Business Associations I Outline

Spring 2014, Professor Sautter

1. Types of Business Entities (for profit entities)

a. Sole Proprietorships
i. Technically not an entity (but the rest are)
1. the oldest form of a business “entity”
ii. The DEFAULT choice
iii. This is a person doing business in their own individual capacity
1. The proprietor is the business AND the business is the
proprietor
2. Person owns ALL aspects of the business
a. So, if the business buys a building, then the sole
proprietor owns that building
b. Owner gets
i. All the returns
ii. AND all the debts
3. AND the person owns it in their own name
a. What are assets?
i. Things of economic value
1. example: cash, buildings
iv. NO SEPARATE LAWS
1. i.e. no “sole proprietor statute”
2. it is covered by all other types of law
v. UNLIMITED LIABILITY (everything they own is on the line!)
1. b/c there are no formal laws governing them
2. So, owner NEEDS insurance
a. b/c the owner is personally liable for everything
b. Partnerships
i. An association of 2 OR more persons/entities acting as co-
owners for a profit.
ii. There are specific laws that govern partnerships
1. Uniform Partnership Act
2. Uniform Limited Partnership Act
3. In LA, they are governed by the Civil code
4. AND, case law interpreting statutes and code provisions
iii. There are different types of partnerships
1. General Partnerships
a. An association w/ 2 or more people/entities
i. Remember persons means
1. Natural
2. OR juridical
b. They have invested money
c. They have un-limited liability for debts OF THE
PARTNERSHIP

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Virile share – “it appears
that a partner's ‘virile’ share
is determined simply by i. General partnerships have a SIGNIFICANT
dividing the total amount of amount of liability
the debt owed by the 1. In every state EXCEPT LA
number of partners a. In LA, General Partners are
personally liable for those ONLY liable for their share
debts.” of the partnership
i. = virile share of the
partnership
2. Limited Partnerships
a. Same as general partnership, except that there
can be as few as 1 person, but the definitions
says it can be 1 or more individuals that are
deemed to be a “limited partner” who therefore
have limited liability
i. Which means only investors have less
control over that entity
ii. 1 or more limited partner OR 1 or more
general partner
iii. Limited partners have a more passive
role in the partnership, this is what
allows them to have limited liability
b. In LA = Partnership in commendam
3. Limited Liability Partnerships (LLPs)
a. For certain types of professionals, ex.
accountants or lawyers
i. Commercial partnerships
ii. Created to protect law firms and
accounting firms from having the liability
for their partners
1. So, in an LLP you are NOT liable
for your partner’s mistake
b. Will have different liability than a general
partnership
c. Keep in mind there is the Uniform Limited
Partner Act
c. Limited Liability Companies
i. Attributes
1. Relatively new & fairly popular
2. Very flexible
3. Very contract based
4. Can almost pick & choose features of a corporation
and partnership that are best for you, this is what
makes it so attractive
ii. A cross between a partnership AND a corporation
iii. Has the tax advantages of partnerships (BIG!)
1. i.e. they have “flow through” taxation

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 2. The partnership itself is NOT taxed
3. ONLY the partners are taxed
a. Corporations are actually “double taxed”
iv. Has the limited liability of corporations
1. Will only lose what you put in (=limited liability)
d. Corporations
i. Most household name companies
1. Ex. Apple
ii. A legal person possessing the following CRITICAL attributes
1. Legal personality
2. Limited liability
3. Separation of
a. Ownership
b. AND control
4. Liquidity – being able to sell ownership interest VERY
quickly/being able to turn ownership interest into cash
5. Flexible capital structure
iii. Requires formal creation under state auspices
1. W/ the Sec. of State
2. Closely (or Privately) Held Companies v. Publicly Held companies
a. Closely Held Companies
i. There are a limited number of people (natural or juridical)
ii. They do NOT file reports or disclosures w/ the SEC
1. Examples
a. Any “mom and pop” business
b. Chick fil A
c. Toys “R” Us
d. Cox Enterprises
b. Publicly Held (or publicly traded) companies
i. There are a substantial number of people (natural or juridical)
1. There are a substantial number of shareholders
ii. They file reports and other disclosure w/ the SEC
1. They also have a registered ownership interest w/ the
SEC so that they can gain access to more investors
iii. Most are corporations
iv. Examples
1. Facebook
2. Apple
3. Wal-Mart
4. Yahoo!, Inc.
3. Questions to ask with ALL business entities
a. How was the business formed?
b. Who formed the business?
c. Who owns the entity?
d. Who controls each entity?
e. Who gets to vote for what?

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 f. Who is potentially liable?
g. What duties are owed to who?
i. i.e. fiduciary duties
1. And, what happens if there is a breach of fiduciary
duties?
h. How are entities terminated?
4. Agency – an agent is essentially stepping in the shoes of the principle
i. Agent = must have physical capability to carry out an act
ii. Principle = must be legally empowered to carry out an act
b. The law of representation
i. Can use agent and mandate interchangeably
1. Agency/Agent = common law terms
2. Mandate/Mandatory = LA terms
ii. The foundation
1. how ALL for profit entities operate
2. AND how fiduciary duty law applies
c. Background Code Articles
i. Art. 2985: Representation
1. A person may represent another person in legal
relations as provided by law or by juridical act. This is
called representation.
ii. Art. 2986: The authority of the representation
1. The authority of the representative may be conferred by
law, by contract, such as mandate or partnership, or by
the unilateral act of procuration.
iii. Art. 2987: Procuration defined; person to whom
addressed
1. A procuration is a unilateral act by which a person, the
principal, confers authority on another person, the
representative, to represent the principal in legal
relations.
2. The procuration may be addressed to the
representative or to a person with whom the
representative is authorized to represent the principal
in legal relations.
iv. Art. 2988: Applicability of the rules of mandate
1. A procuration is subject to the rules governing mandate
to the extent that the application of those rules is
compatible w/ the nature of the procuration.
d. General Rules of Agency
i. Art. 2989: Mandate defined (aka Agency)
1. A mandate is a contract by which a person, the
principal, confers authority on another person, the
mandatary, to transact one or more affairs for the
principal.

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 ii. Art. 2992: Interest Served
1. The contract of mandate may serve the exclusive or
the common interest of the principal, the
mandatary, or a third person.
iii. A manifestation of consent by a principal (P) that an agent
(A) shall act
1. On the principle’s behalf
2. AND will be subject to P’s control
iv. Questions to ask
1. Is there really a principal/agent relationship?
a. To answer this, you must look closely at the
purported relationship between the principal
and the agent
v. Obligations of Agency
1. Art. 3010: Performance of obligations contracted by
the mandatary
a. The P is bound to the mandatary to perform the
obligations that the mandatary contracted w/in
the limits of his authority (the agent’s authority).
The P is ALSO bound to the mandatary for
obligations contracted by the mandatary after
the termination of the mandate if at the time of
contracting the mandatary did not know the
mandate had been terminated.
b. The P is NOT bound to the mandatary to perform
the obligations that the mandatary contracted
which exceed the limits of the mandatary’s
authority unless the P ratifies those acts.
i. This 2nd paragraph goes along w/ Art.
3019
ii. So, if the mandate exceeds authority, the
resolution is governed by
1. 2nd paragraph of 3010
2. AND Art. 3019
a. Art. 3019: Liability when
authority is exceeded
i. A mandatary who
exceeds his
authority is
personally bound to
the 3rd person with
whom he contracts,
ii. UNLESS that person
knew at the time the
contract was made
that the mandatary

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 had exceeded his
authority or unless
the P ratifies the
contract.
2. Art. 3012: Reimbursement of expenses and
remuneration
a. The P is bound to reimburse the mandatary for
the expenses and charges he has incurred AND
to pay him the remuneration to which he is
entitled.
b. The P is bound to reimburse and pay the
mandatary even though the purpose of the
mandate was NOT accomplished.
i. As long as it was not the mandatary’s fault
that caused the problem
3. Art. 3016: Disclosed mandate and Principal
a. A mandatary who contracts in the name of the P
w/in the limits of his authority does NOT bind
himself personally for the performance of the
contract
i. Except look at comment (c): A mandatary
who enters into a contract w/ a 3rd
person in the name of the P and
EXPRESSLY PROMISES the performance
of the contract binds himself personally
for that performance
4. Art. 3020: Obligations of the Principle to 3rd Persons
a. The P is bound to perform the contract that the
mandatary, acting w/in the limits of his
authority, makes w/ a 3rd person.
i. This binds the P to the 3rd party (the
person to whom the agent contracted)
5. Art. 3022: Disclosed mandate or principal; 3rd
person bound
a. A 3rd person with whom a mandatary contracts
in the name of the principal, or in his own name
as mandatary, is bound to the principal for the
performance of the contract.
vi. Form requirements
1. Start w/ Art. 2992: Onerous or gratuitous contract
a. The contract of mandate MAY be EITHER
onerous OR gratuitous.
b. It is gratuitous in the absence of contrary
agreement

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 i. So this is the assumption you start with,
that if it is NOT agreed upon – the
mandatary relationship is gratuitous
ii. Normally deal w/ onerous mandates
2. Art. 2993: Form
a. The contract of mandate is not required to be in
any particular form
i. Can be
1. In writing
2. OR oral
b. Nevertheless, when the law prescribes a certain
form for an act, a mandate authorizing the act
MUST be in that form (=equal dignities rule).
i. Ex. when selling a house
ii. This is a MAJOR exception to the form
requirement
e. How might you know someone is an agent/mandate?
i. They may sign a document as “agent for Chocomize/Joe, etc”
1. This would disclose the
a. Agent
b. AND the principle
f. Types of Authority – MUST KNOW THE DIFFERENCE BETWEEN
ACTUAL AND APPARENT AUTHORITY
1. To do this you have to look at the relationship between
the principle and the agent
ii. Actual Authority
1. Express
a. Exceptions to Express General Authority
i. Arts. 2996 & 2997(specifically 3-5)
b. Written
c. OR oral
2. Implied = implied actual authority – when an agent,
through his position, has permission to undertake acts
that are reasonably related to the agent’s express
authority
a. Often a task that is necessary for the agent to do,
in order to fulfill his express authority
iii. Code articles for Actual Authority
1. 2993-2998
2. Art. 2994: General Authority
a. The P may confer on the mandatary general
authority to do whatever is appropriate under
the circumstances.

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3. Art. 2995: Incidental, necessary, or professional acts
a. The mandatary may perform all acts that are
incidental to or necessary for the performance of
the mandate
b. The Authority granted to a mandatary to
perform an act that is an ordinary part of his
profession or calling, or an act that follows from
the nature of his profession or calling, need not
be specified.
4. Exceptions to General Authority
a. Art. 2996: Authority to alienate, acquire,
encumber, or lease
i. The authority to alienate, acquire,
encumber, or lease a thing must be given
expressly. Neither the property nor its
location need be specifically described.
b. Art. 2997: Express Authority Required (3-5
are most applicable to BA I)
i. Authority also must be given expressly to:
1. (Make an inter vivos donation…
2. Accept or renounce a succession
3. Contract a loan, acknowledge or
make remission of a debt, or
become a surety
4. Draw or endorse promissory
notes and negotiable
instruments
5. Enter into a compromise or
refer a matter to arbitration
6. make health care decisions…
5. 3008: Liability for acts beyond authority;
ratification
a. If the mandatary exceeds his authority, he is
answerable to the principle for resulting loss
that the principle sustains
b. The P is NOT answerable to the mandatary for
loss that the mandatary sustains b/c of acts that
exceed the mandatary’s authority (so P is NOT
bound to the contract)
i. UNLESS the P ratifies those acts
6. 3019: Liability when authority is exceeded
a. A mandatary who exceeds his authority is
personally bound to the 3rd person with whom
he contracts, unless that person knew at the
time the contract was made that the mandatary

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 had exceeded his authority or unless the
principle ratifies it.
7. 3020: Obligations of the P to 3rd Persons
a. The P is bound to perform the contract that the
mandatary, acting w/in the limits of his
authority, makes w/ a 3rd person.
8. 3022: Disclosed mandate or P; 3rd person bound
a. A 3rd person with whom a mandatary contracts
in the name of the P, or in his own name as
mandatary, is bound to the P for the
performance of the contract.
9. So, to sum up Arts. 2994-2997, general authority can be
conferred by the P to the A, which includes the
authority to do “whatever appropriate” (this includes
incidental things), but there are situations where the A
will need express authority (even if they have general
authority).
a. These exceptions come under Art. 2996 & 2997
and include
i. To alienate/acquire, encumber, or lease
1. But don’t have to expressly say
location or property
ii. Contract a loan, acknowledge/remit a
debt, or become a surety
iii. Draw or endorse promissory notes and
negotiable instruments
iv. Enter into a compromise or refer a matter
to arbitration
iv. Apparent Authority
1. Why do we have apparent authority?
a. So that Principals cannot defraud 3rd parties.
i. Protecting 3rd parties who might be
misled by appearances
b. Essentially the “appearance of legitimate
authority”
2. Apparent authority is a judicially created estoppel
remedy.
3. When do we have apparent authority?
a. When the apparent principal makes a
manifestation
b. The manifestation reaches the 3rd party
c. AND the manifestation (alone or in context of
other circumstances) causes the 3rd party to
reasonably believe that the apparent agent is
authorized to act for the apparent principal

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4. W/ apparent authority we are looking for a reasonable
belief by the 3rd party that the agent’s action is on behalf
of the principal. And, the belief is based on an
expression by the purported principal
5. Questions
a. (1) Is there a principle/agent relationship?
b. (2) What kinds of things happened to make a 3rd
party believe an agent had authority?
i. Keep in mind it has to be things that the
Principal did!
6. Whose POV will the Court use?
a. That of the 3rd party
7. In determining a 3rd party’s reasonable reliance, what
will the court look at?
a. Background & occupation of 3rd party
b. Due diligence of 3rd party
8. What do the court’s look at to determine if there is
apparent authority?
a. Express manifestation
i. Oral
ii. OR written
b. Pattern of conduct
c. Putting person in a position that is common to a
local or industry custom
i. = Implied actual authority
d. Use of an intermediary
i. Ex. relying on a secretary or assistant
9. Code Articles
a. Art. 3021: Putative Mandatary
i. One who causes a 3rd person to believe
that another person is a mandatary is
bound to the 3rd person who in good faith
contracts w/ the putative mandatary.
b. Art. 3008: Liability for acts beyond authority;
ratification
i. If the mandatary exceeds his authority, he
is answerable to the principle for
resulting loss that the principle sustains
ii. The P is NOT answerable to the
mandatary for loss that the mandatary
sustains b/c of acts that exceed the
mandatary’s authority (so P is NOT bound
to the contract)
1. UNLESS the P ratifies those acts

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 c. Art. 3019: Liability when authority is
exceeded
i. A mandatary who exceeds his authority
is personally bound to the 3rd person with
whom he contracts, unless that person
knew at the time the contract was made
that the mandatary had exceeded his
authority or unless the principle ratifies
it.
10. Cases
a. Interstate Electric Co. v. Frank Adam Electric
Co.
i. Plaintiff wanted to buy materials from
defendant
1. Defendant sold goods that were
not available on the open market
ii. Interstate went through Defendant’s
agent (Keller),
1. Keller was the defendant’s NEW
agent
a. His official job title was
“regional manner”
b. AND Keller replaced the
previous “regional manner”
i. Plaintiff previously
worked with this
person
iii. Defendant refused to fulfill the contract
that Keller negotiated
1. Arguing that Keller EXCEEDED his
authority
2. Keller normally makes deals and
sends them St. Louis office for
approval
iv. ISSUE HERE IS ONE OF APPARENT
AUTHORITY
v. The true limit of the agent's authority
to bind the principal as between the
principal and third persons is the
apparent authority with which the agent
is invested, and when a third person
has ascertained the apparent authority
with which the principal has clothed
the agent, he is under no further
obligation, in the absence of
circumstances putting him on inquiry,

11
 to inquire into the agent's actual
authority, as the presumption is that one
known to be an agent is acting within the
scope of his authority. The fact that the
agent's apparent authority is different
from the actual authority conferred does
not relieve the principal of responsibility.
vi. Court Found
1. Defendant was liable for damages
2. Why?
a. It was apparent authority,
Plaintiff had previous
dealings w/ defendant’s
regional manner with no
problems, it had always
been done this way
b. AND defendant company
told plaintiff to deal w/
Keller as they had dealt w/
the previous regional
manager
c. Defendant should have
informed plaintiff of the
change in policy BEFORE
the contract was negotiated
vii. But, keep in mind that b/c of Art. 3008
Keller is liable to Frank Adams
b. Boulos v. Morrison
i. Issue – whether plaintiff proved that the
agent had apparent authority
ii. Facts
1. Plaintiff bought electronic
equipment at defendant’s store
2. Lew = store owner who was out of
town
3. Pactor = store manager
4. Mike = Shady Mike
a. Not an employee
b. But, hung around the store
to help drum up business
5. Plaintiff bought a stereo from
Pactor & Mike, but then bought
$8000 worth of more equipment
a. He gave the $8000 to Mike
who said it would be
delivered to their hotel

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 b. Mike took the money and
RAN!
6. “An agent’s power or authority
is composed of his actual
authority, express or implied,
together w/ the apparent
authority which the principal
has vested in him by his
conduct. As between principal
and agent the limit of the agent's
authority to bind the principal is
governed by the agent's actual
authority. As between the
principal and third persons, the
limit of an agent's authority to
bind the principal is governed
by his apparent authority.”
7. “As the Courts of Appeal have
correctly held, the principal will be
bound for the agent's actions if the
principal has given an innocent
third party a reasonable belief the
agent had authority to act for the
principal.”
8. “The burden of proving
apparent authority is on the
party relying on the mandate.”
a. Third party cannot
BLINDLY rely on the
representations of the
agent, they have a duty to
inquire “into the nature and
extent of the agent’s
power.”
iii. Court ruled for the store (defendant)
1. So, it was NOT just what the store
did, but ALSO what the plaintiffs
should have known
2. b/c the plaintiff should have
known better
a. they were “businessmen”
b. it was Labor Day weekend
and should not have
expected a delivery
c. AND they paid in cash

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 i. And only got a
sketchy receipt in
return
d. 3 party’s belief MUST be
rd

reasonable!!
3. Dissenting Opinion – store owner
created this situation by paying
and allowing Shady Mike to hang
around the store
c. AAA Tires v. Big Chief Trucking
i. Implied Apparent authority = placing a
person in a certain position and that
position carries certain local OR industry
customs
ii. Issue – whether Adam Dixon as the
terminal manager for Big Chief’s Baton
Rouge operation had either actual OR
apparent authority to buy tires from the
plaintiff
iii. Facts
1. Dixon purchased tires from the
plaintiff for his personal company
a. Plaintiff sold tires over the
phone
2. But, the plaintiff billed Dixon’s
employer (Big Chief Trucking)
iv. Big Chief is saying that Dixon had no
ACTUAL authority to buy the tires
v. Court says
1. Dixon did NOT have actual
authority
a. Big Chief didn’t own any
trucks
b. But, if Big Chief had owned
trucks, then Dixon would
have had implied apparent
authority
i. b/c one of his job
requirements was
“maintenance”
2. Dixon did NOT have apparent
authority
a. AAA cold called Dixon and
did NOT know his position
w/in Big Chief

14

g. Differences between Actual & Apparent Authority
i. “All forms of authority OR ratification require some act or
It is possible to have
apparent authority w/o
having actual authority,
and it is possible to have
actual authority w/o
appearing to have that
authority to do
something.
b. Just b/c Dixon was a
terminal manager, did not
mean he had authority to
buy tires
3. Court looked at a few factors
a. Looked at it from AAA’s
perspective
b. History of business
transactions between the
two
i. This was the FIRST
transaction
c. Credit References were a
red flag that AAA should
have followed up on
11. Apparent authority questions
a. Is P bound w/ apparent authority?
i. Yes, under Art. 3021
b. Is A bound?
i. Yes, agent will indemnify P under Art.
3008
c. What if A has no actual or apparent authority?
i. The Agent is bound under Art. 3019
1. A is personally bound to 3rd party
a. UNLESS
i. The 3rd party is
aware the agent is
exceeding their
authority
ii. OR there is
ratification by the
principal
series of acts by the P that cause either the A or the 3rd party
REASONABLY to believe that the agent’s acts in a given
situation are authorized by the P.
1. If the A is the person led by the P reasonably to believe
that his acts are authorized, then the authority is
ACTUAL AUTHORITY.
2. If it is the 3rd party (reasonably led by the P), then
authority is APPARENT.
3. If neither form of authority exists at the time the A
purports to act on behalf of a P, then the un-authorized
act may still be ratified by the P by means of after-the-
fact manifestations of consent by the P that ‘expressly’
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 or “tacitly’ affirm the un-authorized act.” [From LA Civil
Law Treatise Business Associations”
ii. Good Comparison Hypo
1. You go to Varsity Sports all the time with Cheney. He
buys your shoes. Most of the time it’s for $90. He has
actual authority. However, this time, you limit him to
$70, but you’ve called Varsity Sports and told them
Cheney’s coming to buy more shoes for you. They don’t
know about the limit. His actual authority is limited to
$70. If he goes above that, he’s exceeded actual
authority. However, he has apparent authority to spend
$90. If he does so, you are still bound for $90, despite
him going beyond his actual authority.
2. What if his actual authority was for $70, his
apparent authority was for $90, but Cheney spent
$120? Varsity has liability of $30, that amount
which they were aware of was in excess.
iii. Actual Authority
1. Must look at the relationship between the principle &
the agent
iv. Apparent Authority
1. Must look at the relationship between the principle &
the 3rd party.
h. Ratification = actual authority after the fact OR curing a lack of
authority
1. So, P is bound to fulfill an obligation A made that P
ratified
ii. Ratification is “the affirmance by a person of a prior act which
did not bind him but which was done or professedly done on
his account. Ratification requires
1. acceptance of the results of the act
2. w/ an intent to ratify
3. AND w/ full knowledge of all the material
circumstances.” (pg. 26, Boticello v. Stefanovicz)
iii. You can have “agency by ratification,” meaning that a P-A
relationship is established through P’s ratification
iv. How does a principal ratify?/Other aspects of Ratification
1. Through Performance
a. Maybe through some sort of documentation
2. P need to know ALL the facts about what they are
getting into
3. P must accept the benefits of that particular contract
4. P must have intent to ratify
5. P must have time to decline
a. So, you can ratify by silence/inaction b/c you
can’t wait forever

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 i. Time frame will vary from contract to
contract
6. Ratification CANNOT be to the detriment of the 3rd
party
a. Ex. I own a mansion and Joe sells the mansion to
someone else, w/o my authority. The mansion
burns down and then I try and ratify  wont’
work!
7. Ratification can be
a. express
b. or tacit.
8. Tacit ratification occurs when the principal retains or
accepts benefits from the unauthorized act while
knowing that the benefits result from the unauthorized
act. This is trying to get at a just result. You cannot take
the benefits of an activity and then say that you don’t
authorize the activity. So basically, if I retain some
benefit coming from my agent’s unauthorized actions,
then I’ve tacitly ratified his or her actions. There are
two big examples of tacit ratification we talked about in
class - implied affirmance through acceptance of the
benefits of the transaction at a time when it is possible
to decline to accept such benefits and implied
affirmance through silence or inaction—a principal
can’t wait forever before repudiating an unauthorized
transaction, a rule based largely on notions of economic
fairness.
v. Questions to ask
1. Is there a principal-agent relationship?
a. If no – stop! There can be no ratification.
2. What type of act constitutes an affirmation by the
principal?
3. What effect should we give to that affirmation?
vi. Code Articles
1. 3008: Liability for acts beyond authority;
ratification
a. If the mandatary exceeds his authority, he is
answerable to the principle for resulting loss
that the principle sustains
b. The P is NOT answerable to the mandatary for
loss that the mandatary sustains b/c of acts that
exceed the mandatary’s authority (so P is NOT
bound to the contract)
i. UNLESS the P ratifies those acts

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2. 1843: Ratification
a. Ratification is a declaration whereby a person
gives his consent to an obligation incurred on his
behalf by another w/o authority.
b. 2 types of ratification
i. An express act of ratification must
evidence the intention to be bound by
the ratified obligation.
1. Does NOT have to be written
2. Just need to be some act that
objectively shows intention
ii. Tacit ratification results when a person,
w/ knowledge of an obligation incurred
on his behalf by another, accepts the
benefit of that obligation.
1. So, when a person accepts the
benefit of an agent exceeding their
authority
3. 1844: Effects of confirmation and ratification
a. The effects of confirmation and ratification are
retroactive to the date of the confirmed or
ratified obligation. Neither confirmation nor
ratification may impair the rights of 3rd
persons.
i. Confirmation is different from ratification
1. Confirmation is when a person
cures the relative nullity of an
obligation
a. Example of relatively
nullity is when a person
lacks legal capacity
4. 2993: Form
a. The contract of mandate is not required to be in
any particular form
i. Can be
1. In writing
2. OR oral
b. Nevertheless, when the law prescribes a certain
form for an act, a mandate authorizing the act
MUST be in that form (=equal dignities rule).
i. Ex. when selling a house
ii. This is a MAJOR exception to the form
requirement

18
vii. Cases
1. Boticello v. Stefanovicz
a. Issue – whether the sale of a property by a
husband is enforceable when the husband only
had a ½ interest in the property
i. Was the husband Mary’s agent? No.
ii. Did Mary ratify the agreement? No.
b. Facts
i. Boticello = plaintiff, buyer
ii. Walter = seller
iii. Mary = wife who did NOT want to sell for
less then $85,000
iv. Boticello wanted to buy Walter’s farm,
made 2 offers, and eventually he and
Walter came to an agreement
1. Entered a lease w/ an option for
Boticello to purchase
2. Walter did not disclose he only
held ½ interest
a. Both had attorneys
v. Boticello made improvements and then
tried to exercise his option to buy
1. Walter & Mary refused
vi. Boticello is suing for
1. Specific damages
2. AND performance
c. Trial court ruled for Boticello b/c they said that
Walter was acting as Mary’s agent
i. So, then the question is if Mary ratified
the lease?
d. Appellate court said
i. Existence of agency relationship is a
question of fact
ii. Marital status ALONE is NOT enough to
prove agency
iii. Co-ownership ALONE is not enough
iv. So, there was no principal-agent
relationship!
1. So, if there was no P-A
relationship, then Mary cannot
ratify
2. Even if there was a P-A
relationship, Mary did not know all
the information

19
 a. Since she did not know all
the information, then she
could NOT ratify
v. Mary did NOT ratify the agreement
1. She did not ratify just b/c she
knew Boticello was a leasee or by
accepting Boticello’s rental
payments
vi. Overruled trial court!
i. Agency by Estoppel (based on tort principles)
i. Looking for the 3rd party to show 2 things
1. A reliance on something that the P did
2. Some sort of change in position by the 3rd party
a. This change in position would make it
impossible for the purported P to deny the
agency relationship
ii. So, essentially the P is at fault in some respect, so we are NOT
going to let P deny that there is an agency relationship
iii. And, keep in mind, in this situation – ONLY the principal is
bound
iv. Often argued in the alternative if apparent authority does
not work
v. Cases
1. Hoddeson v. Koos Bros.
a. Issue – whether the defendant is estopped from
saying he is NOT liable b/c the “salesperson” was
not his agent when the defendant had a duty to
protect customers from situations like this?
b. Facts
i. Hoddeson bought furniture from a
“salesperson” at the Koos Bros. store
1. She paid in cash
2. Did not get a receipt
ii. That “salesperson” did not actually work
at the store
c. Why was it not apparent authority? Like w/ the
Shady Mike Case?
i. B/c the store did not in any way hold this
person out as a salesperson, even though
he was in the store
ii. Negligence alone is NOT enough for
apparent authority
1. Failure to oversee the store =
negligence and this does NOT
automatically create the positive

20
 conduct that is necessary for
apparent authority
iii. But! Negligence may be sufficient for
agency by estoppel
d. Case was remanded to determine if there was
evidence of agency by estoppel
e. How might plaintiff prove this?
i. Testimony
ii. Evidenced of standard procedures of the
store OR customs/traditions
iii. Size of the store AND number of
employees
iv. Store video (if it was a case today)
2. Tedesco v. Gentry Development
a. Issue – whether the doctrine of apparent
authority is applicable in a case involving a
contract to sell immovable property
b. Facts
i. Players
1. Tedesco = buyer
2. Gentry = corp. that owns the land
3. Winford = Gentry’s president
ii. Gentry owned some land that was divided
into plots
1. They were going to sell some land
2. AND reserved 2 plots so a bank
could be built
iii. Winford was given the authority to sell
these plots
1. But he accidently sold the plots
meant for the bank
c. Trial court
i. Ruled for Tedesco
d. Appellate court
i. Overruled
ii. Ruled for Gentry b/c Winfrey needed
EXPRESS WRITTEN authority b/c it
involved a sale of immovables
1. Equal dignities rule
2. Apparent authority does NOT
work w/ the sale of immovables
iii. AND there was no change in position on
the part of Tedesco
e. What if BOD had wanted to go through w/ the
sale

21
 i. They would have had to RATIFY it IN
WRITING (b/c of the equal dignities rule)
1. If they had ratified it, then it would
have been as if the agent had
actual authority from the get go
a. It’s retroactive
j. Differences between apparent authority and agency by estoppel
i. According to the Restatement, apparent authority is based
on the objective theory of contracts that a party ought to
be bound by what he says and manifests rather than by
what he intends, so that a third person who contracts with an
agent need only prove reliance on the appearance of authority
manifested by the principal. Because an enforceable contract
results from the agreement with the agent after the principal's
conduct has manifested his consent, the third person need not
prove any change of position induced by the reliance.
ii. On the other hand, agency by estoppel is based on tort
principles of preventing loss by an innocent person.
1. The third person must show
a. (1) reliance on the conduct of the principal,
b. (2) AND also show such a change of position
on his part that it would be unjust to allow the
principal to deny the agency. Restatement,
supra § 8, comment d.”
i. change in position = some kind of loss

