
(ii)
In
texas, LLC, LC, Ltd. Liability Co., are all acceptable names.
1.
c. Under 18-102 of the Del. LLC Act the
name must contain the words LLC, or the abbreviation L.L.C.
d. Meyer v.
i. Liquor licenses may not be held by
corporations. They must be held by real
people.
ii. The alcohol board held that the LLC
wasn’t a person. The court held that the
limited liability nature of the LLC was similar to the Corporation, and
couldn’t do the license.
iii. The legislature wanted PERSONAL
responsibility and liability. The LLC
would would avoid that.
iv. The methodology: Deconstruct the Legislation (i.e. look at the
legislative history, and verify that the intent of the legislation is
consistant with that purpose).
v. Note 3: 157 –
e. Opinion Number R-17: The formation of LLC’s for legal
services. This ruling allows it in
f.
d. Problem 1 on page 153
Suppose a new client, Lucy Lucky, comes
to your law firm and proposes to from a new Delaware LLC with the following
document. What advice would you give
her?
CERTIFICATE
OF FORMATION
The undersigned authorized person
forming this Limited Liability Company adopts the following Certificate of
Formation:
First: The Name of the Limited Liability Company is Lucky’s Ltd.
Second: The address of the registered office of the
Limited Liability Company which may be, but need not be, the place of business
in the State of
Third: The name of the registered agent and the
address of said agent shall be: Lucy Lucky,
Fourth: The management of this Company may be vested
in a manger or managers by inclusion of a provision to this effect in the
written operating agreement of Lucky’s Ltd.
Fifth: This agreement shall be retroactively
effective as of
Signed: _________________
Name: _________________
Answer
1) Lucky’s Ltd. is not a valid name, so we
would have to inform Lucy of the proper options for naming her company
a. Del. Limited Liability Company Act
Section 18-102 states that the name of an LLC shall contain the words
“Limited Liability Company” or the abbreviation “L.L.C.” or the designation LLC
b. Section 105 of the Uniform Limited
Liability Company Act provides that the name must contain “limited
liability company” or “limited company” or the abbreviation “L.L.C.”, “LLC”,
“L.C.”, or “LC”. “Limited” may be abbreviated as “Ltd.,” and “company” may be
abbreviated as “
2) The address of the registered office and
agent is improper
a. Del. Limited Liability Company Act
Section 18-104 requires that each limited liability company have and
maintain a registered office and a registered agent for service
b. Del. Limited Liability Company Act
Section 18-201(a)(2) states that the certificate shall contain the address
of the registered agent, and it cannot be a P.O. Box
c. Section 108 of the Uniform Limited
Liability Company Act requires a street address for the registered agent
d. You want to make sure the address is kept up
to date b/c all the Sheriff has to do is show up to the address listed on the
certificate to serve you w/process
3) If this were filed under Uniform LLCA then
Lucy would have to include more information on the certificate of formation (See 203 ULLCA)
2. Contracts entered into before formation of a
limited liability firm
a. Problem 3.1 – Liability of Promoters and
Investors for Pre-Formation Transactions
This is the White Rabbit Records
Problem studied in Corporations
Answer
to Problem 3.1
This problem deals with the
liability of promoters. A promoter is a person who transforms an idea into a
business by bringing together the needed persons and assets, and supervising
the various steps required to bring the new business into existence. Often times a promoter of a business
organization makes Ks for the benefit of the entity even before it has been
formed, and the question then becomes who is liable under the K. That is the
issue here.
3/7 –
4/1 – LLC organizational document
signed by Grace, alice, and Lewis. Sent
to state filing office.
4/7 – Grace executes lease
w/landlord on behalf of firm, signs
“white Rabbit Records LLC” by Grace, member.
4/15 – Grance learns organizational
document not yet filed (name problem).
4/22 – Effective date of formation,
after re-filing w letter of consent..
Liabilities
W/Respect to the Recording Contract
Grace
Not only are promoters liable for
pre-formation transactions, but partners are liable as well. Grace is a
co-owner in a business for profit, so she could be liable as a partner.
Lewis
There is also a pretty good chance
that Lewis may be held liable as a co-owner for a business for profit even
though he only invested. However, under Timberline
approach passive investors are not co-owners so they cannot be liable as
partners. Here, it could go either way for Lewis depending on the jurisdiction
and whether they adopt the Timberline approach. There hasn’t been substantial compliance, so
Lewis is still on the hook for the liable.
White
Rabbit Records
As for White Rabbit Records, they
did not exist so they could not be held liable, unless they assumed the
liability after they came into existence. Pursuant to Section 202 of the ULLCA
– filing of the articles of incorporation is conclusive proof that the organizers
satisfied all conditions precedent to the creation of a limited liability
company. However, the articles were not
filed till April 22, after the recording K was executed.
Liabilities
W/Respect to the Lease
Here,
Grace:
Grace
could be liable as a promoter for the same reasons
Lewis:
Again, Lewis liability
will depend on the jurisdiction. One view is that he is a co-owner in a
business for profit. Another view (the
Timberline approach) is that he is only a passive investor and should not be
liable. There is no control by him, so
it would make sense that he was only a limited partner.
White Rabbit Records:
Here, White Rabbit Records still did
not exist so they could not be held liable, unless they assumed the liability
after they came into existence
3.1.2 – Would this change anything
if it was a LLP instead of an LLC?
Grace/Alice would be liable as a GP.
The question is about Lewis.
b. Traditional Approach
i. Goodman v. Darden, Doman &
Stafford Associates
A contract to renovate an apartment
building was executed between partnership and not-yet-formed corporation. When
problems developed, the partnership served the promoter of corporation with demand for arbitration of
the contract. Promoter then brought action for stay of arbitration and order
dismissing him from arbitration.
The Superior Court found that
promoter was not party individually to contract, and
thus, not proper party to arbitration proceedings, and partnership appealed.
The Court of Appeals held that: (1) promoter had burden of proving mutual
intent that he was not to be held personally liable on contract, and (2) facts
that partnership contracted with unformed corporation and made checks payable
to such corporation were insufficient to meet promoter's burden of showing
mutual intent to release, and thus, promoter was required to participate in
arbitration proceedings.
Class
Notes
a. The general rule is that when a promoter makes a K for the benefit of a contemplated
corp., the promoter is personally liable on the K and remains liable even after
the corporation is formed.
b. Restatement 326 – Principal Know to Be
Nonexistent or Incompetent – states that unless otherwise, agreed, a person
who, in dealing with another, purports to act as agent for a principal whom
both know to be nonexistent or wholly incompetent, becomes a party to such K
c. Exception: is if the other party knew the corporation
was not yet formed and nevertheless agreed to hold only the corporation
liable and not to hold the promoter personally liable.
d. Case law is harsh on the promoter – usually finding personal liability
e. Unless there is a release from liability by
the third party and an agreement to accept that liability by the corporation
the promoter will remain liable
f. Lesson for promoters is to make sure that
they ensure that 3rd party makes it crystal clear that they will
only look to the corporation
g. Restatement Section 320 and 321 may factor
in when determining liability
h. The corporation is not liable if it did not
exist unless after it came into existence it adopted the K (i.e., corporation
cannot be bound by acts before its existence it can only be liable for actions
after it came into existence).
i. If the corporation accepts the fruits of
the K entered into before its existence then it may be held liable by ..
ii. Dwinell’s
Central Neon v. Cosmopolitan Chinook Hotel
Sign company brought action against
partnership for breach of contract. The Superior Court entered summary judgment
for sign company, holding partnership liable as a general partnership.
