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.
ii. The
iii. The Court of Appeals held that law firm
could not be held vicariously liable for any tortious act by the attorney.
Class Notes
i. § 219(1) of the Restatement 2nd
provides that a master subject to liability for torts of servant committed
while acting within the scope of their employment (also goes for the
principal/agent relationship. This has
been merged in Texans and in most jurisdictions.
ii. A master is not subject to liability for
the torts of his servants action outside the scope of their employment,
unless: §219(2) R2A
a. the
master intended the conduct or the consequences,
b. the
master was negligent or reckless,
c. the
conduct violated a non-delegable duty of the master, or
d. the servant purported to act or to 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.
iii. This was not within the scope of Parker’s
the employment because the law firm is not in the business of buying and
selling oil and gas leases. Parker
purchased the royalty for himself and was acting in his own interest, not in
the interest of the firm.
iv. Did the agency relationship aid Parker in
committing the tort? The proper inquiry
for determining vicarious liability of a principal whose agent defrauds the
principal’s customer is the relationship between the principal and the
customer. No firm liability because
there was no relationship between the firm and Entente. Neither Parker nor the firm represented
Entente.
iii.
iv. § 219(2) R2A – Not liable for acts outside the
scope of employment.
(1)
Unless Master intended the conduct,
(2)
The
Master was negligent or reckless
(3)
The
conduct violated a non-delegable duty of the master, or
(4)
The
servant purported to act or to speak on behalf of the principal and there was
reliance upon apparent authority, or he was aided in accomplishing the tort by
the existence of the agency relation.
v. Scope of Conduct.
It has to be done to benefit the partnership, then it most likely would
be within the scope of the partnership.
If it is SOLELY for your own benefit, then it would most likely would
not.
vi. §261 R2A – A principal who puts a servant or ther agent in a position
which enables the agent, whil apparently activn within his authority, to commit
a fraud upon third persons is subject to liability to such third persons for the fraud. Comment
a to 261 – The principal is subject to liability under the rule stated in
this section although he is entirely innocent, has received no benefit from the
transaction, and as stated in Section 262, alough the agent acted solely for
his own purposes.
vii. Reliance on the Firm – This will establish liability
since there was reliance on the name of the firm. It is increasingly difficult to deny
liability under 219(2)(d) since they are relying on the reputation of the firm.
VI. Management and Conduct of Firm Business
A. Introduction
1. A
primary consideration in organizing a business firm is choosing the firm’s
governance structure – allocating rights and responsibilities for managing the
firm and for participating in its business
2. Each
from of business entity (sole proprietorship, partnership, limited partnership,
LLC and corp.) has its own governance structure that derives from any underlying
statute and common law
3. An
important factor in choosing a business entity is identifying the governance
structure that most suits the parties’ needs.
4. A
key consideration is the extent to which a business entity allows party
autonomy – gives parties the freedom to change or adapt the entity’s governance
structure
5. To
the extent that an entity’s governance structure gives the parties wide
discretion – the structure is said to be suppletory or enabling. (i.e., the
governance structure authorizes the parties’ agreement and supplements it by
providing default – or back up – rules that apply only where the parties have
not otherwise agreed)
6. To
the extent that an entity’s governance structure constrains party discretion,
the structure is said to be regulatory or mandatory (i.e., the structure
regulates party autonomy be preventing them from choosing a different
governance structure)
B. Partnerships
1.
Intro
a. Of all the organizational forms, the
governance structure of partnerships is generally the most enabling
i. Section
103 of the RUPA provides that:
Except as provided in subsection
(b), relations among the partners and b/w the partners and the partnership are
governed by the partnership agreement.
To the extent that the partnership agreement does not otherwise provide,
this [Act] governs the relations among the partners and b/w the partners and
the partnership.
b. There may be two sources for a partner to
act as an agent for the partnership
i. If
agent has in fact be given authority to engage in activity it is actual
authority
a. Where there is actual authority there is no reliance requirement
ii. To the extent it is based on business of
the same kind being carried on by the partnership it may be closer to apparent
agency power
a. For
apparent authority there would have to be third
party reliance
c. Section 303(d) of the RUPA provides
that a filed statement of partnership authority supplements the authority of a
partner to enter into transactions on behalf of the partnership as follows:
(1) See statute
(2) See statute
d. Public filing does not convey constructive
notice, w/any legal import except for real estate if statement is also filed
with deed record
e. There is no current equivalent of 303 in TX
2. Partners as Agents
a. Apparent Authority
i. Problem 6.1 – Partner’s Ability to Bind
Other Partners and the Partnership
Randy, Gus and Susan are partners
conducting business under the name “Randy’s Grocery Store.” Because Randy and
Susan have strong moral objections to the sale of alcoholic beverages, the
partners agreed that Randy’s would not do so.
For many years, Randy’s never sold beer, wine or liquor.
Recently, Randy’s sales have been
down. One day Gus was in the store and
noticed a lot of college T-shirts and sweatshirts. Gus decided that Randy’s
could sell a lot of beer. Gus called up Spoetzel Brewing and ordered several
cases of Shiner.
When the beer was delivered, Randy
was on the loading dock and refused to accept the delivery. Spoetzel Brewing
sued Randy’s and its partners for breach of K. Randy’s, Randy and Susan defend
on two grounds. First, they argue that
the partner’s agreed that Randy’s would not sell alcohol. Second, they argue
that Randy’s has never bought beer, wine or liquor. What result? Would
either of the following make a difference in your analysis?
Answer to Problem 6.1
This problem presents the issue of
when may a partner bind the other partners and the partnership. The default
rules in the UPA and RUPA provide that a partner is an agent of the partnership
any partner acting in the ordinary course of business may bind the partnership.
In this problem, however, the partners entered into an agreement and when there
is a partnership agreement the affairs of the partnership are governed by the
agreement rather than default rules. Here, the partners expressly agreed not to
sale beer so the partnership and the partners would not be liable. So the
partners could argue that pursuant to their agreement Gus had no authority to
purchase the beer and they should not be liable to Spoetzel. However, while partners can change any of the
default rules by agreement they cannot change those dealing with liability to 3rd
parties. So, although Gus did not have actual authority he had apparent authority and he could bind the partnership.
Spoetzel could also cite RUPA
§ 301 of to support their position, which provides:
(1) Each partner is an agent of the partnership
for the purpose of its business. An act
of a partner, including the execution of an instrument in the partnership name,
for apparently carrying on in the ordinary course the partnership business or
business of the kind carried on by the partnership binds the partnership,
unless the partner had no authority to act for the partnership in the
particular matter and the person with whom the partner was dealing knew or had
received a notification that the partner lacked authority.
Pursuant to this rule the
partnership would be liable if it was in the “ordinary course of business” to
sell beer. Under an objective inquiry, purchasing beer for a grocery store is
probably in the ordinary course of business because most grocery stores sell
beer. However, if the inquiry is
subjective, this grocery store has never sold beer. The burden of proving that a particular act
of an agent is within the scope of the agent’s authority is on the party
asserting the agent has authority. Here,
it is unclear whether Brewing can meet the burden. But they could probably show
Gus had apparent authority.
a. Spoetzel Brewing did not know that Gus
was a partner in Randy’s.
If Spoetzel Brewing did not know Gus
was a partner then it would add further support to the conclusion that Randy’s
is not liable. If Spoetzel did not know Gus was a partner then there could not
have been reliance and thus there can be no apparent authority either.
b. It is common (or uncommon) for groceries
in the area to sell beer.
If it was common for groceries to
sell beer in the area then it would lend support to finding liability under RUPA
§ 301 of the (i.e., if it was common, then Spoetzel
can argue that it was ordinary practice and as such there was reliance, which
could give rise to apparent authority). However, there was a partnership
agreement that prohibited selling beer so there would be no liability on the
partnership or its partners. So this
would indicate that Randy was liable and since there was reliance, the partners
would then have to sue Randy.
ii. Burns v. Gonzalez – Agency in
Ordinary business matters.
a. Action on a note. After an interlocutory
default judgment had been entered in favor of promisee against promisor, the
District Court, entered judgment denying promisee any recovery against
promisor's partner and promisee appealed. Bosquez signed a promissory note to Burns to
enforce the note.
b. The Court of Civil Appeals held that act of
partner in executing a promissory note, where partnership was one which was
restricted to sale of broadcast time over a radio station on a commission basis
and there was nothing to show that transaction of such business made frequent
resort to borrowing a necessity, was not an act for purpose of 'carrying on in
the usual way the business of the partnership' within Uniform Partnership Act,
so that neither the partnership nor nonparticipating partner were bound by the
note.
Class Notes
a. Burns sued Gonzalez and Bosquez,
individually and as partners in Inter-American Advertising Agency to recover on
a $40k promissory note executed by Bosquez in his own name and in the name of
the partnership
b. Bosquez had no authority to sign the note
c. RUPA 301(1) states:
Each partner is an agent of the partnership for the purpose of
its business. An act of a partner,
including the execution of an instrument in the partnership name, for
apparently carrying on in the ordinary course the partnership business or
business of the kind carried on by the partnership binds the partnership,
unless the partner had no authority to act for the partnership in the
particular matter and the person with whom the partner was dealing knew or had
received a notification that the partner lacked authority.
d. Also look at UPA 9(1), which states
Every partner is an agent of the partnership for the
purpose of its business, and the act of every partner, including the execution
in the partnership name of any instrument, for apparently carrying on in
the usual way the business of the partnership of which he is a member,
binds the partnership, unless the partner so acting has in fact no authority to
act for the partnership in the particular matter, and the person with whom he
is dealing has knowledge of the fact that he has no such authority
e. Under both, each partner is an agent of
the partnership for the purposes of its business.
f. This is one of the perils of operating as a
general partnership
g. W/a limited liability partnership the same
rule applies but with a limited liability only the culpable partners would be
liable for the agents conduct
h. The BOP is on the party relying on authority
(this is customary rule of agency law)
i. This case dealt more specifically with the
ability of a partner to borrow money
j. Common
law made a distinction b/w trading and non-trading partnerships w/ only the
former having implied authority for all partners to borrow money. It must be rational for the 3rd
party to rely on that type of business to borrow money.
k. Under the old statute there was some
question, b/c of the non-specificity, whether the usual way of business was the
usual way of that particular partnership or the usual way of businesses of the
same kind generally
l. This case adopted the position that it is
either (this is also reflected in the revised act RUPA 301-1)
m. TX
statute has a similar provision but requires knowledge only.
n. In
this case, given these principals there was no evidence of the character of the
business to support Burns’ position and Burns had the BOP. Consequently, he
lost the case
b. Estoppel
i. Section
7(1) of the UPA provides that:
Except as provided by section 16
persons who are not partners as to each other are not partners as to third
persons
ii. Section 16 of the UPA deals with
partner by estoppel and provides that
When a person represents themselves
as a partner (or consents to another representing themselves as a partner) he
is liable to any such person to whom such representation is made, who has, on
the faith of that representation extended credit to the actual or apparent
partnership
iii. Section 308a of the RUPA allows
places liability on a person representing themselves to be a partner
iv. Under these partnership by estoppel requires
a holding out or representation by words OR conduct that a particular person is
a partner
v. Estoppel also requires a 3rd
party extension of credit to the actual or apparent partnership on faith of
such representation made to them (i.e., it requires reliance on the purported
partnership status)
vi. This
applies to both purported partnerships or actual partnerships
vii. A&B are actual partnership and hold C out
as partner or A,B, & C are not partners but still hold out to be partners,
then liability principles are the same
Problem
6.3 – Partners by Estoppel
Ole
consents to
1)
Is Ole subject to liability to Finn for
the loan to
The issue here is whether Ole is
estopped from denying liability. Pursuant to Section 16 of the UPA and Section
308a of the RUPA Ole would be subject to liability to Finn. Ole consented
to being represented as a partnership.