Apparent Authority Agency by estoppel

1) Looking at manifestation by the P 1) Must show a change in position

2) Was 3rd party’s reliance on authority
reasonable?
- 3rd party has a reasonable belief that
the agent has actual authority
- if the 3rd party’s belief is reasonable,
then P is bound to the contract
3) based on CONTRACT principles
4) You do NOT have to show a change in
position
5) remedy = specific performance
6) Theory is NOT applicable when
involving the sale of immovables
2) Will look at P’s conduct
3) Must also show a reliance on P’s
conduct that caused the change in
position
4) Based on TORT principles
5) relief = damages as a reimbursement
of the change of positions
6) potentially applicable to the sale of
immovables

22
k. Undisclosed Agency/Undisclosed Principle
i. Definition of undisclosed agency
1. Either (both w/ actual authority)
a. Agent does not disclose the fact he is an agent
b. OR agent discloses he is an agent, but does NOT
disclose the principle
i. It is NOT clear what level of disclosure is
required
1. Express statement v.
circumstantial evidence of an
agency relationship
2. Questions to answer
a. Is the principle bound?
b. Is the agent bound?
c. Can the 3rd party enforce the contract?
ii. Restatement (Second) of Agency [Common law, LA adopted
common law principles of undisclosed agency]
1. § 186. General Rule - An undisclosed principal is
bound by contracts and conveyances made on his
account by an agent acting within his authority,
a. except that the principal is not bound by a
contract which is under seal or which is
negotiable, or upon a contract which excludes
him.
2. § 302. General Rule -
A person who makes a contract
with an agent of an undisclosed principal, intended by
the agent to be on account of his principal and within
the power of such agent to bind his principal, is liable to
the principal as if the principal himself had made the
contract with him,
a. unless he is excluded by the form or terms of the
contract,
b. unless his existence is fraudulently concealed
c. or unless there is set-off or a similar defense
against the agent.
3. § 304. Agent Misrepresents Existence of Principal
-
A person with whom an agent contracts on account of
an undisclosed principal can rescind the contract if he
was induced to enter into it by a representation that the
agent was not acting for a principal and if, as the agent
or principal had notice, he would not have dealt with
the principal.
4. § 310. When Performance Must be Rendered to
Principal -
An undisclosed principal upon whose
account an agent has acted within his power to bind the
principal in making a contract, unless he is excluded by

23
 its terms, can require the other party to render
performance to him instead of the agent,
a. except in that case of personal services or where
performance to the principal would subject the
other to a substantially different liability from
that contemplated.
iii. Code Articles
1. Art. 3016 Disclosed mandate and principal - A
mandatary who contracts in the name of the principal
within the limits of his authority does not bind himself
personally for the performance of the contract.
a. UNLESS the agent “expressly promises” a
performance, if this is the case – the agent
will have bound himself personally to the 3rd
party.
2. Art. 3017 Undisclosed mandate - A mandatary who
contracts in his own name without disclosing his status
as a mandatary binds himself personally for the
performance of the contract.
3. Art. 3018 Disclosed mandate; undisclosed principal
- A mandatary who enters into a contract and discloses
his status as a mandatary, though not his principal,
binds himself personally for the performance of the
contract. The mandatary ceases to be bound when the
principal is disclosed.
4. Art. 3023 Undisclosed mandate or principal;
obligations of third person - A third person with
whom a mandatary contracts without disclosing his
status or the identity of the principal is bound to the
principal for the performance of the contract unless the
obligation is strictly personal or the right non-
assignable.
a. The third person may raise all defenses that may
be asserted against the mandatary or the
principal.
iv. Case
1. Frank’s Door & Bldg. Supply v. Double H Construction
a. Key Players
i. Steven = Agent
ii. Double H= Principle
iii. Frank’s Door = 3rd Party creditor
b. Frank’s Door filed suit on an open account
because the bill had not been paid, the suit was
against Double H for the unpaid fee.
c. Steven purchased goods from Frank’s Door for
Double H

24
d. Issue #1 – is Steven personally liable to Frank’s
door because of the debt (b/c he did not disclose
his agency status)?
i. Steven has the burden of proving that
he disclosed his agency status
ii. Court said Steven did NOT adequately
disclose agency status
1. Court is looking for an express
statement here, but that is a very
high standard to set
e. Issue #2 – Is Steven solidarily liable with Double
H for the debt?
i. Art. 2091 – Def. of Solidary liability –
“There is an obligation in solido on the
part of the debtors, when they are all
obliged to the same thing, so that each
may be compelled for the whole, and
when the payment which is made by one
of them, exonerates the others toward the
creditor.”
1. Must be expressly stipulated that
the parties are to be held in solido
a. But there can be “solidary
by law”
2. Court said YES they are solidarily
liable b/c it is imposed by law b/c
of the nature of the relationship
a. A relationship of agency
f. So, BOTH are liable b/c the agency relationship
was not disclosed
g. Express notification of agency is NOT required
h. Individual defendant was properly held
personally liable to plaintiff for construction
goods purchased on open account in name of
corporation where there was no evidence that
individual defendant gave express notification
to plaintiff of any agency relationship or that
isolated references by individual defendant to
corporation in various documents made
plaintiff aware of agency relationship. LSA-C.C.
arts. 3012, 3013, 3021

25
l. Fiduciary Duties of An Agent (one of Prof. Sautter’s favorite
topics)
i. Fiduciary obligation OR duty of loyalty owed by agents to their
principles
1. A fiduciary relationship is one in which one of the
parties is under a duty to act for the benefit of the
other with respect to matters with which the
relationship is concerned.
a. Agent is the fiduciary
ii. Basic duties owed by agent to their principle
1. Duty of loyalty – an agent cannot put his own interests
before the interests of the principle, nor can an agent
put the interest of a 3rd party before the interests of the
principle.
a. This is the duty most often breached
b. An agent is entitled to reasonable compensation
for their role as an agent, but this prevents the
agent from getting ADDITIONAL compensation
for their role as an agent
i. Meaning an agent is not entitled to secret
profits b/c of his status as an agent
2. 3 commons situations where there is a breach in the
duty of loyalty by the agent
a. (1) a payment from a 3rd party b/c there is some
sort of relationship between the agent and the
3rd party
i. ex. a kickback, a bribe, or a gratuity/tip
b. (2) A secret transaction by the agent that the
principle does not know about, where the Agent
makes a profit that the principle does not know
about
i. ex. Principle gets agent to sell a house,
and agent sells it so that the agent
secretly makes a profit
1. To avoid this agent just needs to
a. Disclose
b. AND get the principle’s
consent
ii. You will see the abuse A LOT w/in
corporations
c. (3) Agent used his position as an agent (for that
particular principle) to make some sort of
personal profit from a 3rd party (where the 3rd
party has no relationship with the principle)
i. ex. Reading v. Regem case

26
iii. Duties DURING agency
1. Reading v. Regem (pg. 69 of book)
a. Reading was a sergeant in the UK Army stationed
at the general hospital in Cairo
i. He had no money of his own
ii. But, was eventually found with some very
expensive possessions (i.e. a fancy car)
b. It was found he was accepting bribes from a
criminal who paid him to accompany trucks in
the city, so that they would not be inspected by
civilian inspectors
i. They were not inspected b/c he was in his
UK military uniform
c. Crown confiscated the money and Reading
appealed
i. The only reason he was chosen b/c he
was in the military and wore a uniform
issued by the UK, b/c of that Uniform he
got the money, and since he got the
Uniform b/c he was employed by the UK,
the UK should get to keep the money
1. Reading would not have gotten the
money w/o the uniform
2. Look at problems on pg. 71 & 72 of the book
3. Rash v. JV Intermediate (pg. 72 of book)
a. Defendant hired Rash to start AND manage a
Tulsa, OK division of its industrial plant
maintenance business
i. Duties included
1. Inspecting
2. Repairing
3. Maintaining
a. Oils refineries AND
b. Power plants
b. Rash signed an employment contract
i. $125,000 salary
ii. bonus of 20% net profits
iii. stipulated use of TX law
iv. Rash had to devote
1. Full time AND
2. Efforts
v. 2 year agreement from 1999 to 2001
1. Rush worked until 2004
a. w/o a written contract
extension

27
c. Defendant claims
i. Rash owned and operated at least 4 other
businesses
1. Unknown to defendant
2. One was called TIPS = a scaffolding
business
a. TIPS is essentially an
adverse company, in direct
competition with principle
3. Rash often used TIPS as a
subcontractor
a. Defendant paid $1 million
to TIPS
b. Rash chose TIPS even when
defendant had its own
scaffolding business
d. Issue – Is there a fiduciary duty relationship?
i. There are formal fiduciary duty
relationships stipulated by law
1. Agent to principle is one of them
ii. Restatement says “ ‘[U]nless 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 to with his agency…’” (pg.
73)
iii. Court said Rash WAS AN AGENT
1. Rash hired to build the Tulsa
agency from scratch
a. Was the sole manager in
charge of operations
2. Rash was contractually obligated
to “perform the duties of an agent”
a. Consented to devoting full
time and work to the
defendant
3. Rash does NOT deny his agency
a. Rash claims his agency was
limited
b. And does NOT include
scaffolding stuff
e. Issue #2 – Did Rash VIOLATE his fiduciary
duty?
i. Depends on the SCOPE of the duty.
ii. TX courts warn to be careful in defining
the scope

28
 iii. BUT, Court said that Rash DID VIOLATE
HIS DUTY
1. There is a duty not to compete
w/ your employer
2. Duty to deal fairly
3. Duty to get consent
4. Duty to FULLY DISCLOSE what
matters to the employer’s business
interests
a. This was in direct
competition
b. An agent CANNOT compete
w/ his principle
iv. What could Rash have done to avoid this
violation?
1. He could have disclosed his
relationship to TIPS.
m. Tort Liability
i. Tort Liability of Principle to 3rd parties
1. Issue in both Humble Oil & Hoover Cases are whether
the oil companies are liable for injuries negligently
inflicted by the gas station personnel
2. The Key is whether the gas station operator was an
employee (servant) OR an independent operator
(independent contractor/franchisee)
3. Legal theory involved
a. Respondeat superior – where a master
(employer) is liable for the torts of its servants
(employees)
i. The master/servant relationship exists
when
1. The servant has agreed to work on
behalf of the master
2. The servant has agreed to be
subject to the master’s control OR
the master has the right to control
the “physical conduct” of the
servant
a. Meaning the master has
some control over how the
job is done rather than just
the result of the job
4. So, you must ask some basic questions
a. Is there a master/servant relationship?
b. Was a tort committed w/in the scope of
employment

29
 i. Specifically looking for an element of
control
1. Examples: physical control and
how the job is performed
ii. Essentially – what is the level of control?
c. In LA, you want to ask, is there an economic
relationship?
5. So, in terms of an agency relationship
a. For the Principle to be liable for actions of the
agent/mandate, there must be a
master/servant relationship
b. And, if there isn’t a master/servant relationship,
then the alternate theory of liability is apparent
agency.
i. Was the Principle holding out the agent as
their employee?
6. What are the policy reasons for holding the
employer responsible?
a. The employer is the one who has the insurance
b. Employer has a duty to monitor the employee’s
conduct
c. Employer has the money!
7. Servant v. Independent Contractor
a. There are 2 types of independent contractors
i. Agent = one who has agreed to act on
behalf of another (the principle), but is
NOT subject to the principle’s control
over how the result is accomplished
ii. Non-agent = one who operates
independently and only interacts with the
principle at arm’s length
b. So, there are 3 possibilities
i. Servant
ii. Independent contractor – agent
iii. Independent contractor – non agent
c. Cases
i. Humble Oil & Refining Co. (& Ms. Love)
v. Martin
1. Martin sued after being hit by Ms.
Love’s Car
2. Love left her car at the service
station and the car rolled out of the
service station and hit Martin
a. Love’s car had been left un-
attended

30
Oil Company= Master Employer,
Principle
3. Trial court held Humble & Love
4. Humble’s argument is that they are
Operator = Servant/Employer,
agent
Local Employee = sub-
servant/sub-employee, sub-
agent, & tortfeasor
jointly accountable to Martin for
the damages
not liable b/c the station owner is
an independent contractor
a. This would make Humble
NOT liable for the damages
b. Humble’s evidence
i. Station operator &
gas station
employees did NOT
consider Humble
their employer
ii. The Station operator
paid the gas station
employees directly
iii. The agreement
between Humble &
the gas station
owner said that
Humble did NOT
have authority over
the employees
c. Court said
i. Master/servant
relationship is one
based on facts
ii. That the very nature
of the agreement
between Humble &
gas station owner
indicates a
master/servant
relationship
iii. Station operator had
to send reports to
Humble
iv. Humble had to pay a
fair number of the
gas station’s
operating expenses
v. Humble had a lot of
control over how the
products were sold
by the station

31
 vi. Humble controlled
the hours of
operation
vii. Humble was the
boss and the store
operator was an
employee, which
means the gas
station’s employees
were Humble’s
employees
d. The focus of the court is
on “who has control” of
the operation
ii. Hoover v. Sun Oil Co.
1. Hoover is suing after being injured
in a fire at a gas station
a. The claim is that the gas
station employee was
negligent
2. Sun Oil moved for summary
judgment saying that the station
operator was an independent
contractor, which means that
Hoover would NOT be liable
3. Agreement between Sun Oil and
the gas station stipulated
a. Operator leased facilities
from Sun Oil
b. Sun rep. visited weekly
c. Sun gave advice
d. Operator determined hours
of business
e. Operator did NOT send
written reports to Sun
f. Operator made all the
decisions about the station
employees
4. Issue here again is WHO HAS
CONTROL over the operations?
5. Court said that
a. Operator was an
independent contractor
i. b/c of the
relationship
between the two

32
 ii. Sun has NO
CONTROL over the
day to day
operations of the gas
station
6. Important elements of business
relationships
a. Duration
b. Control
c. Risk of Loss
d. Return
iii. Murphy v. Holiday Inns, Inc.
1. Murphy is suing Holiday Inn for
injuries sustained in a fall
a. Negligence claim – claiming
the hotel did not properly
take care of an area where
water was dripping from an
air conditioner unit
2. Holiday Inn is claiming there is no
master/servant relationship b/c
they just have a licensing
agreement w/ the local hotel
a. An agreement to allow the
hotel to use the name
“Holiday Inn”
3. Trial court granted summary
judgment for Holiday Inn saying
there was no master/servant
relationship
4. Murphy appealed claiming that it
does not matter what the
relationship is called if the nature
of the relationship is similar to that
of a master/servant
a. What matters about the
relationship is the nature
and extent of the control
5. The agreement between Holiday
Inn & the local hotel
a. Hotel paid $5000 to Holiday
Inn
b. Hotel had to build
according to Holiday Inn’s
specifications

33
 c. Hotel made monthly
payments to Holiday in
i. $.15 per room
6. Court said
a. NO master/servant
relationship
i. Just b/c it is a
franchise does NOT
automatically
make it a
master/servant
relationship
ii. Franchisee
relationship does
not indicate there is
day to day control of
the franchisee by the
franchisor
iii. There are reasons
for this type of
franchise
relationship
iv. (1) System wide
standardization of
business identity
v. (2) Uniformity of
commercial
practices
vi. (3) optimum public
good will
b. So, Holiday inn did NOT
control the day to day
actions of the hotel, which
means there was no
master/servant
relationship
c. “A key distinction between
the servant and
independent contractor
types of agents, however, is
the differing natures and
degrees of control exercised
by the principle.” (pg. 45)

34
8. Tort Liability and Apparent Agency
a. So, here again, apparent agency is the
alternate argument when a master/servant
relationship has NOT been established.
b. Was there a holding out of the person as an
employee by the employer?
c. Miller v. McDonald’s Corp (pg. 47 of book)
i. Miller was injured after biting into a Big
Mac with a foreign object in it
ii. The particular McDonald’s was owned by
3K Restaurants
iii. Miller sued
1. McDonald’s (franchisor)
2. AND 3K Restaurants
iv. Relationship between McDonald’s and 3K
Restaurants
1. They had a license agreement
a. 3K had to use the
“McDonald’s System”
i. it described how 3K
should operate the
restaurant in GREAT
DETAIL
ii. mandated the
operating hours
iii. sub-employees had
to wear McDonald’s
uniforms
iv. 3K employees were
specifically trained
v. McDonald’s people
inspected the
restaurant
b. The agreement said that 3K
was NOT McDonald’s agent
i. It described 3K as an
independent
contractor
v. Issue – was 3K an apparent agent for
McDonalds?
1. Miller did NOT know the
difference between 3K and
McDonalds
2. In order for 3K to be an apparent
agent, McDonald’s would have to
hold 3k out as an agent

35
 a. Court held that there were
factual issues as to whether
an actual or apparent
agency relationship existed
between the franchisor and
the franchisee which
precluded summary
judgment
i. But, typically,
franchisor is NOT
liable & not typically
in a master/servant
relationship. But, the
franchisor might be
depending on what
is going on at the
local store.
3. So, you can use the same factors
from the master/servant test to
see if a franchisor held out a local
store as an agent (to determine
apparent agency)
4. Be mindful of the reliance
element, court often looks at the
reason a customer chose that
particular store
a. This is a question of fact for
the jury
5. “Apparent agency and apparent
authority are distinct concepts;
apparent agency creates an
agency relationship that does not
otherwise exist, while apparent
authority expands authority of
an actual agent.”
9. Tort Liability for Agents
a. Blancard v. Ogima (pg. 47 of supplement)
i. Represents the concept of Control from
a Louisiana perspective
ii. Blanchard = injured employee
iii. Ogima = salesman
iv. Blanchard suing
1. Salesman (Ogima)
2. AND dealership owner
v. Blancard was injured by a car that was
not properly put into park

36
 1. The car coasted and hit Blanchard
vi. Trial court ruled for Blanchard against
Ogima, but dismissed the suit against the
dealership owner
1. Court said that Ogima was an
independent contractor
a. Which means the
dealership was NOT liable
for the injury
b. There was a
principle/agent
relationship, but ruled that
Ogima extended his role as
agent
c. AND that coverage did not
extend to the type of car
involved
vii. Why was Ogima considered to be an
independent contractor?
1. Ogima was NOT an actual
employee
a. The dealer had very little
control over him
2. Ogima was paid on commission
a. So, essentially he is NOT
paid for service, but paid
for results
3. Ogima was essentially a
“freelance” salesperson
4. Ogima was an agent for the dealer
(not an employee)
a. The dealer was the
principle
b. Liability is ONLY there if
there is a master/servant
relationship
c. The code says that liability
is incurred when the
master could have
prevented the injury
d. But, the Court said this was
too strict and that there are
other limitations on the
master/servant
relationship

37
 5. “A master or employer is liable
for the tortious conduct of a
Servant or Employee which is
w/in the scope of authority or
employment, but a principal is
not liable for the physical torts
of a non-servant agent…A
principal is NOT liable for the
harm caused by negligent
physical activities of a non-
servant agent. A principal is not
liable for physical harm caused
by the negligent conduct of a
non-servant agent, during the
performance of the principal’s
business.”
a. “Although a servant may
possess the qualities of an
agent, all agents do not
qualify as servants.”
6. 2 questions here
a. Was the driver acting in any
employment relationship
for the defendant?
b. If so, was the relationship
that of a Master and servant
or contractee and
independent contractor?
7. So, essentially you can be an
agent, but that does not
automatically make you an
employee (or servant) that
allows for tort liability.
8. And – the issue here again is about
control!
a. In LA
i. Is there control?
ii. AND, is there an
economic
relationship?/An
economic factor?
b. CNA Insurance Co. v. Nutone Corp. (pg. 55 of
supplement)
i. Plaintiffs are homeowners and
homeowner’s insurance suing the

38
Apparent Servant
Situations where you have a
person who is representing a
3rd party/that the person is an
agent for someone else.
It causes a 3rd person to rely
on the “apparent agent” ii.
iii.
The argument is that the
person thought the “agent”
was an employee and that the
person should be able to rely
on the skill and expertise. iv.
v.
vi.
vii.
viii.
ix.
installer of a security system that failed to
protect the home in a fire
1. Suit against installer and installer’s
insurer
a. Installer had a decal on his
car – why wasn’t this
enough?
Trial jury found for defendants!
Kitchen caught on fire when homeowner
was sterilizing baby bottles
1. At trial everyone agreed it was
the installation that was faulty –
NOT the detectors
Homeowners received $9000 from their
insurer
Person who installed the system was an
authorized person
Court found the company warranty did
NOT cover a faulty installation
Issue – was the installer an employee
of the security company?
1. Was he an agent?
a. Did he have apparent
authority?
i. NO! There was no
manifestation by the
security company to
the homeowners
that the installer was
a certified agent.
ii. Cannot blindly rely
on manifestations of
the agent
2. Was he an employee?
a. Installer ONLY a part time
employee, only employed a
few hours a week
b. NO! All money went to him!
Court found homeowner to be
contributorily negligent
Affirmed ruling for defendant
39
c. Arceneaux v. Texaco, Inc. (pg. 61 of supplement)
i. Arceneauxs were severely burned at a gas
station
ii. Mr. Arceneaux asked the gas station
attendant to fill his tank while his wife
and kids were in the truck
1. Gas station attendant lit a cigarette
while filling the tank
a. And then everything burst
into flames
iii. Arceneauxs are suing
1. Texaco for the attendant’s
negligence
2. AND GM for faulty design of the
truck
iv. Texaco said that the station was an
independent operator rather than a
servant
v. Court found
1. There was NO master/servant
relationship
2. And, asked if there was enough
evidence that apparent authority
would not matter?
a. No, there was NOT enough
control
3. The alterative argument was then
that there was an apparent servant
relationship
a. But, the court said there
was nothing there to
indicate that Arceneaux
relied on Texaco or the
services they rendered.
i. He chose the gas
station b/c he was
running out of gas,
NOT b/c it was a
Texaco
ii. There must be some
sort of holding out of
the attendant as a
servant/employee
by Texaco for there
to be an apparent
servant finding.

40

n. Termination of Agency – How & What Happens in the event of
Art. 3024 Termination
pretty much can
terminate
agency like a
regular contract
Art. 3025
P/A contract can be
terminated at will.
1 exception is if the
object/goal of the P/A
relationship has not
ii. Art. 3025 – Termination by principal
been completed, then
the P/A relationship
will continue until that
goal has been reached
Art. 3028
P has the responsibility iii. No. Code
to notify the 3rd party iv. Art. 3028 – Rights of third persons w/ notice of revocation
that the P/A
relationship has been
terminated.
So, P could be become
liable under apparent
authority if 3rd party is
not notified.
4. What do you need to have a
finding of an apparent servant?
a. A holding out by the master
b. An express statement
c. Maybe a sign
d. Maybe a selling of Texaco
products
i. Art. 3024 – Termination of the mandate and the mandate’s
authority
1. In addition to causes of termination of contracts under
the Titles governing “Obligations in General” and
“Conventional Obligations or Contracts,” both
a. the mandate and
b. the authority of the mandatory terminate upon
the
i. Death of the principal OR of the
mandatary
ii. Interdiction of the mandatary
iii. Qualification of the curator after the
interdiction of the principal
1. The principal may terminate the mandate and the
authority of the mandatory AT ANY TIME.
2. A mandate in the interest of the principal, and also of
the mandatary or of a third party, may be irrevocable,
if the parties so agree, for as long as the object of the
contract may require.
Articles 3026 or 3027
1. The principal must notify third persons w/ whom the
mandatary was authorized to contract
a. of the revocation of the mandate or
b. of the mandatary’s authority (revocation of
mandatary’s authority).
2. If the principal fails to do so, he is bound to perform the
obligations that the mandatary has undertaken.
3. Comments to this article –
a. “A mandatary who purports to represent the
principle despite the revocation of the mandate
acts w/o authority. Such a mandatary is
personally bound to a 3rd person with whom he
contracted (Art. 3019). AND
b. “Further, the mandatary is liable to the principal
under civil code articles 3001 and 3008.”
41
 v. Art. 3029 – Termination by the mandatary
1. The mandate and the authority of the mandatary
terminate when he notifies the principal of his
Art. 3029 a. Resignation OR
Agent can b. Renunciation of his authority
quit/resign 2. Comments
a. “The mandatary is bound to give notice of
termination in accordance w/ CC Art.
2024…EVEN IF the mandate is for a specified
Art. 3031 period of time.”
When A doesn’t know b. “If termination of a mandate for remuneration
that the P/A causes injury to the principal, the liability of the
Relationship has been mandatary is governed by the Titles of
terminated, the 3 rd ‘Obligations in General’ and ‘Conventional
party can still hold P Obligations or Contracts.’”
AND A to that i. “In the case of a gratuitous mandate, the
particular contract. court may reduce the amount of loss for
which the mandatary is liable. See CC Art.
But, it is unclear as to 2990 and 3002.”
the level of knowledge ii. Remuneration = payment, compensation
that is required. OR the act of paying or compensating.
vi. Art. 3031 – Contracts made after termination of the
An express statement mandate or the mandatary’s authority
is clear, but unsure 1. If the mandatary does not know that the mandate or his
beyond this… authority has terminated and enters into a contract w/
a 3rd person who is in good faith, the contract is
enforceable.
5. Partnerships (a very OLD form of business entity)
a. Partnerships are governed by
i. Statutes
1. UPA = Uniform Partners Act (1914)
2. RUPA = Revised Uniform Partners Act (1997)
3. LA Code
a. How partnerships are governed in LA
ii. AND case law
iii. All states have either adopted UPA or RUPA, EXCEPT FOR LA
1. But for the most part, partnerships in LA are like
those in other states, except for 1 BIG difference
b. So, what are we looking for when we are looking for partnerships?
i. Sharing of losses
ii. Sharing of Profits
iii. Sharing of control
iv. And 2 or more persons
v.  we are looking at the conduct of the business to
determine if a partnership exists (i.e. if there is an
inadvertent partnership)

42
 1. B/c for general partnership, you can be deemed to be
partners w/o actually forming a partnership
a. And further b/c there are no formation
requirements, you do NOT have to file
anything w/ the Sec. of State
i. But, to be effective against third
parties, the partnership must file w/
the Sec. of State
c. Keep in mind
i. Legal entity = a separate legal existence from the individual
partners
ii. Legal aggregate = a group of individuals who do NOT have a
separate legal existence
d. Partnerships as a legal entity
i. Have the capacity to sue
ii. Can be sued
iii. Can have judgments collected from their assets
1. These judgments can be collected against the individual
partners as well
iv. Can own property
v. Partnerships should have their own books AND keep their own
records
1. Essentially, it should be separate from those of the
individual partners
vi. Can AND have to file separate federal and tax returns
e. 2 factors that might make partnerships a legal aggregate
i. (1) the partnerships entity itself pays no taxes and taxes are
paid by the individual partners
1. so profits and losses flow through the individual
partners
ii. (2) In the rest of the US, partners have joint & several liability,
so that if the partnership cannot pay then the partners are
liable.
1. BUT! In LA, partners’ liability is limited to their virile
share
a. So, the liability for each partner is limited to the
amount of the debt divided by the number of the
partners
i. This is NOT an advantage for creditors
in LA
f. Art. 2801 – Partnership; definition
i. A partnership is a
1. juridical person,
2. distinct from its partners,
3. created by a contract between 2 or more persons (so
can be people OR other types of business entities) to

43
 combine their efforts or resources in determined
proportions
a. created by a nominate contract
i. if partnership is to acquire immovable
property, the contract MUST be in writing
1. equal dignities rule
ii. And, “it must be filed for registry for a
partner to acquire as in commendam
status” regarding third persons
4. and to collaborate at mutual risk for their common
profit or commercial benefit.
ii. Trustees and succession representatives, in their capacities as
such, and unincorporated associations may be partners.
1. Comments say that the exclusion of curators and tutors
does not necessarily mean they cannot be partners
iii. From comments
1. “The consensual element underlying the creation of a
partnership distinguishes it from the fortuitous creation
of a community interest. The contract of partnership is
based upon a community of interest AND gives rise to
a juridical person distinct from its partners.”
2. Each member of the partnership must make a
contribution
a. May have economic value
b. May aid in achievement of partnership goals
3. Notion of mutual risk – the idea that partners share
risk among themselves
4. “As a juridical person, a partnership is a legal entity
distinct from the partners who compose it.”
a. Smith v. McMicken
5. A partnership has its own
a. Domicile
b. Patrimony
c. Right to sue and be sued in its own behalf
d. Capacity to make donations
e. Capacity to receive legacies and donations
g. Art 2806 – Ownership of immovable property; retroactivity of
partnership’s existence; acquisition of immovable property prior
to partnership’s existence
i. An immovable acquired in the name of a partnership is owned
by the partnership, if, at the time of acquisition, the contract of
partnership was in writing (but does NOT need to be filed). If
the contract of partnership was not in writing at the time of
acquisition, the immovable is owned by the partners.
ii. As to third parties, the individual partners shall be deemed to
own immovable property acquired in the name of the