On appeal, the Court of Appeals held
that: (1) since there was no compliance with Limited Partnership Act at time
partnership entered into contract with sign company, partnership was liable as
a general partnership as a matter of law; (2) sign company's duty to maintain
sign was discharged by partnership's material breach of contract in failing to
make monthly payments, and (3) court properly shifted burden to partnership to
disclose existence of material issues of fact to rebut motion for summary
judgment.
Class Notes
a.
Note
5/6 page 168. The corporation is not
liable for contracts that happened before the formalities in formation were
completed. IT must affirmatively adopt the contracts after it comes into
existence. Can be done expressly or by
ratification (implicitely.)
b.
The
promoter can assign the contract to the corporation, but remains liable unless
the corporation accepts the contracts.
This would indemnify the promoter.
b. In effect, the ruling in this case was
somewhat punitive b/c the Ds were punished for noncompliance. However, in other
K cases we have seen that notice may keep the Ds from being liable.
c. This case was decided under the old act
d. Legislative
framework did not require strict compliance but it required at least
substantial compliance. Everything
is done according to the rules, this would be considered substantial
compliance.
e. Under the old statute, the effect of
subsequent compliance limited liability after the substantial compliance –
there was no relation back
f. The old Act placed no importance on
reliance, but reliance is relevant in the Revised ULPA
g. In the RULPA, § 3.04 deals with persons erroneously believing themselves to be a
limited partner
i. Under 304, person may be liable to third
parties you deal with, who believe in good faith that you are a general partner
ii.
However,
if person causes a certificate of limited partnership or a certificate of
amendment to be filed or withdraws they will not be liable prospectively, but
may still be liable retrospectively
iii.
TRLPA
3.04(a) requires within a reasonable
time. (NOT ON EXAM, but is on the
BAR). RULPA 3.04
c. Interactions of Statutes and Common Law
i.
Problem 3.2
– Liability of Person Erroneously Believing Themselves to Be a LP[KS1]
Investor invested $ 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 a 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 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?
Timeline
of Events
i. Initial distribution of profits
ii. Allan extends credit (10k) to Widgets
iii. Investor learns there is no limited
partnership
iv. Further distribution to Investor
vi. Betty extends credit to Widgets
Answer
to Problem 3.2
This problem deals with the issue
whether a person erroneously believing himself/herself to be a limited partners
is subject to liability as a general partner.
Liability to Alan
There is no C/L reason to hold him
liable, since there is no control by Investor.
Participatrion as a co-owner, then there could be a C/L claim as a
partner. There is no actual authority as a partner, There is no liability under the
old act.
Under Section 304(a) of the RULPA,
a person who makes a contribution to a business enterprise and erroneously but
in good faith believes that he/she has become a limited partner in the
enterprise is not a general partner in the enterprise and is not bound
by its obligations by making the contribution, receiving distributions or
exercising any rights of a limited partner. The “good faith” requirement is
determined under an objective standard and is measured at the time the
contribution was made. The facts demonstrate
that Investor had a good faith belief that he was a limited partner as
evidenced by the Certificate and Agreement of Limited Partnership that he
signed before making the contribution.
Accordingly, under Section 304 of the ULPA Investor would not be liable
as a general partner simply because he made the investment and received a
distribution. Investor would be treated
as a limited partner and under Section 303 limited partners are not
liable for partnership debts/obligations.
Alan may argue that Investor was
made aware of the mistake and he did not take the appropriate corrective action
and should therefore be held liable. Section 304(a) goes on to say that
when a person ascertains the mistake (i.e., that they are in fact not a limited
partner) they 1) must cause an appropriate certificate of limited partnership
or a certificate of amendment to be executed and filed or 2) withdraw from
future equity participation to escape liability as a general partner. The facts show that Investor did neither.
However, Investor was not aware of the mistake until after Alan loaned
the money so Investor should be relieved from liability to Alan.
Alan didn’t know about Investor’s
involvement, so there was no reliance by Alan.
If Alan an relied on Investor’s involvement, then there would have been
liability.
Liability
to Betty
With respect to Betty, Investor
learned of the mistake before Betty made her loan, therefore Investor would
have to take corrective action to be relieved from liability. The old statute required prompt remedial
action. The facts show that Investor did
not act quickly to remedy the situation so he would probably be liable under
the old statute. The new statute, however, trades speed of corrective action
for reliance on part of the third person that the investor was a general partner. The facts do not show that Betty made the
loan in reliance that Investor was a general partner and therefore Investor
would not liable to Betty under the new statute.
There is no amount of time specified
in this problem, so it is unclear if this was done quickly or not. § 11 requires prompt, 304(a) doesn’t mention
prompt, BUT CARSON BELIEVES THAT PROMPT IS IMPLIED BY THE ‘GOOD FAITH’ PART OF
THE STATUTE. We would need to know the
period of time. Case law states that 1
year is not disposative of being prompt.
< 1 year, you may be able to take curative action.
ii. Briargate Condominium Ass’n, Inc. v.
Carpenter
a. Condominium association brought suit against
partner seeking to hold her liable as general partner for assessments, which
had not been paid by partnership which owned several condominium units. The
U.S. District Court held partner liable, and she appealed.
b. The Court of Appeals held that: (1) if
partner, at time she initially joined and contributed to partnership, lacked
"good faith" belief that she had joined as limited partner, she was
liable for assessments, but if she had such a "good faith" belief,
her notice of withdrawal effectively cut off liability for any fees accrued
after such notice, and (2) partner was not personally liable for
assessments accrued before her notice of withdrawal from the partnership,
unless association actually believed in good faith that she was a general
partner at time it transacted business with partnership and subject liabilities
were incurred.
Class
Notes
a. Section 304 of the ULPA deals with
person erroneously believing themselves to be a limited partner
b. Under 304(a) a person is not liable to a 3rd
party if they believe in good faith that they are a limited partner
c. However, if the person determines that they
are in fact not a limited partner they must take remedial action to escape
liability as a general partner
Under 304(b), they will be held liable if there is
reliance by a 3rd party up until there was a withdrawal by the
limited partner.
d. There is no liability if a certificate is
filed or there is a w/drawl from equity participation they will not be held
liable (see rule)
e. This case is favorable to limited partners.
The trend is not to hold limited partners liable. Section 303(a) is a limited
exception for finding liability – only where person participates in control of
business are they liable as a general partner.
f. Here the court adopted the objective good
faith test
g. In this case we had good faith as well as
corrective action
h. Under the old act you could renounce or cure
but it had to be done promptly
i. Here, Carpenter delayed almost a year
j. However, the revised act trades speed for
credit and reliance (i.e., under revised act corrective action does not need to
be taken promptly, rather you look to see if there is reliance)
k. TX states that you must cure within a
reasonable time
k. TX
act also requires knew or should have known – this shows it is the objective
used to determine if there has been good faith
l.
Duty
to return profits already received? No,
only to quit receiving future distributions.
m. Subjective or objective test for good faith.
To avoid the “empty head” problem, there must be an objective standard
read into the test. Most of these
disputes are commercial activities, so there is likely to be some degree of
reliance.
n. Objective Test. Takes a look at ALL the
facts. We are setting a floor which we
won’t go below, but there might be a higher standard for someone else (like a
lawyer who is trained to do this stuff).
iii. American Vending Services, Inc. v.
