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Agency, Partnership, and the LLC: The Law of Unincorporated Business Enterprises Seventh Edition Professor Mark Lowenstein

Spring, 2011 Chapter 1: The Agency Relationship; The Ambiguous Principal Problem; Sub-agency I. The Agency Relationship y Agency relationship = when one person (the agent) consents to act on behalf of and subject to the control of another (the principal). o 1) Consent o 2) Acting on behalf of o 3) Subject to the control of y The principle is responsible for the tortious conduct of his agent. y The principle liable to third parties for contracts made by agent for the principle. y ³Agency is the fiduciary relation that arises when one person (a ³principal´) manifests assent to another person (³an agent´) that the agent shall act on the principal¶s behalf and subject to the principal¶s control, and the agent manifests assent or otherwise consents so to act.´ Restatement 3d §1.10 Carrier v. McLlarky, 693 A.2d 76 (Supreme Court of New Hampshire, 1997) y Facts: D installed a replacement water heater in P¶s house and told him he would try to exchange the old water heater with the manufacturer for credit b/c he thought it was still under warranty. y Proc. Hist: P sued D in small claims court for the replacement value of the water heater and assorted costs. The district court rendered judgment in favor of the plaintiff. D appeals. y Issue: Was there an agency relationship b/w P and D? Holding: yes. y Rule: An agency relationship is created when a principal gives authority to another to act on his/her behalf and the agent consents to do so. The granting of authority and consent to act need not be written, but may be implied from the parties conduct or other evidence of intent. y Reasoning: This was a factual decision for the trial court to make, and the Supreme Court of NH will not overturn a factual finding unless it was unsupported by the evidence. Not the case here. y Issue: Was there a breach? Holding: No. y Rule: Agents have a duty to conduct the affairs of the principal with a certain level of diligence, skill, and competence. y Rule: Under ordinary circumstances, the promise to act as an agent is interpreted as being a promise only to make reasonable efforts to accomplish the directed result. y Reasoning: D made a reasonable attempt to obtain a refund for P. He returned the old water heater for credit, but did not receive credit. He never guaranteed he would receive credit, only that he would make reasonable efforts to do so. y Class Notes: Since this is a tort claim for negligence we need to ask is whether there is a duty. Yes! Because the plumber was an agent and an agent owes a duty of care to the principle. Could the homeowner sue under a breach of contract theory? No. Because there was no consideration given by the homeowner. This was a promise without consideration. But isn¶t consideration necessary for the agreement to act as the agent of the homeowner? NO! The court makes clear that there is no requirement of consideration before an official agent relationship. y Green Checkmarks = (1) Agency relationship can come about even in the absence of consideration. (2) The level of control does not need to be great. (3) The courts tend to focus on one or another of the elements of agency in identifying an agent relationship. Note: y A person does not become the agent of another simply by offering to help or making a suggestion. M.D. & Associates v. Sears, Roebuck & Co.. 749 S.W.2d 454 (Court of Appeals of Missouri, 1988) y Facts: Landlord company sued Sears, as tenant, claiming unlawful possession of the leasehold following termination of the lease. Sears mailed an extension of the lease letter to Paul Hogg with a request for receipt. Paula Fraley, who worked with Mr. Hogg, signed the receipt. The person who first received the notice gave it to an agent for the landlord (Hogg). Hogg was an agent for the leasing company, Fraley was an agent of Hogg. y Issue: Did the landlord company ACTUALLY receive the letter through the agent of an agent? (Was Mrs. Fraley an agent of Mr. Hogg and if so, was Mr. Hogg on notice of the extension, and if so was the landlord on notice?) Holding: Yes. y Rule: The existence of agency and the authority of an agent can be implied by proof of facts, circumstances, words, acts, and the conduct of the party to be charged with the agency. The prior conduct of the parties is a factor to be taken into account if such conduct is a part of the circumstances surrounding the transaction. y Reasoning: Ms. Fraley had been picking up Mr. Hogg¶s mail for months prior to the notice from Sears, and if not expressly, than by acquiescence, she was authorized to do so.

