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AGENCY

AGENCY: R2 1
Fiduciary relation which results from:
1. The manifestation of consent by one person (the principal) to another (the
agent) that the other shall act
1) On his behalf AND
2) Subject to his control AND
2. Consent by the other (the agent) so to act.

• Gorton v. Doty (1937) (page 1)


o School football game, car needed, D volunteered her car but only if the coach
would drive it, accident, D was sued.
o Rule: there was an agency relationship b/t the D and the coach.
o Evidence of Agency:
 Act on D’s behalf: Asked the coach to driver her car, therefore it was
not a loan, and the coach acted on her behalf.
 Act subject to D’s control: exerted control b/c wanted coach to drive
the car. Told him where to drive it.
 Consent to act on D’s behalf: Accepted the car, and drove it to the
game.
o Dissent- agency is more than passive permission, there has to be more
control, more direction. This was a gratuitous bailee relationship= loan of
car, and does not give rise to liability.
• Agency relationship can still be established even if the parties signed a contract
stating that one is NOT acting like an agent for the other. Courts are NOT bound by
how the parties classify their own relationship.
• Gay Jensen Farms Co. v. Cargill, Inc. (page 7)
o Agreement was entered into where Cargill would loan money to Warren, a
grain farmer. Contract stipulated that Warren would provide Cargill with
annual financial statements, Cargill would keep the books, or an audit would
be conducted. Warren would have to obtain Cargill’s consent before he could
more than $5,000 in repairs. Warren began shipping Cargill 90% of its grain.
o Issue: Whether Cargill became liable on contracts made by Warren with
plaintiffs? Plaintiffs= Jensen Farms, sold grain, were not paid by W, want to
establish agency relationship b/t C and W to get $ from C.
o Held: Yes. Agency relationship exists. Warren= Cargill’s agent.
 Cargill is liable b/c Cargill consented to Warren acting on its behalf and
subject to his control:
• Act on C’s behalf: Warren produced grain for Cargill, Cargill
financed Warren.
• Subject to C’s control: Warren was not allowed to take money
from other lenders, bank loans had C’s letterhead, and name
attached. C was able to inspect W, audit, and supervise
operations.
o ADVICE:
 The more control you have over an entity = more likely an agency
relationship. Less control = more like a debtor/creditor relationship
(what Cargill tried to argue.)
• Why does/ should control result in liability?
o Could be involved in the decision-making that lead to the disputed problem.
o The controlling company should have some liability if a problem results.
Liabilities of the Principal to Third Parties:
1. Contractual liability: Focus on authority of agent to act in the way that led to
contractual liability.
 Actual authority – depends on communication b/t principal and agent.
o Express Actual Authority (EAA)- R2 Agency §7, and 26.
 “manifestation” of consent by the principal to the agent.
 Look for some indication by the principal to the agent for the
agent to do certain acts.
• Ex. Principal tells Agent “do X”- Agent has EAA to do X,
and once done, Principal is bound.
o Implied Actual Authority (IAA)- R2 Agency, §7, 26, and 35.
 Agent needs to do the act to carry out Principal’s express
instructions OR
 The act is incidental to/ usually accompanies the carrying out of
the expressly authorized task OR
 Past conduct by Principal, by custom, industry practice, etc.
• Mill Street v. Hogan (page 14)- Bill was hired to paint,
previously had been allowed to hire his brother, Sam.
Elders decided that Petty would be helper, and he was
hard to find so Bill hired his brother, and brother got hurt.
o Bill had implied actual authority to hire his brother.
o Principal intended agent to possess this authority
and includes powers necessary to complete the
duty delegated. Circumstantially proven authority.
o Focus on the agent- here, Bill reasonably believed
that he had the authority to hire his brother, Sam.
 Apparent Authority (AA)- R2 Agency, §8 and 27. –depends on
communication b/t principal and 3rd party.
o Focus on the 3rd party!
 Whether the 3rd party reasonably believed that the agent had
power.
 Look for written or spoken words or other conduct by Principal
that causes 3rd party to reasonably believe that Principal
consented to Agent’s doing the act in question.
o Authority that the agent is held out by the principal as possessing.
 Lind v. Schenley Industries, Inc. (page 16)- Lind was told by
Kaufman that he would get a commission. Lind was told through
a memo to talk to Kaufman. Even if K didn’t believe that he had
authority- doesn’t matter, it matters what L believed, and he
believed that K had the authority.
• Park and Tilford represented that K had the authority to
offer the compensation to L.
 Inherent Agency Power (IAP)= inherent authority. R2, §8A
o Principal does NOT have to make any manifestation to the 3 rd party.
o Consider the fairness to the 3rd party.
o Power of an agent which is derived SOLELY from the agency relation
and exists for the protection of persons harmed by or dealing with a
servant or other agent. Derived from agency relationship- some power
automatically comes from the agency relationship.
o Nogales Service Center v. ARCO- page 31- Whether ARCO’s manager
had the authority to make an agreement with owners of the service
center? Yes- IAP. A principal can be held liable for the actions of its
agent in situations including when the agent is in violation of the
principal’s orders, when the agent acts purely for his own purposes,
and when the agent is authorized to dispose of goods. IAP exists for
the protection of persons harmed by or dealing with a servant of
another agent.
o ADVICE: To avoid becoming liable under IAP, spell out what agent’s
power, what they can/can’t do, and careful supervision of employees.
 Ratification- R2 Agency, §82, 83
o Affirm a PRIOR act which DIDN’T bind you when it was done, BUT it is
given effect as if it was ORIGNALLY AUTHORIZED.
o Affirmance: 2 ways-
 1. Express
 2. Implied
o Any different based on A’s acting with authority? NO, b/c it is as if it
was ratified at the time it took place.
 Estoppel- R2 Agency, §8B – NO agency relationship. (diff. than apparent
authority).
o Plaintiff MUST have suffered a loss in reliance of the purported agency
relationship for estoppel to apply.
o A person who is not otherwise liable as a party to a transaction
purported to be done on his account, is nevertheless subject to liability
to persons who have changed their position (suffered a loss),
because of their belief that the transaction was entered into by or for
him IF:
 (a) he intentionally or carelessly caused such belief OR
 (b) knowing of such belief and that others might change their
positions because of it, he did not take reasonable steps to
notify them of the facts.
o Hoddesson v. Koos Bros (page 40)- plaintiff purchased furniture from
who she though was a salesman, paid him money, and no furniture
was delivered. Rule: there is no actual or apparent authority here, but
the case is remanded, IF it is found that the store was negligent in
preventing imposters from taking orders from customers, then
defendant will be ESTOPPED from disclaiming the agency relationship.
2. Tort Liability: servant (employee) v. independent contractor, actions done within
“scope of employment.”