Morse
a. The Morses entered into a K to sale their
carwash to Durbano and Garn, who were acting as officers of AVSI. The K was executed on
b. When Durbano and Garn breached the K the
Morses sought personal liability of D&G since the corp. did not legally
exist at the time the K was executed
c. The trial court dismissed the Morses’ claim
against D&G finding that their actions constituted a bona fide attempt to
organize the corp. and thus AVSI was a de facto corp., which meant D&G
could not be personally liable
d. The court of appeals reversed the trial
courts decision finding that de facto corporations were extinguished by
Class
Notes
a. This case focuses on the problems of
incorporation
b. This is an important topic b/c of the
limited liability company – there is no extensive case law on limited liability
companies so the analog is corporate law
c.
d. When looking for a name for your company you
do a search and if there is a conflict you can change your name or acquire the
rights. Here, there was an existing corporation that used the name sought -
American Food Service – when they filed. So there initial Articles were not
accepted.
e. A de
jure corporation exist when there is strict compliance with the statutory
framework, which was not the case here.
f. The common law doctrine of the de facto
corporation has three elements
i. a statute in existence by which
incorporation was legally possible,
ii. a colorable/bona
fide attempt to comply with the statute, and
iii. some actual use
or exercise of corporate privileges
iv. some courts would add a forth – the 3rd
party dealt with the corp. and not the individual
g. If recognized the corporation may be bound
by the authorized acts of its agents after the elements are satisfied. Also,
importantly the agent is off the hook if the principal is disclosed.
h. Corporation can be bound if it is a
corporation de jure or de facto
i. Limited liability which exist for S/H’s in
de jure corporations also exist in de facto corporations
j. Here the courts found that the elements of
a de facto corporation existed. However, there was a state business
incorporation act that extinguished the de facto corporation doctrine
k. So in this jurisdiction, unless you get the
certificate back from the secretary of state you are not a corporation
l. Courts have made a distinction b/w passive
investors and persons active in the business of the firm (Timberline
Equipment Co., Inc.)
i. The effect of this would be to have a de
facto limited partnership rather than a de facto general partnership
ii. Remember the orthodox view was that if an
organization had not achieved de facto status, and the P was not estopped to
attack the validity of the corporate status of the corporation, all S/Hs were
liable as partners
iii. The Timberline court rejected this
orthodox view
iv. They held a passive investor could not be
liable as a partner, rather only one who actively participated could be held
liable
m. In this question w/regard to the question of
corporation by estoppel the lead opinion is actually the minority opinion in
Anglo-American jurisprudence
n. The concurring opinion is the majority view
in our modern jurisprudence
o. Corporation by estoppel is inconsistent with
the common law rule of estoppel which requires 3 elements (check to see if this
is right)
a.
Conduct
that misleads another
b.
Causes
them to reasonably believe the misleading information and
c.
To
change their position to their detriment
p. In the context of corporations there is
usually no misleading, rather it is a question of fairness
q.
Estoppel
as a defense has only be recognized where the S/H’s reasonably believe a
corporation de jure exist
r.
Under
the previous versions, 46 and 156 had been adopted by
s.
Note
4 (p. 198) § 2.04 seems to put the de facto corporation back on
the table in very limited form. This has no effect for tort claims. If you are not de jure, then you are
out of luck. You eare either de jure
or not. Most commentators believe this
to be forcefull in the context of voluntary transactions (i.e. contracts). They must believe in good faith that there is
a de jure corporation.
t.
§
2.04 – Comes in an re-establishes a de facto corporation for certain
circumstances. This is also substantial
compliance question.
u.
You
are a de jure corporation when the articles are stamped.
v.
Corporation
by Estoppel.
a.
If
a 3rd party relied on the existence of the corporation, then the 3rd
party can’t then go after the individuals within the corporation.
w.
In
x.
There
is no estoppel unless there is at least a de facto corporation. Some jurisdictions state that there can
be. In
y.
What
is required for 2.04 -- Transaction
iv. Ruggio v. Vining
a.
Lender
brought action against limited liability company and majority shareholder to
collect on promissory note.
b.
This
is a parallel to the old statute 1.46. This is a Florida Statute which reads
”Everyone who acts without authority for a corporation is jointly and severally
liable.”
c.
It
was not clear from the facts that Ruggio acted on behalf of the LLC. Vining knew that the LLC hadn’t been formed.
b. The Circuit Court entered default judgment
against company and granted summary judgment in favor of lender on claim
against shareholder. Shareholder appealed.
c. The District Court of Appeal held that
genuine issues of material fact existed as to whether lender was assuming to
act as limited liability company when negotiating loan for company, whether
lender was estopped or waived his claim against majority shareholder, and
whether execution of promissory note was incidental for limited liability
company's organization or was a subscription or contribution, thus precluding
summary judgment.
Class Notes
a. Here, the court allowed the common law
defense to waiver and estoppel notwithstanding the express statutory provision
that all persons assuming to act will be held jointly and severally liable
b. If
the 3rd party has knowledge that who or what they are dealing with
is not a legal entity or corporation, in that it has not yet been legally
formed, then they will not be able claim they have been misled into believing
that corporation existed. This in turn
means that they can’t hold the people personally liable on the debt
A. Introduction
1. Restatement
§ 7 – Authority is the power of the agent to affect the legal relations of
the principal by acts done in accordance with the principal’s manifestation of
consent to him
2. Power
and authority should be distinguished – authority is manifested through some
type of consent and power is the ability to accomplish an act w/out
consideration of how, when, and under what circumstances. In this sense, power
is broader than authority.
3. There
may be power to bind a principal but no authority to bind a principal, but
nevertheless in some cases the principal may still be bound if the agent had no
authority
4. Actual
Authority
a. Actual
authority has two branches: express and implied
b. Importantly, actual authority depends upon a manifestation of consent by the
principal communicated to the agent
c. The manifestation may be written, it may be
oral or it may depend upon the surrounding facts and circumstances
d. Even if it would be unreasonable for 3rd
party to assert authority if authority actually exists the principal would be
bound
e. Once someone is appointed as Pres. or CEO of
a company there is a grant of authority to execute the duties of that office
which in turn allows that person to conduct ordinary business of the co. and
thus bind it (this is a form of actual authority)
5. Apparent
Authority
a. Apparent
authority depends upon the communication of the principal to 3rd parties
b. Moreover, with apparent authority the agent cannot determine their authority,
the authority must have as its source a manifestation from the principal
c. Actual/real authority and apparent authority leave the principal in the same position –
bound where it exist
d. The legal difference in significance b/w the
two is not that great in most circumstances (both types of authority will allow
the agent to bind the principal)
e. A course of conduct not countermanded may be
reasonably construed as being a grant to the agent to undertake such conduct on
behalf of the principal
f. If you place someone in the office of Pres.
and state they cannot act in certain ways, them being in the office is still a
manifestation to 3rd parties that the person occupying the office
has the authority to conduct ordinary business, so the principal is bound
whether the occupant is actually the Pres. or only dressed up as the Pres (this
is apparent authority)
g. Apparent authority really has two kind of
branches: 1) course of dealing (say there have been a few transactions in past)
and 2) inherent authority (if corp. paints a picture that you are Pres. then it
will be seen that you have inherent authority)
6. Incidental Authority
a. There is also incidental authority – where
there is authority that embraces all that is incidental (e.g., authority to
sell land would include authority to receive consideration – authority to teach
at STCL would include authority to give exams and give grades)
b. For Exam- if you state it is implied or
apparent authority you should define it rather than merely
attaching that label
B. Express Actual Authority
1. General
Info
a. Because of the uncertainty and limitations
of language, interpretation of written instruments is often difficult
b. It may be discovered that he principal and
agent did not have a mutual understanding as to the extent of the authority
granted
2. Problem 4.1a – Powers of Attorney and
Actual Authority of Agents
You are an associate in a law firm.