Three Elements of the Agency Relationship: Restatement Second §1 1. On Behalf Of: The acting party must be acting ³on behalf of´ the principal (³for the benefit of´). y Risk? Look at who has the risk in the relationship. If the principle has the risk, likely an agency relationship. If the acting party is acting on its own behalf, it is not a fiduciary, nor is it fair to subject the other party to the burdens of being a principal. y Be careful though. Merely benefiting another by one¶s conduct is not enough the agent must be acting primarily for the benefit of the principal. (i.e. in Clapp v. Skewer, Skewer was benefited by Clapp¶s regulations of the mall b/c he got a % of the profits) 2. Control: element of subservience. In Cargill, the court lists a number of factors: y At a minimum, Control means the agent must respond to the directions of the principal. y ³Element of subservience´ y Control is defined in different ways depending on the nature of the liability being asserted against the principal. Consent: An agency relationship must be created by mutual agreement. One party in invitum cannot create it. y consent can exist even where the parties involved fail to recognize that they have created an agency relation or explicitly avoid creating an agency. Cargill y consent can be implied as well as express (Sears) o Assent can be found in nonverbal action (i.e. shaking head) or failure to object when action taken previously in an agency capacity is again proposed. Fiduciary Relationship: Ask whether or not the agent has a fiduciary duty to the principle. If no, not likely to be an agency relationship. y They would have to exercise their agency with due care, and if they breach that due care and a third party is injured, the principal is responsible. y Helpful also to ask that isf the agent is negligent (i.e. a retailer is negligent in setting up their store and a third party is injured), would that third party be able to go after the principal?



A. Agent or Seller? = Title is key. y If a distributor holds title to the goods and can set its own price with the retailers = likely seller, not agent. y ³Whether distributor is an agent or a buyer depends on whether his duty is to act primarily for the benefit of the one delivering the goods to him or to act primarily for his own benefit.´ y Important elements = who holds title? Who sets the price? o When the owner retains title, sets the prices, and gives the person selling the goods (consignee) return privileges for unsold goods = agency. o Title is important because whoever has the title is likely to be acting on own behalf, AND take the risk of ownership. y It is possible that a buyer has title to the goods and still be deemed an agent. So the courts will then look to the control element. (i.e. GE) y Rule: One who contracts to acquire property from a third person and convey it to another is the agent of the other only if it is agreed that he is to act primarily for the benefit of the other and not for himself. Factors that one is a supplier, rather than an agent, are: o (1) that he is to receive a fixed price for the property irrespective of price paid by him. This is the most importsnt. o (2) that he acts in his own name and receives the title to the property which he thereafter is to transfer. o (3) that he has an independent business in buying and selling similar property. y Hunter Mining Laboratories, Inc. v. Management Assistance, Inc., 763 P.2d 350 (Supreme Court of Nevada, 1988) o Facts: Hubco agreed to sell to Hunter Basic Four computer equipment, and install it for him. They did not finish the instillation so Hunter hired Data Doctors to install it. They did not finish it either. Both Hubco and Data Doctors were authorized resellers of Basic Four computer equipment. Hunter sued the manufacturer of Basic Four computer equipment. The trial court found for D b/c they did not find any evidence that an agency relationship between D and the two installers existed. o Issue: Was there an agency relationship b/w Data Doctors and/or Hubco and (D)? Holding: No. Affirmed. o Rule: In an agency relationship, the principal possesses the right to control the agent¶s conduct. When the owner retains title, sets the prices, and gives the person selling the goods (consignee) return privileges for unsold goods = agency. o Reasoning: Just because D was able to control some portions of how the installers re-sold its product, they did not retain the power to control their business expenditures, fix rates, demand share in profits, etc. Additionally, there was no ³acting on behalf of´ element because the installers were not acting primarily for the benefit of D ± they acted independently and in their own names.