 1. First establish agency relationship.
 2. Servant v. Independent Contractor
o Master- R2, §2 (1): master is a principal who employs an agent to
perform service in his affairs, and who controls or has the right to control
the physical conduct of the other in performance of the service.
o Servant- R2, §2 (2): servant is an agent employed by a master to perform
service in his affairs whose physical conduct in the performance of the
service is controlled or is subject to the right to control by the master.
o Independent Contractor- R2, §2 (3): independent contractor is a
person who contracts with another to do something for him BUT who is
NOT controlled by the other NOR subject to the other’s right to control
with respect to his physical conduct in the performance of the
undertaking. He MAY or MAY NOT be an agent.
 R2, § 220- determining whether someone is a servant or an
independent contractor.
• i. extent of control
• ii. whether or not the one employed is engaged in a distinct
occupation or business (then that person is usually an
independent contractor)
• iii. Whether work is usually done under direction of the
employer
• iv. Skill required (specialized= independent contractor)
• v. whether the employer supplies the instrumentalities
• vi. length of time the person is employed (shorter=
independent contractor)
• vii. Whether the work is part of the regular business of
employer
• viii. Whether the parties believe they have created a master
servant relationship
• ix. Whether the principal is or is not in the business
 Murphy v. Holiday Inns, Inc. (page 53)- P sued for damages
sustained while she was a guest at Holiday Inn. Rule: NO
agency b/t Holiday Inn and the premises’ holder, b/c there was
no control by Holiday Inn over the methods or details of doing
the work, no control over the day to day operations, an agency
relationship was not established, and therefore Holiday Inn
cannot be held liable.
o 3. Tort Liability and Apparent Agency
 Miller v. McDonalds-(page 58)- P bit into stone at McDonald’s,
went to that particular McDonald’s based on their reputation.
There was only a very small sign indicating that McDonald’s did
not run that particular store, but it was not very distinguishable.
Rule: there was MORE control than Holiday Inn, therefore there is
an agency relationship b/t 3K’s ownership of this McDonald’s and
Big McDonalds. Menu was the same, everything about the
appearance and operation of the Tigard McDonald’s identified
with Big McDonald’s. Big McDonald’s was held out to be the
apparent agent- and P was injured b/c of lack of skill- and P
reasonably relied on this apparent agency relationship, therefore
P can recover.
 ADVISE: make signs bigger, put them in more places, make it
more publicly known- through advertising—that the franchises
are independently owned or operated. They could also get
insurance, advise 3K to get insurance, and as a backup, have
some of your own. Franchise operators- have a manual, obtain
permits in their own name, if there are local rules- it is their
responsibility to get the necessary licenses.
o 4. Scope of Employment- Respondeat Superior- R2, § 219
 (1) Master is liable for the torts of his servants committed while
acting in the scope of their employment.
 (2) master is not liable for the torts of servants committed
OUTSIDE the scope of their employment UNLESS
• 1. The master intended the conduct or the consequences,
OR
• 2. The master was negligent or reckless, OR
• 3. The conduct violated a non-delegable duty of the
master, OR
• 4. The servant purported to act or to speak on behalf of
the principal and there was reliance upon apparent
authority, or he was aided in accomplishing the tort by the
existence of the agency relation.
 Manning v. Grimsley (page 68)- P, spectator at a professional
baseball game, was injured by a ball thrown by the pitcher.
Sought damages from pitcher and employer.
• In MA, need to show conduct, and present interference
with employees ability to do their job. Here, the pitcher
was unable to do his job b/c of P’s conduct, and pitcher
assaulted P based upon this conduct, therefore it fell
within the scope of employment.
• R2, §228:
o (1)Conduct of a servant is within the scope of
employment if, BUT only if:
 (a) it is the kind he is employed to perform
• Pitching the ball= conduct supposed to
perform.
 (b)occurs substantially within the authorized
time and space limits
• Conduct occurred during the game
 (c) it is actuated, at least in part, by a purpose
to serve the master and
• It was actuated to serve the master-
stop the heckling and pitch effectively
 (d) if force is intentionally used by the servant
against another, the use of the force is NOT
unexpectable by the master.
• P was trying to rattle Grimsley,
therefore his retaliation was
foreseeable.
o (2) conduct is NOT within scope of employment IF:
 DIFFERENT IN KIND from authorized conduct,
 FAR BEYOND authorized time or space limits,
OR
 TOO LITTLE ACTUATED by purpose to serve
the master.
• Kind of Scope Within Scope R2, §229
o Of SAME GENERAL NATURE as authorized conduct,
or incidental to it.
o Helpful facts to determine if conduct is so similar/
incidental to be within scope of employment
• Can be within scope of employment, even though
consciously criminal or tortuous: R2, §230
• Can be within scope of employment even though
consciously criminal or tortuous: R2, §231
 Agent’s Fiduciary Obligation- Fiduciary relation b/t principal and agent
o 1. Agency is a fiduciary relation: R2, § 1
o 2. Unless otherwise agreed, an agent must act solely for the benefit of
the principal: R2, § 387
o 3. Account for profits: R2, §388
o 4. Cannot act adversely (unless otherwise agreed, or with principal’s
knowledge): R2, § 389-92
o 5. Cannot act for persons whose interests conflict with the principal:
R2, §394
o 6. Duty not to compete (unless otherwise agreed): R2, §393
o 7. Not use/ share confidential information: R2, §395
o 8. Cannot commingle property: R2. § 398
o General Automotive Manufacturing v. Singer (page 83)- Singer started
outsourcing some of the contracts that he determined Automotive
could not take. Employment contract: stated that he had to observe
certain working hours, not supposed to disclose any information, and
could not engage in other business permanent in nature during term of
his employment. Rule: Court says that Singer should have disclosed
this to the company to determine whether he should do this or not, he
breached fiduciary duty. Remedy: cannot keep secret profit.
o Duty of Care:
 Paid Agent: R2, §379: act with standard of care and with
standard skill and exercise any special skill
 Other duties:
• Good conduct (protect reputation)- §380
• Give Principal relevant information- §381
• Keep and render accounts of $, etc- §382
• Act only as authorized- §383
• Obey directions- §385
o Remedies of Principal: §399- Examples of appropriate remedies:
 Action on contract, for losses and for misuse of property
 Specific performance
 Restitution
 Injunction
 Discharge
 Refusal to pay
o Agent is liable for results of breach: §401, 403
 Agents Fiduciary Obligations AFTER Agency Relationship
o Town and Country-(page 87): three employees of homecleaning agency
broke off and opened their own business and targeted the
homecleaning agency’s clients. Court focused on trade secret: T and C
spent a lot of time and energy getting their customer list. Violated
fiduciary duty b/c they ONLY solicited T and C’s customers.