Also, Finn extended credit on her reliance of this representation. Therefore, Ole would be estopped from denying
the existence of a partnership and would be liable to Finn.
2) Would it make any difference in your answer
if
Yes, this would make a difference.
If there is a partnership by estoppel you treat it as if there is an actual
partnership. This brings us back to the rule that partners are only liable if
it is for action taken in ordinary course of business.
Buying a sports car would not be in the usual course of business so Ole
would not be liable. Ole, however, would
be liable if office supplies were purchased b/c that is in the ordinary course
of business for a law firm.
Problem
6.4 – Partner Liability by Estoppel
Odo
and Worf are partners in the investment banking business. Odo and Worf both
consent to Basheer holding himself out as their partner to Dax. Apparently
acting for partnership purposes, Basheer borrows money from Dax, who thinks she
is lending to the partnership.
1) Who
is liable on the loan?
Pursuant to RUPA § 308(a) Basheer would be liable as a purported partner. Basheer held himself out as a partner and Dax
extended credit in reliance of that representation. So, Basheer would be
liable. Also, Odo and Worf would be
liable under RUPA § 308(b) , which provides that if all of the partners of the existing
partnership consent to the representation, a partnership act or obligation
results.
2) Would it make any difference to your
answer if Odo, but not Worf, consented to being held out?
This would make a difference. Section 308(b) of the RUPA
)provides that if fewer than all the
partners of the existing partnership consent to the representation, the person
acting and the partners consenting to the representation are jointly and
severally liable. So, if only Odo consented then only Odo and Basheer would be
liable.
3) Would it make any difference in your
answer if Worf had consented to Basheer holding himself as a partner to Quark,
but had never consented to any holding out by Dax?
Worf would still be liable. What
matters is that Ole consented to holding another out as a partner. So, Worf
would still be liable under 308(a)
Cheesecake
Factory, Inc. v. Baines – partnership by Estoppel.
Seller sought to recover from
individual for credit extended to sports bar on claim of partnership by
estoppel. The District Court entered judgment for seller, and individual
appealed. The Court of Appeals held that:
(1) individual
did not waive right to appeal by paying judgment, and
(2) evidence that individual consented to another's
representation that he was partner and that seller reasonably relied on
representation in extending credit supported holding individual liable as
partner by estoppel.
Class
Notes
i. Under RUPA 308, those who purport to be a partner
will be liable and those that consent to another holding themselves out as a
partner will be liable to 3rd parties
ii. In
this case there is a focus b/w a public representation and private
representation
iii. Cheesecake
argues that there is no need for reliance if there is a public holding out
iv. The court did not agree – the felt
tradition of reliance was so strong that they would not rule it out
v. Section
308a of RUPA clearly requires reliance
vi. The effect of a public holding out then
person holding them self out can expect that anyone could rely on it – it
relieves P from having to show that D consented
vii. If it was a private holding out then person
holding them self out could expect that only the person they were dealing with
could establish reliance
viii. If your reliance is on the purported
partnership it is usually b/c of focus on particular persons
ix. It was held that the public holding
out will be liable to everyone who relies on it.
x. Knowing that someone is a “general
partner” then they can use that person’s individual credit wortiness as a
guarantee for the deal.
xi. The holding out as a partnership doesn’t eliminate the need
for reliance.
xii. The private representation requires
more reliance will have to be shown.
xiii. What was the evidence in this
case? There was a bank account in this
guys name, he was on the premises,
xiv.
Problem
6.5–Liability Caused By Purported Partners-Distinction B/W UPA and RUPA
With
the consent of Dick, Jane holds herself out to Emily as being a partner of
Dick’s. Emily signs a K to sell widgets to what she believes is the Dick and
Jane partnership on open account. Before Jane delivers the widgets, Dick tells
here that there is no partnership and tells her that he will not be liable for
the K. Assuming the transaction is one that would have bound the partnership if
made by a partner.
1) Under UPA § 16 may Emily bring and action for breach of
contract against Dick?
We know partners can bind the
partnership and all the partners are liable for the partnership business. Here
we want to determine how these principals operate in regard to purported
partners, b/c Jane was a purported partner. Section 16 allows a purported
partner to bind the partnership and all its partners if: 1) there is a holding
out, 2) the other party knows of holding out, 3) there is reliance, and 4)
there is an extension of credit.
Here, the facts show that Dick agreed
to have Jane hold her self out as a partner, so the first requirement is
satisfied. The second requirement was
also satisfied b/c the facts show that Emily signed the K believing the parts
were for the partnership. The facts also
show that Emily relied on the representation that Dick and Jane were partners.
However, the fourth requirement
cannot be satisfied. Here no credit was extended while believing that there was
a partnership. Jane was told before she
delivered the widgets that there was no partnership. Without satisfying this final requirement
Dick cannot be liable as a purported partner (i.e., a purported partner is no
liable on a K if there has been no extension of credit.)
2) Could Emily do so under RUPA § 308?
Under Section 308, Emily could argue
that you do not need an extension of credit, rather all you need is to have to
entered into a transaction. However, Dick could raise a counter argument by
addressing the fact that the comment to Rule 308 states that it is not meant to
create change b/w the two versions. The
comment suggests it is meant only to restate the UPA. Therefore, an extension
of credit would still be required.
Dick could also argue that 308 is
derogation of a well-established common law rule and all rules in derogation of
a well-established common law rule are strictly construed and no where in the
rule does it state that an extension of credit is not required. This should be argued both ways. The RUPA generally specifies changes to the
UPA, and since there was none, it could be assumed that the changes were
unintentional.
3. Partners as Managers
a. Problem 6.6 – Partners as agents
Matthew, Emily and Paul are partners
in a newly opened grocery business, MEP Grocers. Except for an agreement to be
partners, and to divide profits equally, the partners have no other written or
oral agreement as to partnership or business affairs.
1) W/out first discussing the matter with his
partners, Matthew contracted Arrow Bread Company, and contracted for Arrow to
sell bread to MEP Grocers for a week. At the same time, and also w/out
discussing the matter with his partners, Paul contracted with Wholesome Bakers
for the purchase of bread by MEP Grocers for a month. Assume that the partners
have no existing practice.
a. Is the partnership subject to liability
to either Arrow or Wholesome?
The partnership is liable to both
Arrow and Wholesome. RUPA § 301(1) states that all partners are agents for the
partnership and bind the partnership for things in the ordinary course of
business.
Purchasing bread is in the ordinary course of business for grocery
stores so they would be liable.
b. As among the partners, are either Matthew
or Paul liable to Emily or to MEP Grocers for contracting for the purchase of
bread without consulting the other partners?
Matthew and Paul would not be liable
to Emily or to MEP Grocers b/c they had the actual authority to purchase the bread. However, if there was an agreement b/w the
partners that they would not purchase bread without unanimity then Matthew and
Paul would be liable to Emily and MEP. They are liable to Emily b/c they would
be in breach of the K amongst them that there would be no sale in the absence
of unanimity.
The default rule is that they are
agents, and since this is in the ordinary course of business, they would be
liable. They are on the hook for the partner’s share of the profits and losses.
2) The partners meet to discuss the matter.
Matthew likes the quality and flavor of Arrow’s bread, while Emily and Paul
prefer Wholesome’s wider variety. Over Matthew’s objections, Emily and Paul
decide to buy bread from Wholesome, rather than from Arrow. Matthew writes
Wholesome a letter in which he denies the authority of Emily and Paul to bind
MEP Grocers. He also disclaims any liability on any new purchases of bread from
Wholesome.
a. Are either MEP Grocers or Matthew subject to liability to
Wholesome on the K?
Under the ordinary principles of
partnership law, Emily and Paul would have the actual authority to purchase the bread so Matthew and MEP
Grocers would be subject to liability to Wholesome. Pursuant to Section
18(e) of the UPA and 401(f) of the RUPA all partners have equal
rights in the management and conduct of the partnership business. So, Emily and
Paul could make the decision to buy Wholesome bread. It does not matter that
Matthew disagreed with the decision.
b. What action, if any, could Matthew have
taken to avoid liability on purchases from Wholesale?
There are a couple of ways that
partner can have his authority to act limited: 1) you can make specific
provision in the partnership agreement that is entered into at the beginning or
2) you can have a majority of the partners vote to limit the authority of that
partners power to act on behalf of the partnership. If these actions were taken
Matthew could have asserted a claim against Emily and Paul to recover any loss
he may have sustained for their acting outside the scope of agreed upon
authority.
Matthew could have dissolved the
partnership to protect himself (this is only effective to those who have
notice). You can protect your self “prospectively”
(before the transaction occurs).
3) After losing the vote, Matthew again
contracts to buy bread for another week from Arrow. Assume that Arrow does not
know of the partner’s vote.
a. Are either MEP Grocer, Emily or Paul
subject to liability to Wholesome on the K?
There is no actual authority b/c of the vote. However, MEP and its partners
are still liable b/c there is apparent authority. A vote against the purchase of
bread from Arrow will relieve them of liability only if Arrow has notice of
that vote.
b. As among the partners, is Matthew liable
to MEP or his partners?
Once the dispute arose and
because this was a new contract that had never been entered into before
therefore Matt will need the majority approval in order to have actual
authority to enter into this
contract. Because he does not have the
authority and he goes ahead anyway and enters into a contract with Arrow he
will be liable to the other partners for breach of a duty of loyalty and
obedience by entering into contracts in which he did not have authority that
were also adverse to the partnership business.
4) Matthew learns that Paul wants to buy bread
from Wholesome but before either of them had talked to Emily, Matthew contracts
to buy bread from Arrow. Who is liable?
MEP as well as the
partners are liable to Arrow. There is still actual authority in the absence of a more formal sentiment
against actual authority, and even if there was a more formal sentiment against
actual authority Arrow would need notice of such sentiment. However, a formal
vote against may be enough to establish some sort of breach of fiduciary duty
against Matthew. ARGUE BOTH OPTIONS.
Individual debts (non-business
related) are generally not recoverable from the individual partners.
b. National Biscuit Co., Inc. v. Stroud
Proceeding by seller of bread
against former partners who had operated food store for value of goods sold and
delivered. The Superior Court rendered judgment for seller, and partner
appealed. The Supreme Court held that purchase of bread by food store operated
as going concern by two partners was an ordinary matter connected with
partnership business within statute to effect that any difference arising as to
ordinary matter connected with partnership business may be decided by majority
of partners, and although partner told bread seller he would not be personally
responsible for additional bread sold to store, partner and partnership were
liable for such purchase by copartner.
Class Notes
i. Stroud advised Nabisco that he would not
be responsible for any additional bread sold to the partnership
ii. From 2/6 à 2/25 Freeman ordered more bread.