44
 partnership until the contract of partnership is filed for
registry w/ the secretary of state as provided by law.
iii. Whenever any immovable property is acquired by one or more
persons acting in any capacity for and in the name of any
partnership which has not been created by contract as
required by law, and the partnership is subsequently created
by contract in accordance with Title XI of Book III of the Civil
Code, the partnership’s existence shall be retroactive to the
date of acquisition of an interest in such immovable
property, but such retroactive effect shall be without prejudice
to rights validly acquired by 3rd persons in the interim between
the date of acquisition and the date that the partnership was
created by contract.
h. L.R.S § 9:3401 - Central registry; creation
i. A. The secretary of state is hereby directed to create a Central
Registry for Contracts of Partnership.
ii. B. For the purposes of Chapters 1 through 4 of this Code Title,
any document required to be filed with the secretary of state
shall be deemed filed when it is received either physically or
electronically in any office designated by the secretary of
state for the receipt of such documents.
i. L.R.S § 9:3402 – Filing
i. A. The contract of partnership or a multiple original thereof,
The Process duly executed by the partners, or a certified copy thereof, or
1. LA Sec. of State statements submitted by foreign partnerships in accordance
Website with R.S. 9:3421 et seq., shall be filed for registry with the
2. Business Services
3. File Business
secretary of state in accordance with the provisions of this
Documents Chapter to affect third persons as provided by Civil Code
4. Domestic Articles 2806 and 2841 or when the parties choose to comply
Partnerships with the provisions of this Chapter.
a. Gives filing ii. B.
fee
b. Also a fee for
1. (1) The secretary of state may accept any filing
filing authorized by this Title by electronic or facsimile
amendments transmission. All electronic filings authorized by this
5. Partnership Title shall include an electronic or digital signature.
Registration 2. (2) “Digital signature” means a type of electronic
6. Once the partnership
agreement is filed,
signature that transforms a message using an
the Sec. of State will asymmetric crypt system such that a person having the
issue a certificate of initial message and the signer's public key can
registry (this is how accurately determine:
they recognize the a. (a) Whether the transformation was created
partnership)
using the private key that corresponds to the
signer's public key.
b. (b) Whether the initial message has been altered
since the transformation was made.
To file you must:
3. (3) “Electronic signature” means an electronic sound,
1. Fill out the
steps on the
website 45
2. AND, add your
partnership
 symbol, or process attached to or logically associated
with a record and executed or adopted by a person with
the intent to sign the record.
iii. C. A facsimile filing, the process of transmitting printed
documents by electronic method to the secretary of state, is
deemed to be properly signed when the document received by
a facsimile machine in the commercial division, office of the
secretary of state, purports to be a copy of the original
document, and contains the signatures required by this
Section.
j. L.R.S § 9:3403 Contract of partnership; required content
i. A contract of partnership filed for registry with the secretary of
state shall contain the name and taxpayer identification
number of the partnership, the municipal address of its
principal place of business in this state, and the name and
the municipal address of each partner, including partners
in commendam, if any. The failure to include the taxpayer
identification number of the partnership shall not
invalidate nor cause the secretary of state to reject the
contract.
k. L.R.S § 9:3404 Contract amendment
i. An amendment to a contract of partnership shall be filed for
registry in the same manner as an original contract of
partnership. Until filed for registry, such amendment shall
not be effective as to third persons. An amendment to a
contract of partnership that is not registered with the secretary
of state shall be accompanied by an original copy of the
contract of partnership, or a certified copy, and all previous
amendments.
l. L.R.S § 9:3405 - Registration; endorsement; issuance of
certificate; effect
i. When all fees have been paid, the secretary of state shall
register the contract of partnership, or a certified copy, or the
statement of a foreign partnership, in the Central Registry for
Contracts of Partnership created for that purpose, endorse on
all documents delivered the month, day, year, and hour of
filing, and shall issue a certificate of registry certifying that the
contract of partnership or statement of the foreign partnership
is filed and registered. The certificate of registry shall be
conclusive evidence of due registration. A contract, statement,
or amendment that is duly registered is deemed registered as
of the time of filing.

m. L.R.S § 9:3406 - Recorder of mortgages; filings

46
 i. A multiple original of the contract of partnership, or a copy
certified by the secretary of state, and a copy of the certificate
of registry, shall be filed for registry with the recorder of
mortgages of the parish in which the partnership maintains
its principal place of business. Failure to file these documents
with the recorder of mortgages as provided by this Section
shall not affect the title of immovable property as being in the
partnership or the status of a partner in commendam, or a
limited partner.
n. L.R.S § 9:3407 - Delivery in advance of effective date
i. Prior to its effective date, a contract of partnership or a
L.R.S § 9: 3407 pops statement of a foreign partnership may be delivered to the
up a lot!
secretary of state for filing and registration on any specified
month, day, year, and hour on or before the thirtieth day after
the day of delivery.
1. So, if you want your partnership effective upon a certain
date, then you file the forms in ADVANCE of that date
(ex. Jan. 1, b/c the office will be closed)
a. But can ONLY be 30 days before
b. Otherwise, it will be effective when certificate
of registry is issued
o. L.R.S § 9:3408 - Filing within five days of execution; effect
i. A contract of partnership or a statement of a foreign
partnership filed for registry with the secretary of state within
five days of execution, exclusive of legal holidays, is deemed
filed for registry on the month, day, year, and hour of
execution.
1. So, as long as you are filing w/in 5 days of execution, it
will be effective as to that day
2. Ex. if you want to execute the partnership agreement
today, as long as you file w/in 5 days of today, it will be
effective as of today
p. Partnership Formation
i. Partnerships in general
1. Things to keep in mind
a. There are no real formation requirements,
this is why inadvertent formation can happen
i. There are no real requirements to file w/
the Sec. of State
ii. In theory, the formation of a partnership
is a rather simple matter. Except in
connection with acquisitions of
immovable property, no public filing or
“certificate of partnership” is
required—not even a writing is needed.
All that is necessary is for two or more

47
 persons to enter into a contract with
one another that is properly classifiable
as a “partnership” type of contract.
They may enter into this type of
contract as they may any other, “orally,
in writing, or by action
b. Partnership law serves as a residual form of
business classification that applies by default to
any co-owned business that is not formally
organized under some other business
organization scheme
c. Inadvertent formation ONLY happens w/
partnerships
ii. Inadvertent formation – you can be deemed to be partners
w/o actually forming a partnership
1. Darden v. Cox (creates the “Darden Test”)
a. Darden alleges he has a 30% stake in a business
that is being liquidated
b. Cox is fighting back and saying that Darden was a
partner, but that he should only receive 30% of
the profits/losses (not 30% of the partnership)
c. Cox and another man, Hall, formed a partnership
with a 50/50 agreement or stake in the company
i. When Hall leaves, if Cox does not find
another partner, then there would no
longer be a partnership
d. 2 years later Darden became an employee of the
partnership, where he received
i. salary
ii. AND a certain percentage of the profits
1. He was given a bonus at the end of
each year
e. Hall eventually wanted out, and Cox (not
Darden) bought out Hall’s interest
f. Darden & Cox continued to work together, until
Darden became suspicious of Cox after doing an
audit of the company’s finances
i. No formal agreement that there was a
partnership
g. At this point, Darden STOPPED taking a salary
and a capital account was set up for him
h. Once Darden became suspicious, the 2 decided to
liquidate the company
i. Cox was named the liquidator
i. Darden then sued b/c he did not agree with the
distribution of the assets from the liquidation

48
 j. Court said
i. Issue #1- was there a partnership?
1. Requirements for a partnership –
MUST have all 3, “Even if the
parties call their relationship a
partnership, and agree that they
gave their mutual consent to form
it, it will not be considered a
partnership, as between the
parties, unless it is evident that the
other 2 factors result from their
agreement.”
i. This becomes the
“Darden Test,” the
typical test used in
LA. But, there may
be variations on it
b. (1) Partners must have
Darden Test mutually consented to form
a partnership AND
1) Mutual consent to form a i. to participate in the
partnership profits which may
accrue from
2) All partners must share in losses ii. (1) property
AND profits iii. (2) skill
iv. (3) or industry
3) Property/assets create a v. in the proportions
community of goods where each that were
party has an interest determined by the
partners
c. (2) All partners must share
A community of goods in
1. A pooling of resources i. Losses AND
2. Managed for the common interest of ii. Profits
the partners for the purpose of d. (3) “…the property or stock
making profits of the enterprise must form
a. Big question = was the pooling a community of goods in
done in order to MAKE which each party has a
PROFITS proprietary interest.”
i. = a community of
goods
ii. a pooling of
assets/resources
together AND
managed for a
COMMON INTEREST

49
 of the partners for
a profit making
What are profits? A situation where purpose
owners of a venture have whatever is left iii. the property/assets
over after creditors are paid off. have to make a
community, where
What are losses? Contributions made to each party has an
the business venture that were lost. interest
iv. meaning that the
assets are owned by
the partnership,
rather than the
individuals partners
ii. The only issue here though is the division
of goods
1. Cox did not bring all of the goods
into the partnership, so they
cannot solely be his
2. The property belonged to the
partnership when Darden was
brought in as a partners
iii. Court looked at Art. 1958 which says
that if an explanation is unclear, then it
should be interpreted against the
person who should have been more
clear
1. Cox should have been more clear
to explain the boundaries of the
relationship w/ Darden
iv. So, Darden had a propriety interest once
he began depositing and withdrawing
funds from the partnership account
v. Final Thoughts
1. There was a partnership
a. AND it was terminated by
mutual consent
b. Darden had a propriety
interest
c. Darden is entitled to
judicial partition of the
partnership assets
2. Issue of Darden’s capital account
here is very important in the
analysis of the 3rd factor of the
Darden Test
2. Glover v. Sowada

50
 a. Glover and Sowada were in a relationship
b. Glover is suing to recover $40,000 she gave to
Sowada
i. Suit also included a restraining order to
keep him from disposing of any assets in
his business S&S Vans
c. Defendant filed an exception of vagueness b/c
the pleadings did not specify the business
relationship between Glover and Sowada
i. It was denied
ii. But, he answered saying they had no
business agreement between the 2 of
them
d. Issue – why was Glover allowed to use the
business funds?
i. Was it b/c she was working for the
business?
ii. Or was it b/c she was a partner in the
business?
e. Trial court found
i. Both were a part of a partnership by
mutual assent
1. Business = S&S vans
ii. S&S Vans began in1976 and ended in
1980, terminated by mutual assent
iii. Glover is entitled to 50% of the
liquidation of S&S vans
f. Appellate court REVERSED findings of trial
court
g. History
i. 50% of the income was deposited in 2
You always need a PURELY bank accounts
separate bank account for the 1. 1 where Glover banked
company! 2. 1 where Sowada banked
3. each had free access to their
accounts
ii. Glover worked full time for S&S
iii. Sowada still had a day job and worked on
the van at nights
iv. Sowada then moved into Glover’s home
v. It was an ORAL partnership

h. Court says

51
 i. 4 types of partnerships in LA, only 1 does
not require a written partnership
agreement
1. that agreement – commercial
partnership
ii. S&S was NOT a commercial partnership
iii. Used requirements set forth in Darden
v. Cox
1. 3 prong test
a. mutual assent to form
partnership AND
participate in profits
b. share losses and profits
c. property or stock of an
enterprise must form a
community of goods in
which each party has a
proprietary interest
2. Must have all 3!
3. if 1 element is missing it is not a
partnership
4. Burden is on Glover to prove a
partnership existed
5. Glover failed to show the required
level of intent
a. Too much disagreement
between the parties as the
actual set up of the
partnership
b. Sowada’s tax returns were
introduced which showed
he claimed the profits and
loses
i. This points to it
being a sole
proprietorship
ii. Glover did not file
tax returns
c. Glover explained how they
split the money
i. But no real proof of
what she paid to
Sowada
d. Accounts co-mingled funds
of both parties

52
 i. Were used for
business & personal
expenses
e. The two did NOT mutually
assent to form a
partnership
i. Court says that there
needs to be an
expression of intent
to form a
partnership.
ii. This expression does
NOT have to be in
writing, but the
more tacit the
expression, the more
evidence you will
need to prove the
Look at sample partnership partnership existed
agreement on pg. 126 of iii. The best thing is to
supplement. have a written
agreement!
f. Agreement to share profits
alone is not enough to say
there was a partnership
i. Intent to share
profits MUST be
express
ii. Cannot just be
implied
3. Effects of Inadvertent Formation
a. Under partnership law, a finding that two or
more person have somehow become “owners” or
“proprietors” of a non-LLC, unincorporated
business will result in:
i. (1) the creation of a separate juridical
person (the partnership),
ii. (2) the imposition on the “owners” of
indirect personal liability for the
obligations of the business,
iii. (3) the conferral of agency powers on all
“owners” of the business, no matter how
small the size of their interest,
iv. (4) the conferral of a per-capita voting
power on every “owner”, no matter how
small his financial interest,

53

4. Where else might the theory be used?
7 La. Civ. L. Treatise, Business
Organizations § 1.01 (2013 ed.)
Louisiana Civil Law Treatise
Business Organizations
Database updated July 2013
Glenn G. Morris, Wendell H.
Holmes
Chapter 1. Formation of
Partnership
v. (5) the establishment of a per-capita
claim by each “owner” to the residual
value of the business,
vi. (6) the creation of a right in each “owner”
to force the distribution to him, in cash, of
the value of his residual interest in the
business, and
vii. (7) the imposition of fiduciary duties on
each “owner” of the business, not only
with respect to the business itself, but to
the other “owners” as well.
a. An employee quits or is fired and then claims
that he is a partner, entitled to be paid for his
share of the business.
b. One member of an unmarried couple, not
entitled to share as a spouse in a marital
community, claims to have ownership rights in a
business community, an alleged partnership.
c. A tort victim alleges that one or more persons
were partners in a business in order to obtain a
judgment against a wealthy defendant.
d. A contract creditor alleges that the person with
whom he dealt on a contract was actually the
undisclosed agent of a partnership, so that the
other “partners” ought to be held personally
liable to him for their virile share of any amount
that still owed to him after exhaustion of the
partnership assets.
e. The owner of a business claims when he is sued
on a business contract that the business bound
by the contract was not a proprietorship, but a
partnership, so that his personal liability on the
obligation is changed from primary liability for
the whole to secondary liability for a virile share.
f. The creditors of a business claim that an asset
used in the business belongs to an alleged
partnership as a separate entity, and not to an
insolvent “partner” personally, in order to confer
seniority on their claims in relation to the claims
held by personal creditors of the insolvent
partner.
g. Participants in a joint construction project wish
to be treated as statutory employers to avoid tort
liability to an employee of one of the
participants.
54
 h. One of two or more persons who have worked
with one another informally in finding and
making business investments claims to be a
“partner” of the others in order to impose
fiduciary duties on them in business dealings
purportedly related to the business of the alleged
partnership.
i. The Internal Revenue Service alleges the
existence of a partnership in order to attribute
undistributed “partnership” income to a
“partner” or to trigger one or several other
“partnership” rules which would increase the
taxpayer's liability.
j. State taxing authorities attempt to characterize a
co-owned asset not as the property of the co-
owners directly, but of partnership held by those
owners in order to deny to one of the “partners”
the tax benefits that it would otherwise be
entitled to claim as a direct co-owner of the
asset.
iii. Partnership Agreement (pg. 126 of supplement)
1. Says it is a “joint venture agreement,” often these are
partnerships (but they can be LLCs)
2. What is a joint venture?
a. You have 2 or more persons or entities coming
together and forming a business for a specific
purpose, AND they are contributing their own
skills and products to that specific
purpose/venture.
i. So, it is often limited in purpose OR it
could be limited in terms of time
b. Joint venture = a business transaction where
a partnership = business purpose
c. Joint ventures can be
i. Partnerships
ii. LLCs
iii. Or limited partners
q. Partnership by Estoppel
i. VERY SIMILAR to agency by estoppel
ii. It is the idea that if a person is holding out another person as a
partner, then the person who is making the representation
should be estopped from denying this representation
iii. Person is estopped to deny the existence of a partnership if
they have manifested a representation of partnership and the
other has relied on the representation to their detriment

55
iv. 4 elements to partnership by estoppel
1. Representation
a. Express
b. OR implied
2. Representation made by the person charged w/ being a
partner
3. There is a good faith reliance on that representation
4. There is a change in position of the 3rd party
v. Keep in mind that Louisiana says it recognizes partnership
by estoppel, but the LA test has some ADDITIONAL
ELEMENTS
1. So, in practice it is NOT very clear
vi. Gravois v. New England Ins. Co.
1. Gravois was suing for legal malpractice
a. Tried to sue his former attorney AND an attorney
that shared office space with the former attorney
i. Really suing the other attorney’s
insurance provider
ii. Under the theory the attorneys were
partners
iii. Gravois’ attorney was Longeneck
iv. Wegmann share an office w/ Longeneck
b. Insurance protects Wegmann
i. For his liability
ii. Liability for acts by
1. Former partner
2. Officer
3. Director
4. Or stockholder of Wemann’s firm
2. Gravois’ argument
a. Wegmann and Longeneck were partners when
Leongenecker fleeced Wegmann out of some
serious money
i. Diverted company money
ii. AND took out a $4.5 million loan in
Gravois’ name
iii. Wegmann notarized documents w/o
Gravois being present
b. Recover against Wegmann
i. b/c he was Longenecker’s partner
ii. AND for Wegmann’s bad acts
3. Insurance company
a. Denied they were partners
b. Exception for prescription
i. For claims of Wegmann’s own bad acts

56
4. Facts
a. Longenecker was Gravois’ attorney and then
became his financial advisor
b. Gravois took his advance as to certain
investments
i. Eventually Gravois was signing blank
documents
c. Longenecker took out a $4.5 million dollar loan
that Gravois theoretically vouched for
i. The loan had to be restructured and
eventually the bank began contacting
Gravois who learned of the mess
d. Gravois gets another attorney and they begin
meeting w/ Longenecker to determine the
extend of Gravois’ financial liability
i. Longenecker was often uncooperative
5. Court looked at the following issues
a. Did a partnership exist between Wegmann
and Longenecker?
i. No
1. Wegmann said
a. They were never partners
b. They only shared office
space and expenses
c. Did NOT share profits or
losses
d. On occasion Longnecker
might refer a case or ask for
help
i. If this happened,
they split the fee
e. Never paid for
Longnecker’s
representation of Gravois
2. Longnecker said
a. They were never partners
b. Only share space and
expenses
c. While in officer w/
Wegmann, became partners
w/ John Musser
d. Never represented to
anyone that he was
partners w/ Wegmann

57

6. Did a partnership by estoppel exist? “A partnership
The Court looked at the
stationary, phone listing, etc. that
had BOTH names on them.
But, ultimately it came down to
whether there was an intent to
share profits/losses.
Court said that an intent to
share profits/losses is an
indispensible element in the
partnership by estoppel test!
So, in LA, partnership by
estoppel is recognized in theory,
but will be VERY HARD to find in
practice.
7. Did Wegmann’s act make him liable to plaintiff?
3. Gravois stated
a. Stationary said “Wegmann
and Longenecker”
b. Door sign that said the
same
c. Listed in phone directory
under “Wegmann &
Longenecker”
d. Had insurance together
b. Court said
i. By law, there was no partnership b/c
the 2 NEVER contracted to have a
partnership or agreed to have a
partnership
ii. Since there was no other supporting
evidence like tax returns/financial
documents, by law there was no
partnership
may be found to exist even though there is no intent to
form a partnership in those instances in which a person
holds himself out as a partner to the justified detriment
of a third party.” Butler v. Atwood
a. No – there was no written agreement OR an
intent to form a partnership
i. Still required there to be “the intent to
share profits and losses”
1. An “indispensible element”
a. This is NOT an element in
the common law
partnership by estoppel
test
b. This was the biggest issue
in this case!
ii. Gravois didn’t know about Wegmann
until his 2nd attorney introduced him to
him
a. Depends on whether they are joint tortfeasors
i. b/c there would be solidary liability if
they are joint tortfeasors
ii. If joint, prescription would NOT be
interrupted
b. But, if they are NOT joint tortfeasors if there acts
were independent
58

vii. Hartwick v. Hartley
In most other states, ALL
you need is a representation
and detrimental reliance.
In LA, after Hartwick, we
aren’t sure whether you
need a sharing of profits and
losses.
i. If acts independent would only be liable if
the damages were foreseeable
8. Did damage flow from this act?
9. Was the cause prescribed at the time the suit was filed?
a. Remanded on this issue, depends on whether
they are joint tortfeasors or not
1. Hartwick brought a legal malpractice claim against
Hartley over representation after a car accident
a. Hartwick’s claim prescribed, claiming that
Hartley did not file it timely
2. Hartwick then filed against KK & S, Hartley’s “employer”
a. Under a theory of respondeat superior
3. KK & S filed a motion for summary judgment
a. They were not a partnership, merely attorneys
who shared office space
b. KK & S was NOT the employer of Hartley
c. Motion was granted (b/c court said it was a
matter of law rather than a matter of fact)
4. Hartwick’s appeal was based on a theory of
partnership by estoppel
a. That it is an issue of material fact
5. Facts
a. Hartwick was referred to Hartley by a family
member who worked as a receptionist
b. Hartwick spoke to one of the Kieffers who said
he would send someone out
c. Hartley showed up and told he she had a case
d. Hartley later wrote Hartwick saying her case had
prescribed
e. There was KK&S letterhead
f. Cites Gravois case
g. Hartwick never met any of the other attorneys
h. Attorneys did split fees when they made
referrals w/in the office
i. Attorneys said it was only between
attorneys and not between the entity
6. Court affirmed the lower court’s decision
a. No evidence there was a partnership
i. In particular, there were no financial
documents
ii. No agreement between the attorneys
iii. No sharing in profits or losses
7. Concurring opinion
a. Gravois dictates this opinion
59
 b. Partnership by estoppel should be dependent on
what KK & S did and not what Hartley held out to
be true
c. Error that partnership by estoppel requires
intent to share in profits and losses
d. Basically disagrees w/ Gravois
i. Hartwick relied on the fact that Hartley
was part of a firm
1. Stationary, all the evidence, etc.
8. On re-hearing
a. Judgment of court of appeal is reversed
i. There is a genuine issue of fact
ii. This is where it stands to this day…
viii. Young v. Jones (pg. 93 of book)
1. Young deposited $500,000 in a SC bank and it’s GONE
a. Price Waterhouse of the Bahamas sent an
unqualified audit letter about SAFIG
b. Other defendants admit to sending the money
from the bank to SAFIG based on this unqualified
audit letter
2. False statement
a. had a logo for Price Waterhouse
b. was signed Price Waterhouse
3. Young asserts
a. that Price Waterhouse KNEW third parties
would rely on this audit letter
b. AND that Bahamas Price Waterhouse AND the
US Price Waterhouse operate as a partnership
i. If this doesn’t work, then they are
partners by estoppel
c. They hold each other out as partners through
i. World wide advertising
1. Brochures
4. Court found
a. There was no partnership in fact
b. “…a person who represents himself, or
permits another to represent him, to anyone
as a partner in an existing partnership or w/
others not actual partners, is liable to any
such person to whom such a representation
is made who has, on the faith of the
representation, given credit to the actual or
apparent partnership.” (pg. 95).
c. Normally partners are jointly and severally liable
d. There was NO partnership by estoppel
i. No evidence plaintiff relied on brochures

60

ix. From Business Organizations Treatise by Morris & Holmes
r. Partnership Management
i. Code Art. 2802 – Applicability of rules of conventional
ii. Code Art. 2803 - Participation of partners - Each partner
Art. 2803 – default rule for
the distribution of
profits/losses  default rule
= they are distributed evenly.
But, you can always contract
around this! Ex. you can
stipulate that the profits/losses
are distributed according to the
amounts the partners
contributed to the partnership.
ii. No evidence the 2 worked together
iii. No evidence plaintiff relied on statements
the 2 were in a partnership
1. Louisiana law nominally recognizes the possibility that
a person may be estopped to deny the existence of a
partnership that he has represented to exist, even
though the purported partnership might not “really”
exist in the sense required by the various tests for the
formation of a true partnership. So far, however,
Louisiana courts have confused the estoppel theory
with the various theories under which an actual
partnership may be created inadvertently. They have
refused to apply the estoppel theory where the
alleged partners have not shared in the profits and
losses of a common enterprise, even where it seems
clear that a partnership was represented to exist. The
Supreme Court reversed the latest of these decisions,
but on ambiguous grounds, so the meaning of the
reversal is unclear. The concurring opinion in the
reversed appellate court decision points out the correct
approach, but that approach has yet to be adopted in
any majority decision.
obligations – The contract of partnership is governed by the
provisions in the Title: Of Conventional Obligations, in all
matter that are not otherwise provided for by this Title.
participates equally in profits, commercial benefits, and losses
of the partnership, unless the partners have agreed otherwise.
The same rule applies to the distribution of assets, but in the
absence of contrary agreement, contributions to capital are
restored to each partner according to the contribution made.
1. Comments
a. (a) The partners have complete freedom to
contract regarding the manner and extent to
which they are to participate in the profits,
benefits, assets, and losses of the partnership. If
the parties agree, the participation may be
unequal, and it may differ among the four
categories, namely, profits, benefits, assets, and
losses. It is only when the parties have not
agreed on fixed percentages that the parties are
presumed to have intended equal participation.
61
 b. (b) Contributions to capital are specially treated
under this article in that unless otherwise agreed
partners are entitled to the restoration of their
contributions to capital even when the restoration
might result in an unequal distribution or be
disproportionate to the sharing of profits.
iii. Code Art. 2804 - Participation in one category only - If a
partnership agreement establishes the extent of participation
by partners in only one category of either profits, commercial
benefits, losses, or the distribution of assets other than capital
contributions, partners participate to that extent in each
category unless the agreement itself or the nature of the
participation indicates the partners intended otherwise.
iv. Code Art. 2805 - Name of the partnership - A partnership
may adopt a name with or without the inclusion of the names
of any of the partners. If no name is adopted, the business must
be conducted in the name of all the partners.
v. Code Art. 2806 - Ownership of immovable property;
retroactivity of partnership's existence; acquisition of
immovable property prior to partnership's existence
1. A) An immovable acquired in the name of a partnership
is owned by the partnership if, at the time of acquisition,
the contract of partnership was in writing (DOES NOT
NEED TO BE FILED). If the contract of partnership was
not in writing at the time of acquisition, the immovable
is owned by the partners.
2. B) As to third parties, the individual partners shall be
deemed to own immovable property acquired in the
name of the partnership until the contract of
partnership is filed for registry with the secretary of
state as provided by law.
3. C) Whenever any immovable property is acquired by
one or more persons acting in any capacity for and in
the name of any partnership which has not been created
by contract as required by law, and the partnership is
subsequently created by contract in accordance with
Title XI of Book III of the Civil Code, the partnership's
existence shall be retroactive to the date of acquisition
of an interest in such immovable property, but such
retroactive effect shall be without prejudice to rights
validly acquired by third persons in the interim
between the date of acquisition and the date that the
partnership was created by contract.
4. Comments
a. If the contract of partnership is written but has
not been filed with the secretary of state, the

62

Default Rule – unanimous
voted needed to:
1. Amend partnership
agreement
2. Admit new partners
3. Terminate
partnership
4. OR to permit a
partner to withdraw
w/o just cause if the
partnership has been
constituted for a
term.
Default rule for decisions
affecting
management/operation of
partnership  majority vote of
the partners required.
Partners have a duty to
act
1. In good faith
2. w/ fairness in
partner’s duties
Fully informed consent from
partners will allow other
partners to do things they
wouldn’t normally be able to
b/c of fiduciary duties (duty
of loyalty)
Any profits made in discord of
fiduciary duties MUST be
given to the partnership.
contract of partnership is effective between the
parties, but it is not effective toward third
persons so as to enable the partnership to own
immovable property with respect to those third
persons.
5. Code Art. 2807 - Decisions affecting the partnership
a. (1st paragraph) Unless otherwise agreed,
unanimity is required to amend the partnership
agreement, to admit new partners, to terminate
the partnership, or to permit a partner to
withdraw without just cause if the partnership
has been constituted for a term.
b. (2nd paragraph) Decisions affecting the
management or operation of a partnership
must be made by a majority of the partners,
but the parties may stipulate otherwise.
c. Comments - This article is new. Its rules are
applicable only in the absence of contrary
agreement. Decisions affecting the management
or operation of a partnership are to be made by
majority vote, each partner having a single vote,
but the parties may provide for a different
arrangement or for greater or lesser percentages.
For example, the parties may give one
partner complete managerial authority;
likewise, they may stipulate that voting is to
be by percentage interests instead of by
heads, and they may require a two-thirds
vote instead of a majority.
i. Code Art. 2808 - Obligation of a partner to contribute -
Each partner owes the partnership all that he has agreed to
contribute to it.
1. Comment (b) The partnership agreement may
stipulate penalties, and the partnership, as a legal entity,
may sue a partner for breach of contract.
ii. Code Art. 2809 - Fiduciary duty; activities prejudicial to
the partnership - A partner owes a fiduciary duty to the
partnership and to his partners. He may not conduct any
activity, for himself or on behalf of a third person, that is
contrary to his fiduciary duty and is prejudicial to the
partnership. If he does so, he must account to the partnership
and to his partners for the resulting profits.
1. Comments – Consent (fully informed) by the partners
or the partnership to permit activities that otherwise
would be contrary to a partner's fiduciary duty should
be given effect to avoid the consequences of this article
63

iii. Code Art. 2814 - Partner as mandatary of the partnership -
Agency law keeps coming
back!
But, 2814 says that if a
partners is NOT given
authority as mandate, then
it does NOT matter in
relations to 3rd parties. So,
apparent authority will
come in and apply.
And, keep in mind that if a
partner exceeds authority,
iv. Nat’l Biscuit Co. v. Stroud, pg. 127 of book
that partner will be bound
to his other partner for
damages.
only when the consent is given after there has been a
full disclosure of all relevant information.
A partner is a mandatary of the partnership for all matters in
the ordinary course of its business other than the alienation,
lease, or encumbrance of its immovables. A provision that a
partner is not a mandatary does not affect third persons
who in good faith transact business with the partner. Except
as provided in the articles of partnership, any person
authorized to execute a mortgage or security agreement on
behalf of a partnership shall, for purposes of executory
process, have authority to execute a confession of judgment in
the act of mortgage or security agreement without execution of
the articles of partnership by authentic act.
1. Stroud & Freedman were in a general partnership to
sell groceries under the name “Stroud’s Food Center”
a. Nothing in the partnership agreement to limit
Freeman’s power/authority in regards to
ordinary business
b. Partners have authority to bind partnership in
everyday matters
i. Buying bread is a normal, everyday
matter
2. Stroud tells Nat’l that he won’t be liable for bread, but
then Freeman makes a contract with National
3. Each partner is joint & severally liable for debts of the
partnership
a. Which means if Freeman can’t pay, then Stroud
would be liable for the FULL amount
4. Proceeding by Nat’l Biscuit against former partners
who had operated food store for value of goods sold
and delivered.
a. Issue – Is Stroud liable for the debt?
5. They are EQUAL PARTNERS, so it will take a MAJORITY
vote of the partners for them to decide that Stroud
should not be liable
a. So, in this situation BOTH have to agree to have a
majority
i. Which essentially means they need a
unanimous vote
b. They would need a unanimous vote to determine
that Stroud would NOT be liable
c. AND they would have to communicate this to the
3rd party
64
 6. The Superior Court, Carteret County, Joseph W. Parker,
J., rendered judgment for seller, and partner appealed.
a. The Supreme Court, Parker, J., held that
i. 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,
ii. and although partner told bread seller he
would not be personally responsible for
additional bread sold to store,
1. partner and partnership were
liable for such purchase by
copartner.
a. Joint & several liability for
debts
7. Court also said that Stroud was an agent of the
partnership
a. So, Freeman’s acts did bind the partnership
ii. Summers v. Dooley, pg. 129 of book
1. Summers & Dooley entered a partnership agreement for
the purpose of operating a “trash collection business”
a. When 1 was unavailable to work, then the
partner unavailable would provide a
replacement at his own expense
2. 1962 Dooley became unavailable to work and hired a
replacement
3. Summers then wanted to hire an ADDITIONAL person
a. Dooley refused
b. Summers then hired the ADDITIONAL person
and paid him out of his own pocket
c. Dooley found out and REFUSED to pay out of
partnership funds
4. 1967 Summers sued to recover some of the amount he
had paid the additional hire
a. Issue – Is Dooley liable for this expense?
i. NO! B/c Dooley persistently objected
to hiring another person, even though
he profited from it in the end
b. When hiring people, you need a majority vote
where here again would mean BOTH had to
agree