PARTNERSHIP
Sole proprietorship: 1 person is the owner and operator of the business, and they have
NOT taken the formal step of operating a business.

Partnership: NOT officially incorporated, but must have more than 1 owner.

Common Law

UPA/RUPA- 1914 v. 1997


Partnership agreement

Definition: partnership is an association of two or more persons to carry on as co-owners


a business for profit. UPA §6.

Characteristics:

• Profit Sharing: Share of profits is prima facie evidence that he is a partner in


a business: UPA §7.

o Fenwick v. Unemployment Comp. Comm (page 91)- entered into


partnership agreement, Court ruled that it was an employment
agreement b/c there was no obligation to share the profits and no
ownership and control. Intent is NOT dispositive of a partnership.
Partners compared with employees.

• Loss sharing: not required to have a partnership, but it is good evidence of a


partnership.

• Consent: no person can become a member of a partnership without the


consent of all the partners. UPA §18 (g)

• Co-Ownership- the partners co-own the assets of the business

o They share in:

 1. The right to control and dispose of the assets

• Partners compared with lenders:

o Martin v. Peyton-(page 96)- plaintiff-creditor, tried to


find defendants- who loaned money to the company-
as partners. Court ruled NO, the defendants were
lenders, not enough control, this is a precaution that
lenders take- being advised of financial decisions.
Also, defendants cannot enter into a relationship
which binds the firm = limited kind of control.

• Partners compared with employees- Fenwick

 2. Share in profits- Fenwick

Partnership by Estoppel

• Young v. Jones- (page 106): Ps were investors from TX, funds disappeared and
tried to use argument of partnership by estoppel. Ps relied on the fact that PW
was a large company, so PW-US should be held liable for PW-Bahamas. Rule: NO.
PW brought documents that say they are separately organized. UPA §308.

o To show partnership by estoppel:

 1. Representing themselves as partners


 2. 3rd party relies on them holding themselves out as partners

 3. Detriment suffered by the plaintiffs arguing for estoppel

FORMATION:

1. Deliberately

2. Inadvertently

TYPES:

1. Partnership at will- ends as soon as someone doesn’t want to be partners anymore

2. Partnership for a term- set out explicitly how long the partnership will last

3. Partnership defined for a particular undertaking

OPERATION:

• Fiduciary obligations

o Render information: UPA §20

o Account for benefits, hold as trustee any profits from transaction connected
with partnership or from use of its property: UPA §21 compare with RUPA
§404

o Right to formal account of partnership affairs: UPA §22

o Meinhard v. Salmon- (page 109)- lease of Hotel Bristol, for 20 years. New,
more profitable lease was entered into by Salmon, and did not disclose to
Meinhard. Rule: duty to disclose, so Meinhard could have become a part of
it. Doesn’t matter that it might have been for little value- should have been
disclosed. Different result: if the contract was for a different building in a
different area. Dissent- limited duration, not a partnership, no breach.

 utmost loyalty, duty of the finest loyalty, undivided loyalty

 supposed to renounce thoughts of yourself, put your partners well


being ahead of your own= very HIGH standard

o Grabbing and Leaving

 Meehan v. Shaughnessy (page 117)- partners left firm, court ruled


that they breached their fiduciary duties in the letters they sent to
clients, did not present both options of staying or leaving, cannot urge
clients to leave with you- they must retain the choice, firm asked for
list of clients0 but letter sent out to clients before they gave firm the
list, they were specifically asked whether they were going to leave-
duty to tell truth, but kept plans secret. Not as high a standard as
Meinhard-b/c court said that can compete with entity to which they
owe allegiance.

o Expulsion- NO right to expel, MUST be included in the agreement. UPA §31

 Lawlis- (pg. 125)- alcoholic partner, partners voted Lawlis out.


Partnership agreement has a ‘no cause’ clause for expulsion. They
gave him several chances. Court ruled: ok, he was properly expelled.

• Tried to argue that the moment of expulsion = when they took


his files away, court disagreed.

 Limitations:

• Bona fide – must be in good faith

o Ownership of partnership property- who owns what

o Putnam v. Shoaf- (page 132)- Mr. P died, wife took over, and sold share to
Shoafs. Wife wanted half her money back b/c she owned it when money
was stolen. Rule: NO. she gave her interest away, once leave partnership,
not possible to go back and have an interest in the partnership property that
surfaces later.