Class Notes: Courts will look if the purported agent acted on behalf of, with consent of, and in control of the purported principal. Here, the court looks to the fact that the buyer took ultimate title to the goods and could resell them at any price they want. However, just because someone has title doesn¶t end the inquiry. See G.E. below.


United States v. General Electric Co., 272 US. 476 (Supreme Court of the United States, 1926) o Facts: Gov¶t argued that GE was breaking anti-trust laws by fixing the prices of their products that were being sold by 21,000 distributors. GE claimed they were selling the products through agents, and not requiring resellers to sell at a certain price. o Issue: Were the 21,000 distributors agents or buyers? Holding: They were agents. GE wins. o Reasoning: The 21,000 distributors were not getting the title to the products, and they did not buy the products from GE, they were basically receiving the products on consignment from the company to hold in their custody until they could sell them. They were a way for GE to deal directly with the customer. o Class Notes: What were the government¶s best arguments? How could this be characterized as NOT an agency relationship?  Control? How these distributors sell the lamps, as far as where they sell them, how the store is laid out, how they are displayed, etc., was not under the control of GE. There were a lot of aspects of the retailer¶s business, besides the fixing of the price, that were not subject to the control of the manufacturer.  Consent? The retailer consented to sell GE lamps, but did they consent to be their agent? Consent to be controlled by GE in all aspects of their business? Consent to act on behalf of GE, or were they acting on their own behalf?  On behalf of? Who had the risk? The resellers were paying for these lamps right? o Bottom line: Other cases involving similar fact situations (manufacturer tries to fix prices by characterizing retailer as its agent) have met with mixed success. It turns on the elements we have just gone through (above).

B. Agency or Debtor-Creditor Relationship? y If the debtor¶s control over the debtor¶s business is substantial (particularly if it is affirmative in nature and includes the right to initiate transactions) the creditor may be classified as a principal with the debtor its agent. y Cargill = agency found without the right to initiate (primarily because of right of first refusal on grain had a grain source = on behalf), bue PLo says probably wrong. y A. Gay Jenson Farms Co. v. Cargill, Inc., 309 N.W.2d 285 (Supreme Court of Minnesota, 1981) o Facts: Warren borrowed money from Cargill to grow his business. Cargill gave Warren money, but in return was appointed as its grain agent and had a right of first refusal to purchase market grain sold by Warren. Warren was required to provide Cargill with annual financial statements. Cargill was given the right to access to Warren¶s books for inspection. Also, Cargill had to first approve any improvements in excess of $5,000. Warren went under when their checks to farmers were not clearing and after an audit it was found that they were more than 5.6 million in debt to Cargill and farmers. Farmers brought suit against Warren and Cargill under principle-agent theory. o Proc. Hist: The jury found that Cargill¶s conduct b/w 1973 and 1977 had made it Warren¶s principal making Cargill liable to the plaintiffs. o Issue: Was the relationship b/w Cargill and Warren that of principle-agent, or a creditor-debtor relationship? Holding: Principle agent. o Rule: ³An agreement may result in the creation of an agency relationship although the parties did not call it an agency and did not intend the legal consequences of the relation to follow. The existence of the agency may be proved by circumstantial evidence, which shows a course of dealing b/w the two parties. o Rule: A creditor who assumes control of his debtor¶s business may turn into a principal for the acts of the debtor in connection with the business. o Rule: If creditor takes over the management of the business and directs what contracts may or may not be made, he becomes a principal. The point at which the creditor becomes a principal is that at which he assumes de facto control over the conduct of his debtor,whatever the terms of the formal contract with his debtor may be. o Reasoning: By directing Warren to implement its recommendations, Cargill manifested its consent that Warren would be its agent. Warren acted on Cargill¶s behalf in procuring grain for Cargill as the part of its normal operations, which were totally financed by Cargill. Further, and agency relationship was established by Cargill¶s interference with the internal affairs of Warren, which constituted de facto control of the elevator. o All portions of Warren¶s property were financed by Cargill thus there was no independent business. Cargill thought that Warren owed a duty to them. The decisions made by Warren were not independent of Cargill¶s interest OR it¶s control. Cargill exercised its control over Warren through (elements of factors of control):  constant recommendations  right of first refusal  requiring approval before Warren could incur more debt  right of entry onto Warren premises