65
 c. After trial, Summers was only granted partial
relief
d. His argument
i. Even though Dooley did not consent to
hire the additional man, Dooley still
profited from this move
1. Since Dooley profited, he cannot
then refuse to pay the additional
person
a. Theory of estoppel
b. Theory of ratification
5. Court affirmed lower court’s decision
a. MUST have majority agreement of the partners
b. Since Summers did not have Dooley’s consent, he
incurred this expense on his own
6. How does this case jive w/ Stroud?
a. What are the differences?
i. Stroud was a dispute over the ordinary
course of business
1. But, in Summers it is not
something in the ordinary course
of business
ii. In Stroud the 3rd party had not yet been
paid
1. but in Summers the 3rd party had
been paid
iii. Stroud is partner v. 3rd party
1. Summers is partner v. partner
iii. Fiduciary Obligations of Partners  An Introduction
1. Meinhard v. Salmon, pg. 97 of book (Doctrine of
Organizational opportunities)
This case demonstrates the a. Salmon leased a hotel for 20 years from Louisa
Doctrine of Organizational Gerry
Duties or “Usurpation of a i. He put $200,000 into hotel to convert it to
Business opportunity” shops/offices
meaning that the opportunity b. Salmon also had an agreement w/ Meinhard (a
belonged to the partnership and joint venture)
NOT the individual partner. i. Meinhard was to pay ½ of the $200,000
ii. Salman was to give Meinhard
1. 40% of the net profits for first 5
years of lease
2. AND 50% for 3 years after this
iii. If there were losses, they were to bear
them equally
iv. Salman was to have sole power to
manage the operation

66
 c. Property lost money at first, but then became
successful
d. Gerry then wanted to lease this land along w/
others TOGETHER
e. Salmon entered a NEW LEASE w/ Gerry
i. Through his company – Midpoint Realty
Co.
ii. Salmon did NOT tell Meinhard about this
f. When Meinhard learned of the lease he wanted it
held in a trust as an asset to the joint venture
g. Lower court ruled for Meinhard
i. Originally given 25% interest in lease, but
this was increased to 50%
1. This interest also increased
Meinhard’s obligations
h. Court said
i. Partners owe to each other “the duty of
finest loyalty”
ii. Salmon excluded Meinhard from this
opportunity
iii. Salmon had the duty as the partner
who conducted day to day business
1. No other way for Meinhard to
Duty of Loyalty – NOT putting know about it
yourself before the business 2. The partnership was still in
entity. existence when the 2nd deal was
made, meaning Salmon owed
An opportunity is seen as certain fiduciary duties to
property, a right that belongs to Meinhard
the partnership. a. Including the duty of
loyalty
i. So, taking this
interest was a
breach of the duty
of loyalty
3. Salmon was approached b/c he
was the managing partner
a. He did NOT go out on his
own and get this business
opportunity
4. The Court is saying you cannot put
your own interests before the
partnership!
iv. No evidence Salmon was trying to
defraud Meinhard

67
 1. Court said, could have been
different
a. If the object were not the
same
b. If the object were
something completely un-
related
v. Salmon did deserve an increase in his
shares of the trust b/c he did more of the
work
1. So, Salmon gets ½ PLUS 1 share of
trust
i. Dissenting opinion
i. Decision would be correct if the 2 were in a
general partnership
1. But this is a joint venture
2. And there was a limited object, that
was coming to an end (limited
time)
ii. Interest ended when the joint venture
ended
1. But, the majority is what is
followed in most states
a. Including Louisiana
iv. Liability of Partners in Partnerships
1. Art. 2817- Partnership debts; liability - A partnership
as principal obligor (partnership = principal obligor) is
primarily liable for its debts. A partner is bound for his
virile share of the debts of the partnership but may
plead discussion of the assets of the partnership.
a. Partners = principal obligor
b. Individual partners are then secondarily
liable for debts of the partnership
c. In LA, partners are only liable for their virile
shares
i. In common law, partners are joint &
severally liable
1. This is why limited partnerships
are so much more common that
general partnerships in other
states
ii. LA example – there is a $1.5 million debt
that the partnership cannot pay. The
partners would be liable for 1/3 (if 3
partners), they are liable “per head count”

68
 1. If 1 of the partners cannot pay
their $500,000 share, then that
creditor is out of luck!
2. This is limited liability
3. Even if 1 partner contributed 15%
of money for the company, that
partner would still owe the
$500,000
iii. The LA system is not great for creditors,
so what should creditors do to help
protect themselves?
1. Do a credit check on
a. Partnership
b. AND partners
2. Have partners put up collateral
2. Internal Affairs Doctrine – the law of the state of
incorporation (or organization) controls.
a. This includes fiduciary duties
3. Is a new partner liable for debts incurred by the
partnership before this new partner joined? NO!
a. B/c when a new partner joins, it is as if there is a
new partnership. You would have to fill out
paperwork and amend the Partnership w/the
Sec. of State
i. This applies in LA too – new partners are
NOT liable for debts incurred by the
partnership before they joined the
partnership.
4. What about debts incurred after a partner leaves
the partnership? Same thing – a partner who leaves a
partnership is NOT liable for debts incurred after they
leave the partnership.
5. And just in case  debts incurred by the partnership
while a partner is a member of the partnership, that
partner is liable for those debts incurred during the
partnership.
s. Termination, Withdrawal, and Dissolution of Partnerships
i. Code Art. 2818 - Causes of cessation of membership
1. A) A partner ceases to be a member of a partnership
upon: his death or interdiction; his being granted an
order for relief under Chapter 7 or confirmation of a
plan of liquidation or the appointment of a trustee of his
estate under Chapter 11 of the Bankruptcy Code; his
interest in the partnership being seized and not
released as provided in Article 2819; his expulsion from

69

ii. Code Art. 2819 - Seizure of the interest of a partner - A
iii. Code Art. 2820 - Expulsion of a partner for just cause - A
So, you can expel a
partner w/ a majority
vote. But, partner has
to be expelled for just
cause.
Remember that a
majority vote can be a
problem if the
partnership only has 2
members b/c it
essentially requires a
majority vote.
iv. Code Art. 2821 - Partnership constituted for term;
the partnership; or his withdrawal from the
partnership.
a. If a partner dies, will the partners’ heirs be
partners?
i. The heirs will get the partner’s interest,
but they do NOT become partners
ii. What does it mean to get the interest?
1. The interest = the value of the
partner’s interest w/in the
company and within the
partnership
2. Interest = control rights AND
economic rights
2. B) A partner also ceases to be a member of a
partnership in accordance with the provisions of the
contract of partnership.
partner ceases to be a member of a partnership if his interest
in the partnership is seized under a writ of execution and is not
released within thirty days. The cessation is retroactive to the
date of seizure.
partnership may expel a partner for just cause. Unless otherwise
provided in the partnership agreement, a majority of the
partners must agree on the expulsion.
1. Comments - (a) This article grants the remedy of
expulsion to the partnership when the conduct of a
partner is detrimental to the interests of the partners or
the partnership. Examples of conduct of a partner that
would constitute “just cause” for expulsion would be
failure to perform obligations, engaging in activities
that prejudice the business of the partnership, or the
willful or repeated breach of the partnership
agreement. Unless stipulated otherwise, a majority of
the partners must agree on the expulsion, and the partner
against whom the expulsion attempt is made is to have a
vote on the matter; thus, a sufficient number of votes
must be cast in favor of the expulsion to amount to a
majority vote of all partners.
withdrawal - If a partnership has been constituted for a term,
a partner may withdraw without the consent of his partners
prior to the expiration of the term provided he has just cause
arising out of the failure of another partner to perform an
obligation.
70

Partner can withdraw from
a partnership (w/o a term)
if
1) gives reasonable notice
in good faith
2) at a time that is NOT
unfavorable to the
partnership
Upon withdrawal, partner
gets the value of their
interest in the partnership.
Keep in mind you might
advise partnership to put a
“non compete” clause in
agreement. But, also be
aware that the non-
compete clause has to be
reasonable.
1. If a partner withdraws w/o just cause, the partner who
withdrew may be liable for damages.
2. W/o a partnership agreement, there can be NO JUST
CAUSE b/c the other partner cannot breach his
obligations!
v. Code Art. 2822 - Partnership without term (perpetual
partnership); withdrawal - If a partnership has been
constituted without a term, a partner may withdraw from the
partnership without the consent of his partners at any time,
provided he gives reasonable notice in good faith at a time
that is not unfavorable to the partnership.
1. If a partner does NOT give reasonable notice at a
favorable time, then the partner who is withdrawing
may be in breach of his fiduciary duties.
vi. Code Art. 2823 - Rights of a partner after withdrawal - The
former partner, his successors, or the seizing creditor is
entitled to an amount equal to the value that the share of the
former partner had at the time membership ceased.
1. So, the partner who withdrew, is entitled to his
proportionate (virile) share of the partnership at the
time of the withdrawal.
a. Essentially, the partner who withdrew is being
bought out.
vii. Code Art. 2824 - Payment of interest of partner - If a
partnership continues to exist after the membership of a
partner ceases, unless otherwise agreed, the partnership must
pay in money the amount referred to in Article 2823 as soon
as that amount is determined together with interest at the
legal rate from the time membership ceases.
1. This means IMMEDIATE payment of the TOTAL
VALUE
a. Does NOT provide for payments
i. Unless the partnership agreement
provided for a payment plan.
viii. Code Art. 2825 - Judicial determination of amount - If there
is no agreement on the amount to be paid under Articles 2823
and 2824, any interested party may seek a judicial
determination of the amount and a judgment ordering its
payment.
ix. Code Art. 2826 - Termination of a partnership; causes –
1. (1st paragraph) Unless continued as provided by law, a
partnership is terminated by: the unanimous consent of
its partners; a judgment of termination; the granting of
an order for relief to the partnership under Chapter 7 of
the Bankruptcy Code; the reduction of its membership
to one person; the expiration of its term; or the
71
 attainment of, or the impossibility of attainment of the
object of the partnership.
a. Attainment/impossibility of attainment refers to
joint venture OR a partnership w/ a specific
object
b. If it terminates b/c it only has 1 partner, then it
can be run as a sole proprietorship.
2. (2 paragraph) A partnership also terminates in
nd

accordance with provisions of the contract of

partnership.
3. (3rd paragraph) A partnership in commendam,
however, terminates by the retirement from the
partnership, or the death, interdiction, or dissolution, of
the sole or any general partner unless the partnership is
continued with the consent of the remaining general
partners under a right to do so stated in the contract of
partnership or if, within ninety days after such event, all
the remaining partners agree in writing to continue the
partnership and to the appointment of one or more
general partners if necessary or desired.
i. Code Art. 2827 - Continuation of a partnership –
1. (1st paragraph) A partnership may be expressly or
tacitly continued when its term expires or its object is
attained, or when a resolutory condition of the contract
of partnership is fulfilled. If the object becomes
impossible, the partnership may be continued for a
different object.
2. (2nd paragraph)Unless otherwise agreed, a
partnership that is expressly or tacitly continued has
no term.
ii. Code Art. 2828 - Continuation for liquidation; sole –
1. (1st paragraph) When a partnership terminates, the
business of the partnership ends except for purposes of
liquidation.
2. (2nd paragraph) If a partnership terminates because its
membership is reduced to one person, that person is
not bound to liquidate the partnership and may
continue the business as a sole proprietor. If the person
elects to continue the business, his former partners are
entitled to amounts equal to the value of their shares as
of time the partnership terminated, and they have the
right to demand security for the payment of partnership
debts.

72
 i. Code Art. 2829 - Change in number or identity of
partners - A change in the number or identity of partners
does not terminate a partnership unless the number is
reduced to one.
i. Code Art. 2830 - Effects of termination; authority of
partners
1. When a partnership terminates, the authority of
the partners to act for it ceases, except with regard
to acts necessary to liquidate its affairs.
2. Anything done in what would have been the usual
course of business of the partnership by a partner
acting in good faith, who is unaware that the
partnership has terminated, binds the partnership as if
it still existed.
i. Code Art. 2831 - Termination of the partnership; rights
of third parties - The termination of a partnership, for any
reason, does not affect the rights of a third person in good
faith who transacts business with a partner or a mandatary
acting on behalf of the former partnership.
ii. Code Art. 2832 - Creditors of the partnership; preference
The creditors of the partnership must be paid in preference
to the creditors of the partners
iii. Code Art. 2833 - Division of the partnership assets
1. The creditors of a partnership shall be paid in the
following order of priority:
a. (1) secured creditors in accordance with their
security rights;
b. (2) unsecured creditors who are not partners;
c. (3) unsecured creditors who are partners.
2. If any assets remain after the payment of all secured
and unsecured creditors, the capital contributions
shall be restored to the partners. Finally, any surplus
shall be divided among the partners proportionally
based on their respective interests in the partnership.
i. Code Art. 2834 - Liquidation of the partnership
1. In the absence of contrary agreement, a partnership is
liquidated in the same manner and according to the
same rules that govern the liquidation of corporations.
2. A partnership retains its juridical personality for the
purpose of liquidation.
ii. Code Art. 2835 - Final liquidation - The liquidation of a
partnership is not final until all its assets have been collected
and applied to its obligations and its remaining assets, if any,
have been appropriately distributed to the partners.

73
 a. Limited Partnerships (aka Partnerships in Commendam)
Partnerships in
commendam MUST
have AT LEAST 1
general partner AND 1
limited partner.
And! They can be
existing partnerships
that bring on 1 partner
in commendam.
Partnerships in
commendam require: MUST
have ALL 4!
(1) that some notice-giving
document, containing certain
specified terms, be recorded
in one or more specified
public places,
(2) that the partnership adopt
an appropriate name for the
business, one which gives
notice—or at least is not
misleading—concerning the
limited liability of the limited
partners in the firm,
(3) that the limited partners
refrain from participating
excessively in the
management of the firm, and
(4) that at least one partner
act and remain liable as a
general partner in the firm.
iii. Code Art. 2836 - Provisions applicable to partnerships in
commendam - The provisions of the other chapters of this
Title apply to partnerships in commendam to the extent they
are consistent with the provisions of this Chapter.
iv. Code Art. 2837 - Partnership in commendam; definition -
A partnership in commendam consists of one or more general
partners who have the powers, rights, and obligations of
partners, and one or more partners in commendam, or
limited partners, whose powers, rights, and obligations are
defined in this Chapter.
1. Comments - A partnership in commendam is a
partnership that has one or more partners in
commendam. The rules of this Chapter permit an
existing partnership to receive one or more partners
in commendam, and it also permits one or more
parties to acquire the in commendam status at the
inception of the partnership by being parties to the
original contract of partnership, but at least one other
party would have to acquire the status of a general
partner by the original contract of partnership
because the definition of partnership in commendam
requires that there be at least one general partner.
v. Code. Art. 2838 - Name; designation as partnership in
commendam - For the liability of a partner in commendam to
be limited as to third parties, the partnership must have a
name that appears in the contract of partnership; the name
must include language that clearly identifies it as a
partnership in commendam, such as language consisting
of the words “limited partnership” or “partnership in
commendam”; and the name must not imply that the partner
in commendam is a general partner.
1. HOW YOU FORM AND NAME ENTITIES IS VERY
IMPORTANT!
2. “…a partnership in commendam is formed in exactly
the same way that any other partnership is formed.”
vi. Code. Art. 2839 - Name of partner in commendam; use
1. A) A partner in commendam becomes liable as a
general partner if he permits his name to be used in
business dealings of the partnership in a manner that
implies he is a general partner.
2. B) If the name of a partner in commendam is used
without his consent, he is liable as a general partner
only if
a. 1) he knew or should have known of its use
74

vii. Code. Art. 2840 - Partner in commendam; liability;
Limited partners
liability is USUALLY
limited to what they
put in. But! Limited
partners can lose this
status.
Remember that general
partner’s liability in LA
is their virile share.
But, outside LA, general
partners are joint and
severally liable.
You CANNOT form
limited partnerships
inadvertently!
Limited Partnerships
NEED a contract. This is
so you can identify who
is a general partner and
who is a limited partner.
This contract MUST be
filed w/ the Sec. of State!
- look at 3401 & 3410
- 3403 lists the BARE
minimum of what the
contract needs to include.
You must also file any
amendments to the
contract, and the
amendment is NOT in
effect until it is filed!
b. 2) AND did not take reasonable steps to
prevent the use.
3. C) If the name of the partner in commendam is the
same as that of a general partner or if it had been
included in the name of a predecessor business entity or
in the name of the partnership prior to the admission of
the partner in commendam, its use does not imply that
he is a general partner.
agreed contribution
1. (1st Paragraph) A partner in commendam must agree
to make a contribution to the partnership. The
contribution may consist of money, things, or the
performance of non-managerial services. The
partnership agreement must describe the contribution
and state either its agreed value or a method of
determining it. The contract should also state the time
or circumstances upon which the money or other
things are to be delivered, or the services are to be
performed, and if it fails to do so, payment is due on
demand.
2. (2nd Paragraph) A partner in commendam is liable for
the obligations of the partnership only to the extent of
the agreed contribution. If he does not make the
contribution, or contributes only part of it, he is
obligated to contribute money, or other things equal
to the portion of the stated value that he has failed to
satisfy. The court may award specific performance if
appropriate.
i. Code. Art. 2841 - Contract form; registry - A contract of
partnership in commendam must be in writing and filed for
registry with the secretary of state as provided by law.
Until the contract is filed for registry, partners in
commendam are liable to third parties in the same
manner as general partners.
ii. Code. Art. 2842 - Restrictions on the right of a partner in
commendam to receive contributions
1. (1st paragraph) A partner in commendam may not
receive, directly or indirectly, any part of the capital or
undistributed profits of the partnership if to do so
would render the partnership insolvent. If he does so,
he must restore the amount received together with
interest at the legal rate.
2. (2nd paragraph) If the partnership or the partners do
not force the partner in commendam to restore the
amount received, the creditors may proceed directly
75
 against the partner in commendam to compel the
restoration.
iii. Code. Art. 2843 - Restrictions on the partner in
commendam with regard to management or
administration of the partnership - A partner in
commendam does not have the authority of a general partner
to bind the partnership, to participate in the management or
administration of the partnership, or to conduct any business
with third parties on behalf of the partnership.
1. General Rule is that limited partners CANNOT be
agents!
iv. Code. Art. 2844 - Liability of the partner in commendam
to third parties
1. A) A partner in commendam is not liable for the
obligations of the partnership unless such partner is
also a general partner or, in addition to the exercise of
such partner's rights and powers as a partner, such
partner participates in the control of the business.
However, if the partner in commendam participates
in the control of the business, such partner is liable
only to persons who transact business with the
partnership reasonably believing, based upon the
partner in commendam's conduct, that the partner
in commendam is a general partner.
a. “…the limited partners are not supposed to
participate in the management of the
partnership, but if the partnership or partners
fail to meet these conditions, the limited
partners are subjected to liability only to those
creditors who were misled by the failed
conditions into thinking that a limited liability
investor was actually a general partner in the
partnership.”
2. B) A partner in commendam does not participate in the
control of the business within the meaning of
Paragraph A of this Article solely by doing one or more
of the following:
a. (1) Being a contractor for or an agent or
employee of the partnership or of a general
partner.
b. (2) Being an employee, officer, director, or
shareholder of a general partner that is a
corporation or a member or manager of a
general partner that is a limited liability
company.

76
 c. (3) Consulting with and advising a general
partner with respect to the business of the
partnership.
d. (4) Acting as surety for the partnership or
guaranteeing or assuming one or more specific
obligations of the partnership.
e. (5) Taking any action required or permitted
by law to bring or pursue a derivative
action in the right of the partnership.
f. (6) Requesting or attending a meeting of
Prof. said #7 was a “big partners.
ticket item,” b/c these g. (7) Proposing, approving, or disapproving,
actions can change how by voting or otherwise, one or more of the
the partnership is run. following matters:
i. (a) The continuation, dissolution,
termination, or liquidation of the
partnership.
ii. (b) The alienation, exchange, lease,
mortgage, pledge, or other transfer of all
or substantially all of the assets of the
partnership.
iii. (c) The incurrence of indebtedness by
the partnership other than in the
ordinary course of its business.
iv. (d) A change in the nature of the
business.
v. (e) The admission, expulsion, or
withdrawal of a general partner.
vi. (f) The admission, expulsion, or
withdrawal of a partner in commendam.
vii. (g) A transaction involving an actual or
potential conflict of interest between a
general partner and the partnership or
the partners in commendam.
viii. (h) An amendment to the contract of
partnership.
ix. (i) Matters related to the business of the
partnership not otherwise enumerated
in this Paragraph, which the contract of
partnership states in writing may be
subject to the approval or disapproval
of partners.
h. (8) Liquidating the partnership.
i. (9) Exercising any right or power permitted to
partners in commendam under this Chapter

77
 and not specifically enumerated in this
Paragraph.
3. C) The enumeration in Paragraph B does not mean
that the possession or exercise of any other powers by
a limited partner constitutes participation by such
partner in the business of the partnership.
ii. L.R.S. § 9:3401 - Central registry; creation
1. A) The secretary of state is hereby directed to create a
Central Registry for Contracts of Partnership.
2. B) For the purposes of Chapters 1 through 4 of this
Code Title, any document required to be filed with the
secretary of state shall be deemed filed when it is
received either physically or electronically in any
office designated by the secretary of state for the
receipt of such documents.
iii. L.R.S. § 9:3402 – Filing
1. A) The contract of partnership or a multiple original
thereof, duly executed by the partners, or a certified
copy thereof, or statements submitted by foreign
partnerships in accordance with R.S. 9:3421 et seq.,
shall be filed for registry with the secretary of state
in accordance with the provisions of this Chapter to
affect third persons as provided by Civil Code
Articles 2806 and 2841 or when the parties choose
to comply with the provisions of this Chapter.
2. B) (1) The secretary of state may accept any filing
authorized by this Title by electronic or facsimile
transmission. All electronic filings authorized by
this Title shall include an electronic or digital
signature.
a. (2) “Digital signature” means a type of
electronic signature that transforms a message
using an asymmetric crypt system such that a
person having the initial message and the
signer's public key can accurately determine:
i. (a) Whether the transformation was
created using the private key that
corresponds to the signer's public key.
ii. (b) Whether the initial message has
been altered since the transformation
was made.
b. (3) “Electronic signature” means an electronic
sound, symbol, or process attached to or
logically associated with a record and executed
or adopted by a person with the intent to sign
the record.

78

iv.
3403 contains the BARE
MINIMUM of what the
Limited Partnership
contract should include.
v.
Keep in mind you can
amend LP’ship agreement,
but the amendment will
NOT be recognized as
effective against 3rd parties
until it has been filed.
vi.
Once the contract has been
filed w/ the Sec. of State, the
Sec. of State will then issue a
certificate of registry to the
Limited partnership.
vii.
You can file the LP contract
with the Sec. of State 30
days in advance of the day
you want your LP to go into
effect.
3. C) A facsimile filing, the process of transmitting
printed documents by electronic method to the
secretary of state, is deemed to be properly signed
when the document received by a facsimile
machine in the commercial division, office of the
secretary of state, purports to be a copy of the
original document, and contains the signatures
required by this Section.
L.R.S. § 9:3403 - Contract of partnership; required
content - A contract of partnership filed for registry with the
secretary of state shall contain the name and taxpayer
identification number of the partnership (AND whether
they are limited partners), the municipal address of its
principal place of business in this state, and the name and
the municipal address of each partner, including partners
in commendam, if any. The failure to include the taxpayer
identification number of the partnership shall not invalidate
nor cause the secretary of state to reject the contract.
L.R.S. § 9:3404 - Contract amendment - An amendment to a
contract of partnership shall be filed for registry in the same
manner as an original contract of partnership. Until filed for
registry, such amendment shall not be effective as to third
persons. An amendment to a contract of partnership that is
not registered with the secretary of state shall be
accompanied by an original copy of the contract of
partnership, or a certified copy, and all previous
amendments.
L.R.S. § 9:3405 - Registration; endorsement; issuance of
certificate; effect - When all fees have been paid, the
secretary of state shall register the contract of partnership, or
a certified copy, or the statement of a foreign partnership, in
the Central Registry for Contracts of Partnership created for
that purpose, endorse on all documents delivered the month,
day, year, and hour of filing, and shall issue a certificate of
registry certifying that the contract of partnership or
statement of the foreign partnership is filed and registered.
The certificate of registry shall be conclusive evidence of due
registration. A contract, statement, or amendment that is
duly registered is deemed registered as of the time of filing.
L.R.S. § 9:3406 - Recorder of mortgages; filings - A
multiple original of the contract of partnership, or a copy
certified by the secretary of state, and a copy of the certificate
of registry, shall be filed for registry with the recorder of
mortgages of the parish in which the partnership
maintains its principal place of business. Failure to file
these documents with the recorder of mortgages as provided
79

viii.
And you can file 5 days
AFTER your LP
agreement has been
executed, AND it will be
effective back to the date
of execution.
ALL business entities
need to file an annual
report w/ the Sec. of
State.
by this Section shall not affect the title of immovable
property as being in the partnership or the status of a
partner in commendam, or a limited partner.
1. But, if you do NOT file, then it is NOT effective
against 3rd persons.
L.R.S. § 9:3407 - Delivery in advance of effective date -
Prior to its effective date, a contract of partnership or a
statement of a foreign partnership may be delivered to the
secretary of state for filing and registration on any specified
month, day, year, and hour on or before the thirtieth day
after the day of delivery.
ix. L.R.S. § 9:3408 - Filing within five days of execution;
effect - A contract of partnership or a statement of a foreign
partnership filed for registry with the secretary of state
within five days of execution, exclusive of legal holidays, is
deemed filed for registry on the month, day, year, and hour of
execution.
1. But, if you don’t make the 5 day deadline, your
effective date will be the date filed. And for any
days before this, limited partners will be liable as
general partners.
x. L.R.S. § 9:3409 - Annual report
1. A) Each year on or before the anniversary date of
registration with the secretary of state, any partner
shall make and sign in the partnership name a
report to the secretary of state, stating:
a. (1) The municipal address, which shall not be a
post office box only, of its principal place of
business in this state.
b. (2) The names and municipal addresses, which
shall not be post office boxes only, for each
partner.
c. (3) The taxpayer identification number of the
partnership. The failure to include the taxpayer
identification number of the partnership shall
not invalidate nor cause the secretary of state
to reject the report.
2. B) Any partnership registered with the secretary of
state prior to August 15, 1997 shall file an annual
report on the next anniversary date of registration.
3. C) The provisions of this Section shall not apply to a
partnership which does not have a written agreement.
xi. L.R.S. § 9:3410 - Filing and copying fees –
1. A) The secretary of state shall be paid fees as provided
in R.S. 49:222 in advance, for the use and benefit of
the state, by every registered partnership:
80
 a. (1) For filing a contract of partnership.
b. (2) For certified copies.
c. (3) For additional certificates.
d. (4) For filing an annual report.
B) The secretary of state shall be paid fees as provided
in R.S. 49:222 in advance, for the use and benefit of
the state, by every registered foreign partnership:
e. (1) For filing partnership registration
statements and amended registration
statements.
f. (2) For termination of registration.
g. (3) For filing an annual report.
xii. Holzman v. De Escamilla (pg. 166 of book)
1. Appeal by 2 partners
Limited Partnerships a. Court ruled they were general partners and
Case from Text Book NOT part of a limited partnership
i. Which means they could be held liable
as general partners
2. Company = Hacienda Farms, Limited
i. Keep in mind that this name is NO
longer good enough, you can know
longer have just “limited” in the title and
be a limited partnership. But! At the
time it was good enough…
b. Organized in 1943 as a limited partnership
i. De Escamilla = general partner
ii. Russell & Andrews = limited partners
3. Partnership went into bankruptcy
a. Holzman was appointed as trustee of the estate
of bankruptzy
4. Holzman brought the action saying that b/c the
limited partners took control over the management of
the partnership, which turned them from limited
partners to general partners
5. Court said facts really aren’t in dispute  they
were general partners
a. Russell & Andrews were heavily involved in
the farming business
i. Esp. what was planted
b. Russell & Andrews asked De Escamilla to
resign
i. He did
ii. Was replaced by Miller
c. 2 bank accounts = check writing power!
i. in order to withdraw money, needed
signature of 2 of the 3 partners