 Rights as a partner:

• 1. Right to use the property of the partnership- UPA §25

o Possessory right to use the property for the partnership,


equal rights among the partners to use the property for
partnership purposes. ONLY for people in the
partnership= tenancy in partnership.

o RUPA 1997- §501, no more co-owners. NOW- partnership


is a separate legal entity, and the partnership owns its
own property as a separate legal entity.

 §502- transferable interest: each partner has 1


property right and a transferable interest = right to
profits and surplus of the partnership

 §503- legal consequences of transfer: same as UPA,


assignee gets rights to the profits

 §504- charging order from the court. Person with


the charging order is NOT a partner, just have the
right to get the money that comes from the order.

• 2. Interest in the partnership- UPA §26


o Real interest in the partnership- your share of the profits
and surplus.

o Assignable/ chargeable- UPA §27, 28

 ONLY receive profits, does NOT make assignee a


partner. §27

o Right to participate in management-

 All partners have equal rights in the management


and conduct of the partnership: UPA §18 (e)

 No person can become member of the partnership


without the consent of all the partners: § 18 (g)

• Partnership is VOLUNTARY.- cannot force partners to do something.

• Rights of Partners in Management:

o UPA §18 (e): EQUAL rights in management and conduct of business.-can


provide that one does something, and someone else does another.

 National Biscuit v. Stroud- (page 140)- S and F are partners, articles of


partnership did not restrict authority (nor should it- page 141), S told F
that he would not be responsible for any purchase of bread = ordinary
and legitimate business. F sold the bread, RULE: partnership is bound.
F had equal rights in the mgmt and conduct of the pship as a general
partner b/c the purchase was an ordinary matter connected with the
pship and within its scope. –there is NO way that S could have
unilaterally restricted F’s authority, unless F agreed to the restriction.
(DIFFERENT: partnership NOT bound if acts are NOT within the
legitimate and ordinary course of business.)

 Acts which do NOT bind the partnership-

• UPA §9 (1): Each partner is an agent for the partnership AND the
act of every partner for APPARENTLY carrying on in the usual
way in the business BINDS the partnership UNLESS:

o 1. The partner had restricted authority AND

o 2. The person which whom they deal had knowledge of the


fact that they had no authority. (NEED BOTH, to get pship
off the hook)

• UPA §9 (2): acts NOT in the ordinary course of business UNLESS


other partners bind them

• UPA §9 (3): list of acts that partners lack authority to do alone,


require unanimous agreement: CANNOT be contracted out of:
o Assign pship property in trust for creditors;

o Dispose of the good- will of the business

o Do an act which makes it impossible to carry on the


ordinary business

o Confess a judgment

o Submit a pship claim or liability to arbitration or reference

o UPA § 18 (f): NOT entitled to salary- subject to partnership agreement

 Partners make money by sharing profits, partners should share equally


in profits. UPA §18A

o Disagreement: UPA §18 (h)- decided by a majority of the partners, NOT by


partner interest.

o Raising Additional Capital

 There is NO requirement that some partners can be forced to invest


more than others. Exception: if the partnership agreement provides

 There is NO requirement that partners loan money. Exception: if the


partnership agreement provides.

 There is NO requirement that some partners force others to adopt new


partners. Exception: if the partnership agreement provides. Note:
concern with this specific situation, b/c control gets diluted when you
add new partners.

• Partnership Liability:

o Joint and several liability for: UPA §15 (a)

 Loss/ injury caused by wrongful acts or omissions of any partner. UPA


§13

 Misappropriate of $ rec’d by a third person: Embezzlement UPA §15

o Joint liability for other debts and obligations. UPA §15 (b)

o RUPA (1997): ALL joint and several liability.

 FIRST sue pship as a separate legal entity, and go after partner assets
first THEN go after individual partners. RUPA §307 (d)

• Moren v. Jax (pg. 144)- mother puts son on counter, gets hurt.
RULE: partnership held liable b/c she came in, made pizza=
ordinary course of business. RUPA §401 (c)- indemnification
o UPA §18 (b): partner’s right to indemnify other partners for personal
liabilities incurred by him.

• Transferable Interest:

o Interest in pship is transferable. UPA §27

 Effect: does not make the transferee a partner- ONLY get profits,
cannot make managerial decisions.

DISSOLUTION: someone ceases to be associated with the pship UPA §29

• Partnership is NOT terminated once someone leaves, pship continues until the
winding up of their affairs are finished. UPA §30

o Wind up. UPA §37

• Causes: UPA § 31

o Without violation of the partnership agreement:

 1. Termination of definite term, or particular undertaking

 2. Express will of any partner

 3. Express will of all partners

 4. Expulsion- in accordance with pship agreement

• Prentiss v. Sheffel (pg. 163)- two majority partners tried to


exclude third partner by freezing him out. Judicial sale sold the
acquired assets. RULE: excluded partner from a partnership can
bid on partnership assets at a judicial sale. Freeze out= proper
way to dissolve this pship.

o Violation of the partnership agreement- where it does not provide for a


dissolution under any other provision- by the express will of any partner at
any time

o Any event which makes it unlawful to carry on business of pship

o Death of a partner

 Do remaining partners want to continue?

• NO- liquidate under §38

• YES- does partners estate representative agree to let the


remaining continue?

o YES- estate is entitled to fair market value plus interest or


profit- §42
o NO- liquidate under §38

o Bankruptcy (of any partner or partnership)

o Court decree

 Owen v. Cohen (pg 152)- P and D b/came partners to open up a


bowling alley. RULE: Court ordered dissolution b/c D’s conduct
created disharmony in derogation of the best interests of the pship. In
addition, proceeds from the dissolution would pay back P’s loan.

• Types:

• Voluntary

o Partners have right to dissolve

o Partnership agreement- provisions for what happens when someone


dies/disabled/wants to leave

• Involuntary- go to court, get a decree.