The partnership dissolved on 2/25, and now Nabisco is suing Stroud
iii. At the time the court was looking at UPA
9.1. The revised act is 301.1 – each partner is an agent of the partnership for
the purposes of carrying out its business
iv. The partnership is bound by the
actions of its partners unless the partner acting had no actual authority and the 3rd party knew of the lack
of authority
(this is UPA 9.1)
v. There is an important modification in RUPA301.1 – that is notification (once notified it
shifts the burden – need notification rather than knew)
vi. 301.1 establishes a constructive notice
provision while the old act required actual knowledge
vii. Despite being notified of his objection
Straud is still liable b/c it bread was ordered while partnership still existed
and Freeman had actual authority
viii. Partners can change any of the default
rules by agreement except for those dealing with liability to 3rd
parties
ix. Pursuant to UPA 18e and RUPA
401f Each partner has equal rights in the
management and conduct of partnership business
x. Pursuant to UPA 18h and RUPA
401j disputes may be settled by a
majority of persons (not interested). Two owning 2% interest in partnership can
beat out one person owning 98%. These are the default rule and an agreement can
change these default rules
xi. In our case one of two is not a majority, so
a partnership obligation was created and Straud is liable
xii. A partnership is an entity for liability that
arises out of K w/ 3rd persons. Ordinarily, this is a helpful rule
of law b/c partnerships are usually a small business
c. Covalt
v. High
i. Partner brought action against his
copartner, seeking damages for copartner's failure or refusal to negotiate and
obtain an increase in the amount of rental of partnership property.
ii. The trail court found there was a breach of
fiduciary duty b/c the amount obtained for rent was not reasonable
iii. The Court of Appeals held that in the
absence of an agreement between the partners to increase the rent of the partnership
realty, one partner could not recover damages for the failure of the copartner
to acquiesce in a demand that he negotiate and execute an increase in the
monthly rentals of partnership property.
Class Notes
i. The appeals court reversed, b/c rules
state partners have equal rights in management and majority can settle
ii. However, here there was no majority b/w two
so there was no power to impose the will of one
iii. Fiduciary duty is a gap filler. So state of
affairs b/w Covalt and High is contractual and only a majority can change that
agreement
iv. What might otherwise be a fiduciary duty can
be overridden by express agreement
v. The may pick particular duties and contract
for a declination. We allow specific exceptions by contract but not a general
one
vi. Where the partnership consists of only
two partners an act involving the partnership business cannot be compelled by
the co-partner. The rights of the two partners are equal. If the partners are unable to agree and if
the partnership agreement does not provide and acceptable means for settlement
of this disagreement, the only course of action is to dissolve the partnership.
vii. If the parties are divided as to a
business decision affecting the partnership, and in the absence of a written
provision in the partnership agreement providing for such contingency, then, as
b/w partners, the power to exercise discretion on behalf to the partners is
suspended so long as the division continues.
vii. The rule is different, however, as to
transactions b/w partners and 3rd parties. In dealing with third
parties a partner has the authority to act on behalf of the partnership in the
usual way, even w/out the consent of the other partner
C. Corporations
1. In
many ways the governance structure of a corporation is the polar opposite of
that of a partnership
2. Unlike
partners S/Hs have no right, merely by virtue of being a S/H, to participate in
the management and conduct of partnership business.
3. Management
of the business and affairs of a corporation is vested in its board of
directors (Charlestown Boot & Shoe)
4. The
B/Ds generally delegates the authority to run the business of the corporation
on a day-to-day basis to officers elected by the board
5. S/Hs
are not agents of the corp. and have no right to participate in the conduct of
the corporation’s business.
6. S/Hs
have no right to instruct the board of directors or to interfere in its
management of the corporations business and affairs
7. The
S/Hs can affect corporate management in only two respects:
a. The S/Hs elect the person who will
constitute the board of directors, and
b. The B/D cannot take certain extraordinary
actions – amending Articles of Incorporation, merging the corp., selling all or
substantially all of the corporation’s assets –w/out first getting S/H approval
8. Moreover,
whenever S/H or B/D action is required, that action may not be taken
informally, but must be taken only by a majority vote at a meeting
9. Meetings
may be held only after proper notice, and require the presence of a minimum
number of S/Hs, or directors, as the case may be (this minimum is called a
quorum)
10. Recent
years have seen increased flexibility in the corporate form. A prime example is the use of close
corporations.
11. Many
states have passed – close corporation supplements to their business
corporation acts
12. These
supplements authorized all the S/Hs to enter into unanimous S/H agreements with
regard to the business affairs of the corp. and to do so w/out regard to the
traditional role of the board of directors
Class Notes
i.
There
is a functional separation of ownership and control
ii.
Ultimate
control is in the B/D, elected by the S/H.
iii.
There
are formalities associated with the Corporation. Through these formalities are created the
actual and inherent authority. The B/D
can limit the authority of the officers, but the 3rd party must know
of the limitations.
ii.
The
corporation was created to accommodate passive investors and to centralize
management.
iii.
BoD
while acting as Directors, are NOT AGENTS.
iv.
When
the BoD acts to implement their actions, then they can be agents.
iii. So,
the design was to attract numbers of persons who would contribute their money
in the hopes of realizing gain due to the participation and conduct of others
iv. So
a hierarchy was established with the S/H à Officers à
Directors
v. Business
and affairs were to be managed by the B/D and the B/D was to assign officers
for managerial purposes and the S/H were to be passive
vi. In
the closely held corporations there was no particular interest in or need to
limit liability by incorporation b/c there is really no passive persons
vii. There
is no presumption that an equity holder in a corporation is an agent for the
corporation
viii. All the authority is with the B/D and officers. If President acts in an ordinary matter then
corp. is bound. Extraordinary matters require action by B/D for corp. to be
bound
ix. The
corporation generally speaking evolved as the vehicle for passive investors and
so the default rule in coporate law has always been centralized management in
the board and that B/D is unlike an agent – they do not act in an agent
capacity. The B/D directs and controls the corporation
x. Certain
managerial tasks are delegated to officers and some member of the B/D may also
be officers
xi. Officers
are agents, and a director acting as an officer will also be acting as an agent
xii. However,
when corporate directors makes decisions for the corporation they are making
the decision they believe are in the best interest of the corporation and not
strictly as agents
xiii. Unlike the partnership and certain LLPs, a S/H of the corporation
is not an agent for the corp. – there is no actual agent authority and in the
absence of a specific delegation of authority a S/H cannot be classified as an
agent
xiv. In
a closely held corp., where you have owner operated, it is likely that S/H may
have apparent and even actual authority so S/H in closely held corporation may be
deemed an agent
xv. Course
of conduct may provide for actual authority if principal allows the conduct w/out
reprimand
xvi. Principal may limit authority
but if 3rd person has no notice of limitations they may rely on
appearances, which may bind corporation
xvii. Under Section 7.32 to MBCA,
unless shares of a corp. are publicly traded, its S//H may, by unanimous S/H
agreement, may govern their affairs by express K
xviii. Agreement must be written –
while initial agreement has to be by unanimous vote, subsequent amendments do
not have to be
xix. Most
closely held corporations filed under the general rules, but special rules have
been enacted dealing w/closely held corps.
xx.
Problems
faced by closely held corporations under general laws can in part be dealt with
by 7.32
xxi.
The
corporate form provdes the clearest delineation between the ownership and
control of the corporation.
xxii.
The
corporate form is the best for large number of shareholders.
xxiii.
For
Closely Held corporations, you can deviate from the mandatory provisions of
corporate standards. Under the Texas
Business Corporations Act, once the business is publically traded, you can’t
deviate from the mandatory items of the Corporations Act. In a closely held corporation, you can get
rid of the BoD, and other provisions.
xxiv.
Where
the interest holders are few in number, you may have the same agency realities,
regardless of the form. Under the
corporate form, shareholders are NOT agents of the corp. If you have 4 interest holders, as a matter
of law, they may be general agents for the corporation because they act for the
corporation and there may be actual or inherent authority.
xxv.
D. Limited Partnerships
1. Intro
a. The governance structure of the limited
partnership lies b/w that of the partnership and the corporation
b. So far as general partners are concerned,
they generally have the same rights, and are subject to the same obligations,
as are partners in a regular partnership
c. Limited partners have no rights by virtue of
being limited partners, to participate in management or conduct of the
partnership business
d. We have 1916 ULPA and the 1976 act, and
there were also important amendments in 1985 (this is RULPA)
d.
Seminal
cases may have been decided under 1916 act and we would have to determine
whether today’s regulatory framework would make the outcome different
e.
This
has one or more G/P’s and one or more L/P’s.
f.
RULPA
à 1976 Law with 1985 Amendments.
g.
ULPA
à 1916 Act.
h.
§
403 RULPA à In a LP, the G/P has the same
rights as a partner in a regular partnership.
i.
Look
at RULPA § 303 (page 339) only holds a
limited partner liable if he is held out as a general partner.
2. Voting Rights of Limited Partners
a. Wasserman
v. Wasserman
i. Plaintiff partner brought action to
establish his position as sole general partner of limited partnership and for
further relief. The Superior Court,
ii. The Appeals Court held that:
(1) limited partner consented to designation of
plaintiff as sole general partner of limited partnership where she signed
amended provision of partnership agreement to provide that former general
partner could designate such an individual to be general partner without
approval of limited partner, and
(2) amendment of certificate of limited
partnership reflecting plaintiff's admission as general partner was valid where
plaintiff signed amendment as limited partner's "attorney-in-fact"
pursuant to express authorization given him.
Class
Notes
i. Section 403 of 1976 ULPA deals with
general powers and liabilities
ii. In a partnership the
default rule is that all partners are agents and have equal management rights
iii. Section 403
tells us that in a LP, unless otherwise provided in partnership agreement, all
general partners are agents and the management is left in the hands of the
general partners
iv. Whatever a partner can do
in a general partnership, a general partner in a limited partnership can do the
same
v. In this case there was an
agreement and pursuant to the agreement the general partner was allowed to
assign a general partner as long as the assignee was from a designated class or
approved by a majority of the general partners
vi. In Wasserman court looked
to 9.1 of 1916 Act. Under this provision general partners have rights and
liabilities subject to limitations requiring written consent to specific acts
by 100% of the limited partners. (i.e., Section 9.1 of 1916 act stated that
w/regard to extraordinary matter the limited partners must give their approval)
viii. Section 9.1 reflected the
corporate rule that corporation must get S/H approval for extraordinary matters
such as mergers, sale of substantially all assets, etc…
ix. Question was whether this
was extraordinary manner
x. Court looked at revised act
as representing some evidence of a consensus regarding some of the relevant
issues raised in this case
xi. Section 401 of RULPA states
that after the filing of a LP, additional general partners may be admitted as
provided in writing in the partnership agreement or if the partnership
agreement does not provide in writing for the admission of additional general
partners, w/the written consent of all partners
xii. Here, there was an
agreement in writing that provided for this change
xiii. The court in Wasserman held
that a written agreement can change a default rule
xv.
This promotes parties right to freedom of K
xvi. The
partnership agreement allows for the making of additional general partners, and
when this is agreed to by the limited partners, then it is as if they consent
RULPA § 401.
3. Limitations
on Contractual Expansion of Limited Partner Rights
a. Gast v. Petsinger
i. Former project engineer brought suit
against partnership seeking back pay and expenses. The Court of Common Pleas
rendered summary judgment for certain of the defendants on ground that they
were limited partners, and plaintiff appealed.
ii. The Superior Court held that
(1) none of the powers mentioned in partnership
certificate exceeded the degree of control which converts the status of a
limited partner to that of a general partner,
(2) that the court was required to accept as true
all facts asserted by plaintiff,
(3) that key test in determining whether a
limited partner is liable as a general partner is the control that such partner
has in the day-to-day functions and operations of the business and that genuine
issue of material fact was generated whether two limited partners exercised
such degree of control, precluding summary judgment as to them.