81
 1. which meant De Escamilla
could never withdraw money
on his own
a. Keep in mind that De
Escamilla was supposed
to be the general
partner
6. Art. 2483 (older version) says that a limited partner is
NOT liable as a general partner, UNLESS in addition to
his duties as a limited partner he also takes control of
the business
a. This is NOW in article 2844
7. Court says the 2 “limited partners” clearly took
control of the business
a. Most important factor  the bank account,
the 2 limited partners could withdraw
money w/o De Escamilla knowing
b. They asked him to resign
i. AND they chose the successor
c. They were heavily involved in the crops
planted.
b. Improper Formation of Limited Partnerships
i. If improperly formed, a limited partnership may be deemed a
general partnership
1. Which affects liability  So, it can be A BIG DEAL!
ii. What are some ways that a Limited Partnership can be
improperly formed
1. Failing to file w/ the Sec. of State
2. Improper name
a. Art. 2838 requires that a limited partnership
adopt a name that shows it is a limited
partnership
i. You do this by including
1. Limited Partnership
2. Partnership in Commendam
3. OR L.P.
ii. And, the name of the limited
partnership CANNOT imply that the
limited partners are actually general
partners
1. Ex. “Sautter & Friends”
a. “friends” can imply they
are general partners,
EVEN IF it is “Sautter &
Friends, L.P”

82
 2. “Sautter & Lonegrass” is also
NOT ok
a. Lonegrass could lose LP
status
3. YOU ONLY WANT TO INCLUDE
THE NAMES OF GENERAL
PARTNERS!!
a. Or else, you risk losing LP
status for those limited
partners
i. “Sautter &
Friends” ALL
would risk losing
LP status
ii. “Sautter &
Lonegrass” – only
Lonegrass would
risk losing LP
Generally reserved for
professionally licensed status
people: attorneys, b. So, “Sautter, L.P” is OK!
doctors, engineers, iii. Only exception is in 2839(c) - If the
architects, accountants. name of the partner in commendam is
the same as that of a general partner or
But, it varies by state. if it had been included in the name of a
predecessor business entity or in the
name of the partnership prior to the
Virile share is NOT admission of the partner in commendam,
affected by the limited its use does not imply that he is a general
liability rule. partner.
3. Another way to lose LP status is if too much
So, if LLP owes other
debts, then the partners control/too much management power is given to
would be virily liable in the LP
LA. So, a partner can still a. So, how much control can you give to an LP?
be held liable as to their i. LP cannot participate in management
virile share. ii. Default rule is that LPs cannot act as
agents
iii. Look to 2843 & 2844
iv. When does consulting become actual
management?
1. Look to Holzman Case
c. Registered Limited Liability Partnerships
iii. L.R.S. § 9:3431 - Nature of partner's liability in ordinary
partnership and in registered limited liability partnership
1. A) Notwithstanding any other provisions of law to the
contrary contained in Civil Code Article 2817, a partner
in a registered limited liability partnership shall not be

83
 individually liable for the liabilities and obligations
of the partnership arising from errors, omissions,
negligence, incompetence, malfeasance, or willful or
intentional misconduct committed in the course of
the partnership business by another partner or a
representative of the partnership.
a. “representative” most likely includes associates
b. So for a law firm, if an associate commits
malpractice
i. Associate is individually liable
ii. AND LLP itself would be liable
iii. BUT! The individual partners would not
bear personal liability
1. UNLESS the individual partners
was negligent in supervising the
associate
2. B) Nothing in this Section shall be construed as being in
derogation of any rights which any person may have by
law against a partner in a registered limited liability
partnership because of any fraud practiced upon him, or
because of any breach of professional duty or other
negligent or wrongful act by such partner, or in
derogation of any right which the registered limited
liability partnership may have against any such partner
because of any fraud practiced upon it by him.
3. C) Subsection A of this Section shall not affect the
liability of a partner for his virile share of liabilities and
obligations of the partnership arising from any cause
other than those specified in said Subsection A.
4. D) Subsection A of this Section shall not affect the
liability of partnership assets for partnership liabilities
and obligations.
5. E) A partner, which by reason of Subsection A of this
Section is not subject to liability, is not a proper party to
a proceeding by or against a registered limited liability
partnership, the object of which is to enforce the
liabilities and obligations described in Subsection A of
this Section.
iv. L.R.S. § 9:3432 - Registered limited liability partnerships
1. A. To become a registered limited liability partnership, a
partnership shall file with the secretary of state an
application stating the name of the partnership, the
address of its principal office, the number of partners,
and a brief statement of the business in which the
partnership engages.

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 2. B) The application shall be executed by a majority in
interest of the partners or by one or more partners
authorized by a majority in interest of the partners.
3. C) The application shall be accompanied by a fee as
provided in R.S. 49:222 made payable to the
secretary of state.
4. D) The secretary of state shall register or renew any
partnership that submits a completed application with
the required fee.
5. E) Registration is effective for one year after the date
the registration is filed, unless voluntarily withdrawn
by filing with the secretary of state a written
withdrawal notice executed by a majority in interest of
the partners or by one or more partners authorized by a
majority in interest of the partners.
6. F) The secretary of state may provide forms for
application for or renewal of registration.
v. L.R.S. § 9:3433 - Name of registered limited liability
partnership - A registered limited liability partnership's name
shall contain the words “registered limited liability partnership”
or the abbreviation “L.L.P.” as the last words or letters of its
name.
vi. L.R.S. § 9:3434 - Restrictions on distributions - A partner
that is not liable under R.S. 9:3431(A) shall not be individually
liable for the return of a distribution from the partnership to
satisfy the liabilities and obligations described in said
Subsection A except to the extent that the partner is required
to return the distribution in a revocatory action brought in
accordance with Chapter 12 of Title IV of Book III of the Civil
Code.
vii. L.R.S. § 9:3435 - Provisions applicable to registered
limited liability partnerships - A registered limited liability
partnership is a partnership as defined in Article 2801 of the
Civil Code, and the provisions of Title XI of Book III of the Civil
Code apply to registered limited liability partnerships to the
extent that they are consistent with the provisions of this
Chapter. Upon lapse or termination of registration, the affected
registered limited liability partnership shall continue as a
partnership under Title XI of Book III of the Civil Code, but
without application of this Chapter.
1. Art. 2801 = definition of a general partnership

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 Corporations
1. Formation; Pre-incorporation Transactions
a. L.R.S. § 12:21 Incorporators - One or more natural or artificial
persons capable of contracting may form a corporation.
b. L.R.S. § 12:22 Purposes - A corporation may be formed for any
lawful business purposes, except banking and insurance
underwriting in all of their several forms, operating homesteads
or building and loan associations, and except (unless the
corporation conforms to the provisions of Chapter 8 of this Title)
practicing law; and except such other businesses for which
incorporation is governed by special laws, or as may be prohibited to
corporations by law.
c. L.R.S. § 12:23 Corporate name; reservation of name
i. A) The corporate name, except in cases of railroad,
Name MUST include:
1. Corporation/Corp.
telegraph and telephone corporations, shall contain the
2. Incorporated/Inc. word “Corporation”, “Incorporated” or “Limited”, or the
3. Limited/Ltd. abbreviation of any of those words, or may contain instead
4. Company/Co. the word “Company” or the abbreviation “Co.” if the latter
a. But cannot word or abbreviation is not immediately preceded by the
have “and”
or “&” if
word “and” or the symbol “&”. No corporate name shall
using contain the phrase “doing business as” or the abbreviation
Company/Co “d/b/a”. The corporate name shall not imply that the
corporation is an administrative agency of any parish or of this
CANNOT have “doing state or of the United States.
business as” or “d/b/a”
ii. B) As used in this Subsection, the term “corporation”
includes corporations as defined in R.S. 12:1(G), foreign
corporations as defined in R.S. 12:1(K), nonprofit
corporations as defined in R.S. 12:1(O), and limited
liability companies as defined in R.S. 12:1301(10). The
corporate name shall be distinguishable from a name reserved
pursuant to R.S. 12:23(G) and shall be distinguishable from the
name of any other corporation, limited liability company, or
trade name registered with the secretary of state unless any of
the following Paragraphs applies:
1. (1) The other corporation is about to change its name;
or to cease doing business; or is being liquidated; or, if a
foreign corporation, is about to withdraw from doing
business in this state; and the written consent of the
other corporation to the adoption of its name or a non-
distinguishable name has been given and is filed with
the articles.
2. (2) The other corporation has theretofore been
authorized to do business in this state for more than
two years and has never actively engaged in business in
this state. The failure of a business or foreign
corporation to file a Louisiana corporate franchise tax

86
 return for two consecutive years shall constitute prima
facie evidence that it has not actively engaged in
business in this state during such period.
3. (3) The other corporation has failed to pay the
corporate franchise tax or taxes due by it to the state for
the preceding five consecutive years.
4. (4) The other corporation, if a foreign corporation, is
not authorized to do business in this state and has not
filed a Louisiana corporate franchise tax return for two
consecutive years.
5. (5) The other corporation or limited liability company
filed for dissolution or withdrawal prior to the
preceding five years and has not received the tax
clearances required for final dissolution or withdrawal.
iii. C) Nothing in this section shall abrogate or limit the law as to
unfair competition or unfair practice in the use of trade names,
nor derogate from the principles of law or the statutes of this
state, or of the United States, with respect to the right to
acquire and protect trade names.
iv. D) A corporation may use a corporate name in any language,
but the name shall be in English letters or characters.
v. E) (1)(a) No business corporation except a bank holding
company shall include in its corporate name any of the
following words or phrases in any form: “bank”, “banker”,
“banking”, “savings”, “safe deposit”, “trust”, “trustee”,
“building and loan”, “homestead”, “credit union”,
“insurance”, “casualty”, “redevelopment corporation”, or
“electric cooperative”. No corporate name other than that of
an independent insurance agency or brokerage corporation
shall contain the word “insurance”.
1. (b) However, if a corporation seeking issuance of a
certificate of incorporation in this state includes in its
name the words “bank”, “banker”, “banking”, “savings”,
“safe deposit”, “trust”, “trustee”, “building and loan”,
“homestead”, “credit union”, or any other word of
similar import as part of its name or title, the secretary
of state shall require, prior to issuance of the certificate
of incorporation, satisfactory evidence that written
notice of such application for a certificate of
incorporation has been delivered to the office of
financial institutions in writing not less than ten days
prior to the date of issuance of the certificate of
incorporation.
2. (2) If the corporation seeking the issuance of a
certificate of incorporation in this state includes in its
name the word “engineer”, “engineering”, “surveyor”, or

87
 “surveying”, the secretary of state shall require, prior to
the issuance of the certificate of incorporation, evidence
satisfactory to him that written notice of such
application for a certificate of incorporation has been
delivered to the Louisiana Professional Engineering and
Land Surveying Board in writing not less than ten days
prior to the date of issuance of the certificate of
incorporation. If the applicant corporation files with its
application to the secretary of state a written waiver
signed by the executive secretary or any officer of the
Louisiana Professional Engineering and Land Surveying
Board waiving the requirement of the ten days' written
notice to said board, as set forth in the preceding
sentence, the secretary of state shall be authorized to
proceed immediately with the processing of such
application.
vi. (3) If the corporation seeking issuance of a certificate of
incorporation in this state includes in its name the word
“architect”, “architectural”, or “architecture”, the secretary of
state shall require, prior to issuance of the certificate of
incorporation, satisfactory evidence that written notice of such
application for a certificate of incorporation has been delivered
to the State Board of Architectural Examiners, in writing, not
less than ten days prior to the date of issuance of the certificate
of incorporation. If the applicant corporation files with its
application to the secretary of state a written waiver signed by
the executive director or any member of the State Board of
Architectural Examiners waiving the requirements of this
Paragraph, the secretary of state shall be authorized to proceed
immediately with the processing of such application.
vii. F) The assumption of a name in violation of this section shall
not affect or vitiate the corporate existence, but the court
having jurisdiction may, upon application of the state or of any
person, unincorporated association or corporation interested
or affected, enjoin a corporation from doing business under a
name assumed in violation of this section, although its articles
may have been filed and recorded and a certificate of
incorporation issued.
viii. G. (1) The exclusive right to the use of a corporate name may
be reserved by:
1. (a) Any person intending to organize a corporation
under this Chapter or Chapter 2 of this Title;
2. (b) Any business, nonprofit or foreign corporation
intending to change its name;
3. (c) Any foreign corporation intending to apply for
authority to do business in this state; or

88
 4. (d) Any person intending to incorporate a foreign
corporation and to have it apply for authority to do
business in this state.
5. (2)(a) Application to reserve a corporate name shall
be filed with the secretary of state. If the secretary of
state finds that the name is available for corporate use,
he shall reserve the name for the exclusive use of the
applicant for a period of sixty days or such shorter
period as may be requested.
6. (b) When a corporate name is reserved as herein
provided, the person, firm, corporation, association,
partnership, or other entity making such
reservation shall pay to the secretary of state, for
the use and benefit of the state, a fee as provided in
R.S. 49:222 as a condition of such reservation.
7. (c) The secretary of state may, for good cause shown,
extend the reservation for an additional period of not
more than thirty days. Not more than two such
extensions shall be granted.
8. (d) The right to the exclusive use of a specified
corporate name so reserved may be transferred to any
other person or corporation by filing in the office of the
secretary of state a notice of such transfer, executed by
the applicant for whom the name was reserved and
specifying the name and address of the transferee.
ix. H) The provisions of this section shall not affect the right of any
corporation existing on January 1, 1929, to continue the use of
its corporate name.
x. I) No business corporation shall include in its corporate
name any words which deceptively or falsely suggest a
charitable or nonprofit nature.
d. L.R.S. § 12:24 Articles of incorporation
i. A. The articles shall be written in the English language, and
shall be signed by each incorporator, or by an agent of each
incorporator duly authorized by a document attached to the
articles. The articles shall be acknowledged by one of the
persons who signed the articles, or may instead be executed by
authentic act.
ii. B. The articles shall set forth:
1. (1) The name of the corporation.
2. (2) In general terms, the purpose or purposes for
which the corporation is to be formed, or that its
purpose is to engage in any lawful activity for which
corporations may be formed under this Chapter.
3. (3) The duration of the corporation, if other than
perpetual.

89
 4. (4) The aggregate number of shares which the
corporation shall have authority to issue.
5. (5) If the shares are to consist of one class only, the
par value of each share or a statement that all of the
shares are without par value.
6. (6)(a) If the shares are to be divided into classes, the
number of shares of each class; the par value of the
shares of each class or a statement that such shares
are without par value; the designation of each class
and, insofar as fixed in the articles, each series of each
preferred or special class; a statement of the
preferences, limitations and relative rights of the shares
of each class and the variations in relative rights and
preferences as between series, insofar as the same are
fixed in the articles; and a statement of any authority
vested in the board of directors to amend the articles to
fix the preferences, limitations and relative rights of the
shares of any class, and to establish, and fix variations in
relative rights as between, series of any preferred or
special class.
7. (b) Any of the designations, preferences, limitations and
relative rights of the shares of any class and of the
variations in relative rights and preferences as between
series may be made dependent upon facts ascertainable
outside the articles or any amendment thereto,
provided that the manner in which such facts shall
operate upon the designations, preferences, limitations,
relative rights, or variations in relative rights and
preferences is clearly and expressly set forth in the
articles or amendment thereto. The term “facts”, as used
in this Paragraph, includes but is not limited to the
occurrence of any event, including a determination or
action by any person or body, including the corporation.
8. (7) The full name and post office address of each
incorporator.
9. (8) The taxpayer identification number of the
corporation. The failure to include the taxpayer
identification number of the corporation shall not
invalidate nor cause the secretary of state to reject the
articles.
iii. C) The articles may also contain the following:
1. (1) A provision granting to the shareholders or any
class of shareholders the preemptive right to subscribe
to any or all additional issues of stock, or securities
convertible into stock, of the corporation of any or all
classes. A provision that “Shareholders shall have

90
 preemptive rights” shall have the meaning stated in R.S.
12:72, and this provision shall be deemed to be included
in the articles of every corporation heretofore formed
unless the articles contain a specific provision
enlarging, limiting or denying preemptive rights.
2. (2) Any provision concerning the powers or rights of
the corporation, the directors or the shareholders, or
any class or classes of shareholders.
3. (3) A provision that cash, property or share dividends,
shares issuable to shareholders in connection with a
reclassification of stock, and the redemption price of
redeemed shares, which are not claimed by the
shareholders entitled thereto within a reasonable time
(not less than one year in any event) after the dividend
or redemption price became payable or the shares
became issuable, despite reasonable efforts by the
corporation to pay the dividend or redemption price or
deliver the certificates for the shares to such
shareholders within such time, shall, at the expiration of
such time, revert in full ownership to the corporation,
and the corporation's obligation to pay such dividend or
redemption price or issue such shares, as the case may
be, shall thereupon cease; provided that the board of
directors may, at any time, for any reason satisfactory to
it, but need not, authorize (a) payment of the amount of
any cash or property dividend or redemption price or
(b) issuance of any shares, ownership of which has
reverted to the corporation pursuant to a provision of
the articles authorized by this section, to the entity who
or which would be entitled thereto had such reversion
not occurred.
4. (4) A provision eliminating or limiting the personal
liability of a director or officer to the corporation or its
shareholders for monetary damages for breach of
fiduciary duty as a director or officer, provided that
such provision shall not eliminate or limit the liability of
a director or officer:
a. (a) For any breach of the director's or officer's
duty of loyalty to the corporation or its
shareholders;
b. (b) For acts or omissions not in good faith or
which involve intentional misconduct or a
knowing violation of law;
c. (c) For liability under R.S. 12:92(D); or
d. (d) For any transaction from which the director
or officer derived an improper personal benefit.

91
 No such provision shall eliminate or limit the
liability of a director or officer for any act or
omission occurring prior to the date when such
provision becomes effective.
iv. (5) Any other provisions for the regulation of the business
and the conduct of the affairs of the corporation not
prohibited by this Chapter or other laws of this state,
including, without limitation of the generality of the foregoing
phrase, any provisions restricting the transfer of shares or for
the optional or compulsory sale and purchase of shares among
the shareholders and the corporation or any of them.
e. L.R.S. § 12:25 - Filing and recording articles and initial report;
issuance and effect of certificate of incorporation;
commencement of corporate existence
i. A. (1) The articles shall be filed with the secretary of state,
together with the initial report prescribed by R.S. 12:101. A
notarized affidavit of acknowledgment and acceptance
signed by the registered agent, if not included on the initial
report, shall be attached to the articles of incorporation and
initial report.
ii. (2) If the first directors are not named in the initial report, a
supplemental report, setting forth their names and addresses
and signed by each incorporator or his agent or by any
shareholder, shall be filed with the secretary of state, and filed
for record as provided in Subsection D of this Section, as soon
as they have been selected.
iii. (3) The articles and initial report may be delivered to the
secretary of state in advance, for filing as of any specified date
and, if specified upon such delivery, as of any given time on
such date, within thirty days after the date of delivery.
1. B. If the secretary of state finds that the articles and
initial report are in compliance with the provisions of
this Chapter and after all fees have been paid as
required by law, the secretary of state shall record the
articles and the initial report in his office, endorse on
each the date and, if requested, the hour of filing thereof
with him, and issue a certificate of incorporation that
shall show the date and, if endorsed on the articles, the
hour of filing of the articles with him. The certificate of
incorporation shall be conclusive evidence of the fact
that the corporation has been duly incorporated, except
that in any proceeding brought by the state to annul,
forfeit, or vacate a corporation's franchise, the
certificate of incorporation shall be only prima facie
evidence of due incorporation.

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 iv. C. Upon the issuance of the certificate of incorporation, the
corporation shall be duly incorporated, and the corporate
existence shall begin, as of the time when the articles were
filed with the secretary of state, except that, if the articles
were so filed within five days (exclusive of legal holidays)
after acknowledgment thereof or execution thereof as an
authentic act, the corporation shall be duly incorporated,
and the corporate existence shall begin, as of the time of
such acknowledgment or execution.
v. D. A multiple original of the articles, or a copy certified by the
Secretary of State, with a copy of the certificate of
incorporation, and a multiple original of the initial report, or a
copy certified by the Secretary of State, shall, within thirty days
after filing of the articles with the Secretary of State, be filed for
record in the office of the recorder of mortgages of the parish
in which the registered office of the corporation is located.
vi. E. (1) If the corporation contracts with the state, a statement
acknowledging such contract shall be filed with the secretary
of state and shall include the names and addresses of all
persons or corporate entities who hold an ownership interest
of five percent or more in the corporation or who hold by
proxy the voting power of five percent or more in the
corporation and, if anyone is holding stock in his own name
that actually belongs to another, the name of the person for
whom held, including stock held pursuant to a counterletter.
The statement acknowledging a state contract and ownership
and voting interest shall be duly acknowledged, or executed by
authentic act.
1. (2) This Subsection does not apply to:
a. (a) Any agreement entered between the state
and a corporation for electric or gas service.
b. (b) Publicly traded corporations.
c. (c) State chartered banks.
f. LSA-R.S. 12:25.1 Acquisition of immovable property prior to
incorporation; retroactivity of corporate existence - Whenever
any immovable property is acquired by one or more persons acting in
any capacity for and in the name of any corporation which is not duly
incorporated, and the corporation is subsequently duly incorporated
in accordance with the provisions of R.S. 12:25, the corporate
existence shall be retroactive to the date of acquisition of an
interest in said immovable property, but such retroactive effect
shall be without prejudice to rights validly acquired by third
persons in the interim between the date of acquisition and the
date that the corporation was duly incorporated.
g. L.R.S. § 12:26 Condition precedent to beginning business - A
corporation formed under this Chapter shall not incur any debts or

93
 begin the transaction of any business, except business incidental to its
organization, or to the obtaining of subscriptions to, or payment for,
its shares, until the amount of paid-in capital with which it will begin
business, if stated in the articles, has been paid in full.
i. Concerning the issuing of stock
ii. Do NOT include the paid in capital requirement in bylaws
h. L.R.S. § 12:27 Expenses of organization, reorganization and
financing - The reasonable charges and expenses of organization or
reorganization of a corporation, and the reasonable expenses of, and
compensation for, the sale or underwriting of its shares, may be paid
or allowed by the corporation out of the consideration received by it
in payment for its shares, without thereby impairing the fully paid and
non-assessable status of such shares.
i. L.R.S. § 12:28 By-laws
i. A) Unless the articles provide otherwise, the board of
directors may make and alter by-laws, including by-laws
fixing the directors' qualifications, classifications, number or
term of office, or fixing their compensation, subject to the
power of the shareholders to change or repeal any by-laws so
made.
ii. B) The by-laws may contain any provision relating to the
business of the corporation, the conduct of its affairs, its
rights or powers, or the rights or powers of its shareholders,
directors or officers, not inconsistent with law or the
articles.
iii. C) The board of directors may adopt emergency by-laws,
subject to repeal or change by action of the shareholders,
which shall be operative during any emergency resulting from
an attack on the United States or on a locality in which the
corporation conducts its business or customarily holds
meetings of its board of directors or its shareholders, or during
any nuclear or atomic disaster, or during the existence of any
catastrophe or other similar emergency condition, as a result
of which a quorum of the board of directors or a standing
committee thereof cannot readily be convened for action. The
emergency by-laws may make any provision that may be
practical and necessary for the circumstances of the
emergency, including provisions that:
1. (1) A meeting of the board of directors or a committee
thereof may be called by any officer or director in such
manner and under such conditions as shall be
prescribed in the emergency by-laws;
2. (2) The director or directors in attendance at the
meeting, or any greater number fixed by the emergency
by-laws, shall constitute a quorum;

94
 3. (3) The officers or other persons designated on a list
approved by the board of directors before the
emergency, all in such order of priority and subject to
such conditions and for such period of time (not longer
than reasonably necessary after the termination of the
emergency) as may be provided in the emergency by-
laws or in the resolution approving the list, shall, to the
extent required to provide a quorum at any meeting of
the board of directors, be deemed directors for such
meeting;
4. (4) The board of directors, either before or during any
such emergency, may provide, and from time to time
modify, lines of succession in the event that during such
emergency any or all officers or agents of the
corporation shall for any reason be rendered incapable
of discharging their duties; and may either before or
during any such emergency, effective during the
emergency, change the head office or designate several
alternative head offices or regional offices, or authorize
the officers so to do;
5. (5) Notice of any meeting of the board of directors
during such an emergency need be given only to such of
the directors as it may be feasible to reach at the time
and by such means as may be feasible at the time,
including publication or radio; and
6. (6) To the extent required to constitute a quorum at any
meeting of the board of directors or a committee
thereof during such an emergency, the officers of the
corporation who are present shall, unless otherwise
provided in emergency by-laws, be deemed, in order of
rank and within the same rank in order of seniority,
directors for such meeting.
iv. D) No officer, director, or employee acting in accordance with
any emergency by-laws shall be liable except for willful
misconduct. To the extent not inconsistent with any emergency
by-laws so adopted, the by-laws of the corporation shall
remain in effect during any emergency and upon its
termination the emergency by-laws shall cease to be operative.
v. E) No person, not an officer or director, dealing with the
corporation, shall be charged with constructive notice of the
by-laws.
j. L.R.S. § 12:29 Shareholders' agreements
i. A) Any lawful provision regulating the affairs of a corporation
or the rights and liabilities of its shareholders, which is not
required to be set forth in the articles, may be set forth in an
agreement among all of the shareholders who would be

95
 entitled to vote on the provisions thereof if proposed as an
amendment to the articles. Such an agreement shall be binding
on all persons who are at the time such agreement is made, or
who thereafter become, shareholders of the corporation,
subject, in the case of persons not signatory thereto, to
compliance with R.S. 12:57(F). No other person dealing with
the corporation shall be charged with constructive notice of
such an agreement. Such an agreement may be terminated or
modified by amendment at any time, in the manner (except
that no amendment thereto need be filed or recorded except as
provided in subsection B of this section) and by the vote which
would be required for adoption of an amendment to the
articles deleting or similarly modifying the provisions thereof
if they had been set forth in the articles, or by such larger vote
as may be specified in the agreement.
ii. B) A duplicate copy of each such agreement and of each
amendment thereto, or a certified copy of the minutes of the
meeting at which the amendment was adopted by vote, shall be
filed in the corporation's registered office, and shall be open,
daily during business hours, to the inspection of any
shareholder or his attorney, agent or legal representative.
k. L.R.S. § 12:31 Method of amending articles generally
i. A) A corporation may, in the manner herein provided,
amend its articles in any respect, to effect a reclassification
of its stock, to include or change any provision authorized
by this Chapter, or to omit any provision not required by
this Chapter.
ii. B) Except as hereinafter provided in this Section, an
amendment altering the articles may be adopted by a vote of at
least two-thirds of the voting power present, or by such larger
or smaller vote (not less than a majority) of the voting power
present or of the total voting power as the articles may require,
at an annual or special meeting of shareholders, the notice of
which shall set forth the proposed amendment or a summary
of the changes to be made thereby.
iii. C. (1) If an amendment would adversely affect the rights of the
holders of shares of any class or series, then in addition to the
vote required by Subsection B of this Section, the holders of
each class or series of shares so affected by the amendment
shall be entitled to vote as a class upon such amendment,
whether or not by the terms of the articles such class or series
is entitled to vote; and the vote of the holders of at least two-
thirds of the shares of each class or series so affected by the
amendment, present or represented at the meeting, shall be
necessary to the adoption thereof, except that the articles may
provide, with respect to any such class or series, for the vote of

96
 a greater or lesser proportion (not less than a majority) of the
voting power present or of the total voting power, in which
case the vote so provided shall be the necessary vote for such
class or series.
1. (2) Except as otherwise provided in the articles, the
rights of a shareholder shall not be considered
adversely affected unless the amendment (otherwise
than as permitted by the articles):
a. (a) Alters or abolishes any preferential right of
his shares having preferences;
b. (b) Creates, alters or abolishes any right in
respect of redemption of his shares;
c. (c) Alters or abolishes any preemptive right in
respect of his shares;
d. (d) Creates or alters (other than to abolish) any
restriction on transfer applicable to his shares;
e. (e) Excludes or limits his right as a shareholder
to vote on a matter, except as such right may be
limited by voting rights of new shares then being
authorized of an existing or new class; or
f. (f) Alters or abolishes any right of his shares to
receive dividends, except as such right may be
affected by dividend rights of new shares then
being authorized of an existing or new class.
iv. D) In the event that the duration of a corporation as fixed in the
articles may heretofore have expired, or may hereafter expire,
without any action having been taken with reference thereto,
and without proceedings having been undertaken or instituted
to dissolve and wind up the corporation, the articles may be so
amended as to extend the duration of the corporation as
specified in the articles, in the same manner and with the same
force and effect as if the articles had been amended prior to the
expiration of the duration of the corporation as set forth in the
articles, except that if the corporation's name is no longer
available for use by it, its name shall be changed appropriately.
The declaration in the minutes of the meeting of the
shareholders at which the articles are amended by extending
the duration of the corporation, that prior to the expiration of
the duration of the corporation no action had been taken with
reference thereto, and that no proceedings had been
undertaken or instituted to dissolve and wind up the
corporation, shall constitute prima facie evidence of those
facts.
v. E) Whenever the articles shall require for action by the holders
of any class or series of shares or by the holders of any other
securities having voting power the vote of a greater number or