• Application of partnership property AFTER dissolution UPA §38 and 42

o Without violation of partnership agreement:

 Each partner (unless otherwise agreed) may have the pship


property applied to discharge its liabilities, and the surplus applied
to pay in cash the net amount owing to the respective partners.
Each partner can force liquidation, pay partnership liabilities, and
pay surplus. UPA §38

o With violation of pship agreement:

 INNOCENT partners have right:

• Liquidate

• Make wrongful partner pay damages

• Continue business using pship property

o MUST pay wrongful partner the value of his interest in


pship minus damages; ignore value of good will of
business.

• Sharing of losses:

o Kovacik v. Reed (page 179)- K invested $, R provided labor, and they


would share profits 50-50. Did NOT discuss the possibility of sharing
losses. RULE: the partner who didn’t put in any cash to begin with
doesn’t have to pay the money that was lost. Why? b/c implied
agreement as to the value of their contributions, and they both lost-
neither should have to make up to the others. (DIFFERENT: under UPA
§40 (b)- ordered form of payment).

• Buyout Agreements

o Separate agreement- establishes a mechanism by which partners could be


bought out.

o G & S Investments v. Belman- (pg. 183)- partnership formed to run an


apartment building. One of the partners had a drug problem, others
wanted to get rid of him. After they initiated court proceedings to
dissolve the pship, he died. RULE: the filing for court-ordered dissolution
did NOT constitute a dissolution event. Actual dissolution occurred upon
the death of the partner, buy out provisions in the agreement apply.

o UPA §38

• Rights of departing partners:

o Meehan v. Shaughnessy-part II (page 192)- agreement stated that if you


brought the client in on your own, you could take the client with you and
pay a reasonable charge. Court made the departing partners pay the fair
charge, and pay what they would have made in profits had they finished
at the firm. Departing partners have the burden to prove that the clients
would have gone with them even if they did NOT breach the fiduciary
duties.

Under RUPA (1997):

Dissociation- replaces ‘dissolution’

• §601- Causes of dissociation:

o Death

o Expulsion

o Express will of partner

• §602- wrongful dissociation:

o Breach of express provision of pship agreement

o Leaving prematurely- if pship for term, or particular undertaking

o Liability for any damages to pship if wrongful dissociation.


Partnership property AFTER dissociation:

• §701- purchase of dissociated partner’s interest: continue business; purchase


dissociated partner’s interest at buyout price (default calculation method), and pay
interest from date of dissociation

• §801- events causing dissolution and winding up of partnership business:


dissociation when business is being dissolved and wound up; dissociation events
listed.

LIMITED PARTNERSHIP:

General partners have more control, limited partners have limited role.

Formation: in partnership agreement. File a ‘certificate of limited partnership’ with the


public official. MUST have at least one general partner and one limited partner

• Liability: Generally, no personal liability

o Limited partners are liable as general partners if they take part in the control
of the business, as they did here- they chose the crops to be planted, and
could withdraw the entire funds if they chose. Holzman v. De Escamilla- (pg.
197)
CORPORATION
FORMATION

 MUST filed Articles of Incorporation in order for it to come into existence.

 Place of Incorporation: DE is most common choice.

 Participants:

 Shareholders = owners of the corporation

 Board of directors

 Officers- bind the corporation

 Corporation

MECHANICS OF INCORPORATION

 Select a corporate name (MBCA 4.01)

 MUST contain certain either “corporation,” “company,” or an abbreviation.

 Incorporator- files Articles/ Certificate of Incorporation

 Hold organization meeting (MBCA 2.05)

 Elect directors (if NOT named in Articles) and officers

 Approve bylaws

 Issue stock

 Authorize bank account, etc

PROMOTER AND THE CORPORATE ENTITY

 Promoter: an individual who develops the business idea for the corporation, and
who brings together the investors and other corporation participants.

 Owe fiduciary duties- similar to agent and principal.

• Duty of loyalty, honesty, and care

♦ Ex. Cannot take secret profit.

 Pre-incorporation dealings AND promoter liability:


 Southern Gulf Marine- (pg. 202)- before it was formally incorporation, southern
gulf entered into a contract with Camcraft where Camcraft would provide
southern gulf with a boat. RULE: Camcraft had suffered no injury even though
Southern- Gulf was not incorporated.

 Promoter is still liable when the corporation is never formed. MBCA 2.04- people
who take an active role will be liable for a business that is not properly
incorporated.

THE CORPORATE ENTITY AND LIMITED LIABILITY

 Unless otherwise provided, a shareholder is NOT personally liable for the acts or
debts of the obligations- MBCA 6.22 (b)

 Theories of liability:

 1. Enterprise Liability- when several small corporations operate together as a


single enterprise, courts may find that the entire enterprise, and NOT just the
single corporation is liable for the obligations of the corporation.

 2. Piercing the Corporate Veil

• Walkovsky v. Carlton-(pg. 207)- P was run down by taxi cab. RULE: court did
not find Carlton liable b/c he was not acting in his individual capacity.
Corporate veil could not be pierced.

• Test:

♦ MUST be unity of interest and ownership that the separate personalities of


the corporation and the individual no longer exist

♦ Circumstances must be such that adherence to the fiction of separate


corporate existence would sanction a fraud or promote injustice.

 Sea Land v. Pepper Source (pg. 212)- establishes test. P argues that he
wasn’t paid by Pepper Source. Met first part of test, didn’t meet second
b/c could not show a kind of wrong. RULE: need something that arises
to the level of fraud to pierce the corporate veil.

 On remand- ruled in favor of Sea-Land- found that the sold


shareholder had commingled property of the companies, and
engaged in blatant tax fraud was enough to pierce the corporate
veil.

 In re Silicone Gel Breast Plants (pg. 222)- Bristol bought out MEC, 2/3
of MEC’s directors were Bristol’s directors. Filed consolidated returns
prepared by Bristol and Bristol provided loans to MEC. Showing of fraud
is NOT necessary to pierce the corporate veil. RULE: “when a
corporation is so controlled as to be the alter ego or mere
instrumentality of its stockholder, the corporation may be disregarded
in the interests of justice.” p.226 –ok to have some overlap, but make
sure that the board is in place is an active board. Here, it was not.