Your supervising partner assigns you the following file. 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
Answer
to Problem 4.1a
In drafting a power of attorney for
Leslie Owner’s husband, under the circumstances presented by the problem, there
are a couple of concerns. First, you are
going to want to determine the scope of the power of attorney. Then once the scope is defined you must think
of possible contingencies that may occur and determine if the scope of
authority will apply to those contingencies.
Powers of attorney are strictly
construed and will not apply to powers not clearly granted. Consequently, a general grant of authority to
deal with the ordinary course of business will not include the power to do
extraordinary things. For example, if
Owner’s husband decided to sale the business or transfer the business by making
a gift these transactions would not be covered by a general grant of authority. Such extraordinary actions would require a
specific grant of authority.
Therefore, you would have to consult
with Owner and determine what, if any, additional powers she would want to
specifically grant her husband in addition to the general grant of authority to
conduct ordinary business matters.
Note, with a business you would want
to focus on what things require a resolution by the board of directors and
include that list (meet with client to make sure they want to give that
authority)
Problem
4.1b - Powers of Attorney and Actual Authority of Agents
You are an associate in a law firm.
Your supervising partner assigns you the following file. Grandpa Jones is
retired, and has substantial assets that greatly exceed the current exemptions
for the imposition of estate taxes. Grandpa is 80 years old, and has just been
diagnosed with Parkinson’s disease.
Grandpa is too preoccupied with his health to pay proper attention to
his assets. He also knows that w/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 your concerns in drafting
the power of attorney?
Answer to Problem 4.1b
Here you would have to address life, death and disability
issues such as termination of life support, etc… With regard to these issues
you would probably want to make sure his family is in agreement and get some
written acknowledgement in that regard. The power of attorney would have to
make express grants in this regard.
Another issue is the competency
issue. The Parkinson’s disease may prevent Grandpa from making competent
decisions. So you will want to make sure that the daughter’s power of attorney
gives her the sole authority to make decisions.
You do not want Grandpa’s incompetence interfering with her
decision-making authority.
You will also need to determine what
exactly are his assets and how Grandpa wants to dispose of those assets. Does he want avoidance of estate taxes by
giving away stock to the heirs so that they get a stepped up basis in
accordance with disposition. Also who does he want the money given to at death
and how does he wanted it transferred.
You would also want some specific
language on how to manage money for living expenses, medical expenses, etc…
Depending on amount of these expenses it may be deemed an extraordinary
action. And extraordinary things you
would require a specific grant of authority.
3. King v. Bankerd
a. Landowner sued agent for damages, alleging
breach of trust and breach of fiduciary duty in connection with transfer of
property. The Circuit Court granted landowner's motion for summary judgment.
Agent appealed. The Court of Special Appeals affirmed.
b. On appeal, the Court of held that:
(1) agent holding broad power of attorney
lacks power to make gift of principal's property unless that power is
expressly conferred, arises as a necessary implication from conferred powers,
or is clearly intended by parties as evidenced by surrounding facts and
circumstances;
(2) power of attorney authorizing attorney as
agent to "convey, grant, bargain and/or sell" subject property
"on such terms as to him may seem best," did not expressly authorize
gratuitous transfer of property and would not be so interpreted; and
(2)
agent's
conduct could only be "reasonable" if principal intended for agent to
give property away.
(3)
The
court tries to determine the “intent” of the person expressing the power of
attorney.
Class
Notes
a. This is an important case b/c it sets forth
the rules dealing w/express grants of authority
b. The strongest form of an express grant of
authority is a writing and a power of attorney is a vehicle for doing that
c. The writing requirement is quite limited –
the real property law in some jurisdictions will require writing
d. There is also the equal dignity rule – if
activity requires there to be a writing then the grant of authority to do the
activity must also be in writing
e. The rules of interpretation for written
powers of attorney are set forth in this case
f. The focus must be on the intent of the
principal – the intent of the principal is the most important consideration
g. To determine intent, language used should be
interpreted in light of surrounding circumstances
h. Powers of attorney are strictly construed
and will not apply to powers not clearly granted
i. So, the power to sell does not embrace and
include the power to give away
j. Powers of gift must either be expressly
stated, arise by necessary implication from a grant of power, or be clearly
intended from light of all surrounding circumstances. Here, there was no
evidence that Bankerd intended any authority to make a gift
j.
Note
Cases page 207.
a.
Gifts
to children should be within the general power of attorney.
b.
Von Wedel -- The grants must be within the “grants
within the ordinary course of business” and a gift was not within that grant.
c.
Note 4 on page 207.
Restatement 47, the agent
would be authorized to take such acts as the agent “reasonably believes
necessary to prevent substantial loss to the principal with respect to the
interests committed to the agent’s care.”
k.
See
note 5 on p. 208 – issue was whether agent could file divorce for mentally
incompetent person
i. Here, the majority adopted the view that
there was no power to grant authority to an agent – it was too personal a
matter
ii. As a matter of public policy the grant
could not be upheld – the principal was w/out power to grant to an agent the
ability to bring a divorce action
ii. The only exception is where the ward
is competent as to the separation matter but not to the property matter
b.
C. Implied Actual Authority
1. General Info
a. All forms of authority that are not express
are necessarily implied
b. Actual authority might be implied-in-fact or
even implied-in-law
2. Problem 4.2 – Implied Actual Authority of
an Agent
When its building needed painting,
Church hired Bill to paint it. Church had hired Bill on various projects,
including the last painting of the Church building. While working on those
projects, Bill had often asked his brother Sam to help out as needed. In fact,
Same 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 Church suggested that Bill
might use Gary, who was hard to contact, Bill asked Sam to help out again. The
morning Bill and Sam came to paint, Bill discovered that there was not enough
paint, and sent Sam 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?
Answer
to Problem 4.2
This problem presents an issue
similar to that raised in Mill Street Church of Christ v. Hogan. Restatement (Second) of Agency § 35
provides that unless otherwise agreed, authority to conduct a transaction
includes authority to do acts, which are incidental to it, usually accompany
it, or are reasonably necessary to accomplish it. RA2 § 43 provides (1) consent by the principal in
conduct of an agent whose previously conferred authorization reasonably might
include it, indicates that the conduct was authorized; if clearly not included
in the authorization, consent in it indicates affirmance. (2) Acquiescence by
the principal in a series of acts by the agent indicates authorization to
perform similar acts in the future. According to these rules, an express grant
gives rise to implied actual authority.
The extent of this implied actual authority will depend upon various
factors including: whether the agent
reasonably believes because of present or past conduct by principal that principal
wishes him to act in a certain way or have certain authority, the nature of the
task or job, the existence of prior similar practices, specific conduct by the
principal in the past permitting the agent to exercise similar powers, and
custom and usage in the industry. Here, Bill was given authority to
paint the church. Bill had done previous work for the Church and in the past
Bill had hired help. The Church knew he
hired help and they allowed it.
Therefore, under Section 35 and 43 Bill had the implied actual authority
to hire Sam.
After determining that Bill had the
authority to hire Sam, we must then determine whether Sam had the authority to
buy the paint. Since Sam was hired w/in
the authority of Bill, Sam was authorized to paint and buying paint is
incidental to painting. So Sam would
have had the implied actual authority to buy the paint.