correspondence and criticism Class Notes: In this case, as the debtor got sloppier and lost money, the lender became concerned and ratcheted up its control in order to protect itself. When the debtor went bankrupt, plaintiffs looked for deep pockets. Their theory was that any Ks the Warren entered into, were Ks on behalf of Cargill because Warren was acting as Cargill¶s agents. The court here agreed making Cargill liable for all of the liabilities of its debtor(/agent), Warren. This is important b/c every bank lender who enters into an extensive loan agreement with a debtor has to be concerned about the fact ³have I gone too far with the control element that I¶ll be deemed a principal and my debtor will be deemed an agent?´ Was the court right here? Cargill¶s arguments make a good case that the court was wrong ± there was no agency relationship: o The grain elevator owned the grain, seeds, could resell at any price they wanted to. Even though Cargill owned rights of first refusal still meant they could sell at any price they wanted to. o Also, just because they were in debt to Cargill and any profit they made was going to go to Cargill, thus benefiting Cargill, they were still operating their own business, and trying to dig themselves out of the deep hole they had dug. Elements of factors of control the court found (p. 32): 1. Cargill¶s constant recommendations to Warren by telephone; 2. Cargill¶s right of first refusal on grain; 3. Warren¶s inability to enter into mortgages, purchase stock or pay dividends w/out Cargill¶s approval; 4. Cargill¶s right of entry onto Warren¶s premises to carry on checks and audits; 5. Cargill¶s correspondence and criticism of Warren¶s finances, salaries, inventory; 6. Cargill¶s determination that Warren needed ³strong paternal guidance´; 7. Provision of drafts and forms to Warren upon which Cargill¶s name was imprinted; 8. Financing of all Warren¶s purchases of grain and operating expenses; 9. Cargill¶s power to discontinue the financing of Warren¶s operations. Lowenstein thinks it¶s a wrong decision. Thinks the court got it wrong.

E. Agent or Escrow Holder and Third Party Beneficiaries y Escrow = holder of an escrow contracts to hold money, a deed, or some other asset until the occurrence or nonoccurrence of a specified event before a specified date. The escrow contract states the holder¶s duties to deliver or return the escrow upon the occurrence or nonoccurrence of the specified event. The escrowed deed or other property is beyond the control of the parties to a transaction for a specified time and the escrow contract determines when the holder may properly make delivery. An escrow holder is not an agent during escrow period but becomes one if escrow succeeds or fails. y Duty of escrow holder = to adhere to the terms of the escrow agreement. Failure to do so will make the escrow holder liable to parties for whose benefit the escrow was created for loss caused by the holder¶s failure to adhere to the terms of the agreement. y King v. First National Bank, 647 P.2d 596 (Supreme Court of Alaska, 1982) o Facts: Olsons held land subject to payment of the full purchase price to the state of Alaska. When the Kings purchased it, an escrow agreement was signed by the Olsons designating D as the escrow holder, stating that the Kings were to make payments to D who were to in turn make the payments to the state of Alaska. The remainder was to go to the Olsons. The Olsons subsequently modified this escrow agreement so that all the money from the King¶s payments were sent to the Olsons. None was sent to the state of Alaska. The Kings had thought they had paid off their land when the state of Alaska informed them that they had not received any payments from them in quite some time and were thus repossessing the land. o Issue: Was D an agent or a ³escrow holder´? Holding: Agent. o Rule: If a principal delivers property to agent, with a command to deliver to T upon performance, he is an agent for the principal only and no liability of agent to T. But the agent may be liable under 3rd party beneficiary when: (1) K between Principal and A is intended to benefit T or (2) K between principal and A is for discharge of a single obligation. o Reasoning: Since the Olsons were the only ones to sign the escrow agreement, there was no escrow and they could change the agreement whenever they wanted. o Issue: Is the bank liable to the Kings as third party beneficiaries? Holding: Yes. o Rule: When an agent¶s employment is for the benefit of a particular person or for the performance of a single obligation by the principal, it may be found that the agreement with the principal was a contract for the benefit of the donee or obligee. If so, the agent is responsible to such person for his non-performance or misperformance. o Rule: An agent acting on behalf of one person may be held liable to a third person for failure to perform a contract intended to benefit the third person. The third party is justified in relying on the contract and it may not be changed w/out his consent. o Reasoning: The original escrow instructions were drafted by the Kings¶ attorney with particular sections intended to protect the Kings¶ interest so it is possible they were third party beneficiaries. o Rule w/r/t third party beneficiaries: Traditionally, an agent is not liable for injuries to third persons resulting solely from a mere breach of duty, which he owes to his principal, unless at the same time the agent owes a separate duty to the third party. In order for a third party to enforce a contract, it must be shown that there was a contractual