Class Notes
i. This is most litigated matter under
limited partnerships – limitations on contractual expansion of limited partners
rights
ii. Section 303 of 1976 act deals with
liability to 3rd parties
iii. This case focuses on the primary reason why
the uniformed act was revised – this was the liability provision
iv. UPA § 7 -- Under the 1916 Act limited partners were
not liable for partnership debts of LPs unless they took part in the control of
the business (i.e., limited partner was not liable as general partner
unless in addition to exercising rights of limited partner they took control of
the business)
v. RULPA § 7 -- Under 1976 act if the limited partners
participates in the control of the business, they are liable only to
persons who transact business with the limited partnership, believing, based
upon the limited partner’s conduct, that the limited partner is a general partner
(the new act requires reliance)
vi. 1976 act put limitation on liability of
limited partners who took part in control of business
vi.
SJ
is allowed were there is not sufficient evidence that limited partner took
control in business
vii.
UPA
b. Frigidaire Sales Corp. v. Union
Properties, Inc. – Corporate General
Partner
i. Creditor of partnership brought action
against corporate general partner and limited partners individually when
partnership failed to pay installments due on contract.
ii. The Superior Court entered judgment for
creditor against corporate general partner but dismissed claim against limited
partners and creditor appealed.
iii. The Court of Appeals held that limited
partners are not liable as general partners simply because they are active
officers or directors, or are stockholders of a corporate general partner in a
limited partnership.
Class
Notes
i. Here, Frigidare was a LP and there was a separate
corp. set up as a general partner –
ii. Manion and Baxter are the S/Hs, officers
and directors of
iii. Manion and Baxter controlled day to day
affairs of
iv. Question is whether they are taking part
in the control for the purposes of the ULPA so that they lose their limited
liability
v. TX said they lose their limited liability
but TX was in the minority
vi. The majority of jurisdictions ruled as the
court did in this case – the only one liable without limits is the corporation
and Manion and Baxter did not lose their limited liability
vii. Court was unwilling to protect a corporate
actor – Frigidare was a corporate actor and should have know what they were
doing – If Frigidare wanted Manion and Baxter to be liable they should have
obtained a personal guarantee from them
viii.
Majority rule is that there is no prohibition against using a corporate
general partner and the S/Hs and directors of that corporate general partner
can have limited interests even though the may take part in conduct of
corporation
ix.
RULPA
§ 303(b) –
x.
RULPA
§ 303(b)(1) – Allows for a G/P that is a corporation § 303(b)(1) allows a G/P to be a an officer,
etc. of a corporation. This essentially
overrules Delaney v. Fidelity Lease.
c. Note on Re-RULPA Section 303
i. Section 303 – No Liability as Limited
Partner to 3rd Parties
A limited partner is not liable for
a debt, obligation, or other liability of the limited partnership solely by
reason of being a limited partner, even if the limited partner participates in
the management of and control of the limited partnership
E. Limited Liability Companies
1. Intro
a. LLCs do not have a standard governance
structure
b.
The
LLC business form was developed for the purpose of combining the limited
liability of S/Hs with the governance structure of partnerships
c.
The
LLC doesn’t punish the participants in the management of the company.
c. Not coincidentally, the most common
governance structure LLC acts is “member mangement”
i. In a member-managed LLC, members generally
have the rights and power of partners in a partnership to participate in the
management and conduct of LLC business
d. The alternate governance structure of LLC
acts is “manager-management”
i. In a manager-managed LLC, management of
the business and affairs of the LLC is vested in the manager, who generally has
the rights and powers of partners in a partnership
ii. Members generally have no right to
participate in the management or conduct of LLC business
e. Under the ULLCA, and LLC’s articles of
organization must specify whether the LLC is to manager-managed
f. Note, however, that having this knowledge
may work against 3rd parties
g. ULLCA 203(a)(6) – Says that the
articles of incorporation must set forth whether the company is to be
manager-managed, and, if so, the name and address of each initial manager. The manager managed entity is analogous to a
corporation and its board of directors.
i.
ii.
h. ULLCA 404(a): In a member-managed company, each member has
equal rights in the management and conduct of the company’s business
(ordinary), and except as otherwise provided in (c), any matter relating to the
business of the company may be decided by a majority of the members.
i. ULLCA 404(b): In a manager-managed company, each manager
has equal rights in the management and conduct of the company’s business, and
except as otherwise provided in (c), any matter relating to the business of the
company ma be exclusively decided by the manager, or if, there is more than one
manager, by a majority of the manages; and a manager must be designated,
appointed, elected, removed, or replaced by a vote, approval, or consent of
a majority of the members, and holds office
until a successor has been elected and qualified, unless the manager sooner
resigns or is removed.
j. ULLCA §404(c) requires that the
following items be consented to by all Members:
Amendment of the operating agreement, the authorization or ratification
of acts or transactions, an amendment to articles of organization, compromise
of an obligation to make a contribution, compromise, as among members, of an
obligation of a member to make a contribution or return money or other property
paid or distributed in violation of this act, making of interim distributions,
admission of a new member, use of the
company’s property to redeem an interest subject to a charging order, the
consent to dissolve the company, a waiver of the right to have the company’s business
would up and the company terminated, the consent of members to merger, and the
sale, lease, or exchange, or other disposal of all, or substantially all, of
the company’s property with or without goodwill.
k. ULLCA 103: Says all of the above is subject to an
operating agreement. However, (b)
provides rights that can’t be waived – duty of loyalty, unreasonable
restriction on right to information or access or records, unreasonably reduce
duty of care, elimination obligation of good care, vary the right to expel a
member, vary the requirement to wind up the LLC, or restrict rights of a
person, other than a manager, member, and transferee of a member’s
distributional interest. THEREFORE, THE
CODE IS THE DEFAULT RULE!
2. Problem 6.7
Lucy is a member of Belle’s Ice
Cream Shop, LLC, a member-managed limited liability company organized under the
ULLCA. The LLC has two other members, Mary and Paula.
The LLC holds title in its name to a
building just off the town square in Sealy, which it has been using to operate
a small ice cream shop under the name of “Belle’s”. Business had turned down in
Sealy. Believing that Belle’s sould do better in nearby Brenham, Lucy asked
Neighbor, who owned the store next door, if he was interested in buying the
building and lot. Lucy and Neighbor
agreed to a price of $250k. Neighbor paid Lucy the $250k, and Lucy signed,
acknowledged and delivered the deed transferring the LLC’s interest in the
building and lot.
Lucy had never discussed a possible
sale with Mary or Paula, and did not have their consent to a sale of the
property. Mary and Paula have asked you if they may recover the property.
1) Assuming that the articles of
organization of the LLC have no provisions that might affect your answer, plead
advise Mary and Paula.
Section 301 of ULLCA provides that
subject to subsection (c) each member is an agent of the limited liability
company for the purpose of its business, and an act of a member, including the
signing of an instrument in the company’s name, for apparently carrying on in
the ordinary course the company’s business or business of the kind carried on
by the company binds the company, unless the member had no authority to act for
the company in the particular matter and the person with whom the member was
dealing knew or had notice that the member lacked authority. Here, the sale of the primary asset of the
company will not likely be construed as ordinary business. Hence, Lucy did not have the authority to act
under subsection (1). Additionally,
subsection (2) provides that an act of a member which is not apparently for
carrying on in the ordinary course the company’s business or business of the
kind carried on by the company binds the company only if the act was authorized
by the other members. Here, Lucy did not
obtain the consent of the other members to sell the building. However, § 301(c) provides that unless the
articles of organization limit their authority, any member of a member-managed
company or manager of a manager-managed company may sign and deliver any instrument
transferring or affecting the company’s interest in real property. The instrument is conclusive in favor of a
person who gives value without knowledge of the lack of authority of the person
signing and delivering the instrument.
Here, Lucy has sold an interest in real estate. She is a member of the LLC. She has signed, acknowledged and delivered
the deed conveying the interest in the real esate. The articles of organization have no
provisions regarding this issue.
Additionally, it does not appear that Neighbor had any knowledge that
Lucy did not have the authority to enter into this transaction and has given
value. Hence, the deed is conclusive in
favor of neighbor. However, the
provisions of § 404 supercede the general provisions of § 301. ULLCA §
404(c)(12) provides that the sale, lease,
exchange, or other disposal of all, or substantially all, of the company’s
property requires the consent of all members.
Although the facts are not entirely clear, it appears likely that this
building that Lucy sold represents substantially all of the assets of the
company. Hence, the sale will be invalid
because of the lack of consent.
2) Would your answer change if Lucy, Mary
and Paula had been operating Belle’s Ice Cream Shop as a partnership under the
UPA? Under the RUPA?
Under UPA it is pretty much the same result. Section 9(1) of
UPA provides “every partner is an agent of the partnership for the purpose of
its business, and the act of every partner, including the execution in the
partnership name of any instrument, for apparently carrying on in the usual way
of business of the partnership of which he is a member binds the partnership,
unless the partner so acting has in fact no authority to act for the
partnership in the particular matter, and the person with whom he is dealing
has knowledge of the fact that he has no such authority.” The result is not
different. However, under ULLCA members
may convey the company’s property even if it violates the law or an agreement
b/w the partners and that conveyance is good for the 3rd party b/c
pursuant to 301.3 the statutory frame work provides for the members to do that
subject to 412 limitation. Therefore,
under ULLC members can transfer real property; however, it would not be able to
be conveyed under UPA or RUPA unless the transaction meets the requirements of
§ 9(1).
General agency law rules. The general agency applies to “ordinary
course of business” but can be limited
by a vote, and notice to the 3rd party. There is no protection to 3rd
parties for “extrodinary matters.”
A. Intro
1. At least in theory there may be situations
where managerial discretion conflicts with fiduciary duties
2. The
scope of decision making is unbounded b/c one never really knows what may occur
during the existence of an enterprise
3. One of the reasons that there is some
reliance on the fiduciary duty is that we do not want the discretion of those
who manage to go without any possible regress or any possible accountability
4. It
is impossible to identify exactly what a manger should do under certain
circumstances
5. The
fiduciary duty allows for some hostile redress or a check on managerial
discretion
6. The fiduciary duty essentially arise out of
two sets of circumstances – the relationship b/w the parties or the control
over property or other interest that is to be exercised, at least in part, for
the benefit of others
7. Often times the duty is in fact the only
check under law, b/c there may be no duty owed by 3rd parties
8. The fiduciary duty has two
major prongs: 1) duty of care and 2) duty of loyalty
8.
The care standard may be an ordinary care standard
for agents
9.
Justification:
Free marketplace, the P has some opportunity to determine the
skillfulness of the agent. You can ask
for references. You can check the litigation records and the BBB. You can check the standards.
10.
The P assumes the risk of the skillfulness of the
agent freely selected. This puts the oneness on the P.
B. Business Judgment Rule
1. Intro
a. A director or officer who makes a business
judgment in good faith fulfills his duty if:
i. the
director or officer is not interested in the subject of his business,
ii. the director or officer is informed with
respect to the subject of his business judgment to the extent he reasonable
believes is necessary, and
iii. the director or officer rationally believes
that his business judgment is in the best interests of the corporation.
b. If the conditions are not met the standard
of review is based on the entire fairness or reasonability of the transaction
c. The person challenging the director’s action
may argue that the business judgment rule should not apply if they can show:
i. That the decision was tainted with self-interest
ii. That
the directors did not inform themselves
iii. That
there was bad faith/fraud
a. There was no
legitimate business purpose (or no rationale basis) or
b. There was waste
2. Myers
v. Maxey
Legal
malpractice action was brought against two attorneys and their law firm based
on failure to have will prepared for client who was under guardianship signed
in front of judge. The District Court on pretrial motion for summary
adjudication of negligence and breach of contract claims, granted directed
verdict for one attorney, refused to submit issue of punitive damages to jury,
and thereafter entered judgment on jury verdict in favor of second attorney and
law firm. Appeal was taken. The Court of Appeals held that: (1) ruling on
motion denying interlocutory summary adjudication was reviewable; (2) fact
issues existed to preclude summary adjudication; (3) no basis existed for
holding first attorney either directly or vicariously liable in connection with
second attorney's preparation of will; (4) evidence was for jury on issue of
whether second attorney reasonably believed that, under one of two apparently
conflicting statutes, will did not have to be signed before judge; and (5) no
evidence supported submission of punitive damages issue to jury.