A subagent has the same authority as
the principle agent. § 43 requires that
the primary agent limit the authority of the subagent if it is his desire for
the subagent NOT to have the same level of authority. When a principle bestows the authority on a
person, the principle is sending a signal to that person, and to 3rd
persons as to their authority.
3.
a. Church sought review of Workers'
Compensation Board determination that injured worker was an employee of the
church.
b. The Court of Appeals held that person hired
by church to paint the building had implied authority to hire his brother to
help him.
c. Brother was injured and question was whether
he was EE for worker compensation purposes
a. Brother’s status turns on whether Bill was
an agent for the Church. There was no express authority.
c. Restatement 2nd Section 35 (when
incidental authority is inferred) states “unless otherwise agreed, authority to
conduct a transaction includes authority to do acts which are incidental to it,
usually accompany it, or are reasonably necessary to accomplish it
c. In this is case it was clearly
contemplated that Bill would need help so under the circumstances it can be
decided that consent was given by the Church to Bill to hire a helper, so he
has implied authority.
d. What was his authority?
i. Apparent Authority – Apparent authority is the powere
to affect the legfal 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. RsA2 § 8
ii. Implied authority – Actual authority circumstantially
proven which the principal actually intended the agent to possess and
includes such powers and are practically necessary to carry out te duties
actually delegated.
iii. Apparent Authority – Not actual authority bust is the authority the agent is held out by
the principal as possessing. It is a
matter of attearances on which 3rd parties come to rely.
D. Duty of Loyalty
1. Intro
a. Section 13 of the Restatement 2nd
of Agency (Agent as a Fiduciary) states an agent is a fiduciary with respect to
matters within the scope of his agency.
The fiduciary owes the utmost faith and
loyalty and full disclosure of all material facts that bear to the
interests of the agent.
b.
c. A fundamental principal is that agency is a
consensual relationship either by express agreement or by inference
d. In the absence of an agreement the burden is
on the party seeking to establish such a relationship
e. Agent would have to disclose all
material information for the principal to make an informed decision as to
whether he wanted to consent to the agent’s activity.
f. Debtor and creditor is something
that may be relegated to an express contract.
The principle-agent relationship would be too difficult to put into a
contract since the relationship is a flexible one.
g. The duty of loyalty cannot be
contracted away. A general declination
(“The principle has no duty of loyalty to the agent…) would be considered void
as against public policy. Specific
things can be limited via the contract
h. Also look at Sections 387 – 396,
which deal with duty of loyalty
i. 387 – An agent is subject to a duty to the
principal to act solely for the benefit of the principal in all matters
connected with his agency.
ii. 388 – Duty
to account of profits arising out of employment. Unless otherwisea greed, 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. EXPENSES WILL NOT BE INCLUDED (i.e. THEY ARE
NOT PROFITS) The profits are held in a
constructive trust for the principal.
iii. 389 –
Acting as adverse party without principal’s consent.
iv. 390 – Acting as adverse party with principal’s
consent.
v. 391 – Acting for adverse party without principal’s
consent. Can’t do it.
vi. 392 – Acting for multiple parties with principals’
consent. Must make all facts known to
the parties.
vii. 393 – Competition as to Subject matter of
Agency. Can’t compete with principal.
viii. 394 – Acting for One with Conflicting Interests.
ix. 395 –
Cannot use or Diclosing confidential information.
x. 395 – Using
confidential information after the termination of Agency relationship.
2. Problem
4.3
See problem 1.2
3. 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
4. Schock v. Nash
a. Trustee of grantor's estate and beneficiary
under grantor's will brought action challenging transfers made by
attorney-in-fact pursuant to a durable power of attorney (POA).
b. The Court of Chancery ruled that attorney
violated her fiduciary duty by transferring grantor's property to herself and
her family, and ordered attorney and her family to pay restitution. Attorney
appealed.
c. The Supreme Court held that:
(1) attorney had burden to establish that
grantor, after full disclosure of facts, consented to attorney's gratuitous
transfers to herself and her family members;
(2) POA agreement did not give attorney express
authority to transfer property to herself and her family, as required for such
transfers to be valid;
(3) rule on admissibility of extrinsic evidence
regarding scope of POA is not "bright line" rule;
(4) even if POA had been ambiguous, extrinsic
evidence did not support finding that attorney had authority to transfer
grantor's assets to herself and her family; and
(5) restitution orders issued against attorney's
family members were supported by evidence, even if family members were unaware
that transfers were improper.
Class
Notes
a. Here, Schock became an assistant and an
advisor of an elderly widow, Ms. Dever. During the relationship Irma Schock was
given a general power of attorney to handle Ms. Dever’s matters. Before Ms.
Dever’s death, Irma transferred most of Ms. Dever’s property to herself and her
family
b. A common principle of agency law is that the
agent has a duty to act in the best interest of the principal and solely for
the benefit of the principal
c. An agent cannot take unfair advantage of
their position
d. Transfers to a trustee are voidable unless
there is:
i. approval
by a court or
ii. consent by the grantor (directly or indirectly by waiver)
e. The burden of proof in this regard is upon
the trustee
f. Powers of attorney are strictly construed –
more so than ordinary Ks and all embracing language does not include
extraordinary matters. To have power to do extraordinary things you must have
an express grant of power
g. Gifts are in a category all there own – they
are more suspect
h. Under
the bright line rule gifts to by agent must be expressly and clearly authorized
in writing – no extrinsic evidence will be considered (TX follows this rule)
i. This court rejected the bright line rule
as being inflexible.
j. Instead of using the bright line rule the
court focused on the principal’s intent, in which case all extrinsic evidence
may be relevant
k. However, the court did set the bar high –
it wanted quantitative and qualitative evidence – there must be evidence of
both consent; as well as full disclosure; as well as knowledge of all material
facts
l. Under Restatement 2nd,
Section 390 – disclosure of an
adverse act is not sufficient. There is
a further duty to insure that the principal has impartial advice with regard to
consent
m. Accordingly, where there is a close
relationship there is a burden on the agent to show that the consent is not the
result of undue influence
o. In this case, the consent was on a
preprinted form raising the question of whether it in fact embodied the
principal’s intent – the fact that it was boiler plate discounts the notion
that the principal understood what they were consenting to – it is not the
principal’s language
p.
5.
a. Physician brought action against attorneys,
who been retained by physician's insurer to defend medical malpractice action
against him, to recover damages allegedly suffered due to fact that attorneys
settled the action without physician's express permission and knowledge.
b. The Circuit Court entered summary judgment
for attorneys, and physician appealed.
c. The Appellate Court reversed and remanded.
d. After allowing attorneys' petition for leave
to appeal, the Supreme Court held that attorneys had duty to make full
disclosure to physician in regard to intent to settle the litigation without
physician's consent and contrary to his express instructions, regardless of
extent of insurer's authority to settle without physician's consent.