in other words. etc. will receive a disbursement of money. What happens in a lot of cases is the general contractor will say that the subs have been paid. etc. acquiring property. y Technically though. but have general oversight of the corporation.o o o intent to benefit the third person. cannot be told what to do. y But could create great weight toward the finding of an agency relationship if other factors present. The Franchise Relationship: Franchise = a license from the owner of a trademark or trade name [the franchisor] permitting another [the franchisee] to sell a product or service under that name or mark. y Some courts tend to look at the indicia of control and say that there was an agency relationship. Landlord-Tenant ± in general. d. For this purpose.e. the lender wants to make sure that as the project is being built. Officers of the corporation y Officers though clearly ARE agents b/c subject to control by board of directors. the subsidiary will incur liability that it can¶t pay (tort liability. 2. not an agency or partnership agreement. So banks will not disperse money to a general contractor unless they receive lien waivers from the subcontractors (a certificate that they¶ve been paid). c. Property Relationships a. etc. y Directors don¶t act on behalf of the corporation. While there is no agency b/w franchisor and franchisee. contractual.) owns another business entity.e. In this theory. 4. Agency Distinguished From Other Relationships. Notes: In construction contracts. an agreement between a franchisor and franchisee does not create an agency relationship. Multiple Corporations: y Subsidiaries = i. and will not pay the subs with that money. that the third party was the direct and intended beneficiary of the contract. This is because in particular transactions it is not necessarily the case that the one spouse is acting on behalf of and subject to the control of the other spouse. NOT the elements of agency.). These agreements usually give the franchisor a significant amount of control over the franchisee. b. The subs normally fail on both the escrow and third party beneficiary arguments b/c the subs are not the intended beneficiary of the contract b/c the bank usually convinces the court that the contract was entered into for it¶s own protection. or. y Some employees. Also. 3. one business entity (corporation. there are a number of cases that have held the franchisor liable for the franchisee¶s actions because it APPEARED to a third party that there was an agency relationship. 1. what matters is what a third party perceived. directors have no authority to act on behalf of the corporation individually. Directors y It¶s a common misperception that directors of a corporation are agents of a corporation. but only for that particular circumstance. Quite often. F.). agree to appoint one of the members to be an agent of the corporation for a number of different purposes (i. They can however.´ y It usually includes an exclusive right to sell the product in a specified territory. Co-ownership = this relationship does not in itself establish agency b/c one cannot fairly infer that one co-owner consents to another acting on his behalf merely from the fact that they are joint owners of property. Corporate Relationships a. b. The Marriage Relationship y A marriage relationship does not in itself create an agency between husband and wife. Mechanics lien = statutory provision that allows those who improve real property to have a prior lien for the worker materials that they provided. LLC. Employees of the corporation y Employees are almost always agents of the corporation. like doctors. this relationship in itself does not involve agency. Most courts however will honor the parties intent to create a franchise relationship. The subs say that the money shouldn¶t have been disbursed b/c they weren¶t paid and this contract was for their benefit (they¶re third party beneficiaries). The plaintiff will bring a claim . y Also. all the contractors are being paid because the bank doesn¶t want there to be a mechanics lien that would take priority over its own mortgage on the property. the director would be an agent. nobody has the authority to tell the directors what to do. y nature of the lease could establish an agency relationship when the lessee was required to make improvements. they can only act as a group. because of their expertise.