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 proportion than is required by any Section of this Chapter, the
provision of the articles requiring such greater vote shall not
be amended or repealed except by such greater vote, unless
the articles shall otherwise expressly provide.
l. L.R.S. § 12:41 General powers
i. A) A corporation shall have the power to perform any acts
which are necessary or proper to accomplish its purposes as
expressed or implied in the articles, or which may be
incidental thereto and which are not repugnant to law.
ii. B) Without limiting the grant of power contained in Subsection
A of this Section, it is hereby specifically provided that every
corporation shall have authority:
1. (1) To have a corporate seal which may be altered at
pleasure, and to use the same by causing it or a
facsimile thereof to be impressed or affixed or in any
manner reproduced; but failure to affix a seal shall not
affect the validity of any instrument;
2. (2) To have perpetual existence, unless a limited period
of duration is stated in its articles of incorporation;
3. (3) To sue and be sued in its corporate name;
4. (4) In any legal manner to acquire, hold, use and
alienate or encumber property of any kind, including its
own shares, subject to special provisions and
limitations prescribed by law or the articles;
5. (5) In any legal manner to acquire, hold, vote and use,
alienate and encumber, and to deal in and with, shares,
memberships, or other interests in, or obligations of,
other business, nonprofit or foreign corporations,
associations, partnerships, joint ventures, individuals or
governmental entities;
6. (6) To make contracts and guarantees, including
guarantees of the obligations of other business,
nonprofit or foreign corporations, associations,
partnerships, joint ventures, individuals or
governmental entities, to incur liabilities, to borrow
money, to issue notes, bonds and other obligations, and
to secure any of its obligations by hypothecation of any
kind of property;
7. (7) To lend money for its corporate purposes and invest
and reinvest its funds, and to take and hold property or
rights of any kind as security for loans or investments;
8. (8) To conduct business and exercise its powers in this
state and elsewhere as may be permitted by law;
9. (9)(a) To elect or appoint officers and agents;
a. (b) To define their duties;
b. (c) To fix their compensation;

98
 c. (d) To pay pensions in cash, shares of stock, or
property, and establish pension plans, pension
trusts, profit sharing plans, and other incentive
and benefit plans for any or all of its directors,
officers, and employees; and
d. (e) To establish stock bonus plans, stock option
plans, and plans for the acquisition of any or all
of its unissued shares, or of shares acquired or to
be acquired, by the employees of the
corporation, or by employees of subsidiary
corporations, or by trustees on their behalf,
which plan:
i. (i) May include the establishment of a
special fund or funds for the purchase of
such shares in which such employees
during the period of their employment or
any other period of time may be
privileged to share on such terms as are
imposed with respect thereto,
ii. (ii) May provide for the payment of any
price of such shares in installments, or
iii. (iii) May provide for the delivery of such
shares without any payment therefor;
10. (10) To make and alter by-laws, not inconsistent with
the laws of this state or with the articles, for the
administration and regulation of the affairs of the
corporation;
11. (11) To provide indemnity and insurance pursuant to
R.S. 12:83;
12. (12) To make donations for the public welfare, or for
charitable, scientific, educational or civic purposes;
13. (13) In time of war or other national emergency, to do
any lawful business in aid thereof, at the request or
direction of any apparently authorized governmental
authority.
iii. C) Without limiting the grant of power contained in Paragraph
(6) of Subsection B of this Section to corporations to make
contracts of guarantee and suretyship, any contract of guaranty
or suretyship by a corporation of an obligation of:
1. (1) A corporation or foreign corporation or nonprofit
corporation all of the outstanding stock of which is
owned, directly or indirectly, by the corporation making
the contract;
2. (2) A corporation or foreign corporation or nonprofit
corporation which owns, directly or indirectly, all of the

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 outstanding stock of the corporation making the
contract;
3. (3) A corporation or foreign corporation or nonprofit
corporation all of the outstanding stock of which is
owned, directly or indirectly, by a corporation or
foreign corporation or nonprofit corporation which
owns, directly, or indirectly, all of the outstanding stock
of the corporation making the contract,
shall be deemed to be necessary or proper to accomplish the
purposes of the corporation making such contract, as
expressed or implied in its articles or which may be incidental
thereto, unless the articles shall expressly provide otherwise.
m. L.R.S. § 12:42 Defense of ultra vires
i. A. No act of a corporation, and no conveyance or transfer of
movable or immovable property to or by a corporation, shall
be invalid by reason of the fact that the corporation was
without capacity or power to perform such act or to make or
receive such conveyance or transfer; but such lack of capacity
or power may be asserted:
1. (1) In an action by a shareholder against the
corporation to enjoin the performance of any act or the
transfer of movable or immovable property by or to the
corporation; but in any such action the plaintiff shall
sustain the burden of proof that he has not at any time
prior thereto assented to the act, conveyance or transfer
in question, and that in bringing that action he is not
acting in collusion with officials of the corporation. If
the unauthorized act, conveyance or transfer sought to
be enjoined is being, or is to be, performed or made
pursuant to any contract to which the corporation is a
party, the court may--if all of the parties to the contract
are parties to the action, if the corporation is without
capacity or power to perform the act or make or receive
the transfer sought to be enjoined, and if the court
considers such relief to be equitable--enjoin the
performance of such contract, and in so doing may
allow to the corporation, or to the other parties to the
contract, compensation for any loss or damage
sustained by any of them which may result from the
action of the court in enjoining the performance of such
contract, but anticipated profits to be derived from the
performance of the contract shall not be awarded by the
court as loss or damage sustained;
2. (2) In an action in damages by the corporation or by its
receiver, trustee or other legal representative, or by its
shareholders in a derivative or representative suit,

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 against the incumbent or former officers or directors of
the corporation;
3. (3) In an action by the state to dissolve the corporation,
to enjoin the corporation from the transaction of
unauthorized business, or to revoke a certificate of
authority of a foreign corporation.
ii. B. This section applies to acts performed by, and conveyances
and transfers made by or to, a foreign corporation in this state,
and to all conveyances to or by a foreign corporation of real
property situated in this state.
n. L.R.S. § 12:101 Initial report
i. The initial report to be filed as provided in R.S. 12:25(A), shall
be signed by each incorporator, or by his agent duly authorized
by a document attached to the report, and shall set forth:
1. (1) The location and municipal address, if any, (not a
post office box only) of the corporation's registered
office;
2. (2) The full name and municipal address, if any, (not a
post office box only) of each of its registered agents; and
3. (3) The names and municipal addresses, if any, (not a
post office box only) of the first directors, if they have
been selected when the articles are filed with the
secretary of state.
2. Closely held (aka privately held) v. publicly held corporations
a. Closely held (privately held) corporations
i. Have a limited number of people
ii. Do NOT file financial reports w/ the SEC
b. Publicly held corporations
i. They have a SUBSTANTIAL number of people
ii. They do file financial reports w/ the SEC
3. Critical Attributes of Corporations
a. They have legal personality
b. They have limited liability
c. There is a separation of ownership & control
d. Liquidity
e. Flexible capital structure
4. C Corp. v. S. Corp.
a. C. Corp
i. Standard corporation
ii. Double taxation – taxes are paid at a corporate level on income
AND taxes are paid on an individual level when dividends are
paid
b. S Corp.
i. Corporations that elect to pass through corporate income and
loses to shareholders for income tax purposes
1. This avoids the double taxation that C. Corps have

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 a. Avoids taxation on corporate income
ii. S Corps require
1. NO MORE THAN 100 SHAREHOLDERS
2. Only 1 class of stock
3. Shareholders may NOT be corporations, partnerships,
or LLCs
5. Boards v. Stockholders
a. Boards act on issues
b. Shareholders react (at most)
i. Shareholders can vote on
1. Election of directors
2. Any amendments to the articles of incorporation and
bylaws (generally speaking)
3. Fundamental transactions
4. Odds & ends
a. Ex. approval of independent auditor
6. Top Management Team is made up of:
a. CEO = Chief Executive Officer
b. CFO = Chief Financial Officer
c. CO = Chief Operating Officer
d. CTO (or CIO) = Chief Technical Officer
e. CLO = Chief Legal Officer
7. Why do so many corporations incorporate in Delaware?
a. There are NO minimum capital requirements
b. You only have to have 1 incorporator
i. A corp. may be an incorporator
c. DE has favorable taxes in comparison to other states
d. For companies who do business outside of DE
i. No corp. income tax
ii. No sales tax, personal property tax, or intangible property tax
on corporations
iii. No taxation upon share of stock held by non-residents AND no
inheritance tax upon non-resident holders
e. A corp. can keep all of its books/records outside of DE AND may have
a principal place of business address OUTISDE of DE as well
f. DE has a highly competent judiciary in company law and extensive
and detailed case law on the subject
8. Incorporation Process
a. 1) Promotion
b. 2) Name Search
i. MUST have either in name:
1. Corporation/Corp.
2. Incorporated/Inc.
3. Limited/Ltd.
a. Keep in mind that Limited Partners CANNOT
used “Limited” or “Ltd.”

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c. 3) Subscribers
d. 4) Filings – 3 documents must be filed
i. 1) Articles of Incorporation w/ the Sec. of State
1. Why are they important?
Filings – 3 documents
1. Articles of Incorp.
2. Initial report
3. Affidavit
After 3 documents are filed,
will get back a Certificate of
Incorporation from the
state.
Keep in mind that the 30 day
and 5 day rules apply here
too!
2. What must the articles of incorporation contain?
Articles of Incorp. Should contain
1. Name
2. Purpose
3. Duration (if not perpetual)
4. Aggregate authorized # of
shares
5. Name AND address of
EACH Incorporator
6. Taxpayer ID Number
i. ONLY corporations can do this!
a. The articles of incorporation are potentially
much more important than the initial report.
b. They do not list matters as easy to change as a
registered office or a registered agent.
c. Instead, they set forth the basic terms of the
agreement among the shareholders of the new
company concerning its nature, structure and
governance.
d. But like the initial report, the articles will be
available for public inspection and must satisfy
statutory requirements concerning their content
and execution.
e. This triple role for the articles,
i. as a requirement of incorporation,
ii. as public disclosure and as private
iii. agreement, can make the drafter's work
challenging.
f. But the minimal statutory requirements for
articles sufficient to form a new corporation are
easy to satisfy.
a. The articles of incorporation of Louisiana
corporation need state only five things:
i. 1. Its name;

1. This is always Art. 1
ii. 2. Its purpose[s];

1. This is always Art. 2
iii. 3. The number of authorized shares;

1. Art. 4 of Iberia Bank Example,
called “capital stock”
iv. 4. The par value of the shares, or a
statement that the shares are no-par;
and

1. This will set forth the maximum
number of shares that can be
issued
2. You always want to authorize
more shares than you are going to
originally issue
a. So, that the BOD can have
some leeway
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Prof. said that Articles of
Incorporation are often very
detailed and contain a lot
more information than the
required bare minimum.
ii. 2) Initial Report
1. The initial report is simply
b. AND b/c it is difficult to
amend the articles of
incorp.
v. 5. The name and post office address of
each incorporator.
1. Art. 5 in the Iberia Bank example
b. The statute also says that the articles “shall” set
forth three other items,
i. duration,
1. if not perpetual
a. But, most are perpetual
ii. classified-share terms,
iii. and the corporation's taxpayer
identification number
1. Prof. says that this is often NOT
done in practice
iv. but those items really are not mandatory,
as neither of the first two items needs to
be included unless the normal rules are
being modified, and the omission of the
third item, the taxpayer number, does not
invalidate the articles or give the
secretary of state grounds to reject them.
c. The articles may also include any number of
optional provisions concerning the regulation of
the business and the conduct of the affairs of the
company, as long as they are not prohibited
elsewhere in the corporate statute or in other
laws.
d. two-thirds of the voting power present at a
shareholders' meeting must approve
amendments to the articles.
a. a listing of the name (or for the registered
office, the location)
b. and the municipal addresses for
i. (a) the corporation's registered office,
ii. (b) its registered agent(s) and
1. This is very important!
2. For service of process
iii. (c) its initial director(s).
1. Unless they have not yet been
selected
a. If selected later, must file a
supplemental report
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 c. This report essentially tells the public who
initially has been given the power to manage
the corporation and who in the state has the
authority to receive service of process on its
behalf. If the initial directors have not been
selected by the time of incorporation, then that
item may be left out of the initial report, and the
corporate existence may be begun without it, but
a supplemental report listing the initial directors
is then supposed to be filed “as soon as they have
been selected.”
iii. 3) The initial report must contain or be accompanied by a
notarized affidavit by the registered agent indicating that
he has accepted his appointment as agent.
1. This is listed individually b/c it need to be filed!
e. 5) Cert. of Incorporation is received back from the state
f. 6) Draft bylaws
i. In reality, you will do this as you put together the Articles of
Incorporation
LA requires: ii. But, they do NOT have to be filed in order to be validly
1. President incorporated
2. Treasurer iii. BOD can make changes to bylaws
3. CFO iv. Do NOT include a Paid in capital requirement in the bylaws??
4. Secretary v. What are bylaws?
1. From the treatise - bylaws are the rules of corporate
governance that are set forth in a document that is
contained in the official corporate records and has the
word “bylaws” printed or typed on it in a way that
suggests that the word is intended to be the title of the
document.
2. Prof said bylaws are the document governing the
internal structure of the organization
a. § 28 – pg. 151 of supplement
g. 7) 1st Organizational meeting
i. What should be done at this first meet?
1. Name directors if you have NOT done so already
2. Adopt the bylaws
3. Appoint officers
4. Authorize the sale of founder’s stock
a. i.e. issue stock
b. governed by § 26 & § 27
ii. Other information about the 1st organizational meeting
1. It does NOT need to be held in person
2. But, you need it to set up the working structure of the
corporation

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9. What is the liability for Pre-incorporation activity? (Usually of the
promoter)
10. The Nature of the Corporation (pgs. 169-175 of boo)
a. Promoter = a person who identifies a business opportunity and puts
together a deal, forming a corporation as the vehicle for investment by
other people
i. What are their fiduciary obligations?
ii. What are their obligations to 3rd persons for pre-incorporation
commitments?
b. Southern Gulf Marine Co. No. 9, Inc. v. Camcraft
i. Plaintiff suing for breach of a contract to furnish a ship
ii. Defendant came back w/ exception for no cause of action
1. b/c they weren’t actually a corporation at the time the
contract was signed
a. So “no cause of action b/c of legal status of
plaintiff”
b. Initially it was granted
i. Then REVERSED
iii. they incorporated under different laws than the represented at
the time the contract was signed
c. Contract
i. Provided for
1. Defendant to purchase items
2. Payment price
3. Specifications
4. Delivery date
ii. Plaintiff ‘s president signed
1. Personally
2. AND as president
iii. Pres. of Defendant’s company signed
iv. Contract required consent to the “Shipping Act of 1916” where
the plaintiff must be a citizen of the US
v. Plaintiff was a citizen of TX
d. After contract, plaintiff said that they had incorporated under
Caymans instead of TX
i. “such incorporation was done to make the vessel’s use in
foreign commerce more economical.” (pg. 182)
ii. Plaintiff sent defendant a letter explaining this
e. After letter, defendant defaulted on the obligation to build the ship
f. Trial court said
i. Contract requires 2 parties, and since plaintiff was not
incorporated – they were not a party and w/o 2 parties, there
can be no contract
ii. Pres. could not enforce the contract individually
1. Since he signed himself in addition to signing for the
“corp.”

106
 a. But, this wasn’t put in appeal
i. Court said they found merit in this
argument, but it was abandoned b/c they
didn’t bring it up on appeal
iii. Appellate court
1. “We believe the defendant, having given its promise to
construct the vessel, should not be permitted to escape
performance by raising an issue as to the character of
the organization to which it is obligated, unless its
substantial rights might thereby be affected.” (pg. 173)
2. Cites Latiolais v. Citizen’s Bank
a. If one contracts w/ an entity they treat as a
corporation, they cannot then get out of it by
saying that the entity was not actually a
corporation
i. Theory of estoppel
3. Also cites Casey v. Gilli
a. “Where a party has contracted w/ a corporation,
and is sued upon the contract, neither is
permitted to deny the existence, or the legal
validity of such corporation. To hold otherwise
would be contrary to the plainest principles of
reason and of good faith, and involve a mockery
of justice.” (pg. 173)
4. Defendant’s rights were NOT affected by the status of
the plaintiff
5. There was no real problem w/ incorporated in the
Cayman islands rather than TX
11. Shareholders
a. SHAREHOLDERS HAVE LIMITED LIABILITY FOR CORPORATE
OBLIGATIONS
i. There has never been a case where corporate shareholders are
held personally liable.
12. Liability in a Corporation
a. SHAREHOLDERS HAVE LIMITED LIABILITY FOR CORPORATE
OBLIGATIONS
b. Officers & Directors also have limited liability for corporate
obligations, when acting on behalf of the corporation
c. So, this means that “corporate participants” can only lose what they
invested
d. Exceptions
i. Fraud
ii. Piercing the veil
e. Examples from CALI – Cora, on the other hand, has incorporated her
business, Ajax Plumbing, Inc. She is the sole shareholder, sole director,
and the sole officer of Ajax Plumbing, Inc. She has elected to have the

107
corporation taxed under subchapter S of the Internal Revenue Code.
When she signs contracts with vendors, leases with landlords, and
promissory notes with the bank, she does so in her capacity as
president of Ajax Plumbing, Inc., and all of the documents so indicate
her representative capacity
i. Corporation is buy no means a "bulletproof" way for Cora to
avoid liability. Many small business people learn this the hard
way. Creditors with any degree of sophistication, including the
landlord and key vendors, will insist on the owners (i.e. the
shareholders) of the business providing a personal guarantee
to back up any obligations of the corporation. So, much of the
potential limited liability from contract claims is illusory. In the
end, small corporations like Cora's provide limited liability
from contract claimants only for those contracting parties who
are either unsophisticated or who lack the economic clout to
demand a personal guaranty.
ii. At the same time, on the tort side, the corporate form only
provides limited liability from torts committed in the
corporation's business by others. If the shareholder herself is
also the tortfeasor, the mere fact that she is a shareholder in
the corporation that would be ultimately liable does not
prevent her from also being personally liable as the tortfeasor.
So, if Cora has some employees, she could shield herself from
liability for their acts, but if she herself commits the tortious
act, she will have to pay.
iii. On the other hand, courts will not routinely impose liability on
shareholders merely because there are not enough assets in
the corporation's name to satisfy all of its obligations. This is
one of the realities of dealing with a corporate form and it is
the major reason why business people want to form
corporations. The mere fact that some people will not be fully
paid does not raise problems for respect of the corporate form.
iv. On yet another hand, if Cora has somehow messed up the
incorporation process, she will likely not get the protection of
the corporate form. Granted, the formal requirements to
incorporate a business are quite modest, but sometimes things
go awry. When someone like Cora tries unsuccessfully to form
a corporation yet goes about her business dealing with others
as if a corporation had been properly formed, sometimes she
will be afforded the same protection as if the corporation had
been formed, and sometimes not.
v. Finally, there will be situations where a court will refuse to
recognize a properly formed corporation. This is the so-called
"piercing the corporate veil" situation, which is the subject of
this CALI lesson. As you will see in a minute, the specific
formulation of the piercing doctrine varies from place to place,

108
 but there are some general themes as well. We will explore
those themes in the screens that follow.
13. Why have limited liability as a policy reason?
a. Allows people to diversify their investments
b. You want to encourage risk taking in a way, so that people start up
corporations
c. It also encourages liquidity, or that people have that ability to sell
their shares
14. Why allows for piercing of the veil?
a. B/c risk taking can go too far, and you don’t want someone taking
advantage of the limited liability
15. Piercing the Veil & Single Business Enterprise
a. Piercing the Veil - is going through a corporation to get to the main
shareholder’s personal assets
i. This ONLY happens w/ private held corp.
1. So, you never see veil piercing w/ a public company
ii. Every state recognizes piercing the veil
1. But there are A TON OF VARIATIONS
iii. It is a very VAGUE and un-principled area of corporate law
iv. Van Dorn Test (pg. 182-184 of book)
1. Must be such unity of interest and ownership that the
separate personalities of the corporation and the
individual no longer exist
The party seeking to pierce the veil a. To determine this, look at 4 factors
must show something more than i. Failure to maintain adequate corporate
the fact that he is owed money by records or to comply w/ corporate
the corporation. formalities
1. Ex. holding meetings, passing
articles of incorporation/bylaws.
ii. Commingling of funds or assets
iii. Undercapitalization (corporations that
never had enough financial resources
invested in them in the first place)
iv. 1 corp. treating the assets of another
corporation as its own
2. Circumstances must be such that adherence to the
fiction of separate corporate existence would
sanction a fraud or promote injustice
a. “Although an intent to defraud creditors would
surely play a part if established, the IL test does
not require proof of such intent. Once the first
element of the test is established, either the
sanctioning of a fraud (intentional wrongdoing)
or the promotion of injustice, will satisfy the
second element.” (pg. 184)

109
 b. What is “promoting injustice”
i. Lower bar than proving fraud
v. CALI Information – Comparing partnerships &
corporations and setting up the policy behind veil piercing
1. Our legal system has handled the problem of
organizational rights and duties in two very different
ways. In the partnership context our legal system
has traditionally viewed the partnership
organization as an aggregation of natural persons
and has not accorded the organization legal
personality in its own right. Although modern
partnership law has evolved toward a more entity-like
view of partnerships where the partnership has "legal
personality" for some purposes, in the end the
responsibility for partnership obligations ultimately
rests on the individual partners.
2. On the other hand, business organizations that
require some kind of government action for their
creation, such as corporations, limited liability
companies, and limited partnerships, are regarded
as juridical persons. Once chartered by the
government, the organization acquires a juridical life of
its own with its own legal existence or legal personality
and its own constitutional rights. The existence of the
organization is separate and distinct from the legal
existence of its members or shareholders. Neither the
corporation nor its shareholders possess the rights, or
bear the duties, of the other. This idea of the separate
legal personality for a corporation and its shareholders
is the hallmark of traditional entity law.
3. In many areas of legal and business activity, the fiction
of separate legal existence of organizations and their
owners works quite well. In some situations,
however, maintaining the legal separation between
owners and the organizations leads to unjust
results. To remedy those unjust results, the law has
developed a variety of doctrines that permit courts
to get around the rules of traditional entity doctrine
and allow the legal consequences of a corporation's
acts to be imposed on its shareholders or some
other legal person such as a related corporation.
vi. Alternate agency argument (from CALI)
1. If proceeding under agency law, the traditional
Using the cab case elements of piercing the corporate veil , such as lack of
as an example. respect for the corporate entity, fraud, adequate
capitalization, etc., ought to be irrelevant. Instead,

110
 liability ought to hinge on whether the corporate
person was a servant of Carlton and therefore
created vicarious liability for him.
2. This is because under an agency theory the separate
corporate identity of the corporation remains intact.
Indeed, it is that intact corporate legal person who is
going about creating liability for the principal.
3. Unfortunately, in the closely held situation, as here,
establishing the agency theory raises some serious
questions. In its opinion, the court says proof of the
agency depends on proof that Carlton "used the
corporation to further his own rather than the
corporation's business." But all corporations are used
to further the economic objectives of the shareholders.
4. In any event, agency theory does not seem to work
well to impose liability on individual shareholders in
a closely-held corporation, like Carlton, since people
in his position are likely to possess actual or inherent
authority to act as corporate officers or employees,
which would suggest that their acts of control were
taken in those roles, as opposed to their roles as
shareholders.
b. Single business Enterprise - is getting to the assets of another
company w/ a common owner
i. Green Case
1. SBE theory was first used in Green v. Champion Ins.
Co., a case arising out of a scandalous insurance
SBE different from veil piercing company failure that was heavily covered by the
in 2 ways: Louisiana news media. The SBE theory allowed the
liquidator of the failed insurance company in Champion
1) Used to break down to take control not only of the insurance company's
corporate walls, rather than assets, but also the assets of several separately-
going after personal finances of incorporated affiliates, and to distribute all those assets
shareholder.
in accordance with the priority scheme set forth for
2) Uses 18 factor test, rather insurance companies. Under that scheme, policy-holder
than 5 factor test. claims received a seniority in rank that they would not
have had in the liquidation of an ordinary business
corporation. Hence, the effect of the SBE theory in
Champion was to permit the liquidation of an
insurance company and its affiliates in a way that
maximized recoveries for policyholders at the
expense of recoveries by ordinary creditors of the
affiliated noninsurance corporations.
2. The SBE theory differs from traditional veil-piercing
law in two important respects. First, the SBE theory
is used to break down corporate walls between

111
 affiliated corporations, and not to impose personal
liability on an ultimate corporate shareholder. In
Champion, for example, the liquidator of the insurance
company was not attempting to pierce the veil of the
various Champion affiliates to impose personal liability
for corporate debts on members of the family who
owned Champion and its affiliates. Instead, he was
trying to treat all the corporations involved as a
single corporation, i.e., as a “single business
enterprise.” The effect of such treatment was to put
all the assets and all the liabilities of all the
corporations into one big pot. Creditors of financially
strong corporations had to share the assets of those
corporations with creditors of financially-weaker
corporations, and they had to watch the assets of the
combined firm distributed be distributed first to
policyholders, as if, contrary to fact, all of the
corporations involved were insurance companies.
Hence, where the SBE theory is used in connection with
the insolvency of the dominant corporation or affiliated
groups, it may cause innocent creditors of some
affiliates to be penalized financially because of the
wrongdoing of the affiliated corporations' controlling
shareholders.
3. The second distinction between the SBE theory and
traditional veil-piercing law is the test used to
determine whether the SBE remedy is appropriate.
Instead of the traditional five-factor test, the
Champion case established an eighteen-factor test.
Included among the eighteen factors were several items
that would be present in most parent-subsidiary
organizations, such as (1) common working control
over the affiliated corporations, (2) common directors
or officers, (3) unified administrative control, (4) one
corporation causing the incorporation of another
affiliated corporation, and (5) centralized accounting.3
ii. Must look at 18 factors from pg. 237-238
1. corporations with identity or substantial identity of
ownership, that is, ownership of sufficient stock to give
actual working control;
2. common directors or officers;
3. unified administrative control of corporations whose
business functions are similar or supplementary;
4. directors and officers of one corporation act
independently in the interest of that corporation;
5. corporation financing another corporation;

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 6. inadequate capitalization (“thin incorporation”);
7. corporation causing the incorporation of another
affiliated corporation;
8. corporation paying the salaries and other expenses or
losses of another corporation;
9. receiving no business other than that given to it by its
affiliated corporations;
10. corporation using the property of another corporation
as its own;
11. noncompliance with corporate formalities;
12. common employees;
13. services rendered by the employees of one corporation
on behalf of another corporation;
14. common offices;
15. centralized accounting;
16. undocumented transfers of funds between
corporations;
17. unclear allocation of profits and losses between
corporations; and
18. excessive fragmentation of a single enterprise into
separate corporations.
iii. CALI material – Applying SBE to the Cab Case
1. Enterprise liability would treat all ten corporations in
Carlton's taxi empire as a single entity. It breaks down
the entity barriers between the corporations (cell walls
between the individual corporations), but not the
barriers between the corporations and the
shareholders.
2. This theory requires proof that Carlton did not respect
the separate individual identities of the ten
corporations--for example, in the assignment of drivers,
in the use of bank accounts, in the ordering of supplies,
etc. If successful, the plaintiff would be allowed to
recover from all the corporations but not from the
shareholders.
3. Under this theory, Walkovszky could reach the assets of
the other cab companies but not Carlton's non-taxi
assets. As long as Carlton drains all profits out of the cab
companies, and the few assets in the corporations are
heavily mortgaged, however, enterprise liability may
not help Walkovszky much -- the related corporations
don't have much to contribute.
c. Reverse piercing – getting to the other business entities via the
controlling shareholder.
i. Sometimes it is allowed when a dominant shareholder
treats the corporation as his “alter ego.”