Class
Notes
a. Attorney was representing P and his
insurance company and the case was settled without notice to the P and contrary
to his instructions. Insurance K gave right to settle without consent. Question
was whether attorney breached their duty of loyalty
b. Restatement
2nd Sections 391 and 394 have application here
c. Under Section 391 – an agent is
subject to a duty to his principal not to act on behalf of an adverse party in
a transaction connected with his agency w/out the principal’s knowledge
d. Under Section 394 – an agent is
subject to a duty not to act or to agree to act during the period of his agency
for person whose interest conflict with those of the principal in matters in
which the agent is employed, even if the A is not acting in a transaction for
the P.
e. Here, there was a potential conflict of
interest and when the settlement issue came up it became an actual conflict
f. Once a conflict becomes actual there is
a different approach to the case
g. Once conflict came up the attorneys could
not continue to represent both unless there was knowing, informed consent
h. So the attorney was liable for damages
proximately caused by breach of duty
i. Damages here were the ability to receive
more money (you could bring in experts to show that settlement should have
brought in more money)
j. Professor says this cases show a lot about
power of attorneys – it may be on exam
k. Remember for anything extraordinary you
need express consent
l. These cases also show that attorneys are agents
– attorneys are to do what the principal tells them to do
l.
The
attorney has a right not to represent someone for any reason but once you
undertake representation you have a duty of loyalty to your client
m.
The
lawyer’s conflict was only POTENTIAL until the actual settlement
discussion. After full disclosure of the
conflict, and there was agreement (consent), it would be ok to continue. Take a
look at the model code to confirm that the professional rules do require it.
n.
§
392 – Acting or Adverse party with Principal’s Consent. An agent who acts for two parties has a duty
of fairness to both of the and should disclose facts that would affect the the
judgment of the parties, EXCEPT when the parties consent.
o.
Even
with consent (even in writing), you should be reluctant if one of the parties
has significantly less knowledge than the other party. (LC) If in doubt, a second attorney would be
advisible.
V. Power of Agents
to Bind the Firm by Unauthorized Acts
A. Introduction
1. An agent’s power to bind the principal is
the agent’s ability to do so
2. Authority
is the power to bind that results from the principal’s manifestations to the
agent of the principal’s consent to be bound
3. Thus
an agent authorized to bind the principal has the power to do so
4. The
use of agents to conduct business inevitably involves the risk that agents will
sometimes exceed their authority to bind the principal
5. The
question then becomes under what circumstances should the principal – or the 3rd
person dealing with the agent – bear the risk of unauthorized actions?
6. The
Restatement explains power to bind by unauthorized acts using the doctrines of
apparent authority, estoppel to deny authority, and
inherent agency power
7. Courts
use only a single doctrine – “ostensible authority”
8. All
of the Restatement doctrines make similar inquiries:
a. First, did the 3rd party with
whom the agent dealt believe that the principal had consented to the agent
binding the principal?
b. Second, was that belief reasonable under the
circumstances?, and
c. Third, to what extent was the principal
responsible for that belief?
B. Apparent Authority
1. Problem
5.1 – Power of Agent to Bind the Firm by Unauthorized Acts - Apparent Authority
P planning to establish a dealership
to sell farm machinery. He hired A to
organize and operate the business. A was expressly authorized to collect for
machinery sold and to hire and discharge office help, mechanics, and sales
people but was expressly forbidden to borrow any money on Palmer’s credit.
Palmer supplied the money to establish a bank account in the local bank. The account was in P’s name, but
Answer to Problem 5.1
The use of agents to conduct
business inevitably involves the risk that agents will sometimes exceed their
authority to bind the principal. The question then becomes under what
circumstances should the principal – or the 3rd person dealing with
the agent – bear the risk of unauthorized actions? That is the issue here, to
what extent should Palmer be liable for the unauthorized acts of
Generally, a principal, such as
Palmer, will be bound by the act of their agent if the agent has the authority
to bind the principal. There are three
types of authority – actual authority, apparent authority, and inherent authority.
Section 7 of the Restatement
(Second) of Agency defines actual authority 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.
Section 8 defines apparent authority as the power to affect the legal relations of
another person by transactions with third persons, professedly as agent for the
other, arising from an in accordance with the other’s manifestations to such
third persons.
Section 9 defines inherent agency
power as power of an agent which is derived not from actual authority, apparent authority or estoppel, but solely from the agency
relations and exists for the protection of persons harmed by or dealing with a
servant or other agent.
On the facts, we can
rule out actual authority b/c
The bank would then have
to look for apparent authority.
For apparent authority you need manifestation and reasonable
reliance. To determine if you have
manifestation and reasonable reliance you may look to three sources: direct communications,
appointments, and course of dealing. Here, although
However,
As for course of
dealings,
The Bank could also rely
on the unjust enrichment argument – in that it is not equitable for the Bank to
have to loose this money that Palmer has been unjustly enriched by. Bank could also rely
on estoppel theory based on Palmer’s failure to act in that Palmer probably got
notice from the Bank several times that his account was overdrawn. This can
support estoppel argument by showing he failed to do anything about it or take
appropriate measures, which will estop him from denying the authority of
2. Hamilton Hauling, Inc. v. GAF Corp. –
Unauthorized long term contract by A
a. Bajt was purchasing agent for GAF – Bajt
could not execute Ks exceeding $25k or one year in duration. Bajt
exceeded his authority and signed a K for 10years. Seller - Hamilton Hauling -
brought action against corporation on ten-year purchasing contract executed by
corporation's purchasing agent.
b. The Circuit Court of
c. The Court of Appeals held that there was
no evidence from which it could be concluded that apparent agency authority for
purchasing agent to execute contract was created.
a. Section 8 of Restatement 2nd
deals with apparent authority.
It states that apparent authority arises when a principal holds out or
manifests to a third party that the agent has the power and the 3rd
party reasonably believes that the principal consents to the agent
acting
b. An agent cannot create his or her own
authority – this clearly creates some protection for principals.
Accordingly, what Bajt said about his authority is not relevant. You can’t
have a putative agent.
c. This case also illustrates that a 3rd
party has some obligation to act reasonably in determining an agent’s authority
d. There are certain sources for determining
agent’s authority
i. Direct
communication from the principal to the third party
ii. Appointment
of an agent to a position
a. In
this context the question becomes what are the generally recognized duties and
authority of a person appointed to such a position. The CEO has the inherent authority to conduct
the ordinary business of the enterprise.
This means that the 3rd parties can rely on the authority
associated with the position. This would
be considered “inherent authority.” To
be countermaneded, the 3rd party would have to know about the
countermand.
b. By
appointment the principal is holding out that person as having the generally
recognized duties and authority associated with that position
c. Principal
can limit that by direct communications to 3rd parties
iii. Prior
acts or course(s) of dealing
e. Applying
these three sources to this case we find
i. There
were no communication b/w GAF and the 3rd party – Hamilton Hauling
ii. Bajt
was appointed as a purchasing agent.
This could be seen as a source of authority to allow Bajt’s conduct to
bind GAF. However, there was a specific
limitation on Bajt’s authority, but remember there was no express manifestation
of this limitation to the 3rd party
f. Nevertheless,
there are two prongs: manifestation
and reasonableness of reliance
g. Here
it was not usual for the purchasing agent to handle the types of deal done with
i. Another argument for the final exam
could have been the possible implied ratification of the contract by the
accepting of some deliveries of these wood chips by GAF early on. This argument would fail though because the
principal must have known of the long term contract.
j. The close cases favor the 3rd
party.
k. Other factors:
i. Course of dealing with the agent,
both direct and indirect.
ii. If the course of dealing is unknown
by the 3rd party, then the agent will most likely be held liable.
3. Fennell v. TLB Kent Company
a. Employment discrimination action was
dismissed and $10,000 settlement agreement was approved by the United States
District Court for the Southern District of New York, Louis L. Stanton, J., and
plaintiff's request that action be restored to calendar was denied. Plaintiff
appealed.
b. The Court of Appeals held that plaintiff's
failure to make any manifestations to defendants' counsel that plaintiff's
attorney and his associates were authorized to settle case precluded
plaintiff's attorneys from having "apparent authority" to settle employment
discrimination case for $10,000 without plaintiff's consent.