This relationship has a lot of the indicia of the agency relationship. y Rule: Consent. unless principal actually notifies 2nd broker of termination before she binds. Panio got Ps to agree to counter Ds counteroffer before Olthoff sent the message attempting to withdraw. D directed Olthoff to withdraw the offer to P and Olthoff left a messages with Panio withdrawing the offer. o Issue: Is there a subagency relationship b/w the seller of a home and a multiple listing service? Holding: Yes. o Proc. a listing contract which authorizes the listing broker to list the property with a multiple listing service permits the listing broker to create a subagency with other members of the multiple listing service. Agent distinguished from middleman H. So in order to solve this. to indemnify for losses and liabilities resulting from authorized. o B is an agent of P as well as A. Subagency = agents acting for other agents. o Consent? This is problematic because corporations many times create these subsidiaries for the sole purpose of avoiding liability! So these two are at odds. (3) type of agency. o The parent controls the subsidiary b/c it owns it. . y Remote Principal = original principal. the courts have required more than the existence of a parent-subsidiary relationship before finding an agency relationship. Many times courts will require a finding that the parent exercises so much control that there really is no separate business. y Stortroen v. expressly or impliedly. 736 P. 1987) o Facts: P wanted to sell and listed with agent Panio who was to find them a new home.. and has no indemnity rights against the remote principal. If the subsidiary is acting as an agent for the parent. o A would want to make B a co-agent. The whole purpose of this entity is to increase profits for the owner. In order to establish subagency. good faith performances of the agency.  In order to avoid liability. Upon acceptance 2nd broker has power to bind principal to K. or knowledge and no consent and no estoppel to deny consent. o Rule: Under traditional agency principles. y Sub-agency must be distinguished from co-agency. o Rule: Notice of termination of subagency is not effective until receipt. Panio consulted a multiple listing service and found them home owned by D who had an exclusive listing with Olthoff. which underscores the importance of P¶s express or implied consent to this relationship. avoiding the burdens of being B¶s principal. obviously the parent will be liable. Subsidiaries are assumed to not be agents unless the alter-ego rule is applied. where two agents both act for one principal. Chapter 2: Rights and Duties Between Principal and Agent A. Meanwhile Carelli made an offer of $112K (higher) that D wanted to accept. D rejected offer and prepped counter-offer given to Olthoff and then Panio. not a subagent. y Subagency exists when an agent is authorized expressly or (more commonly) implicitly by the principal to appoint another person to perform all or part of the actions the agent agreed to perform on behalf of the principal. the parent company should allow the subsidiary to operate independently. (2) circumstances.y y y against the parent corporation looking for deep pockets. y Listing Contracts = a common example of subagency (Stortroen): K authorizes broker to offer % of commission to other brokers if they find a buyer. is notice to the principal. o Rule: Notice to an agent given in the course of a transaction. o Acting on behalf of. P in the example above is the remote principal. Hist: District Court held that a principal-agent relationship existed b/w the purchasers and the selling broker (Olthoff) in connection w/ the sale and that the purchasers¶ act of notifying the selling broker¶s associate of the acceptance of the seller¶s counteroffer did not constitute notice to the sellers of the acceptance. y Implied authority comes from: (1) type of work to be done. which is within the scope of the agency.2d 391 (Supreme Court of Colorado. a principal must know or have reason to know that the agent will hire someone else to act on behalf of the principal and consent. B is a subagent and A is both an agent to P and a Principal to B. not a subagent. Panio helped Ps make offer contingent upon sale of their home. Notice to a subagent who is under a duty to communicate the notice to the agent is effective to the same extent as if notice had been given to the agent. the actor is an agent¶s agent. Duties of Principal to Agent ± are these fiduciary duties or something else? Common law duties a principal owes its agent: 1. If A remains responsible to P for the actions taken. to such arrangement. Beneficial Finance Co. The listing broker¶s act of listing the property with the multiple listing service constitutes an offer of subagency by the listing broker to other multiple listing service members to procure a buyer in exchange for a percentage of the sales commission. Alter-ego/instrumentality doctrine = 5. If there is no knowledge.