 Also, Bristol may be liable b/c it held its name out there- by putting
it on the products.

 Easier to get single shareholder.

 Tort v. Contract

 Tort: courts are generally more lenient when there is a tort plaintiff,
require less proof. Don’t have to show fraud.

 Contract: voluntary dealt with D, therefore has a higher standard of


proof, need to show fraud.

SHAREHOLDER DERIVATIVE SUITS – Cohen, p.232

 Derivative suit: brought by shareholder on behalf of entire corporation.

 Requirements:

• 1. Demand – that the corporation bring the suit on its own behalf

♦ Why? –cuts off possible litigation, board’s decision to make, gives the
corporation one more time to look at the potential for litigation

♦ Where to get information: public sources, records of the corporation-


shareholder has the right to inspect books and records to investigate the
possibility of corporate wrongdoing.

 Excused from making demand:

 1. Majority of board has a material financial or familial


interest

 2. Majority of the board is incapable of acting independently


for some other reason such as domination or control

 3. Underlying transaction is not the product of a valid


exercise of business judgment

♦ Grimes v. Donald (p. 241)- Grimes attacks board’s decision to enter into
the agreement on the grounds that it was wasteful, excessive and
operates as an abdication. Demand was refused. RULE: the shareholder
must overcome the presumption (business judgment rule) that the
rejection of the demand was made in good faith, MUST be proven with
particular facts. Here, it was not. ALSO, cannot contest that demand was
excused IF already made the demand. Have to allege wrongful refusal.

 Wrongful refusal:
 1. if a demand is made and rejected, the board rejecting the
demand is entitled to the presumption of the business judgment
rule UNLESS the stockholder can allege facts with particularity
creating a reasonable doubt that the board is entitled to the benefit
of the presumption.

 2. IF there is reason to doubt that the board acted independently or


with due care in responding to the demand, the stockholder may
have the basis ex post to claim wrongful refusal.

• 2. Give security for defense

• 3. Contemporaneous ownership - Must have had share AT THE TIME of


the injury.

 Direct suit: brought by individual who suffered the injury.

THE ROLE AND PURPOSES OF CORPORATIONS

 Make donations. MBCA 3.02 (13)

 AP Smith Mfg. v. Barlow- (pg. 282)- shareholder protested against donation


made by corporation. Incorporation documents contained no express authority
to make charitable donations. RULE: charitable donation ok, b/c it was NOT
made indiscriminately or to a pet charity of the corporate directors in
furtherance of personal rather than corporate ends.

• Restrictions on charitable donations:

♦ not made indiscriminately

♦ not made to a pet charity

♦ not made in furtherance of personal goals.

 Dodge v. Ford Motor Co. (pg. 288)- Ford decides: no more special dividends.
Wants the extra profits to go back to the company, wants to build smelter,
raises wages of employees. RULE: “a business corporation is organized and
carried on primarily for the profit of the stockholders.” Court ruled that the
corporation had must pay the special dividend, and because it was in the best
interests of the corporation, Ford was permitted to move forward with the
smelting plant.

 Shlensky v. Wrigley- (p. 293)- P wants Wrigley Field to use lights to have night
games, Wrigley refuses. RULE: do NOT have to prove fraud, illegality, or
conflict of interest to win, however, the claim MUST border on one of the three in
order for the court to interfere. Here, there is a presumption that Wrigley acted
within the best interests of the corporation, concerns about the surrounding
neighborhood were legitimate.

DUTIES OF DIRECTORS
 Chosen by shareholders

 Make important business decisions

 One vote per share

 Terms of office: MBCA 8.05- corporations decide

 Number: MBC 8.03

 Functions: MBC 8.01

 (b) all corporate powers shall be exercised under the authority of the Board of
Directors

 Mode of making decisions:

 MBCA §8.20- meetings

 MBCA §8.24- quorum- adequate number of directors present

• Decided by the bylaws, or it is a majority

 MBCA §8.21- can take action without a meeting by giving consent and writing
out a statement of the possible action.

OFFICERS

 Required corporate officers- MBCA §8.40

 Chosen by the Directors

 Functions: someone has to be assigned the task of preparing minutes for


meetings, and keeping records.

 One person can have more than one role- MBCA §8.40 (d)

 Removal: MBCA §8.43

 Resign by giving notice, effective when notice is delivered unless otherwise


specified
 Removed

Duties of Officers, Directors, and Other Insiders:

1. Duty of Care:

 A director must be diligent, attentive, and prudent in making decisions. The


‘business judgment rule’ presumes that corporate directors are fulfilling this
duty. MBCA §8.30, 8.42 (officer)

• Rebuttable presumption: presumption that directors acted in


accordance with the business judgment rule.

♦ AP Smith- charitable donation- show no reasonable belief that it was in


best interests/ excessive amount or it was made for personal reasons.

♦ Dodge- dividends- show fraud, misappropriate assets, bad faith, or


arbitrariness (No rational business purpose for the decision).

♦ Shlensky- lights- show fraud, illegality, or conflict of interest

♦ Kamin (p. 328)- board of directors issued a stock dividend, minority


shareholders balked and initiated a derivative suit, b/c the corporation
could have saved money on taxes if it sold the shares. RULE: court held
that it would not interfere unless it be made to appear that the acts were
fraudulent or collusive, and destructive of the rights of the stockholders.
Mere errors of judgment are not sufficient grounds for equity interference.
Courts will not second guess what the directors did just b/c they thought
their idea was better.

♦ Van Gorkom- (p. 332)- DIRECT action brought by a class of shareholders


alleging that they were personally harmed by the acts of the board of
directors. This case involved a leveraged buyout deal. RULE: the directors
breached their duty of care by failing to make an informed decision. The
court cited instances of rushed board meetings, and a failure on the part
of the directors to educate themselves of the details of the deal.