C. Estoppel
1. Intro
a. Section 8B of the Restatement 2nd
provides that a principal may be estopped from denying that his agent had
authority and may be liable to third persons under certain circumstances
b. Estoppel may result from a
misrepresentation, or within a limited area, from a failure to reveal facts
c. Estoppel by Misrepresentation
i. Estoppel by misrepresentation may occur in
the field of agency, where a principal represents to another that one has
authority to do an act or to make a contract for him, when in fact they have no
such authority.
ii. Ordinarily, in this situation there is
apparent authority and not merely estoppel.
iii. Key Difference between Estoppel and Apparent
Authority:
a. Estoppel
can be based on negligence of the principal due to his failure to act or
omissions while Apparent authority requires some affirmative conduct or act by
the principal.
b. For Estoppel there must also be not only the
reasonable belief by the 3rd party BUT also the 3rd party
must have changed their position in the form of detrimental reliance. (merely entering into a contract will not be
sufficient enough to invoke estoppel because it does not serve as a change of
position.)
d. Estoppel by Silence
i. In many situations one may be deprived of
a right of action, be subject to an action or even lose his property by failing
to reveal the truth if he knows that another is acting or will act under a
misapprehension.
ii. When one realizes that another is or may
come under a misapprehension as to the authority of his agent or the ownership
of his property (even if it is a misapprehension for which he is not at fault)
he has duty to give information
e. Illustration of Estoppel
i. P learns that A, who has no authority or
apparent authority to sell P's goods, is negotiating with T as
P's agent for their sale. He does nothing although he could easily notify T. T
pays A for the goods, as is customary in such a transaction. P is not entitled
to recover the goods and is liable to T for the breach of any customary
warranty given by A.
2. Problem
5.2 – Estoppel
Merchant is in the business of
selling and repairing used stereos. In the ordinary course of business, Buyer
buys a stereo from Merchant. Buyer pays Merchant the purchase price and takes
delievery of the stereo. Merchant later
discovers that the stereo sold to Buyer was not owned by Merchant, but rather
was owned by Owner. Did the merchant have the power to transfer the owner’s
title, if:
a. Owner left the stereo with Merchant to be
repaired
Under the common law mere possession
and control of personal property is not enough to convey to 3rd
parties any notion of authority or power. Accordingly, under the common law
rule the mere fact that Merchant had the stereo in his possession does not
allow buyer to assume Merchant has to authority to sale the radio. So under the
common law, the Merchant would not have to power to transfer title and Owner
would be able to get his stereo back from Buyer.
However, U.C.C. 2-403
provides that 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 entruster to a
buyer in the ordinary course of business. The policy supporting this rule is
that the person entrusting his property is in the best position to avoid the
loss by carefully selecting the person to whom he entrusts his property. That is to say, voluntarily entrusting goods
of same kind that merchant deals with carries with it a certain risk and if the
entruster does not protect themselves they will bear the loss. Under the UCC
rule Merchant would have the power to transfer the owner’s title in the stereo.
NOTES:
The ucc is designed to protect bonafied purchasers. You shouldn’t have to trace back the source
of the purchase. This was the ordinary
course of business so you couldn’t go after buyer. The UCC trumps the A&P relationship.
b. Thief
stole the stereo from Owner, and sold it to Merchant
Here, the Merchant still would not
have the power to transfer owner’s title under the common law rule b/c mere
possession is not enough. In this situation, the Merchant may assert that the
UCC gave him the power to transfer the owners’ title, but Merchant would have
to establish entrustment. Owner may
argue that there was no voluntary entrustment b/c stereo was stolen from him.
If Owner could prove that Commercial code was not applicable then you go back
to common law, which states that possession is not enough. Can’t go after the Buyer, but could go after
the Merchant. Unless there is some
reasonable doubt on the part of the Buyer that it wasn’t a reasonable purchase.
Suppose the thief forged documents,
and the forgery couldn’t be decerned by the ordinary person. PROBABLY A RED
HERING.
3. Metalworking Machinery Co., Inc. v.
Fabco
a. East Cost sold machine to
Metalworking, but Metalworking never picked up the machine. With the passage of
time, East Cost decided to sell it to Yoder who in turn sold it to Fabco
b. Issue is whether Metalworking by leaving the
machine in East Cost’s possession, estopped Metalworking from asserting that
East Cost did not have the authority to sell it
c. Court of Common Pleas of Hancock County
entered money judgment in favor of owner and against party who purchased
machine from original seller. That party appealed.
d. The Court of Appeals held that mere
possession or control of the property by the original seller was not sufficient
to estop the real owner from asserting his title against the third party who
subsequently purchased that property in good faith, but not in the
"ordinary course of business," where real owner committed no
affirmative act upon which third party relied, other than leaving machine in
possession of original seller for nine months after purchase, of which fact
third party was not aware.
Class
Notes
a.
Section 8 of the Restatement 2nd
deals with estoppel:
(1) A person who is not otherwise liable as a
party to a transaction purported to be done on his account, is nevertheless
subject to liability to persons who have changed their positions because of
their belief that the transaction was entered into by or for him, if
(a) he intentionally or carelessly caused such
belief, or
(b) knowing of such belief and that others might
change their positions because of it, he did not take reasonable steps to notify
them of the facts.
(2) An owner of property who represents to third
persons that another is the owner of the property or who permits the other so
to represent, or who realizes that third persons believe that another is the
owner of the property, and that he could easily inform the third persons of the
facts, is subject to the loss of the property if the other disposes of it to
third persons who, in ignorance of the facts, purchase the property or
otherwise change their position with reference to it.
(3) Change of position, as the phrase is used in
the restatement of this subject, indicates payment of money, expenditure of
labor, suffering a loss or subjection to legal liability
e. Common law rule is that mere possession
alone does not convey to 3rd parties any notion of authority or
power
f. Common law rule has been changed by the
uniform commercial codes
g. U.C.C. 2-403 provides that in
trusting possession of goods to a merchant who deals in goods of the same
kind gives the merchant the power to transfer all rights in goods to
a buyer in the course of ordinary business (this is legislative rule enacted in
derogation of common law, so it must be strictly construed)
h. Exception to the general rule proscribed by
the commercial code is not applicable since East Coast was a manufacturer and
like machinery was not sold by it (East Coast was not a merchant dealing in the
same kind of goods)
i. The common law rule applied and as such
possession was not enough. Thus, Metalworking prevailed.
D. Inherent Agency Power
1. Intro
a. Arguably, the principal should not be liable
for actions of its agent that are not authorized, b/c when the agent exceeds
their authority the agent does not really serve as agent as to those excessive
activities
b. However, b/w the innocent 3rd
party and the innocent principal, the losses caused by the agent’s misconduct
must be borne
2. Dupuis v. Federal Home Loan Mortgage
Corporation
a.
Mortgagor
brought breach of contract and other claims against Federal Home Loan Mortgage
Corporation (FHLMC), which had purchased note and mortgage from bankrupt
lender, and FHLMC counterclaimed to collect on note and foreclose mortgage.
b.
The
District Court held that:
(1) despite FHLMC's liability under agency law
principles for lender's breaches of contract, Merill doctrine,
protecting federal entity from agent's acts in excess of actual authority, provided complete defense to FHLMC
on all mortgagor's contract claims;
(2) no civil recovery was available under
(3) evidence did not support negligence claim
against FHLMC for lender's actions in administering loan; and
(4) FHLMC was holder in due course entitled to
recover full amount of note, and lender's failure to disburse escrows was not
viable affirmative defense on counterclaim to enforce note and mortgage.