Class
Notes
a. Here we see the care principal in the
context of lawyers
b. The principal agent relationship requires
that the agent owe fiduciary duties to the principal – care and loyalty
c. Here, we saw that the agent is not required
to be perfect but only to exercise a reasonable degree of care under all the
facts and circumstances
c. An
attorney who acts in good-faith and in an honest belief that his advice and
acts are well founded and in the best interests of his client is not answerable
for a mere error of judgment or for a mistake in a point of law which has not
been settled by the court of last resort and on which reasonable doubt may be
entertained by well informed lawyers
d. You have
to look at the market of attorneys in the area and determine the skillfulness
of the attorney.
e. In matters
of issues that are unsettled, then you are less likely to be sued for
malpractice. Compared to age
discrimination, where there is very little unsettled law, a mistake like this
would constitute M/P.
f.
It is not easy to sue attorneys for M/P. More likely where there is complete
negligence.
g. Misfeasance,
short of confict of interest, will not be enough.
h. Relationship
between Rules of Ethics and the Liability.
They set a standard which the lawyers can be held to.
i.
Mere error of judgment does not constitute negligence. Where there
is reasonable doubt, amount well intentioned lawyers, the differences in
opinion, they can’t constitute a basis for liability. Only where the law is well settled, and
erroneous advise is given, can a cause of action be created.
j.
Rule 11 sanctions can be levied for outlandish
claims.
k. When there
is a good faith claim, then there must also be a showing that there was no
conflict of interest to offset it.
2. Problem 7.2 – BJR and Discretion of
Management
Mr.
Hood Meadows, Oreg., Ltd. is a limited partnership established to carry on the
business of constructing and operating a winter sports development. Under the LP agreement, management of the
business and affairs of Mt. Hood Meadows is the responsibility of its general
partner, Mt. Hood Meadows Development Corp. That agreement also provides that
the limited partners have no right to take part in the control of the
business. For the years in which profits
were earned after 1974, the general partner elected to distribute only 50
percent of the limited partner’s taxable profits. The remaining profits were
retained and reinvested in the business.
Three of the limited partners have sued to force the general partners to
distribute the retained profits.
Assume that the limited partnership
agreement does not require the distributions, and that they are not required
under the applicable statute. On what
basis, if any, should a court interfere in the general partner’s decision as to
the distribution of any profits?
Under the ULPA, we know that
management of a limited partnership is vested in the general partner. Here, the
limited partnership established a separate corporation (“Mt. Hood Meadows
Development Corp.”) to act as the general partner. The majority rule is that
there is no prohibition against using a corporate general partner.
The issue is whether a
court could interfere with the general partner’s decision. Here, since the general partner was a
corporation we look to corporate laws to determine whether the general partner
had the discretion to distribute only 50% of the profits. General rule in corporations is that the
management is left to the B/D. The
decision to distribute is a business decision and under the default rule it was
within the discretion of the corporation.
Section 7.32 of the MBCA
allows S/Hs of a corp., whose stock is not publicly traded, to change the
default rules by unanimous agreement. The facts do not show that an agreement
was made by the S/Hs to change the default rule so the rule would apply and it
would be within the discretion of the corporation to make the distribution.
S/Hs could argue that
the general partner/corp. owes a fiduciary duty to its S/Hs. However, the
general partner/corp. in this case is allowed protection under the business
judgment rule. Under the business
judgment rule so long as the director makes a decision, is not interested in
the subject of his business, the director is informed with respect to the
subject of his business judgment to the extent he reasonable believes is
necessary, and the director or officer rationally believes that his business
judgment is in the best interests of the corporation then it is w/in the
directors discretion.
Bottom line is, assuming
we know who can make the decision, so long as it was made in good faith and it
was not unreasonable the decision maker is given broad authority to make the
decision. Here, we know that the corporation can make the decision and there
are no facts showing that the decision was not made in good faith. Therefore,
the corporation should be given broad authority to make the decision and the
court should not interfere with its decision.
RULPA § 404(c) (Like the Business
Judgment Rule) (p. 261) – A partner’s duty of care to the
partnership and the other partners in the conduct and winding up of the
partnership business is limited to refraining from engaging in grossly
negligent or reckless conduct, intentional misconduct, or a knowing violation
of law.
3. Kamin v. American Express Company
Plaintiffs
brought stockholders' derivative action, asking for declaration that certain
dividend in kind was waste of corporate assets, directing defendants not to
proceed with distribution, or, in alternative, for monetary damages. Individual
defendants, corporate directors, moved for order dismissing complaint for
failure to state cause of action, and alternatively, for summary judgment. The
Supreme Court held, inter alia, that complaint alleging that corporate
directors negligently permitted declaration of payment of dividend, without any
allegation of fraud, oppression, arbitrary action or breach of trust, failed to
state cause of action.
Class
Notes
a. This is a duty of care case in the context of corporate law
b. Here, the S/H complained of a decision by
the B/D to declare a dividend payable in shares of DLJ, which American Express
had invested and lost. S/H argued corp. should have sold shares to get a
capital loss that could be offset against gains for tax purposes
c. In essence the complaint was that the
directors were negligent in their business decision (there was no allegation of
fraud or breach of trust)
d. In the absence of such a complaint the suit
is dismissed b/c directors are not liable for what might arguably be errors in
judgment (this is the standard)
e. The BJR can be invoked by Ds where they act
in the absence of any conflicting interest and where it is shown that the
process engaged in for decision making is not unreasonable under the
circumstances
f. So, as the court suggests, courts do not
want to get involved and justifiably are concerned with substituting their
judgment for the judgment of directors. Another consideration is judicial
economy – courts are already busy as it is w/out getting involved in decisions
of business organizations
g. The B/D is vested with the discretion to
manage a business and its affairs and this includes paying dividends
h. This case also stands for the proposition that
directors are not liable for mere errors in judgment
i. There is a reluctance b/c it is difficult
to replicate in the court room the situation the directors perceived when they
made their decision
j. More fundamentally, we do not wish to have
directors be so risked adverse that they fail or shy away from taking chances.
We have an economy that on a whole has benefited from the predisposition of
many of entrepreneurs to role the dice
k. Directors ordinarily are only liable for
malfeasance and nonfeasance but NOT misfeasance
l. The prescription is that directors should
exercise care but they are not personally liable unless the are GROSSLY
negligent not simply negligent
m. The BJR includes the lack of self-dealing.
Here, there was only a minimal hint of self-dealing – There was a 20 member B/D
and the dealing would have only a slight impact on 4 directors – but the
non-conflicted directors favored the plan adopted by the Ds and there was no
showing that the 16 were corrupted by those with an interest
n. The decision making process as a whole was
one made in good faith and without self interest
o. Conflict of interest is rather narrowly
defined
p. Section 401(c) really requires for
the BJR – lack of interest, information to the extent reasonably necessary and
a rational belief that the course of conduct is in the best interest of the
corporation (i.e., the BJR rule is available if there is no conflict of
interest and the decision making process is not unreasonable)
q. One of the reasons underlying the BJR is
that the S/H has some choices and these choices are maximized where the shares
are publicly traded (if you do not like management – sell your shares)
q. Where there is no market for the
shares there is a greater predisposition for the courts to get involved
r. For publically held corporations,
the separation of powers accentuates the problem of “agency cost.”
s. There is a policy of
“non-interference” with BoD. The more
“purely business” the decision, the stronger the adhearance to the default rule
(BJR).
t. So much of law today is
transactional. There is a greater
disposition of courts to review these fairness issues. Where some class of
shareholders are getting ripped off, then courts are more likely to get
involved. Courts have an interest in
fairness, as opposed to the distribution of dividends, so they won’t get
involved in the business of the company.
u. There is no liability for corporate
directors for simple mistake or negligence. You have to show gross negligence
or fraud to get liability.
v.
C. Duty
of Loyalty
1. Intro
a. Importantly, the duty of loyalty, the other
prong of the fiduciary duty, is approached differently than the duty of care –
there is a different analytical framework
b. In loyalty cases the burden of proof is on
the D where as in duty of care cases the burden is on the P.
b.
In
other words, the BJR does not obtain to duty of loyalty cases.
c.
Duty
of Care cases – Skillfulness
d.
Duty
of Loyalty cases – Honesty.
a.
There
is a moral judgment associated with the D/L cases.
b.
2. Schock
v. Nash
a. In this case there was a power of attorney
and a number of questions arose out of that power of attorney. The person with
the POA made various gratuitous gifts to herself and others, and no express
power in POA allowed person to do so.
b. There is also a predisposition of courts not
to accept extrinsic evidence to interpret the intent of the grantor
c. Unless the intention to allow gratuitous
transfers was expressly stated in the POA, no such power would exist (this is
bright line rule)
d. The court in Shock did not apply the bright
line rule, rather they looked to extrinsic evidence
e. Section 387 of the Restatement 2nd
states undivided loyalty is required by the fiduciary
f. Acting under a POA you are acting as an
agent and have certain fiduciary duties including duty of loyalty
g. Under
Section 389 acting adversely is prohibited
h. Under Section 390 even when acting
under authority there must be full disclosure of material facts
i. The
requirement of duty of loyalty is more exacting than duty of care
j. Condemnation of dishonest is more severe
than those who are just negligent. Honesty goes to the core of character and we
believe that most persons are capable of adhering to fundamental principles of
honesty so are punishment is more severe for dishonest
k. Lawyers must advise their clients of
potential for conflict and advise them to seek independent legal advice on the
conflicting transaction
l. Schock allowed knowing, consented to,
courses of conduct that involved the fiduciary in a conflict – principal may
consent to conflict after consultation
m. All doubts are resolved against the position
of the fiduciary and the fiduciary bears the burden of proof to show that the
transaction was allowed.
2. Starr v. International Realty, Ltd.
a. He failed to disclose that
purchase price had been inflated by a commission and that International Realty
had a right to buy the vendor’s interest in the sales K
b. Issue was whether under
these circumstances there was a violation of the duty of loyalty
c. The court looked to Section
21(1) of the 1914 UPA, which provides:
that
every partner must account to the partnership for any benefit and hold as
trustee for it any profits derived w/out the consent of the other partners from
any transaction related to formation, conduct, or liquidation of the
partnership or from any use of partnership property
d. You must account for profits
but expenses can be deducted
e. After this case Section
404(a) was added to the revised act. Section 404(a) in the revised act
shows the drafters had some problems with the breadth of fiduciary duties and
as a result they were limited to duty of care and loyalty
f. Section 404(a) states the
only fiduciary duties a partner owes to the partnership and the other partners
are the duty of loyalty and the duty of care
g. Section 404(a) deletes
the reference of fiduciary duties in connection to the formation of a
partnership. Section 21 of old act placed fiduciary duty before, during and
after existence of partnership. New act
took out duty during formation or before existence of partnership.
h. If the court relied upon
404(a) rather than 21(1) the result would have probably remained the same.