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 ii. What do you look at to determine if reverse piercing
should be allowed?
1. Unity of ownership interest
2. Co-mingling of assets
3. Undercapitalization (corporations that never had
enough financial resources invested in them in the first
place)
4. Fraud/injustice
16. Introduction to Corporation Management & Control
a. Ultra Vires Doctrine
i. Ultra vires acts = acts beyond corporate powers
ii. Acts that go beyond a corporation’s powers are not pre se
invalid
iii. Keep in mind that the doctrine is a bit limited b/c corporations
have a lot of flexibility in what they can do!
iv. LSA-R.S. 12:41
1. “Corporations have power to take actions that further
its purpose”
v. LSA-R.S. 12:42
vi. They are several remedies if there are ultra vires acts
1. Shareholders suit to obtain an injunction OR recover
damages
2. Suit by corporation
3. State action for injunction or dissolution
b. Debt v. Equity
i. Equity  Equity holders = shareholder = stockholders
SH interest 1. Shareholders own interest in the corporation
means they a. They have
own stock & i. Control rights
contribute $$ ii. AND financial rights
2. This also means that BOD & Officers owe fiduciary
duties to the stockholders (aka equity holders)
Debt holders hold ii. Debt 
some form of debt 1. Debt holders have
a. Notes = short term debt
b. Debenturs
i. Vary in length
ii. Usually NOT secured by property
c. Bonds = longer term in nature
2. Debt holders have a right to
a. Interest
b. AND principal
3. What do debt holders NOT have (that equity holders
do)?
a. Debt holders do NOT vote in governance of
corporation

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 b. BOD & officers do NOT owed fiduciary duties to
debt holders
c. Authorized shares
i. The maximum number of shares of capital stock that can be
sold to the public will be specified in the articles of
incorporation
ii. Outstanding shares = issued shares owned by the stockholders
iii. Treasury shares = issued shares that have been acquired by the
corporation
1. Why do companies have treasury shares?
a. Employee stock option plans
b. Preparation for a merger
c. To increase earnings per share
d. Supporting the stock price
e. To avoid a hostile takeover
d. Shareholder Meetings
i. Can he held anywhere
ii. Have to hold at least 1 a year
iii. Annual Meeting - § 73(a)
1. Usually held in the Spring
2. Elect directors
3. BOD calls the meeting
a. But, if BOD does not call for 18 months, then the
shareholders can call a meeting
iv. Special Meeting - § 73(b)
1. Called to address items that may need a shareholder
vote during the year
a. Who can call one?
i. President
ii. BOD
iii. OR anyone authorized to do so in the
articles of incorporation OR bylaws
iv. OR by Secretary who is acting upon a
written request of 1/5 of the total voting
power
1. By written request
2. 1/5 can be changed by the articles
of incorporation OR the bylaw
2. Often they are for authorization of a merger
3. They are usually held at the corporation
v. When is notice required?
1. Written notice
Empty voting – when you 2. To shareholders entitled to a vote
get a meeting notice & voting a. Shareholders of record - § 79
material before a meeting, i. shareholder of record = persons
but then you sell your shares
registered on records as owners of shares
before the meeting is actually
held.
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 b. Corp. will fix a “record date” in advance to
determine who the shareholders of record are
i. Not more than 60 days before event
ii. Unless specified different in articles of
incorporation or the bylaws
iii. And if to determine who can vote at SH
meeting
1. Not less than 10 days before the
meeting
a. b/c notice has to go out not
less than 10 days before
meeting
c. If NO record date is set, shareholders of record
will be those who
i. Own shares as of close of business on the
day BEFORE the meeting notice is mailed
ii. OR if notice is waived, the close of
business on the day before the meeting
3. Give
a. Time
b. place
c. AND purpose
i. If not the annual meeting
4. At least 10 days before meeting
5. NOT more than 60 days before meeting
6. Unless otherwise provided for in the articles of
incorporation
7. Notice has been deemed to be given when written
notice goes into the mail
8. Notice can be waived in writing
e. Meeting Adjournment
i. If a meeting is adjourned, there does NOT need to be a new
notice given unless a new record date is fixed
1. Meaning you know the next meeting date
ii. You can adjourn a meeting if you need more time to do
something
iii. If you are dealing w/ election of officers, you can only adjourn
from day to day to collect votes
1. This does NOT happen often, but it is a possibility
iv. § 103 Corporate records; right of shareholder to inspect
1. Every corporation must keep
a. Accounting books
b. Meeting minutes
i. Which should include votes

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f. Quorum
i. § 74
ii. You must have a quorum to be able to conduct business at the
meeting
iii. Requires a majority (50.1%) of voting power
1. In person OR by proxy
a. But, it can vary according to the articles of
incorporation/bylaws
i. CANNOT be less than 25% of voting
power
iv. If there is originally a quorum, but the quorum is lost, the
corporation can continue the business of the meeting
g. Shareholder Consent
i. This is in lieu of a meeting
ii. MUST BE UNANIMOUS
h. Voting
i. Generally 1 vote per share of stock (= default rule)
1. But, this can vary b/c of the articles of incorporation
a. Ex. Class A stock w/ 1 vote per share; Class B
stock w/ 10 votes per share
i. AND, you can have even more classes of
stock
ii. Why have different classes of stock?
1. Ex. Founders might have Class B
stock so that they have more
voting power within the
corporation
ii. Election of BOD requires a plurality
1. Plurality = just 1 more vote than the other person
iii. Straight v. Cumulative voting
1. Default rule = straight voting
2. Straight voting
a. Requires a plurality
b. And each SH gets to vote on each open position
on the Board
3. Cumulative Voting
a. You take the number of open seats
b. Multiple this by the number of shares owned to
get the number of votes
c. And, then you distribute those votes however
you like amongst the candidates
4. Reasons for cumulative voting
a. Trying to allow minority shareholders to get
seats on the board
b. But, there is very little case law for cumulative
voting

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 c. Prof. thinks you should avoid cumulative voting
b/c there are other ways to allow minority
shareholders spots on the Board
iv. “Say on pay” vote
1. this is new!
a. Recommended every 3 years
2. Shareholders can place a “non-binding” vote on the
compensation of officers.
a. An “advisory vote”
3. It’s non binding b/c the corporation does NOT have to
adhere to the outcome, but it can show shareholder
discontent and might affect what is done.
i. Classes of Stock
i. Preferred Stock
1. A cross between debt & equity
2. Only about 25% of corporations have preferred stock
3. Usually has a stated dividend rate
4. Normally has no voting rights
5. They get paid first, they have a preference for dividend
distribution
a. Order if liquidated
i. Debt
ii. Preferred stock
iii. Then common stock
6. Owners of preferred stock do have equity w/in the corp.
7. BA I focuses on common stock
17. Preemptive rights
a. Definition from Civil Law Treatise = By virtue of these rights
shareholders could “preempt,” or purchase on a pro-rata basis before
any persons not then shareholders, any new issue of a corporation's
shares. The right was an elective one; if not exercised the corporation
would be free to sell to whomever it chose.
b. Definition from notes
i. § 24(c)(1)
ii. A RIGHT OF FIRST REFUSAL
iii. A right to purchase new shares issues (if those shares have
voting rights) before the BOD creates more shares
1. Meant to help protect SH by not diluting the value of
their shares too much
iv. Period is to NOT be more than 15 days
v. They ONLY exist if INCLUDED in the articles of incorporation

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18. Board of Directors
a. § 81(a)
b. Characteristics
i. Need to have at least 1 director
ii. Number of directors either (always want an odd number
of directors!)
1. In articles of incorporation
2. OR there is a manner in which to determine the # in the
articles of incorporation
3. If not done the first 2 ways, then it is the number
elected by shareholders
4. And, if not done first 3 ways, it is the number of
directors named in the initial report or supplemental
report
iii. Default rule = Directors serve at least 1 year AND at most 5
years
iv. What can be determined by the articles of
incorporation/bylaws
1. Number
2. Classification
3. Qualifications
4. Compensation
5. Terms of office
6. Manner of election
7. Time & place of meeting
8. Powers/duties of directors
v. What is required by § 81
1. Office becomes vacant if a director dies
2. BOD may declare vacant the office of a director if
a. Director either
i. Interdicted
ii. OR declared incompetent
iii. Declared bankrupt
iv. Incapacitated b/c of illness or other
infirmity to perform his duties for 6
months or more
v. If ceases at any time to lose qualifications
vi. “The shareholders, by vote of a majority of the total voting
power at any special meeting called for the purpose, may
remove from office, w/ or w/o cause, any one or more of the
directors, notwithstanding that his or their terms of office may
not have expires, and may forthwith at such meeting proceed
to elect a successor for the unexpired term.” § 81(d)(4)
vii. Classified Board v. Staggered Board
1. Classified board = a class or series of stock that has the
ability to elect a member or certain member to BOD

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 a. Prof. thinks this is better than having cumulative
voting
2. Staggered Board = Terms of directors are designed so
that not every director will come up for election at the
same time
a. Why have a staggered board?
i. Helps avoid learning curve
ii. Helps prevent loss of institutional
knowledge
iii. It helps avoid a hostile takeover
b. So, you will see them more w/ public companies
viii. Once the BOD elected
1. BOD will elect a chair
a. Chairman will usually get a little more
compensation
ix. What happens if there is a vacancy?
1. How might you have a vacancy?
a. Dies
b. Resigns
c. BOD declares it vacant b/c of the reasons listed
above
2. If there is a vacancy
a. the BOD will fill it w/o someone who can finish
out the term
b. OR call a special meeting and the shareholders
will vote
x. Removal of directors/BOD
1. If the shareholders are NOT happy w/ a director or the
BODs, the shareholders can remove them w/ OR w/o
cause!
a. The default required vote for this is a majority of
total voting power
i. Remember you need a plurality to be
elected
19. Control
a. Voting Control
i. Voting Trust = an agreement among shareholders under
which all of the shares owned by the parties are transferred to
a trustee. The trustee then becomes the nominal, record owner
of the shares.
1. The trustee votes the shares
2. The trustee is responsible for distributing any dividends
to the beneficial owners of the shares.
3. Trustee will generally have a term
a. § 78 says term of 15 years (can’t exceed 15
years)

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 i. that can be extended by 10 years
ii. Vote Pooling Agreement (more common) = a written
agreement among shareholders to cast their votes together as
block in a manner determined by a procedure set forth in the
agreement.
1. Key take-aways
a. Written agreement
b. Casting votes as a block
c. In a manner determined by procedure
d. That procedure is set forth in the agreement
2. Often they have provisions for when the parties
disagree
a. Usually provide for an arbitrator/referee
3. OFTEN PAIRED W/ AN IRREVOCABLE PROXY
4. Enforcement Mechanisms 
a. Ringling Bros. Case
Ringling brothers is the leading i. John Ringling North created a voting trust
case on vote pooling so he could secure a $1 million loan
agreements. ii. Ringling Bros is a closely held
corporation
1. Problem for closely held corps. is
that people may fall out of favor
w/ each other making it hard to
undo or enforce pooling
agreements
iii. The voting trust then expired, and his
aunts wanted more control
iv. The aunts then draft a vote pooling
agreement that gives them 5 out of the 7
directors
1. The shares were being voted
cumulatively
2. If the Aunts don’t agree then the
attorney gets to decide
3. In 1946, the aunts don’t agree
v. Vote pooling agreements are valid and
can designate an arbitrator who can make
decisions AND there are a variety of
different enforcement methods
vi. In Ringling Bros., the court’s response
was to strike the votes of the S/H who did
not abide by the pooling agreement
(which in essence allowed the majority
S/H to win)

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Read McQuade  you need to
know the name of this case on 5. McQuade v. Stoneham:
the exam!
Vote Pooling Agreement = they
agreed to elect each other to BOD.
But, then they also agreed to
appoint each other as Officer, VP,
Treasurer. AND to pay each other
certain salaries. AND not to make
fundamental changes in the corp.
governing structure.
The parties abide by this for a while,
but then there is a falling out…
McQuade sues for specific
performance.
Court says that once members are elected to
BOD they have an obligation to exercise
independent business judgment b/c they
represent everyone!
So, they can’t bind themselves to certain
decisions in ADVANCE.
Court invalidates entire agreement! SHs can
pool together to vote and agree in advance
who to ELECT to BOD, but if the underlying
purpose is void/illegal then the ENTIRE
AGREEMENT will be void.
Bottom line – you cannot pool votes to
determine what you will do once you are
elected to the BOD.
a. RuleWhile S/Hs may combine to elect
directors, that power is not extended to
contracts whereby limitations are placed on the
power of directors to manage the business of the
corporation by the selection of agents at defined
salaries
b. FactsThere was a vote pooling agreement
among S/Hs. The K was that 2 S/Hs would be
elected directors of the corporation and then
they would have specific offices and salaries.
This happened at the same time McQuade
purchases stock for a substantial amount of
money. There was a falling out and McQuade
wants his position and salary.
c. HoldingThe court said that it is acceptable to
enter into an agreement to pool your votes but
that you cannot make the directors perform
certain actions.
i. The court says that it is invalid because it
limits the directors to act in the best
interest of the corporation. Shareholders
may not control director’s exercise of
judgment. The people most likely to be
harmed by agmts like this are minority
shareholders and creditors. In this case
neither of the groups to be harmed were
complaining. There was no argument
that McQuade was overpaid or that he
was unqualified. The court makes the
decision on fundamental problems and
doesn’t look to specific facts of the case.
d. Be aware that even though these agreements
seem fair and reasonable, they have sometimes
been held invalid. LLC and partnerships can
set up agmts for positions and salaries
without a problem.
e. To avoid this problem, have a long-term
employment contract. This will allow for
claims of breach if McQuade is removed from
office. Or issue a separate class of stock that is
entitled to choose the position.
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 6. Clark v. Dodge:
a. FactsThere were 2 corps. each owned by
Dodge (25%) and Clark (75%). Dodge took no
active part in the business although he was a
director. Clark was a director, was treasurer and
Clark kept his end of the bargain, but
Dodge fired him. Clark sued. Dodge
GM, and knew the formulae and methods of the
claimed the agreement was void (per medicinal preparations of the business alone.
McQuade). Clark and Dodge entered into an agreement
whereby Dodge was to vote as a S/H to make
Court said the agreement was Clark director and GM (if he remained
enforceable, they distinguished it from
McQuade b/c Clark and Dodge were
faithful, efficient and competent) of the corp.,
the only 2 shareholders, so they can that Clark receive ¼ of net income as salary,
make these kinds of agreements. and that no salaries to other officers should
be unreasonable so as to reduce Clark’s
So, after this, if there is a SH salary in exchange for Clark to share his
agreement executed by ALL the
shareholders – it is ok. They can agree
formulae and methods of the medicinal
to what they want… EVEN IF it ends preparations w/ Dodge’s son. Clark brought
up NOT being in the best interest of suit to enforce this K where Dodge breached by
the shareholders. not voting according to the agreement.
b. HoldingThe court upheld a similar agmt to the
Keep in mind – it MUST be unanimous!
one in McQuade. The court observed nothing in
LA has a statute that says this - § the agmt hurt anyone. There was not an attempt
29(a), pg. 153 of supplement. to sterilize the board and the infringement was
slight. All of the shareholders were parties to
the agmt.
b. Irrevocable Proxies
i. Keep in mind that the appointment of a proxy is generally
revocable at the will of the shareholder who grants it. In
some circumstances, however, a proxy will be deemed
irrevocable.
ii. Proxies CAN be irrevocable “if coupled w/ an interest”
1. “coupled w/ interest” usually means
a. creditor gets a proxy on shares held as collateral
b. employment at the company
c. Buyer of stock after the record date gets a proxy
from the former shareholder
iii. From LA Civil Law Treatise
1. The general test which courts developed for
determining whether a proxy is irrevocable is whether
it is “coupled with an interest.” Of course, this phrase
has no inherent content and its meaning must be
derived from further analysis. A useful compendium of
the instances in which common law courts found the
requisite interest to exist is found in the Revised Model
Business Corporation Act, which provides:

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c. Fiduciary Duties – directors and officers can be held personally liable
for debts of the corporation IF THEY FAIL to satisfy fiduciary duties to
the shareholders.
i. § 91 - Relation of directors and officers to corporation and
2 Duties
1) Duty of Care
2) Duty of Loyalty
2. An appointment of a proxy is revocable by the
shareholder unless the appointment form
conspicuously states that it is irrevocable and the
appointment is coupled with an interest. Appointments
coupled with an interest include the appointment of:
a. (1) a pledgee;

b. (2) a person who purchased or agreed to
purchase the shares;

c. (3) a creditor of the corporation who extended it
credit under terms requiring the appointment;

d. (4) an employee of the corporation whose
employment contract requires the appointment;
or

e. (5) a party to a voting agreement created under
section 7.31.
3. Note that this provision has two elements:
a. first, a conspicuous statement of irrevocability;
b. and second, the existence of one of the
enumerated relationships.
4. The statute is also expressly nonexclusive, and
contemplates that other arrangements may be held to
be coupled with an interest.
shareholders
1. § 91 (A) Officers and directors shall be deemed to
stand in a fiduciary relation to the corporation and
its shareholders, and shall discharge the duties of
their respective positions in good faith, and with
that diligence, care, judgment, and skill which
ordinary prudent men would exercise under similar
circumstances in like positions; however, a director
or officer shall not be held personally liable to the
corporation or the shareholders thereof for monetary
damages unless the director or officer acted in a
grossly negligent manner as defined in Subsection B
of this Section, or engaged in conduct which
demonstrates a greater disregard of the duty of care
than gross negligence, including but not limited to
intentional tortious conduct or intentional breach of his
duty of loyalty. Nothing herein contained shall derogate
from any indemnification authorized by R.S. 12:83.
2. (B) As used in this Section, “gross negligence” shall be
defined as a reckless disregard of or a carelessness
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 amounting to indifference to the best interests of
the corporation or the shareholders thereof.
ii. Keep in mind that the Business Judgment Rule permeates
EVERYTHING!
iii. When Board Directors and officers are sued for breach of
fiduciary duties, their defense will be the business judgment
rule, which is essentially that they were acting in good faith.

iv. Business Judgment Rule embodied in § 91(c)

1. (C) A director or officer who makes a business judgment
Business Judgment
Rule is a deferential
standard.
v. Obligations of Control: Duty of Care
1. Kamin v. American Express Company (pg. 308)
Business Judgment Rule
1. Presumption
2. Informed basis
3. Good faith
4. Honest belief actions
were taken in the
best interest of the
corporation
The business judgment rule is
a rebuttable presumption!
in good faith fulfills the duty of diligence, care,
judgment, and skill under Subsection A of this Section if
the director or officer:
a. (1) Does not have a conflict of interest with
respect to the subject of the business judgment.
b. (2) Is informed with respect to the subject of the
business judgment to the extent the director or
officer reasonably believes to be appropriate
under the circumstances.
c. (3) Rationally believes that the business
judgment is in the best interests of the
corporation and its shareholders
a. Shows the business judgment rule & why we
have this protection
b. AmEX invested $30 million in DLJ (a company)
and LOST $26 million, AmEX wanted to get rid of
this loss, so they distributed the DLJ shares as
dividends in kind to the shareholders
c. The SHs bought a derivative suit (a suit on behalf
of the corporation) and said that AmEx should
have sold the stock and given cash as dividends
d. SHs were arguing that the BOD breached their
fiduciary duties in making this decision (duty of
care AND loyalty)
e. But, the BOD said that this decision was
protected by the Business Judgment Rule
i. Remember that the Business Judgment
Rule is a presumption that the BOD acted
in good faith AND that the BOD’s actions
were in the best interest of the
corporation
1. BJR comes from the common law,
but is embodies in LA in § 91(c)

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2.
A few things from mergers &
acquisitions will be helpful to
understand this case. When you close on
a house, there is always a delay between
signing the contract and closing. So,
signing = actual signing of the contract,
but when there is a merger, there will be
a signing and then a signing of the
acquisition agreement. SHs of the target
company will have a chance to approve
the transition (LA requires 2/3 vote,
where DE only requires a majority).
Once the shareholders approve, then
you have the closing.
BOD will usually have to call a special
meeting, another reason for the delay
between signing and closing.
f. “The directors’ room rather than the courtroom is
the appropriate forum for thrashing out purely
business questions which will have an impact on
profits, market prices, competitive situations, or
tax advantages…It is not enough to allege, as
plaintiffs do here, that the directors made an
imprudent decision, which did not capitalize on
the possibility of using a potential capital loss to
offset capital gains. More than imprudence or
mistaken judgment must be shown.” (pg. 310 of
book)
i. So, there is a public policy reason for the
BJR, the courts are not going to second
guess the decisions of a BOD.
ii. So, courts are looking for GROSS
NEGLIGENCE in terms of the BJR.
Smith v. Van Gorkom: The case for Duty of Care
a. FactsVan Gorkom (CEO) convinced the
directors that they should sell the TransUnion
after the senior management opposed the
proposal. Van Gorkom wanted to sell b/c he
wanted to retire; the company was a great
company to buy b/c they had all these tax credits
they couldn’t use. Van Gorkom says he will sell
the shares at $55/share (they are worth
$38/share). Van Gorkom calls a special meeting,
but does not tell the directors why he is calling it
until they arrive. The BOD approved the sale, and
the stockholders also approved the sale. This
was a DE case. Eventually the SHs are bought
out for $55/share. Then a class action suit is
brought to undo this transaction OR get
damages.
i. The Claim was that the TransUnion
(Van Gorkom’s company breached
their fiduciary duties, in particular the
duty of care
1. They didn’t really investigate
what they could have sold the
stock for, who came up with the
$55/share price?
ii. So, the class action will have to overcome
the presumption of the BJR – that the
BOD’s breach was so egregious that BJR is
NOT applicable in this case. So, the class
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 action would have to prove there was
gross negligence.
iii. There were three infirmities:
1. insufficient time of the
presentation
a. Van Gorkom’s presentation
to the BOD was only 20
minutes
b. AND Van Gorkom did NOT
provide any copies of the
acquisition agreement
2. Directors listened to the analysis
with no questions
3. and voted within 2 hours, didn’t
bring any documents into the
meeting.
a. There was no inquiry into
price and no independent
efforts for information.
b. There is nothing to say that the decision was a
bad decision. The court was looking only to the
procedure of the decision. The case was
remanded to have an adequate price determined.
c. Ct. concerned with process, not merits.
d. In this case, the procedure was sufficiently
tainted with gross negligence.
i. Court’s reasons
1. Hushed nature of the special
Market Test  After singing the meeting, no one knew why they
agreement, if another were there until they arrived
person/company comes along and is a. This is unusual!
interested in buying, there is usually a 2. $55/share price was NOT backed
provision in the original agreement
up by any information/evidence
that allows negotiation w/ this new
interested company. And, it usually a. they should have hired an
even allows you to enter into a new independent financial
agreement w/ this new party. advisor
b. AND NO ONE ASKED ANY
But, in this case there was a problem
QUESTIONS ABOUT THE
b/c the actual agreement was never
entered into evidence. PRICE
3. Remember that owners’ rights
But, the language of the agreement come with: 1) economic/financial
did NOT provide for a market test. rights 2) voting rights. It was the
court’s belief BOD was not sure
what TransUnion was worth to
potential buyers, specifically the
right to control

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Exculpatory provision or “raincoat
provision” = a corp. is allowed to
eliminate personal liability for directors
in their articles of incorporation. So,
most all corporations have this
provision now.
In LA = § 24(c)(4)
If a corporation does not have this
provision, the BOD can still be
personally liable for a breach of the duty
of care.
Exculpatory provision covers duty of
care. So, most litigation has switched to
duty of loyalty cases.
vi. Duty of Loyalty
1. When director places their own interest above that of
the corporation/shareholders. Officers have a duty NOT
to compete with the corporation
a. What was the right to
control worth?
4. TransUnion should have done a
“market test”
e. This decision was SHOCKING to the mergers
& acquisition community!
f. Eventually there was a $23 million settlement
i. So, it was deemed that the BOD breached
their duty of care in the tune of $23
million…
g. Ct. didn’t distinguish between inside and outside
directors. While all of directors have a duty of
care, statute does take into account similar
circumstances and like positions. Thus, in part.
circumstances, the standard may be raised to a
higher degree.
h. There was a dissent that said that these BOD
were smart, capable people who had served on
other boards…
i. After decision, DE passed a law allowing for
provisions in a company’s articles of
incorporation that allow the elimination of
personal liability for directors for breach of
fiduciary duty, but the provision doesn’t
eliminate liability for conflict of interest, bad
faith, or intentional misconduct. [Substantively
similar to LBCL §24(c)(4)]
a. NO Self-dealing
b. Conflicts of interest
c. Usurpation of a corporate opportunity
i. Corporate Opportunities Doctrine (but it
is still part of the duty of loyalty) = taking
a business opportunity for your own
personal benefit even though it belongs to
the corporation
1. Who is involved?
a. BOD
b. Officers
c. Dominant Shareholders
who take an active role in
managing the corp.
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 2. § 84 says when contracts between corp. and directors
would be ok
§ 84 is also a a. Requires
pretty standard i. Disclosure to the BOD that allowed BOD
provision to approve by vote in good faith
1. Where interested officer refrains
from voting
ii. OR Disclosure to shareholders was
provided, and shareholders voted to
allow transaction in good faith
iii. OR the contract was fair to the
corporation as of the time it was
authorized/approved/ratified by the
BOD/committee/shareholders
3. Bayer v. Beran (pg. 334 of book)
a. B/c there is a conflict of interest, the BJR does
NOT apply!
b. The conflict of interest is b/c there is a contract
between the corp. and the CEO’s wife
c. The burden of proof is on the defendant to show
that the transaction was fair to the corp.
d. FactsSome of the directors of a corp. (not the
board collectively) decided to enter into a radio
advertisement campaign costing approx. $1M
per year. One of the singers on the program was
the wife of the Pres. and a director of the comp.
The Πs claimed that the ad campaign were
negligent in selecting and renewing the radio
program and that the directors were motivated
by a noncorporate purpose – to further, foster,
and subsidize the wife’s singing career – in
causing the radio program to be undertaken and
spending large sums of money on it.
e. HoldingThe Court ruled that the directors had
not breached their fiduciary duty of loyalty to the
corp. by embarking on the radio programming
and in renewing it. In essence, the Court held
that b/c the K is fair, it is valid even though
disinterested directors have not formally ratified
it.
i. The Court stated that the evidence failed
to show that the program was designed to
foster or subsidize the career of the wife
as an artist or to furnish a vehicle for her
talents. The wife was initially consulted
a/b acts for the show and participated,

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Broz
- owns RFBC & BOD Pres
- on board of CIS
- Both do the same kind of business
(cell phone stuff)
CIS is not doing well, opportunity
comes up for RFBC to buy Michigan
2. But, then PriCellular comes along
and they want to buy Michigan 2
too.
4. Broz v. Cellular Information Systems, Inc. (pg. 345)
Pri makes tender offer to CIS
shareholders. Tender offer = done
w/ public companies, where
someone offers shareholders cash
for their shares. So, then Pri owns
CIS.
Pri then gets CIS to sue Broz for
taking the opportunity to buy
Michigan 2 from Pri.
Under corporate opportunity doctrine
corporate officer or director may not
take business opportunity for his own if:
(1) corporation if financially able to
exploit opportunity,
(2) opportunity is within corporation's
line of business,
(3) corporation has an interest or
expectancy in opportunity, and
(4) by taking opportunity for his own
corporate fiduciary will thereby be
placed in position inimicable to his
duties to corporation.
Court looks at these 4 factors to
determine the holding.
What is an “interest or an expectancy?”
Expectancy = if someone else swoops in
and takes it, if everything would have
gone normally the other company would
have gotten it.
while being paid reasonable
compensation.
ii. The Court stated that although the
Directors failed to follow the formal
requirements by not raising the ad
campaign at a formal meeting and not
adopting a resolution to approve it, the
failure to follow the requirements was not
fatal. The expenditures were approved
and authorized by the members
individually, and may in no sense be
considered ultra vivres. On the entire
case, the directors acted in the free
exercise of their honest business
judgment and their conduct in the
transactions challenged did not constitute
negligence, waste, or improvidence.
a. FactsBroz is Pres. and sole stockholder of
RFBC. He is also a member of the board of
directors for Π, CIS. Both corps. were engaged in
the business of providing cellular telephone
service. One corp., Mackinac, sought to divest
itself of a license area – Michigan-2. RFBC was
approached as a candidate to purchase it but CIS
was not considered a viable purchaser b/c they
were having financial problems. Broz spoke w/ 2
directors of CIS concerning his interest in the
license area and both said that CIS was not
interested and would reject any offer to
purchase it. Another corp., PriCellular, made a
tender offer to the S/Hs of CIS to pay cash to
them to purchase their stock in CIS directly from
them, thereby acquiring CIS. Pri then made an
option purchase w/ Mackinac of the Michigan-2
service area, and agreed that Mackinac could sell
it to any party willing to exceed the option K by
500K. Broz agreed and bought the license.
b. IssueWhether Broz breached duty of
loyalty to CIS for not offering Michigan 2
license to CIS before he bought it?
c. HoldingBroz did not breach his duty b/c he
was under no duty to consider the plans of Pri in
acquiring CSI and therefore was entitled to
proceed in his own economic interest in the
absence of any countervailing duty.
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 d. held that:
Remember that if there is NO corporate
opportunity, then there is NO breach!
If there is a corporate opportunity, then you
have to look to see if the director disclosed it.
What do you have to disclose?
1) You have to make BOD aware of
opportunity
2) material information
3) how much it is being offered for
5. Things to keep in mind about disclosure
a. What do you have to disclose?
b. Once disclosed, the Board can either
i. (1) determination of whether corporate
fiduciary usurped corporate
opportunity is fact-intensive and turns
on, inter alia, ability of corporation to
make use of opportunity and
corporation's intent to do so;
ii. (2) there is no per se requiring
presentation to board prior to
acceptance of opportunity, if
corporation does not have interest,
expectancy or financial ability to pursue
opportunity; and
iii. (3) on facts of case director was not
required to consider interests of
corporation proposing to acquire
corporation in reaching decision
whether or not to purchase license in
question.
i. You have to make BOD aware of the
opportunity
ii. You have to disclose the material facts
1. If you do not disclose the material
facts, then there will always be
room for an argument that
disclosure is not valid
iii. You have to tell how much it is being
offered for
i. Reject the opportunity
1. Which allows director to continue
on
2. This ALSO means there is NO
breach!
ii. OR NOT reject the opportunity
1. Which means the BOD may want
to act on it
2. This means there could be a
breach depending on how things
progressed
131
This case was big b/c it was going
to determine if good faith was a
separate stand alone doctrine
from fiduciary duties.
The Technicolor Case said that
fiduciary duties is comprised of 3
distinct duties:
1) Loyalty
2) Care
3) Good Faith
But, then Disney comes along
and says good faith is NOT a
part of the duty of loyalty.
Disney court says that BOD
Practices don’t have to be
perfect to be protected by
the BJR.
Keep in mind that this is not
entirely reconcilable w/
Smith v. Van Gorkom
6. Disney
a. Ovitz was chosen to replace Michael Eisner as
the Disney CEO & Chairman
b. Ovitz had
i. A 5 year employment contract w/ a
combo of
1. Salary
2. Stock option
3. And severance benefits
ii. Employment contract was approved by
the compensation committee, but not the
full board
c. Ovitz ended up not working out and his
severance package came in and he GOT
MILLIONS
i. He was fired w/o cause
d. There was a shareholder suit claiming
i. Board was no properly informed
ii. Contract constituted waste
iii. Board should have fired Ovitz for cause
iv. Board members were not independent
e. BJR rule will come in
f. On appeal
i. Did Board make an informed decision
about hiring Ovitz?
1. It was proper to delegate to the
compensation committee
2. But, the compensation committee
did not have a “single document”
summarizing the cost of an early
non-fault termination
ii. Did Board make an informed decision
about hiring Ovitz?
1. Board knew a lot about it
iii. Waste claim
1. No merit to this claim
2. Deal was to induce Ovitz to leave
his very lucrative job in LA
3. Prof says it is VERY difficult to
prove a waste claim!
a. If BJR fails, then the plaintiff
can argue that the BOD was
wasteful, but in order to
prove that the BOD was
wasteful, the plaintiff must
show that the decision was
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 so one sided that the BOD
was essentially
squandering corp. assets
i. This is a VERY
difficult standard to
prove!
g. Practical lessons of Disney
i. Procedural diligence
1. You need to document everything!
ii. Disclose internal company materials to
Board
1. Or compensation committee
iii. Consider having compensation committee
hire an independent expert next time
iv. Look to see the compensation level of
“peer companies”
v. Do a legal analysis of ALL terms of the
deal
7. So, keep in mind that actions taken in bad faith are a
breach of the duty of loyalty
a. But, what is bad faith?
i. Examples of bad faith
1. Conduct motivated by subjective
bad faith/intent to do harm is bad
faith
2. Intentional dereliction of duty
3. Conscious disregard of one’s duty
8. Also, keep in mind that gross negligence is NOT bad
faith, gross negligence is a breach of a duty of care
a. Why does this matter?
i. B/c of the provision that says BOD will
not be personally liable b/c of breaches of
duty of care (i.e. gross negligence)
20. Benefit Corporations
i. The role of a corporation is supposed to be to maximize
shareholder value
b. But, w/ the Benefit Corporations
i. There is an emphasis on social causes
ii. Corp. can consider things other than just maximizing
shareholder value
1. Expands fiduciary duties to non-SH interests that might
include employee interests or environmental interests
iii. Examples
1. Patagonia