♦ Brehm- (p. 345)- Eisner, the Chairman of Disney, hired his friend Ovits as
a top company executive. O’s contract contains provisions regarding his
compensation under several different scenarios. The scenario under
which he could receive the most compensation- where O was unable to
fulfill his obligations through no fault of his own. Shareholders objected.
RULE: the court rejected shareholder’s argument that the directors’
decision was uninformed. The board relied on an expert advice when
making the agreement.
2. Duty of Loyalty:

 Conflict of Interest Transactions

i. Common law: if you have a transaction involving the corporation and


one of its directors has a conflict of interest as it is entered into, at
some later point, the corporation can void that contract.

ii. Modern Law:

 Test:

• 1. Substantive- look at fairness of the transaction

♦ Bayer (p. 374)- shareholders challenge the hiring of a


director’s wife as a performer on a show that the corporation
sponsored. RULE: the court found that the wife’s payment
was reasonable to the overall cost of the production. The
court excused the directors for failing to conform to corporate
formalities, and admonished them to be more observant in
the future. Board had no idea that the wife would be hired,
was NOT an effort to facilitate in the signer’s career.

• 2. Procedural- look at the way in which the transaction was


approved, as long as it was approved by the disinterested and
informed directors and shareholders- OK.

♦ Lewis- (p. 379)- corporation shared some common directors


and shareholders. A shareholder of one of one of the
companies who was not a shareholder of the other, sued,
alleging that those who were directors of both companies
were self dealing. RULE: deal was fair.

• MBCA §8.60- definitions

♦ Conflicting interest

♦ Fair to the corporation


♦ Required disclosure

• MBCA §8.61 (b): directors is NOT liable if:

♦ Approved by directors: §8.62 OR

 Proper approval by directors will get you off the hook, cannot be held
liable

♦ Approved by shareholders, then cannot be held liable: §8.63 OR

♦ Transaction proven fair-then you will not be held liable.

 Self-Dealing – director/ officer on both sides of the transaction. DEFENDANT


bears the burden of proving that the transaction was fair and reasonable at the
time it was entered into. Lewis.

• A deal CANNOT be set aside because of self-dealing if ANY of the following


occurred:

♦ 1. Fair and reasonable to the corporation at the time it was approved by


the board

♦ 2. Interested parties have to disclose that they are interested, the rest of
the board who is not interested must approve- approval by a disinterested
and informed board

♦ 3. Shareholders vote once they are informed

 Corporate Opportunity – take an opportunity and exploit it for yourself

• Test:

♦ 1. Is the corporation financially able to undertake the opportunity?

♦ 2. Is it in the line of the corporation’s business?

♦ 3. Is it one where the corporation has an interest?

• In Re Ebay- (p. 389)- shareholders of Ebay found out that directors and
officers have taken advantage of investment opportunity. Given the
opportunity to buy stock that could quickly go up in value. RULE: could be a
corporate opportunity.

 Standard for Director Liability: MBC §8.31

• Director NOT liable UNLESS plaintiff shows: (SHOW ONE)

♦ 1. Not in good faith OR

♦ 2. Decision flawed because (a) no reasonable belief in corps best interest,


or (b) not informed (duty of care) OR
♦ 3. Objectivity problem

♦ 4. Problem re: oversight/ attention- not properly overseeing business


affairs/ attention OR

♦ 5. Problem re: benefit/ fairness

Basic Roles and Rights of Shareholders:

-not personally liable for corp. acts/ debts (6.22 b)

-have ‘preemptive rights’ IF in articles (6.30)

-receive dividends IF declared- then have right to get them (6.40)

-annual meeting (7.01); proxy voting OK (7.22)

-usually 1 vote per share= default (7.21)

-elect directors by plurality (7.28) compare with7.25

-may bring derivative suit (7.40-46)

-vote on conflicting interest transactions (8.63), business opportunities (8.70)

-amend articles (10.03); some mergers (11.04)

And any extra rights if own ‘preferred stock’ (6.01)

CLOSELY HELD CORPORATIONS

 Shareholders in closely held corporations have a more active role than in bigger
corporations.

 Shareholders expect to become directors and officers in closely held corporations.

 Galler- (p. 618)- two brothers owned drug company, disagreement about whether they
were going to enforce an agreement that was made and executed before one of the
brothers got ill and passed away. RULE: agreement had to be enforced, there was no
objection due to fraud or disadvantage minority interest

 Abuse of Control:

 Wilkes (p. 630)- W and four other partners ran retirement home. Began to do well,
but relationships became strained. W notified that he intended to sell his shares.
The board ceased W’s salary and did not reelect him as director or officer. W sued.
RULE: majority shareholders have to deal with minority according to good faith
standard. There was NO legitimate business purpose for severing him from payroll.
This was a freeze out. Majority should be entitled to a little bit of selfish ownership.
2 part balancing test/approach:

 Controlling groups must show legit business purpose for oppressive conduct
 minority must show less harmful ways to achieve the same thing.

FEDERAL SECURITIES LAW


Rule: MUST register securities (stock) with SEC (securities exchange commission) PRIOR
to sale, UNLESS exception applies.

Securities:

Stock= equity securities- represents ownership interest in corp.

Bonds= debt securities- represent debt owed by the corp. to the bondholder.

Security Exchange Act of 1934:

Focus: securities transactions/ matters AFTER initial issuance by the corporation;

Covers:

-securities fraud, including insider trading

-periodic public disclosure requirements (annual, quarterly, certain events)

-takeover regulation

-proxy regulation

Registration: Section 5

CANNOT offer to sell stock, BEFORE filing a ‘registration statement’ AND

CANNOT sell stock UNLESS

-stock was registered with the SEC or an exemption applies AND


-buyer of stock received copy of the PROSPECTUS (key disclosure/ sales
document = core of the registration statement)

REGISTERED = when SEC signed off on the registration statement’s compliance with
disclosure requirements NOT on merits/ value of stock, etc.

Exemptions: when is a sale exempt from the registration requirement?

o Exempted securities

 Securities issued by the US or a state

 Securities issued by a bank

o Exempted transactions

 Transaction NOT involving a ‘public offering’

 Small offering of securities: $ limit

 Offering (within $ limit) of securities to ‘accredited investors’ =


institutions and wealthy sophisticated individuals.

o Note: if exempt from registration requirement, still cannot commit a FRAUD.