However, you could argue that here the case involved pre-formation and the new
act got rid of fiduciary duties during pre-formation
i. Bottom line is you should
disclose info just to be safe
j. 404(d) deals with
obligation of good faith and fair dealing – this obligation is supposed to be
distinctly different from the requirement the UCC that applies to all Ks (it is
supposed to be some where b/w UCC and fiduciary duties explained in Meinhard
case.
l.
This good faith and fair dealing requirement is not
intended to create rights that the parties did not at least attempt to address
m. RULPA §
404(b) – Limits the duty of loyalty to three areas.
a. Give the
profit from a transaction to the partnership
b. Can’t
deal adversely to the partnership.
c. Can’t
compete with the partnership.
n. Look up
Meinhardt v. Salmon 249 ny 458
3. Problem 7.4 – Obligation of Partner to
Act at Request of Other Partner
Covalt
and High were corporate officer and S/Hs in CSI. Covalt owned 25% of the stock
and High owned the remaining 75% of the stock. Both men received remuneration
from CSI in the form of salaries and bonuses.
In late
1971, after both High and Covalt had become corporate officers of CSI, they
formed a partnership. The partnership bought land and built an office and
warehouse building. In February of 1973, CSI leased the building from the
partnership for a 5-year term. Following the expiration of the initial term of
the lease, CSI remained a tenant of the building; the corp. and the partnership
orally agreed to certain rental increases. The corp. made substantial
improvements to the leasehold. Under the original lease any improvements to the
premises were to accrue to the partnership upon termination of the lease.
In
December of 1978, Covalt resigned his position as an officer of CSI and went to
work for one of its competitors. Covalt, however, remained a partner with High
in the ownership of the land and the building rented to CSI. On
Assuming
that $3,580 was the fair rental value of the land and building, has High
breached his fiduciary duty as a partner?
High did not breach his fiduciary
duty as a partner. Pursuant
to Section 404 of the RUPA, the only fiduciary duties that a partner owes to
the partnership and the other partners is the duty of loyalty and the duty of
care. Under 404(a) a partner will have
satisfied their duty of loyalty so long as they account for any profits
received, refrain from dealing adversely to the partnership, and refrain from
competing with the partnership.
Here, there are no facts
that show that High failed to account for any profits or that he was competing
with the partnership. The only issue
with respect to his duty of loyalty is whether he acted adversely to the
partnership. Covalt may argue that the
rent he requested was the fair rental value and by not charging the fair rental
value High acted adversely to the partnership (i.e., High’s decision lost money
for the partnership). But this argument
would probably not be sufficient to constitute a breach of loyalty.
As for a partner’s duty
of care – this duty is satisfied so long as the partner refrains from engaging
in grossly negligent or reckless conduct, intentional misconduct or a knowing
violation of the law. No facts in this
problem suggest that High engaged in grossly negligent conduct, reckless
conduct, intentional misconduct or a knowing violation of the law. Therefore, High did not breach his duty of
care.
Note, that in a
partnership as b/w the partners themselves, in the absence of an agreement by a
majority of the partners, an act involving the partnership business my not be
compelled by the co-partner. Here,
Covalt could not have compelled High to Act.
Also note, that in a
partnership if the parties are divided as to a business decision affecting the
partnership, and in the absence of a written provision in the partnership
agreement providing for such contingency, then, as b/w partners, the power to
exercise discretion on behalf to the partners is suspended so long as the
division continues. The rule is different, however, as to transactions b/w
partners and 3rd parties. In dealing with third parties a partner
has the authority to act on behalf of the partnership in the usual way, even
w/out the consent of the other partner
4. Labowitz v. Dolan
a. The question surrounds the
allocation of profits and distribution of cash of a LP. Limited partners sued
general partner for alleged violations of the distribution policy
b. The trial court dismissed
the complaint b/c it found that the discretion exercised by the general partner
was expressly provided for in the partnership agreement
c. On appeal the question was
whether in fact the limited partners case should be heard and not summarily
dismissed.
d. The general partner argues
in defense that the agreement is superior and no other evidence such as private
placement memorandum in this case was allowed
e. The private placement memo
stated that it was the intended policy that all taxable income would be
distributed
f. Limited partners had to pay
taxes and were not getting any distribution. There was a question as to whether
this was classic squeeze out – tactic by general partner to force limited
partners to sell their interest at a discount
g. The limited partners are
arguing the private placement memo and there was also an obligation of good
faith and fair dealing that arises out of all Ks and the partnership agreement
was a K, and that there was a breach of fiduciary duty, notwithstanding the
partnership agreement, which, on its face, gave complete discretion to the
general partner
h. This case stands for the
proposition that there is a fiduciary duty that is not extinguished by a
partnership agreement
i. There was a fiduciary
relationship here b/c the general partner managed the partnership property for
the benefit of the limited partners. Fiduciary duties apply in addition to
those set forth in K and any limitation on the duty of loyalty must be
expressly provided for (this is general rule followed in most
jurisdictions, including TX)
j. An agreement that no
fiduciary duties apply is violative of public policy
k. You can have specific
waivers but they must be clear after disclosure and consultation and in some
cases we may go further to require advice from independent counsel
l. Majority rule is that
fiduciary duty remains and is not extinguished by express agreement or K unless
there is a specific waiver after full disclosure
m. Boiler plate language is suspect and usually
does not work
5. Sonet v. [Plum Creek]
Timber Co.
a. Plum Creek Timber (limited
partner) owns and operates a wood product and timber facility
b. Management
is done by Plum Creek Management Company (General Partner)
c. Here, we have the common law
duties and partners - in light of their fiduciary duties - are not to act in
their self-interest to the exclusion or disadvantage to those they owe
fiduciary duties to
d. Question in this case is
to what extent can an agreement b/w the parties modify these common law
principles
e. Management will seek maximum
flexibility to operate better and seek greater gains. The agreement will be
central
f. Principals and agents can
deal after full disclosure if the transaction is fair and the burden is on the
fiduciary to prove the fairness
g. One way to prove it is fair
is to look to market prices – landlord tenant arm’s length transactions
h. Section 403a of the ULPA
states that except as provided by agreement
a general partner of a limited partnership has the rights and powers and
is subject to the restrictions of a partner in a partnership w/out limited
partners
i. Under 404b – we have the
duty of loyalty. Under this section a partner’s duty of loyalty is limited to 3
situations:
i. to account for profits
ii. to refrain from dealing with a party that
has an adverse interest to the partnership
iii. to refrain from competing
with the partnership in the conduct of the partnership business
j. 404 of RUPA states that
partner only owes duty of care and duty of loyalty – 404b deals with duty of
loyalty and 404c deals with duty of care
k. In corporations with
respect to duty of care you need to be grossly negligent to breach that duty.
Partnership act goes along with gross negligence standard
l. Section 103 of RUPA
discusses effect of partnership agreements. Section 103b discusses what the
partnership agreement may NOT do
i. It may not eliminate the
section 404b duty of loyalty but it may identify specific types or categories
of activities that do not violate the duty of loyalty, if not manifestly
unreasonable or all the partners or a # or % specified in the agreement may
authorize or ratify, after full disclosure of all material facts, a specific
act or transaction that would otherwise violate the duty of loyalty
ii. Under clause 4 you cannot unreasonably reduce the duty of care
iii. Under clause 5 your cannot
eliminate the obligation of good faith and fair dealing
m. Broad discretion is available
only after the most exacting disclosure, especially where the proponent is the
source of the disclosure
VIII. Firm’s
Accountability for Notification to and Knowledge of the Agent
A. General Rules
1. Knowledge
a. E.Udolf, Inc. v.
i. The P notified D of losses it had incurred
as the result of an EE’s dishonesty and sought from the Ds indemnification,
plus interests, for those loses
ii. Section
272 of the Restatement 2nd
is the imputation principle, which provides:
a principal is affected by the
knowledge of an agent concerning a matter as to which he acts w/in his power to
bind the principal or upon which it is his duty to give the principal
information
iii. There
is a predisposition to impute the knowledge of agents to principles
iv. Court concluded that knowledge of an EE may
be imputed to and ER under EE dishonesty insurance policy if the EE holds a
position of management or control in the exercise of which a duty to report
known dishonesty of a fellow EE can be found to exist either explicitly or by
fair inference from a course of conduct
b. Problem 8.1 – Firm’s Accountability for Knowledge of Agent
Tom and Paul are partners in Law
Firm. Tom and Paul agree that T will act as managing partner. As such, T
handles all administrative and personnel matters.
On repeated occasion, P sees A, during
the normal course of a working day, become unreasonably angry with secretaries
and paralegals. P always admonished A to act in a more appropriate manner, but
did not report A’s conduct to T. Several months later, A becomes angry and hits
Clerk.
Clerk has now sued Law Firm,
claiming that Law Firm knew of Associate’s explosive tendencies and negligently
failed to either fire or control Associate. In Clerk’s suit, will Law Firm
be responsible for P’s knowledge.
Answer
to Problem 8.1
Section
102 of RUPA provides (a) A person knows a fact if the person has actual
knowledge of it. (b) A person has notice
of a fact if the person: (1) knows of it; (2) has received a notification of
it; or (3) has reason to know it exists from all of the facts known to the
person at the time in question. (f) a partner’s knowledge, notice, or receipt
of a notification of a fact relating to the partnership is effective
immediately as knowledge by, notice to, or receipt of a notification by the
partnership, except in the case of a fraud on the partnership committed by or
with the consent of the partner. Hence,
under § 102(f) Paul’s knowledge is attributed to the firm. Hence, the firm may be found negligent under
these circumstances.
UPA § 12 Notice to any partner of
any matter relating to partnership affairs, and the knowledge of the partner
acting in the particular matter, acquired while a partner or then present to
his mind, and the knowledge of any other partner who reasonably could and
should have communicated it to the acting partner, operate as notice to or
knowledge of the partnership, except in the case of a fraud on the partnership
committed by or with the consent of that partner.
ULLCA § 102 (a) A person knows a
fact if the person has actual knowledge of it.
(b) A person has notice of a fact if the person: (1) knows of it; (2)
has received a notification of it; or (3) has reason to know it exists from all
of the facts known to the person at the time in question.
Restatement § 268 provides that
notification to an agent is notification to the principal if the agent was
actually or apparently authorized to receive the notification.
Restatement § 273 provides that
knowledge that is only within an agents apparent authority will not be attributed to the principal unless
a third party relied on the appearance of authority.
2. Notification
a. Dvoracek v. Gillies
i. Gillies rented a commercial space from
Dvoracek. The lease provided for an option to renew for a two-year period. Through the course of the original lease G
had left checks with D’s EEs. G
testified that he left a notice of his intent to renew the lease with one of
D’s EEs. At the end of the original lease
D sought to get his place back and G refused claiming he had filed notice to
renew. The trial court directed a verdict for D, even assuming G delivered the
notice, D’s EEs were not her agents for the purposes of receiving the notice. G
argued the EEs had either actual or apparent authority to accept the notice.
ii. Restatement
2nd of Agency Section 9 states that notice is a formal act
iii. 268 states that notification is effective
when given to an agent authorized or an agent apparetntly authorized
iv. Case
was remanded b/c there was a question of fact with regard to apparent authority
B. Time From which Notification of Knowledge
Affects Principal
1. Problem 8.3
Owner owns and operates Mall. Alan
and Betty are leasing agents for the Mall and share an office suite in the Mall.
As such, each is authorized to negotiate and to sign, on O’s behalf, leases
covering space in the Mall. On Friday, B leases space to L, who planned to open
a laser-tag game in the Mall.