United States. It was to issue all documents on the Board¶s form. and to pay all expenses and maintain them in seaworthy condition. Operate if not otherwise expressly agreed to. to deal with the agent fairly and in good faith. o Subagent is entitled to indemnity from both the immediate principal and remote principal.  customs of the business  nature of the relationship  i. the immediate principal can obtain indemnity from the remote principal. y Issue: Is the United States liable as the principle of the entire venture. or other wrongful conduct. and for which it was to account on forms prescribed by the Board. out of these it was to bear its ³administrative and general expenses of every nature. including cost of defending a frivolous suit grounded upon acts performed on behalf of Principal¶s business (Admiral Oriental) y Indemnity o Not entitled to recover for losses that are solely Agent¶s fault ± i. y For these reasons it is difficult to construe the agreement as anything other than that of a straight agency. y Rule: Duty of exoneration. The people who owned the cargo onboard the Elkton sued Admiral for their loss. ³the agent may not obtain reimbursement for his or her separate defense costs unless it is shown that joint representation would have left the agent¶s interests unprotected. equip. 86 F.2. victual and supply´ the vessels as the Board required. all on the Board¶s account.14. Duty of Exoneration and Indemnification y Agent has a right to reimbursement for expense reasonably incurred during the course of agency. o Policy underlying this is explained in Admiral Oriental Line by Judge Learned Hand:  the venture and the profits are the principal¶s so should be the expenses. .´ not including brokerage however. 1936) y Facts: Admiral Line (Line Co. y Reasoning: The Shipping Board appointed the Atlantic Gulf as its Agent to manage. 1. They chose not to charter their ships but to put them in trade on its own account. Restatement Third §8. If the principal and the agent are co-defendants represented by separate counsel. but also for any which it might be compelled to pay to the subagent. may recover from the principal the expenses of his defense.e. Before paying the debt a surety may call upon the principal to exonerate him by discharging it. or commissions ³for agency services rendered at foreign ports. o Can be used to avoid the expenditure of personal resources under circumstances in which the principal should bear the loss. illegal acts. by trade custom. Comment b. operate and conduct the business of such vessel as it . . Atlantic Gulf was to ³man. y Indemnification = Admiral sued Atlantic for indemnification. o Agent¶s right to indemnity depends on reasonable inferences drawn from the circumstances. y Greencheckmark: The right to be reimbursed includes litigation expenses. They were charged with fitting out the steamship the Elkton on a voyage. Admiral Oriental Line v. y Issue 2: Is the United States is liable to Atlantic for Admiral¶s defense fees even though Atlantic hadn¶t paid anything yet? Holding: Yes. . real estate brokers are. for expenses their agent (Atlantic Gulf) is compelled to pay to the subagent? Holding: Yes y Rule: An agent. compelled to defend a baseless suit. may assign to the Agent. as principle of the whole venture. Admiral won the lawsuit but was out the money it paid to defend itself. If subagent obtains indemnity from immediate principal. y It was the United States venture because they were the ones who had something to lose. appoint sub-agents. **These are default terms.) was an agent of Atlantic Gulf and Oriental Co. was responsible not only to them for expenses incurred. There was a typhoon on the voyage and the Elkton was lost. collect freights which it must deposit in a bank approved by the Board and in the Board¶s name.