Pros and Cons of Registration

• Cons: Try to qualify for an exemption if possible because:

o Cost of process

o Time involved in process

o Disclosure concern- initial/continuing

• Benefits of Registration:

o Broader distribution/ market so more $

o Easier to re-sell

o You’ve made it!

Liability- 1933 Act – focus ON registration

• Liability for misrepresentation OR omission- creates a private right of action and


basis for criminal prosecution.
• Lawyers Role:

o Due diligence review

 Review corp. minute books, articles and bylaws, annual and other
reports, etc.

 Interview corp. officers, etc- to get their sense of what’s going on

 Goal: assess the accuracy and adequacy of disclosure in registration


statement re: corporation and securities.

• The 1933 act was designed to ensure that prospective investors receive disclosure
of information so that they can make informed decisions prior to buying securities
in registered offerings.

o SEC does NOT perform a merit review of securities.

o Purchasers of securities that are sold in an offering that was exempt from the
registration requirement WILL NEED to make sure that their re-sale
transaction qualifies for one of the exemptions: NOT A FUNCTION of the ACT.

1934 Act- what happens AFTER registration

• Focus: securities transactions/ matters AFTER initial issuance by corp.; covers:

 Securities fraud, including insider trading


 Periodic public disclosure requirements
• Annual, quarterly, certain events, insiders' trades
 Takeover regulation
 Proxy regulation

• Insider Trading 10b-5

o Illegal for anyone to use a manipulation or device in securing a security.

o Applies to all persons

o Covers:

 Untrue statements of a material fact/ omissions of material facts

 Insider trading

 Other kinds of fraud, deceit, etc.

 Provides a FEDERAL remedy for securities fraud.

o U.S. v. O’Hagan- (p. 501)- insider trading. Lawyer in firm which was retained
by Grand Met regarding a potential tender offer for the common stock of
Pillsbury Company- headquartered in Minneapolis. Lawyer- Ohagen- bought
the stock and sold it for millions in profit. RULE: he was involved in insider
trading b/c he was a temporary insider. When a peron misappropriates
confidential information he is violating 10b-5. Traditional theory: applies to
insiders who owe shareholders a fiduciary duty, here no duty was owed,
however the misappropriation theory applies: you have a duty to disclose to
the SOURCE OF THE INFORMATION. Here, law firm = provider, and Ohagen
breached duty.

o Corporate Insiders- violate 10b-5 by trading corporation’s stock on basis of


confidential information b/c owe fiduciary duty to corporation and its
shareholders.

 Permanent = officer/director of a corporation

 Temporary = attorneys, doing some legal work for corp.

o Corporate Outsiders- held liable under the misappropriation theory.


O’Hagan. Violate 10b-5 by misappropriating confidential information for
trading purposes in breach of duty of trust or confidence owed to the source
of the information.

 Ex. Attorney uses info received from law firm client to trade in the
stock of another corp. O’Hagen

LIMITED LIABILITY COMPANY


• FORMATION

o Distinct entity, distinct from its members- ULLCA §201

 Partnerships- are NOT distinct from its members

o Participants = owners =members and managers -choice

 Members look more like a partnership

 Managers look more a corporation

o Process:

 File Articles of Organization. ULLCA §202

• Content: ULLCA §203

o State whether managed by members or managers.

o Comply with LLC name requirements (§105)

 MAY enter operating agreement. §103

• LEGAL RELATIONSHIP
o b/t LLC, its members and managers to 3rd parties

 Agency/ authority

• In member- managed LLC- §301 (a)

• In manager- managed LLC- §301 (b)

 LLC liability for 3rd party losses for wrongful acts or omissions, etc.
§302.

 Limited liability- §303

 NO ‘piercing’ for failure to observe formalities- §303 (b)

o b/t members/ managers to each other/ LLC

 members interests/ dissociation (501, 601)

 tax treatment: can elect pass-through tax treatment (like partnership


or “S Corp.”)- applies to both profits and losses

• owners alone pay tax on entity’s income.

• Double taxation= usual C Corp. tax treatment- entity pays tax on


its income and owners also pay tax when they get some of it (ex.
Shareholders receive dividends)

• One level of taxation on income = partnerships = S. Corp. =


corporation itself does not pay taxes on the income, individual
owners pay.

o Individual partners pay tax on the individual income


received from the partnership

 Compare LLP = GP with liability limitations re: tort and/or contract


claims.

• Operates as general partnerships (GP) with limitations on their


liability.

o In some states, partners are only protected against tort


claims.

o Manager Rights

 Management- 404 and distributions- 405

• In member- managed LLC- 404 (a)- equal right to manage;


majority vote
• In manager- managed LLC- 404 (b)- equal right to manage,
majority vote, selected by members.

• Matters requiring unanimous member vote- 404 (c)

• Distributions- equal shares- 405 (a)

o Standards of Conduct:

 Members: have ONLY fiduciary duties specified- loyalty, care, good


faith and fair dealing

 Managers: §409 (h): managers have same conduct as members.


(members who are NOT managers owe NO duty to the company or to
other members solely by reason of being a member).

o Distributional Interests; Dissociation

 Members distribution interest- 501, etc.

• Member NOT co-owner of LLC property

• Distributional interest IS transferable (transferee does NOT =


member, §502).

 Member’s Dissociation- §601

• Power to dissociate at any time, MAY be wrongful- §602.

• Effect depends on whether at will or term LLC

o If term, whether LLC will wind up and dissolve, or not-


§603).

o Walter, Waste and Land v. Lanham-(p. 300)- Need to make clearly that it is
an LLC, otherwise you could end up with personal liability as was found here).

o McConnell v. Hunt- (p. 317)- not required to have an operating agreement,


although it is advisable. Courts will enforce provisions of operating
agreement. Provision in operating agreement said it was ok to compete,
therefore it was permissible.