Unknown to B, on Monday, Alan had
leased the space in the Mall to
Assume that Alan had authority to
agree to the inclusion of the exclusivity provision, and that O will be liable
to Arcade for breach of K. Assume further that O will also be liable for
special damages if it knowingly breached the lease. Will O be responsible
for special damages?
Answer
to Problem 8.3
a. Owner would be liable and would be liable for even special
damages
b. Authority to bind the owner with respect to leases also gives the
agent the power to bind with respect to knowledge of agents
c. Alan failed to inform the Owner and as a consequence the owner is
liable
d. The Owner is liable for entrusting power and authority in Alan
2. Biggs
v. Terminal RR Assoc
This is
suit alleging direct negligence by the RR for a number of circumstances. First for failing to provide a safe place for
Briggs to work, for failing to protect Biggs from Parr, and knowingly retaining
a violent EE. The supervisor did not see much in terms of Parr’s propensity for
violence.
Notes
a. The scope of what was revealed was limited
and more importantly the timing
b. There must be sufficient time to communicate
and sufficient time to react for imputation to apply
c. Since there was no prior notice of Parr’s
violent propensities then the RR could not be held liable for failing to
provide Biggs a safe place to work
d. Co-agents are not responsible for stopping
action – they have no independent duty
C. Adverse Agents
1. Federal Deposit Ins. Corp. v. Smith
Ds, Smith and other directors of
Family Federal were being sued. There
was insolvency so the B/Ds were no longer in charge.
Notes
a. Our law provides for the absolute priority rule, which stratifies
classes for distributions from an insolvent institution. We have secured creditors, unsecured, S/Hs
(preferred and common)
b. Under absolute priority rule the secured creditors would look to
the property to secure the credit they extended
c. No S/H can be paid one penny unless the secured creditors and
unsecured creditors are made completely whole
d. By definition then, once there is insolvency S/Hs no longer have
a viable interest in the corp.
e. Here the S/Hs were pursuing the directors for personal liability
b/c they could get nothing from the corporation
f. The question here is the statute of limitations and whether
these claims against the directors can be pursued
g. Here, the court found that
i. The
Doctrine of Adverse of Domination serves either to delay the accrual of a
claim by a corporation against its directors and officers, or, in the
alternative, to toll the running of the applicable statute of limitations. The doctrine is premised on the theory that
it is impossible for the corporation to bring the action while it is
controlled, or “dominated”, by culpable officers and directors.
h. Attribution of knowledge to a corporation, given that a
corporation is a person only w/in the contemplation of our laws, means that
corporation is charged with knowledge of what its agents know unless the
agent’s knowledge is so adverse as to destroy the relationship
i. If its goes undiscovered SOL will be 5 years if it is
discovered it will be 3 years
j. The doctrine of adverse domination stays the running of the
statute of limitation as long as the person w/in the contemplation of the law
have an interest adverse to the corporation
k. Here, the directors had an interest adverse to the corporation
l.
There are two versions:
i. Under the single disinterested director version there is not
stay if there is at least one single disinterested director
ii. The other rule is the disinterested majority rule – if the
majority of the directors have an interest then it will stay the running of the
SOL
m. This adverse domination doctrine is interposed to stay the running
of the limitations
A. Intro
1.
The
doctrine of ratification arises out of the risk of unintended dealings inherent
in the use of agents in the market place
2. Even where an agent dealing with a third
party has acted outside the scope of the agent’s power to bind the principal,
the principal may nonetheless be bound if the principal ratifies the agent’s
act
B. Affirmance
1. Botticello v. Stefanovicz
a. In
1965 Stefanovicz purported to lease a farm to Botticello – a 3rd
party – and under the lease B would have an option to buy. S realized in 1968
that his wife was a tenant in common in the farm. B had taken possession of the
farm and made substantial improvements. The wife knew of all this and when B
decided to exercise his option to pay the couple refused. The trial court held
that the wife was bound to the lease/option agreement either b/c S acted as her
authorized agent or alternatively the wife had ratified the lease/option
agreement.
Class Notes
a. Agent
Theory
i. Importantly, agency status is not
inherent in the husband wife relationship
ii. Even
where one spouse tends to business more than the other spouse (e.g., one spouse
does all the business for the couple) it is still not inherent
iii. Nor
is the agency relationship inherent in a co-ownership of property relationship
b. Ratification Theory
i. One basis for ratification is the
acceptance of fruits and benefits
ii. However,
even though there was acceptance of fruits and benefits, these benefits perhaps
flowed from the marital relationship and not from separate acceptance by the
wife
iii. Ratification also requires affirmation with
the knowledge of all material facts
iv. Ratification requires actual knowledge
and not constructive knowledge
v. So,
the question in this case is the option and not the rental – Did wife know of
the option
vi. The
wife knew some things – the occupancy and improvements – but not the option
vii. Botticello
was making some substantial improvements, so the question is - are these
improvements consistent with a mere lessee
viii. The question that arises here is what about these improvements by B
that would make a reasonable person think B had some interest greater than a
lessee. However, ratification requires actual knowledge not constructive
knowledge
ix. The
court determined that the wife was not liable but S was still subject to liability,
but the fact remains that they are tenants in common so what happens to one
happens to the other
x. What
is important here is that there is no liability for the wife
2. Problem 9.1
Allen, purporting to represent Paula
but w/out authority to bind, leases P’s farm to T for a term of five years . A tells P what he has done, but does not
tell her the term of the lease. Without inquiring as to the lease term, P
demands, and accepts from T, the security deposit and first month’s rent. In
view of P’s willful ignorance of the lease term, may P avoid the lease after
she learns the term is five years? Did P know enough facts that she should have
investigated before affirming instead of blundering ahead heedless of her
ignorance? Under Restatement 91 & comment e, P may be found to have assumed
the risk of proceeding with only generalized knowledge of the circumstances.
Would it make any difference if the terms of the similar farm leases
customarily range b/w 3 and 5 years? One to two years?
Answer
to Problem 9.1
C. Knowledge of Agents
1. Estate of Sawyer v. Crowell
Class
Notes
a. The facts seem clear that Durrance had no
actual knowledge so the question is can the knowledge of his secretary be
imputed to him so that it can be declared that Durrance affirmed or ratified
the deal
b. From last case we know that the knowledge is
not imputed from one spouse to another
c. We know that imputation with regard to
agents is relatively automatic when we are talking about a matter within the
authority
i. When
dealing with leasing agents all knowledge of leases is imputed to the principal
d. Here, there is no actual authority for the secretary
i. There are no documents or evidence showing actual authority
e. The question is then was there apparent
authority, which would require Durrance to
have conveyed something to the 3rd party
f. Here there was no direct conversation or
any appearances
X. Dissociation of
Owners from Firms
A. Expulsions
1.
Intro
a. UPA section 38(1) provides:
When dissolution is cause in any way, except in contravention
of the partnership agreement, each partner, as against his co-partners and all
persons claiming through them in respect of their interest in the partnership,
unless otherwise agreed, may have the partnership property applied to discharge
its liabilities, and the surplus applied to pay in cash the net amount owing to
the respective partners. BUT if dissolution is caused by expulsion of a
partner, bona fide under the partnership agreement and if the expelled partner
is discharged from all partnership liabilities, either payment or agreement
under section 36(2), he shall receive in cash only the net amount due him from
the partnership
b. Bottom Line: When dissolution is
cause by the expulsion of a partner, bona fide under the partnership agreement,
the expelled partner loses the right to liquidation. So effect of expulsion is
very important
c. As a threshold matter it is the dissolution
that the remaining partners want to prevent b/c dissolution coupled with
liquidation rights means the business affairs are going to be hampered by the
winding up process
d. Where there is a liquidation right and a
right to demand that the partnership be wound up then that person can seek an
injunction to stop the use of partnership assets
e. What is important is that the fiduciary duty
continues although it may be modified by an agreement b/w and amongst the
partners
f. An agreement can permit expulsion w/ or
w/out cause
g. Generally, speaking –certainly from the
standpoint of the group – it will be good to provide for expulsion w/out cause
b/c the issue of cause can be expensive
h. Such an agreement will be upheld unless
there is bad faith – you can have an agreement to expel w/out cause but you
cannot have an expulsion in bad faith
i. If the expelled person can show the
expulsion was made in bad faith – such as a desire to keep them from getting
benefits of future deal – the fiduciary duties kick in
j. The RUPA 601(3) allows for
expulsion pursuant to a partnership agreement
k. Note on Expulsions in LPs and LLCs
i. Under RULPA 402(3), a general partner is
w/drawn and cease to be a general partner when the general partner is removed
in accordance with the partnership agreement
ii. Under ULLCA 601(4) a member can be
dissociated from the LLC based on the member’s expulsion pursuant to the
operating agreement
2. Problem 15.4 – Partner Termination Under
Agreement
Levy, was a physician engaged in the
practice of medicine as a partner in Nassau Queens Medical Group. By a majority
vote of the partnership executive committee, Levy was expelled from the
partnership on the ground that he was more than 70 years of age. The
partnership agreement provided that a partner who was 70 years old or older
could be terminated by a majority vote. Levy argues that the partners
terminated him in bad faith. Other partners over the age of 70 were not
expelled from the partnership. Levy believes that the real reason for the
termination was Levy’s criticism of partnership decisions.
Answer to Problem 15.4
a. The purpose of the termination clause was to
provide a simple, practical and speedy method of separating a partner from the
partnership, and in the absence of undue penalty or unjust forfeiture, the
court may not frustrate this purpose
b. While bad faith may be actionable, there
must be some showing that the partnership acted out of a desire to gain a
business or property advantage for the remaining partners
c.
Policy
disagreements do not constitute bad faith since at the heart of the partnership
concept is the principle that partners may choose with whom they wish to be
associated
d.
The
law upholds the premise of severing the partners from the partnership.
e.
There
is a fiduciary duty, but the partnership agreement shifts the burden to the
expelled person to show that he was expelled in bad faith.
f.
There
is no Title VII protection since he was a partner, and is not considered an
employee.
2. Bohatch v.
Bohatch was a lawyer in Butler
Binion’s D.C. office. After Bohatch was admitted to partnership, she became
concerned tat McDonald was over-billing the firms primary D.C. client. Shortly
after raising her concerns Bohatch was asked to leave and she was given no
year-end distribution. There was partnership agreement that freely allowed for
expulsion of partner and there was no limit for grounds of expulsion – it could
be w/ or w/out cause. Agreement provided that expulsion would not result in
dissolution
Class Notes
a. There is a fiduciary duty that attains and
applies in this case – expulsions for purely business reasons do not fall into
the bad faith category (expulsion can be made so long as there is no bad faith)
b. Protecting client relations is especially
important in context of a law firm and so if some conduct is offensive to
partners or clients then it will not be bad faith
c. Once there is this K the fiduciary duty is
modified importantly w/regard to the burden of proof the burden of proof shifts
to the expelled partner to show bad faith by showing and evil, malevolent or
predatory purpose
d. If you have an agreement the law is heavily
in favor of those who expel as opposed to those who are expelled
e. Butler Binion did breach the partnership
agreement b/c there was no notice as required in the agreement
f. Most jurisdictions if they are going to
protect good faith whistle blowing will do so only if the person is right
(majority rule is they are only protected if they are correct about their
charges and claims)
B. Judicial Expulsions
1.