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 c. What is a benefit corporation?
i. The goal is for the corporation to have a material social
impact on the community and the environment
ii. A legal status under state law (currently 22 states plus DC)
iii. Does NOT require corporation to be certified by B Lab
1. B Lab – a nonprofit organization that certifies
corporations as B Corp.
iv. Must include a statement in your Articles of Incorporation
1. If you want to amend an existing corp, then you will
need a 2/3 vote
d. Keep in mind that there are NO publicly traded benefit corporations
e. There is VERY LITTLE case law on it yet.
21. Certified B- Corp
a. What is a B Corp?
i. It means that this corporation has met certain standards
in regards to social, environmental, etc. goals
ii. Certified by B Lab
1. Again, B Lab is a nonprofit organization that certifies B
Corps.
b. Examples
i. TOMS
ii. Ben & Jerry’s
22. Corporation Dissolution
a. Corporations typically have an indefinite life (as opposed to a joint
venture), so this is why we are talking about voluntary dissolution
b. Can be dissolved voluntarily either by
Corporate Dissolution i. The shareholders authorizing the dissolution
1. Will need a MAJORITY of BOD present to approve at a
Voluntary  special meeting or annual meeting
1. SH Vote (majority 2. If no shares have been issued, then authorized by the
present) OR incorporators
Affidavit (if no debts)
2. Liquidation ii. OR by affidavit
3. File Articles of 1. You can dissolve by affidavit if the corporation is NOT
Dissolution w/ Sec. of State doing business AND does NOT owe any debts OR
immovable property
c. But, keep in mind that just b/c there is a vote of dissolution, the
corporation does NOT automatically go out of business  There is
more to do!
i. You have to liquidate the corporation
1. Ranking of who gets paid & in what order
a. Secured creditors
b. Un-secured creditors
c. Preferred stock holders
d. Common Stock holders
ii. Then you have to file the articles of dissolution w/ the Sec. of
State

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23. Limited Liability Companies
a. LLC Basic Information
i. They are a cross between a general partnership AND a
corporation
1. This means
a. They have the tax advantages of partnerships
b. But, the limited liability of corporations
ii. First came around in 1977
iii. How does the IRS treat LLCs?
1. In 1988, the IRS ruled that LLCs could qualify for
partnership-like tax treatment
a. So, profits are NOT subject to double taxation
(like they are in corporations).
b. Like in partnerships, both losses & capital gains
flow through the owners of the LLCs
i. AND the owners pay taxes on the capital
gains
ii. AND the capital gains keep their lower tax
rates
2. 1997, IRS further liberalized w/ the “check the box”
regulations
a. This gives unincorporated associations (Like
LLCs) the ability to choose their tax status w/o
regard to the entity’s nontax legal characteristics
i. So, you can choose to be taxed as a
partnership
ii. Since the “check the box” option came
into the picture, the number of LLCs
skyrocketed
iv. Legislation for LLCs vary from state to state
1. But, the basics are pretty standard
v. LLC Statutes are MUCH LESS DETAILED than corporation
statutes
vi. LLCs are VERY contract based
1. So, they can implement the most attractive elements of
partnerships and contracts
vii. Very flexible b/c they are contract based
viii. You do NOT see many publicly traded LLCs
1. People are used to investing in corporations…
ix. Owners of LLCs are called MEMBERS
1. You can have only 1 member
2. But, you can have multiple members as well
3. Members can be individuals or juridical persons
4. Ownerships interests are called
a. Interests
b. OR units

135
 5. Members have limited liability
a. So, only stand to lose capital contributions
b. Personal assets cannot be taken
i. Unless the veil is pierced, which is
possible
1. Veil piercing w/ LLCs is similar to
how it is w/ corporations
x. Proper form of capital contributions -§ 1321.
Contributions to capital - The contribution of a member to a
limited liability company may take the form of cash, property,
services rendered, or a promissory note or other binding
obligation to contribute cash or property or to perform
services.
1. So, it can include:
a. Cash
b. Property
c. Services rendered
d. Promissory notes
e. Or other obligations to contribute
f. Include future obligations
i. What must be filed?
2. Articles of organization
a. Governed by § 1304(a)
3. Initial report
4. Notarized affidavit of acknowledgement & acceptance
for the registered agent
a. This is actually part of the initial report
ii. Once filed, Sec. of State will issue a certificate of
organization
5. Can file up to 5 days after execution
a. And date of execution will be retro-active
6. OR up to 30 days in advance of the date on which you
want the LLC to come into existence
iii. What needs to be in the articles of organization?
7. The person who signs them does NOT have to be a
member or a manager of the LLC
a. So, an attorney or paralegal can execute/file the
articles of organization
8. MUST include info listed in § 1305
a. Name
i. § 1306 (a) – MUST include certain terms
1. Limited Liability Company
2. Or L.L.C
3. OR L.C.
a. No one uses L.C.

136
 ii. § 1306 (d)
1. Name cannot imply it is a
charitable organization or non
profit
iii. § 1306 (c)
1. If name does not satisfy the
requirements of the name, it does
NOT have a negative affect on the
organization OR its members
2. But, for a person who has been
negatively affected by misleading
name, this person can apply to
court to enjoin the LLC from doing
business
b. Purpose for which it is being formed
i. Or, you can say it is being “formed to
engage any lawful activity”
c. W/in the forms, must include
i. Registered Office’s address
ii. Registered agent’s address
iii. Affidavit
iv. Names & addresses of first managers or
members
1. If not yet selected, you can file a
supplementary report later on
2. Must file as soon as these people
are selected
b. Also need to draft an Operating Agreement/LLC agreement
i. Does NOT need to be filed w/ the Sec. of State
1. No one files it
ii. Basic contract governing the affairs of the LLC and saying the
various rights/duties of the members of the LLC
1. It is basically an operating contract
iii. So a cross between corporate bylaws and a shareholder
agreement
iv. Will to provide for the management of LLC, § 1311
1. Management can be kept w/in members = “Member
Managed”
a. This is the DEFAULT RULE
b. This makes it like a general partnership
2. OR selected mangers = “Manager-managed”
a. This makes it like a corporation’s BOD
b. Operating agreement MUST spell out the
qualifications managers are required to have
c. § 1313

137
 i. says that Board of Manager’s election will
be by PLURALITY vote
ii. Managers are removed by a majority vote
1. Either
a. With cause
b. OR w/o cause
c. LLC Liability
i. § 1322. Liability for contribution
1. A) A promise by a member to contribute to the limited
liability company shall not be enforceable unless set
forth in a writing signed by the member.
2. B) Except as provided in a written operating agreement,
a member's obligation to the limited liability company
to perform any enforceable promise to contribute cash
or property or to perform services shall not be
discharged if he is unable to perform because of
death, disability, or other reason. If a member does
not make the required contribution of property or
services, he or his personal representative is obligated,
at his or his personal representative's option, to either
contribute cash equal to that portion of value of the
stated contribution which has not been made or forfeit
his entire membership interest, or, in the case of a
personal representative, forfeit all rights in such
membership interest to which he may otherwise be
entitled. However, a creditor of a limited liability
company who extends credit after a member signs a
writing which reflects the obligation and before any
such election to forfeit the membership interests is
made may enforce the original obligation to the extent
that the limited liability company refuses or is unable to
honor the extension of credit.
ii. § 1323. Sharing of profits and losses
1. The profits and losses of a limited liability company
shall be allocated among the members and among
classes of members in the manner provided in a
written operating agreement. To the extent the
operating agreement does not so provide in writing,
profits and losses shall be allocated equally among
the members. The provisions of this Section regarding
the allocation of losses shall not affect the limitations on
the liability of members and managers set forth in R.S.
12:1320.
a. So, the default rule is that profits/losses are to be
distributed evenly

138
 b. This is LIKELY to be changed in the operating
agreement
d. Management of LLC
i. Single Member Management (pg.264 of supplement)
1. JUST for single member LLC
ii. Multiple Member LLC Agreement on Westlaw in the Form
database, also on Moodle
1. VERY LONG b/c it is for multiple member LLCs
2. This particular one is being run very much like a
corporation
a. Like a corporation, can issued different types of
stocks/interests
i. Preferred units = preferred stock
ii. Incentive units = units issued to
employees, management, officers, etc.
1. Part of employment compensation
plans
iii. So, adopting a capital structure very
similar to a corporate plan
iii. § 1316 says that all decisions made by managers will be made
by MAJORITY vote
iv. § 1318 says that members still have a vote on some aspects of
running LLCs
1. § 1318(a) Unless otherwise provided in the articles
of organization or a written operating agreement, each
member of a LLC shall be entitled to case a single vote
on all matters properly brought before the members,
and all decisions of the members shall be made by
majority vote of the members.
a. Default rule = each member gets 1 vote
2. § 1318(b) Unless otherwise provided in the articles
of organization or a written operating agreement, a
majority vote of the members shall be required to
approve the following matters, whether or not
management is vested in one or more managers
pursuant to R.S. 12:1312:
a. (1) The dissolution and winding up of the limited
liability company.
b. (2) The sale, exchange, lease, mortgage, pledge,
or other transfer of all or substantially all of the
assets of the limited liability company.
c. (3) The merger or consolidation of the limited
liability company.
d. (4) The incurrence of indebtedness by the
limited liability company other than in the
ordinary course of its business.

139
 e. (5) The alienation, lease, or encumbrance of any
immovables of the limited liability company.
f. (6) An amendment to the articles of organization
or an operating agreement.
e. Types of Distributions – 2 Types
i. Interim Distribution
1. Like dividends
2. § 1324 - Interim distributions
a. A) Except as provided in this Chapter, a member
is entitled to receive distributions from a limited
liability company before the withdrawal of the
member from the limited liability company and
before the dissolution and winding up of the
limited liability company to the extent and at the
times or upon the occurrence of the events
provided in an operating agreement or as
authorized by the members.
b. B) Interim distribution of cash or other assets of
a limited liability company shall be allocated
among the members and among classes of
members in the manner provided in a written
operating agreement. To the extent such
operating agreement does not so provide in
writing, distributions shall be made equally to
the members.
ii. Distributions Upon withdrawal
1. § 1325. Distributions upon withdrawal
a. A) If a limited liability company has been
constituted for a term, a member may withdraw
without the consent of the other members prior
to the expiration of the term, provided he has
just cause arising out of the failure of another
member to perform an obligation.
b. B) A member of a limited liability company not
entered into for a term may withdraw or resign
from a limited liability company at the time or
upon the happening of an event specified in a
written operating agreement and in accordance
with the written operating agreement. If a
written operating agreement does not specify
the time or the events upon the happening of
which a member may withdraw or resign, a
member of a limited liability company not
entered into for a term may resign or withdraw
upon not less than thirty days prior written
notice to the limited liability company at its

140
 registered office as filed of record with the
secretary of state and to each member and
manager at each member's and manager's
address as set forth on the records of the limited
liability company.
c. C) Except as otherwise provided in this Chapter,
on withdrawal or resignation, a withdrawing or
resigning member is entitled to receive such
distribution, if any, to which the member is
entitled under a written operating agreement
and, if not otherwise provided in a written
operating agreement, within a reasonable time
after withdrawal or resignation, the fair market
value of the member's interest as of the date of
the member's withdrawal or resignation.
iii. If distributions are not in the operating agreement, they will be
authorized by members in a MAJORITY vote AND paid equally
to all members
f. Transferring Interests
i. Remember that stocks are freely transferable, and w/
partnerships you can only transfer financial aspects (not
managerial aspects)
ii. But, it is different w/ LLCs, the default rule is that when
members want to sell their interests, it is really an
ASSIGNMENT
1. So, under the default, you are really only transferring
your financial rights
a. Not your
i. Managerial rights
ii. OR voting rights
2. So, an assignee does NOT become a member
3. There MUST BE A UNANIMOUS VOTE TO ADMIT AN
ASIGNEE AS A MEMBER
a. So, the assignee is really only getting the right to
the distribution
i. No matter how it is managed
4. But, the assignee can be liable for the contributions the
former member PROMISED to make AND if there is an
LLC & natural person as a member, and the member
dies (or is incompetent), under § 1333, then the
member who died’s legal representative will become
the dead member’s assignee
iii. §1330 - Assignment of membership interest
1. A) Unless otherwise provided in the articles of
organization or an operating agreement, a membership
interest shall be assignable in whole or in part. An

141
 assignment of a membership interest shall not entitle
the assignee to become or to exercise any rights or
powers of a member until such time as he is admitted in
accordance with the provisions of this Chapter. An
assignment shall entitle the assignee only to receive
such distribution or distributions, to share in such
profits and losses, and to receive such allocation of
income, gain, loss, deduction, credit, or similar item to
which the assignor was entitled to the extent assigned.
2. B) Unless otherwise provided in the articles of
organization or an operating agreement, the pledge of
or granting of a security interest, lien, or other
encumbrance in or against any or all of the membership
interest of a member shall not cause the member to
cease to be a member or to have the power to exercise
any rights or powers of a member.
3. C) Unless otherwise provided in a written operating
agreement and except to the extent assigned by
agreement, until an assignee of a membership interest
becomes a member, the assignee shall have no liability
as a member solely as a result of such assignment.
iv. § 1332 - Right of assignee to become a member
1. A) Except as otherwise provided in the articles of
organization or a written operating agreement:
a. (1) An assignee of an interest in a limited liability
company shall not become a member or
participate in the management of the limited
liability company unless the other members
unanimously consent in writing.
b. (2) Until the assignee of an interest in a limited
liability company becomes a member, the
assignor shall continue to be a member.
2. B) An assignee who becomes a member has, to the
extent assigned, the rights and powers, and is subject to
the restrictions and liabilities, of a member under the
articles of organization, any operating agreement, and
this Chapter. Except as otherwise provided in the
articles of organization or a written operating
agreement, an assignee who becomes a member also
shall be liable for any obligations of his assignor to
make contributions under R.S. 12:1322 and to return
under R.S. 12:1328(A) distributions received in
violation of R.S. 12:1327. However, the assignee shall
not be obligated for liabilities unknown to the assignee
at the time that he became a member.

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 3. C) Whether or not an assignee of a membership interest
becomes a member, the assignor shall not be released
from his liability to the limited liability company under
R.S. 12:1322 and 1328.
v. § 1333 - Powers of estate of a deceased or incompetent
member - If a member who is an individual dies or a court of
competent jurisdiction adjudges him to be incompetent to
manage his person or his property, the member's membership
ceases and the member's executor, administrator, guardian,
conservator, or other legal representative shall be treated as an
assignee of such member's interest in the limited liability
company. If a member is a corporation, trust, or other entity
and is dissolved or terminated, the member's membership
ceases and the member's legal representative or successor
shall be treated as an assignee of such member's interest in the
limited liability company.
g. LLC & Agency
i. § 1317(a) Agency & LLC
ii. If we have a member managed LLC (default choice) then the
individual members have the ability to bind the LLC in contract
1. So, members are mandatories/agents of the LLC
iii. § 1317(b)
1. If a member is restricted in their ability to be an agent
for the LLC in the LLC agreement (this is NOT filed w/
Sec. of State, so it is NOT publicly available), any
company they work with shall be deemed to know this.
a. The restriction has to be mentioned in the
articles
b. This puts the burden/duty on the 3rd party
company to find out if there are any restrictions
h. Water, Waste & Land v. Lanham, pg. 269 of book
i. Water, Waste, & Land = Westec = Member managed LLC
ii. Clark was w/ Lanham & contact Westec about performing
engineering work
iii. Issue= whether the members or managers of a LLC are
excused from personal liability on a contract where the other
party to the contract did not have notice that the members or
managers were negotiating on behalf of a LLC at the time the
contract was made.
iv. Court said
1. Clark as the agent MUST fully disclose the principal in
order to avoid personal liability
a. Clark should have disclosed the full name of the
LLC
i. Once that is fully disclosed, then Clark
would NOT be liable

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 i. Example
i. Elf (PA) & Malek (MA) are forming an LLC, Jaffrey is president
of Malek
ii. they have an employment agreement & LLC agreement
iii. LLC agreement has a provision that all disputes between
members will be resolved by arbitration in CA
iv. Elf claims that Jaffrey had engaged in a number of
wrongdoings, filed action against Jaffrey AND LLC in Delaware.
1. Claimed that the arbitration agreement w/in the LLC is
un-enforceable
a. Elf LOSES on this argument
v. Why does Elf lose?
1. B/c Elf had the freedom to contract, LLCs are designed
around this idea of “freedom to contract.”
j. Fisk Ventures v. Segal (pg. 280 of book)
i. Reason we are looking at it – intro to start up companies,
common problems you will see there.
1. Also seeing venture capitalists
ii. Segal contributed the patent rights in exchange for Class A
interest/unit, Fisk gets Class B units
1. And they are pretty much passive investors
iii. Learn what a “put right” is
1. A put right provides Johnson the option to acquire the
company to redeem his membership units at a price
determined by an independent appraisal
a. Basically, to buy out his rights
k. Limited liability
i. Members in LLC have limited liability
1. Like SHs in a corp., will only lose what they
contributed/invested in the LLC
a. One of the great benefits of an LLC
i. In § 1320
ii. § 1320(c) – non-joinder rule about bringing certain types of
suit
iii. But, piercing the corporate veil applies in LLC
1. Use the same test as w/ a corporation
iv. Who owes fiduciary duties?
1. If manger managed
Manger managed – a. Managers owe duties
always compare to a
corp.
b. Members do NOT owe duties to shareholders
i. But, if the member is a manager, then
Member Managed – they will owe fiduciary duties
always compare to a 2. In a member managed LLC
general partnership a. This will be very similar to GP’s
b. Members owe fiduciary duties to other members
3. 1314(a) – Duties of members and managers

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 a. Sets up the Duty of Care
b. 1314(d) sets up the Business Judgment rule
which protects fiduciaries w/ their business
decisions
4. 1318(c) covers authorization of interested
transactions/contracts
a. they will NOT be void if the interest is disclosed
OR known to the members
b. AND if a majority of the dis-interested members
approve that particular transaction
c. OR it is fair to the LLC
5. 1315
a. arose after Smith v. Van Gorkom
b. Either articles of incorporation OR operating
agreement can limit/eliminate personal liability
for breach of the duty of care.
l. Long Form Agreement
i. Pg. 54 of document on Moodle
ii. Tag-along rights
1. Keep in mind these can be used in partnerships and
corporations as well
a. So NOT just limited to LLCs
2. These rights will only be used by private companies
(NOT publicly traded one)
3. What are these?
a. Look at § 1005
b. It gives a minority SH/investor a right to sell his
stake interest in the company, if the majority
investor(s) has entered into a contract to sell
their stake
i. So, allows minority investors to tag along
to whatever transaction the majority
investor has entered into AND for the
same terms as the majority investor will
get
4. These rights are a way to protect the minority investors
a. Will see this more in larger LLCs
iii. Drag – along rights/ or “bring along” (opposite of tag along)
1. § 1004
2. A majority investor can force a minority investor to sell
on the same terms
3. Why would a majority investor want a provision like
this?
a. Maybe whoever they are selling it to would not
agree to the sale unless this was done

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24. Withdrawal
a. § 1325
i. like w/ partnerships, there are different rules governing
withdrawal from an LLC based on whether there is a term LLC
or a non-term LLC
1. Term LLC (meaning it is NOT indefinite in nature, there
is a set duration/term), see these a lot w/ a joint
venture (set purpose & set time)
i. Remember joint ventures can take any
form really
b. If there is a member who wants to withdraw w/o
the consent of the other members, under
1325(a) they need to have just cause arising out
of failure of another member to perform an
obligation
i. Very similar to partnerships
ii. If they do NOT have just cause and they
want to withdraw, they will have to get
consent
1. This is a majority consent!
a. Keep in mind that for a
term partnership – it is
unanimous consent
2. For a Non Term LLC (most LLCs are non term LLCs)
a. §1325(b)
b. Members can withdraw in accordance w/ the
terms set forth in the operating agreement
c. If the operating agreement does NOT provide for
withdrawal, the default is that the member can
withdraw w/ giving AT LEAST 30 days notice to
each of the managers and members
25. Dissolving LLCs
a. § 1334
b. Except as provided in operating agreement, an LLC can be dissolved
as:
i. As provided in the operating agreement
ii. If the members consent
1. Will need a majority vote (§1318)
iii. To have a court issue a decree of dissolution
iv. § 1335.1 - if the LLC is no longer doing business, does not owe
any debts, then the LLC can simply be dissolved by an affidavit
1. same as w/ corporations
c. Keep in mind that before LLC goes away, you have to liquidate it
i. First – pay off creditors
ii. Then pay any distributions members are entitled to
iii. Then pay back an capital contributions

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 iv. Then pay out the rest of the assets in accordance to how they
shared their distributions
26. Study tip for LLCs 
a. Compare manager managed to corporations, but remember that
individual directors of corporations cannot act to bind the corporation
(b/c the whole BOD acts as super agent of the corporation). But,
managers in LLC can bind the entity, even if there is a Board.
i. This is the only big difference
b. W/ respect to member voting, there are only 2 events (default rules)
that require a unanimous vote of members
i. (1) Adding new members
ii. (2) Changing the contribution of a member

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Final Review information 

General Limited LLC Corporation

Partnerships Partnerships
Formation Informal creation, Formal requirements Formal Requirements Formal Requirements
Requirements no formal
requirements Must file Must file Must file
1) written 1) articles of incorporation 1) articles of incorporation
Unless, you want to partnership 2) initial report 2) initial report
own property, then agreement will be 3) notarized affidavit of 3) notarized affidavit of
must file written filed with the acknowledgement & acknowledgement &
partnership registration form acceptance (technically part acceptance (technically part of
agreement w/ Sec. from Sec. of State of initial report, but often initial report, but often filed
of State & filed separately) separately)

Operating agreement (or Bylaws, the document that will

LLC agreement), this does govern the internal affairs of
NOT need to be filed w/ the corporation. You will need
Sec. of State. This will these, but they are NOT filed
govern internal operations, w/ the Sec. of State
similar to
bylaws/shareholders
agreement
# of Required At least 2 At least 2 At least 1 At least 1
Persons
But, 1 must be a More flexible b/c of this. More flexible b/c of this.
Remember general partner and 1
they do NOT must be a limited
need to be partner
natural
persons

Limited NO! Yes - for the limited Yes. Members will only lose Yes. Members will only lose
Liability of partner, but this is what they contributed to what they contributed to the
owners/inves But, in LA, liability contingent on LP not the LLC. corp.
tors of that is limited to virile participating in
entity. share when management/control W/ the exception of veil W/ the exception of veil
partnership cannot of the partnership piercing. piercing.
Liability for pay its debts. (b/c they can lose
ANY debt the their limited liability
entity cannot status as LP). Will
pay for. only lose what they
invested in the
partnership (capital
contribution).

General partners are

liable for their virile
share, virile share is
between the general
partners (b/c if you
come to this, the
limited partners have
already lost their

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 capital contributions)

How Yes on economic Economic interest are Not completely freely Yes, they are freely
transferable interest, economic transferable. transferable. Assignee will transferable. This is one of the
are these rights are only get the economic benefits of having a
interests? Are transferable. Management interest rights. corporation.
they freely are NOT transferable.
transferable? But, no on Will have to have You can freely transfer, but
management/votin unanimous consent to… you want to check on the
2 interests: g interests, they liquidity of the company – or
economic & are NOT freely you want to look at the market
management/ transferable. to really see what your
control rights interests are.

Centralized No centralized No centralized Default rule is that it is Yes! BOD manages the
management? management, the management. member managed. corporation. BOD elected by
general partners shareholders. BOD acting as
Who is manage the entity. General manager(s) But, you can have a fiduciaries for shareholders.
managing (this is the Default are managing the manager managed LLC. You
each of these rule). GPs have the partnership. LPs will will need to change articles Then, the BOD will elect
entities? right to vote in the have voting rights for of incorporation and officers.
management of the “big ticket items.” operating agreement.
GP. So, centralized management
w/in BOD and officers.

Future services is NOT adequate consideration for corporation. But, it is adequate

consideration for all the other entities.

Corp. by estoppel applies w/ contact claims, and when a person thinks they are a
corporation all along, and there will be a windfall for either party if the corp. does
NOT exist. ONLY APPLIES w/ contract claims.

De facto corporation applies both in contracts & tort claims. The person has to have
made a good faith attempt to incorporate the entity, had a legal right to create a
corp., and acted like a corp.

Corp. by estoppel & de facto corp. are NOT used often, must like ultra vires doctrine.

S. Corp formed like any other corp., but they are electing to be taxed as a
partnership, i.e. flow through taxation rather than a double tax. S. Corp does have to
be made of natural persons, they cannot be made of juridical persons.

What is the benefit to partners if they form a registered LLP? These are formed
for certain types of professionals (lawyers, accountants, etc.). They have limited
liability in respect to debts or obligations of other partners, i.e. debts, negligence,
malpractice, etc. W/ everything else, they will have regular liability – as if they are
general partners. So, you have to look at what is causing the debt/obligation to
determine the level of liability.
- limited liability w/ respect to certain items.

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What are preemptive rights? A right of first refusal given to existing shareholders
(shares w/ voting rights) to purchase shares to maintain their percentage of
ownership. As long as those shares are being issued for cash! The issue is that you
don’t want existing shareholders’ vote to be diluted
- can ONLY buy their proportional amount. If you own 7% of shares of
corporation, if they issue 100 new shares, you only have a right to 7 of those
100 shares.
- HAS to be indicated in the articles of incorporation for it to be allowed
- new shares MUST BE ISSUED FOR CASH.
- Not shares being issued for stock option or employee benefit or merger or
some other reason
- have 15 (maximum) days to say you want to exercise your right, § 72(a)(1)

Partnerships – cash, services, property or promise to provide any of those are ALL
valid contributions.

For a corporation, the promise of future services/cash/property is NOT ok in LA.

What votes is required by members of a LLC to sell or lease immovable

property owned by the LLC? Would your answer change if the LLC was
manager-managed? A majority vote is required. No, it would be the same even if it
were manager-managed. §1318.

What is the default rule for votes needed to amend the articles of
Incorporation of a corporation? 2/3 of the voting power present. So, it will really
be 2/3 of the quorum. Quorum is 2/3 of majority voting power – present in person
or by proxy. So, 2/3 of the 2/3 required quorum.

Quorum, pg. 160 - § 74. But, quorum can be reduced in articles of incorporation, but
it can be NO LESS than 25% of the total voting power.

What do we mean by voting power? We are talking about those shares that have a
right to vote on whatever the issue is. Looking at different classes of stock.

DO NOT NEED TO KNOW CUMULATIVE VOTING FORMULA. You just need to know
how it is different from plurality voting.

Plurality is ONLY for electing directors.

Legal Entity – not just for partnerships, partnerships are a legal entity though. The
partnership is acting as a legal entity. But, partnership can also be a legal aggregate
– meaning you look to the individual partners for some things, ex. the partners are
paying taxes or the fact that the partners are responsible for the debts of the
partnership. So, when using legal aggregate, it just means we are looking at the

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partners. Same w/ limited partnerships, LLC – it is NOT just for partnership, but she
used partnerships as an example and it came up in that context.

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