Class Notes
a. FHLMC was an undisclosed principal and
Fidelity was its general agent. FHLMC,
the principal was found liable
b. Why? – Fidelity is a general agent b/c it
was appointed to act on behalf of FHLMC, there was consent, etc. Servicing the loan includes acts that are
usual or necessary in such transactions.
i. Cannot be apparent authority b/c there can be no holding out when there is
an undisclosed P.
ii. Cannot be estoppel b/c the 3rd party cannot
have a belief that an agency exists if the P is undisclosed.
c. The P did not authorize the A to mismanage
the account; A was authorized to properly service the loan. Here, the A did receive payments but never
credited the account.
d. This is inherent agency power = it arises
from some agency relationship.
e. Section 8A of the Restatement 2nd deals with inherent agency power
i. Inherent
agency indicates the power of an agent, which is derived not from authority,
apparent authority, or estoppel, but solely from the agency relation and exists for the
protection of persons harmed by or dealing with a servant or other agent.
g. General Agents
i. Section 3 of the Restatement 2nd provides that a
general agent is authorized to conduct a series of transactions (not
just one) involving a continuity of service.
ii. General Agents have broad inherent agency
power.
iii. Factors include the number of transactions,
the number of people dealt with, and the length of time, and prior dealings
between the A & P.
iv. A
loan service agency requires that a number of transactions occur over an
extended period of time. So loan service agent would be a general agent
v. Section 161 of the Restatement 2nd discusses unauthorized acts of general agents when the principal is
disclosed or partially disclosed
a. A
general agent for a disclosed or partially disclosed principal subjects his principal
to liability for acts done on his account which usually accompany or are
incidental to transactions which the agent is authorized to conduct if,
although they were forbidden by the principal, the other party reasonably
believes that the agent is authorized to do them and has no notice that he is
not so authorized.
vi. Section 194 of the Restatement 2nd discusses the creation of liability by unauthorized acts of general
agents when the principal is undisclosed
a. A
general agent for an undisclosed principal authorized to conduct transaction
subjects his principal to liability for acts done on his account, if usual or
necessary in such transactions, although forbidden by the principal to do them.
h. Special Agents
i. Section 3 of the Restatement 2nd provides that a
special agent is an agent authorized to conduct a single transaction or a
series of transaction not involving a continuity of service
ii. Section
161A of the Restatement 2nd discusses
the liability of a principal for unauthorized acts of special agents when the
principal is disclosed or partially disclosed:
A special agent for a disclosed or partly disclosed
principal has no power to bind his principal by contracts or conveyances which
he is not authorized or apparently authorized to make, unless the principal is
estopped, or unless:
(a) the agent's only departure from his authority or apparent
authority is
i. in naming or disclosing the principal, or
ii. in having an improper motive, or
iii. in being negligent in determining the facts upon which his
authority is based, or
iv. in making misrepresentations; or
(b) the agent is given possession of goods or commercial documents
with authority to deal with them.
iii. Section 195A of the Restatement 2nd discusses the
creation of liability by unauthorized acts of special agents when the principal
is undisclosed:
A special agent for an undisclosed
principal has no power to bind his principal by contracts or conveyances which
he is not authorized to make unless:
(a) the agent's only departure from his authority
is
(i) in not disclosing his principal, or
(ii) in
having an improper motive, or
(iii) in being negligent in determining the facts
upon which his authority is based, or
(iv) in
making misrepresentations; or
(b) the agent is given possession of goods or
commercial documents with authority to deal with them.
i. The Merrill doctrine -The usual
rule is that as between two innocent parties, the loss should fall upon the one
who created the enabling circumstances – i.e., the Principal. However, the principal’s liability is limited
by federal statute to breaches by the agent for the Federal Crop Insurance
Corp. under actual authority granted by the principal. If no actual authority, no liability.
j. Here, it is undisputed that Fidelity’s
wrongful acts as an agent were explicitly contrary to and prohibited by FHLMC’s
Sellers’ and Servicers’ Guide. Whatever
the form in which the Government functions, anyone entering into an arrangement
with the Government takes the risk of having accurately ascertained that he who
purports to act for the Government stays within the bounds of his authority.
k. Commercial
actors usually act with some dominion.
You can withhold assignment unless you get guarantees against this type
of problem.
3. Kidd
v. Thomas A. Edison:
a. If
a man selects another to act for him with some discretion, he has by that fact
vouched to some extent for his reliability.
b. While
it may not be fair to impose upon him the results of a total departure from the
general subject of his confidence, the detailed execution of his mandate stands
on a different footing.
c. Principals
are accountable for “the agent’s minor deviations.” The more substantial the deviation, the more
likely the misconduct was outside the boundaries of the agent’s inherent
authority.
E. Special Topics
1.
Intro
a. Up until now, we have focused on principal’s
liability in K for authorized, and certain unauthorized, acts by their
agents.
b. This Section sets forth some closely related
areas in which principals may be held liable in tort for certain acts
within their agents actual or apparent authority
2. Agent
Diversion of Funds
a. Problem
5.11 – Principal Liability for Agent Diversion of Funds
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 D. Even though firm
policy required only a $1500 retainer, lawyer asked for $5K. When client asked how to fill out the check,
lawyer said the firm would stamp its name in as payee.
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 the name of the payee. Lawyer then deposited the check in his
personal account. Lawyer used the $5K 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, Lawyer 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 had paid the $1,500 retainer. Client objected that Client had
already paid $5k.
May the Firm require Client to pay the $1,500 retainer that the Firm
never received?
This problem addresses the issue of
agent diversion of funds and when a principal may be liable for the agent’s
actions in that regard. Here, the firm could not require the Client to pay the
$1,500. The facts show that Lawyer was a
senior attorney in the Firm and had the authority to accept new cases on behalf
of the Firm. Consequently, he would have the authority to request the $1,500
retainer, which was Firm policy for taking on new clients (i.e., requesting the
$1,500 was within the course and scope of the Lawyer’s job). According to § 219(1) of the Restatement (Second) of Agency, a
master is subject to liability for the torts of his servants committed while
acting in the scope and course of their employment. There was actual authority to collect $1,500. Pursuant to this rule the
Firm would be liable/responsible for the $1,500 that its Lawyer requested in
the course and scope of his employment, even though the Firm never received the
money.
When master (or principal) is liable for Torts of His servants or other
agents. This applies to the
Principal/Agent relationship also.
If not, is the Firm also
subject to liability to Client for the additional $3,500 demanded by Lawyer
solely for Lawyer’s own purposes?
As for the additional
$3,500 requested by Lawyer the Firm could argue that this amount fell outside
the scope of employment b/c it was the Firm policy to request only $1,500, and
that as such the Firm is not liable.
However, Section 219(2)(d) states that a master may still be liable for
the tortious acts of their servants, even if committed outside the scope of
their employment, if the servant purported to act or speak on behalf of the
principal and there was reliance upon apparent authority, or he was aided in accomplishing
the tort by the existence of the agency relationship. Under this rule the Firm would be liable to
the Client for the additional $3,500 as well Under appearant authority (and
actual authority).
b. Entente Mineral Co. v. Parker
i. Prospective purchaser of royalty interest
brought action against attorney, who had purchased the interest from his
client, and the attorney's law firm.