Intro
a. We know that a dissolution is caused by the
separation of any partner unless provided otherwise by the agreement
b. If the agreement is at will then a partner
may withdraw at any time
c. If the partnership agreement is for a set
term then a partner cannot withdraw from the partnership before the term
expires without violating the agreement
d. However, you can petition the court for
dissolution
e. Under UPA 31(6) a partnership can be
dissolved by a court decree under UPA 32.
g.
UPA 32(1) permits a partner to petition a court to dissolve a
partnership, among other reasons, where: (c) a partner has been guilty of such
conduct as tends to affect prejudicially the carrying on of business and (d) a
partner willfully or persistently commits a breach of the partnership agreement
or otherwise conducts himself in matter relating to the partnership business
that is not reasonably practicable to carry on the business of the partnership
with him
2. Problem 15.5 – Judicial Dissolution
A general partnership for the
operation of an insurance business was formed for a five year-year term in 1934
with 10 partners. Partner Brown held the majority interest in the business, with
the other nine partners sharing the remainder.
The partnership agreement provided that Brown would set the salaries of
the partners, that the admission of a new partner would require the affirmative
vote of a majority in number of the partners, and that all other decision would
be made by an affimative vote of a majoirty in interest of the
partnership. Brown proposed the
admission of
Answer to 15.5
a. Under UPA 32(1)(c) and (d) a partner can
petition the court to dissolve a partnership (see intro above)
b. Under the older statute we have 31 causes of
dissolution. Section 31 causes are considered objective causes
c. Causes for judicial expulsions are
considered subjective
d. Under 31(2) – in contravention of the
agreement
e. So, if a partnership agreement does not
have a term it is considered to be at will and can be ended any time by the
declaration of any party (default rule)
f. Even if agreement is for a term
partner’s may reserve the right to call it quits – way around this is to have
an agreement to the contrary
g. So, if you carry the burden to show that the
basis exist then the court SHALL order dissolution (this is different then
default rule for corporations which say court may order dissolution)
h. The RUPA 601(5) provides that a partnership may be dissolved on application
by the partnership or another partner, the partner’s expulsion by judicial
determination
h.
Default
rule is that any time a partners is separated then the partnership is expired
unless there is an agreement to the contrary
i.
UPA
38(2) – Allows for the continuation of the
partnership by the members who were not at fault.
j.
The
courts try to have the parties work out their differences because of the impact
of the dissolution of the partnership.
2. Monteleon v. Monteleon
a. Lower court directed a judicial sale saying
the partnership should be dissolved. The question was whether the partner’s
conduct amounted to a wrongful termination entitling the other partners to a
dissolution. The appellate court found the other partner’s conduct was
wrongful, entitling others to dissolution
b. Court looked to 38(2) of old act
c. The way around all of these questions is the
agreement that the caveat that notwithstanding an agreement there is a
fiduciary duty
C. Fiduciary Limits on Rights to Dissociation
and Dissolution
1. Intro
a. Notwithstanding
an agreement, the fiduciary duty remains
b. Agreement may just shift the burden of proof
to the expelled partner to show bad faith
c. Disagreement on policy is not bad faith
2. Cadwalader,
Wickersham & Taft v. Beasley
Beasley was a partner w/ firm’s
Notes
a. Question is whether this is an expulsion or a w/draw?
b. At common law if you wanted to get rid of a partner you had to
dissolve and reform w/out that partner – the written agreement was the answer
to this
c. Cadwalader’s defense is that there was not any expulsion. Beasley
said closing of office was in effect an expulsion – moving to N.Y. was not a
reasonable alternative and his refusal of the offer was not a voluntary w/draw
d. Agreement provided that w/drawn partner is entitled to only to a
return of capital
e. Beasley insisted he did not voluntarily w/draw, so this section
was not applicable to him
f. The partnership agreement provided that w/draw, death or any
other event would result in dissolution of agreement unless 75% of remaining
partners agreed to dissolve
g. Thus Cadwalader’s argued that even if it were wrongful expulsion
it would not be dissolved. Court disagreed.
g.
The court held that there was enough evidence to show that
the firm anticipatorily got rid of Beasley, Beasley did not voluntarily w/draw
and the anti-dissolution provision did not apply
h.
The court held that there was nothing in the partnership
agreement that allowed for the “easy” expulsion of partners. Since there wasn’t, there wasn’t much they
could do except dissolve the partnership.
i.
You can expel for no reason, for good reason, but NOT for
bad reasons.
j.
Once you have the agreement, then the burden is shifted to
the expelled person to show bad faith.
3. Problem
15.7 – Unequal positions in dissolution.
G and H.B. are partners in Santa
Maria Line Supply, which was formed in December 1949, for the purpose of
conducting a linen supply business in
From 49 to 57, the partnership lost
approximately $62k. During 58, Vandenberg Air Force Base opened nearby, and business began to improve. The partnership earned
$3,824 in 58 and 2,282 in the first three months of 59. The partnership’s chief
obligations are $47k owed to Mission Supply Service on open account and $12k
owed to Bank of America.
Mission
Supply Service, which is wholly owned by G, has sold the partnership all linen
and machinery used in the day-to-day operation of its business from Mission
Supply Service. Since 49 the partnership has paid Mission Supply Service a
total of $234k. The proceeds of the loans from Bank of America was used to pay
Mission Supply Service.
In April
1959 G dissolved the partnership, and demanded that it be liquidated. H.B.
argues that G is acting in bad faith, and is attempting to use his superior financial
position to appropriate the now profitable business of the partnership. H.B.
believes that the amount owed Mission Supply Service may make it difficult to
sell the business as a going concern. He fears that upon dissolution he will
receive very little and that G will receive a business that has become very
profitable.
Answer
to Problem 15.7
a. There is a principal known as bidding in which means the creditor
can play with the paper entry of the debt
b. If an item is auctioned a creditor can make a bid and not have to
pay by referring to debt owed. This is why you find that creditor usually ends
up with property
c. There is probably enough evidence saying that this is over the
line so the court could fashion a solution that would provide for a more
equitable separation
d. Court can do this by failing to grant dissolution or ruling that
dissolution is unfair and then there would be some sort of settlement among the
partners
e. Superior financial position and knowledge will be a factor when
determining bad faith
f. You cannot take an action that is designed to benefit
yourself over those who you owe a fiduciary duty to
g.
Is expulsion part of a scheme to deny a partner his just
desserts? If so, its wrong.
h.
Is this a partnership at will or a partnership for a
term? It is a partnership at will?
i.
UPA 31(1)(b) – By the express will of any partner when no
definite term or particular undertaking is specified.
j.
Since there was a fiduciary duty between the partners, and
the reason for the request for dissolution was the information you learned
while in the partnership would be a violation of the fiduciary duty.
k.
Just because one of the partners could do better
4. Konover
Development Corp. v. Zeller
a. GP brought breach of K against LP claiming
LP failed to deal with debts.
b. Notwithstanding the agreements discretion
given to the GP with regard to the feasibility
c. Notwihstanding this a fiduciary duty remains
d. The GP had to prove the GP dealt fairly with
the LP and had to prove that by clear and convincing evidence
e. The exercise of the right under the K had to
be viewed in light of all of the facts in the case including whether there was
full disclosure, whether the amount was adequate, whether LP had access to
independent advice, and degree of sophistication and bargaining power b/w the
parties
f. Agreement is not void against public policy
but having the agreement does not take away the ability of a court to analyze
and determine if a fiduciary duty has been breached
g. Court determined that partner had a
fiduciary duty
h.
Case
was reversed and remanded to determine whether fiduciary duty was breached.
i.
There
would have to be a determination if the partners acted in good faith, and if
they acted in good faith regarding the partnership agreement.
5. Rosenfeld, Meyer & Susman v. Cohen
a. A partner was working on one case, and after
being carried for a number of years on the eve of the judgment they withdrew.
b. You can withdraw from law firm and
take clients with you but you have a fiduciary duty so you must inform the firm
you are leaving and if you plan on taking clients you should tell firm so they
have opportunity to solicit clients to stay with them.
c. The court found that this was a
misappropriation of the client, and a breach of the fiduciary duty.
Problem 15.8
Competing with the partnerships. This is a course of conduct to appropriate a
partnership asset. The wrongdoer holds
the profits in a constructive trust for the partnership. The remedy would be the extraction of the
percentage of his profits as if the partnership were continuing.
actual authority, 14, 20, 21, 30, 35, 38, 39, 43, 48, 49, 50, 51, 53,
59, 60, 61, 63, 80
apparent authority, 20, 35, 42, 43, 44, 45, 46, 48, 49, 50, 51, 53, 54,
60, 77, 80
Cases
Burns v. Gonzalez – Agency in
Ordinary business matters., 54
Cheesecake Factory, Inc. v. Baines –
partnership by Estoppel., 57
Delaney v. Fidelity Lease -- Against Frigidaire case. Overrulled by RULPA 303(b)(1), 66
Frigidaire Sales Corp. v. Union
Properties, Inc. – Corporate General
Partner, 66
duty of loyalty, 39
Hamilton Hauling, Inc. v. GAF Corp.
– Unauthorized long term contract by A, 44
holding out, 57
inherent authority, 43
ordinary course of business, 56, 59
partnership by Estoppel, 57
Problem
6.1 – Partner’s Ability to Bind
Other Partners and the Partnership,
53
Problem 6.4 – Partner Liability by
Estoppel, 56
Problem 6.5–Liability Caused By
Purported Partners-Distinction B/W UPA and RUPA, 58
Problem 6.6 – Partners as agents, 58
promoter, 26, 27, 28
R2A
§ 219(1) -- Authority within the scope of employment., 50
219(2), 51
219(2) -- Exceptions
on when the master is liable for the tort actions of the servant (agent)., 52
RA2 § 43, 38
Restatement (2nd) of A
219(1), 50
Restatement (second) of Agency
219, 50
Restatement (Second)
of Agency
219(2)(d) – Speaking on behalf of
the principal and there was reliance on what was said, 51
387, 39
389, 40
390, 40
391, 40
392, 40
393, 40
394, 40
395, 40
RSA
261 -- Principals who put in the
position to conduct the fraud are liable., 52
RULPA
§ 303(b) – Safe Harbor conduct of
things not establishing control, 66
§ 303(b)(1) – Allows for a G/P that
is a corporation, 66
§ 401 --
Admission of General Partners., 65
§ 7 -- Liability of Limited Partners
(requires reliance on 3rd parties), 65
RULPA 3.04, 29
RUPA
§ 301, 54
§ 301(1) -- Partner agent of
partnership, 59
§ 308(a) -- Liability of Purported
partner (problem 6.4), 56
§ 308(b) -- Liability of Purported
partner (all partners consent to representation. Problem 6.4), 56, 57
301(1) -- Knew or had notification
that they had to authority., 55
301.1 -- Adds constructive notice
vs. UPA 9.1 which is actual knowledge.,
61
308 -- Liability by estoppel, 57
401(j) -- Disputes settled by a majority
of persons (not interests) See UPA 18(h), 61
401f -- Each partner
has equal rights (See UPA 18e), 61
RUPA
§ 308, 58
RUPA 202(c)(3) --
Evidence of a partnership, 23
UPA
§ 16, 58
§ 7 -- LIability of Limited Partners
(Requires control), 65
18(h) -- Disputes settled by a majority of persons
(not interests) See RUPA 401(j), 61
9(1) -- Every Partner is an Agent if
carrying on the Usual Way, 55
UPA
9.1 -- Partership is bound unless partner had no actual authority and
3rd party knew, 61
UPA
18e -- Each partner has equal rights
(See RUPA 401(f)), 61
UPA 7(4) -- Formation of a partnership, 23
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