´ Atlantic Gulf was to furnish a bond for faithful performance of its duties and was forbidden to profit in any way from the services rendered. y Exoneration = an agent may sue Principal before he suffers a loss where Agent would have a right to indemnification. y Rule: An agent has a duty to notify the principal of a claim against the agent and give the principal the opportunity to defend the claim. generally expected to bear advertising costs. he is not obliged to make inroads into his own resources when the loss must in the end fall upon the principal. so they should be the ones who bear the hazard of defending unwarranted suits. For this the company was to be paid in percentages on the gross receipts including salvage.2d 201 (United States Court of Appeals 2nd Circuit. Admiral (agent) in turn sued Atlantic Gulf (principal) to recover the money it spent on its defense. Exonneration = Atlantic sued United States for indemnification.e. grounded upon acts performed in his principal¶s business. All of these duties can be altered or negated by express agreement b/w principal and agent with the possible exception of the duties of good faith and care. Atlantic Gulf attempted to bring in the United States claiming that they were agents of the United States and that the United States (remote principal). mere negligence.´ and the company agreed to act as such ³in accordance with the directions´ of the Board. Equitable doctrine available to agent.

Duty to Deal Fairly and in Good Faith y The principal is required to maintain a standard of conduct that will not harm the agent¶s business reputation or reasonable self-respect. a servant is subject to a duty to indemnify the master for damages the master had to pay resulting from the servant¶s negligence while acting within the scope of employment. o Rule: A principal has a duty to deal fairly and in good faith with an agent and to provide the agent with any information that might subject the agent to physical or pecuniary loss in dealing with the product. Duty of Care y Subject to agreement. Duty to Indemnify Principal for Loss Caused by Misconduct y Rule: A principal has an action in tort or in contract against an agent who wrongfully causes it loss. Greencheckmark: The principal will indemnify the agent . P. Southern District of Mississippi. Admiral was a subagent because they were an agent of an agent and their appointment was contemplated and consented to by the main principal. y Agent can terminate the relationship and to sue for breach of contract. Also. The agent is also responsible for the subagent¶s expenses. so long as the agent isn¶t at fault. as where the agent negligently damages the property of the principal.y y Greencheckmark: This extends to subagents. D¶s actions to identify and remedy problems with their pacemakers were reasonable under the circumstances. c. Thus. This is a default term. 5. and diligence normally exercised by agents in similar circumstances. an account of money or other things which he has received or paid out on behalf of the principal. 1. If the agent wants indemnification. He had to send out notices to his clients regarding the quality of the products. . The duty to inform P came about only when D. This is because the principal is dependent on the agent. Non-Fiduciary Duties of Agents a. or exceeds his authority. y Rule: The agent must obey all reasonable directions of the principal but has no duty to perform illegal. and render to his principal. b. . the agent must not bring disrepute to the principal. o Issue: Did the principal breach the implied duty of good faith and fair dealing that it owed to its agent.´ Restatement 3d §8. Duty of Good Conduct and to Obey y Rule: An agent is subject to a duty not to act in a manner that makes continued friendly relations with the principal impossible. in the exercise of reasonable diligence. (Cordis) y Taylor v. The Duty to Account y Rule: ³Unless otherwise agreed. o Class Notes: The fact that he is seeking to avoid a non-competition clause affects the outcome of the case. the duty of care includes the duty of a paid agent to act with the ³care. they have to contract for that. even when they are at fault. in failing to timely provide P with material information relating to problems it had discovered in its pacemakers? Holding: No. unethical or unreasonable acts. b. B. . 634 F. It puts the plaintiff in a weaker position as it looks like he¶s just griping about looking for a way to avoid the noncompetition agreement. The Fiduciary Duties of Agents a. o Rule: The principal¶s good faith duty to the agent also demands that the principal must maintain a standard of conduct that will not harm the agent¶s business reputation. competence. He signed a non-competition agreement. Comment a.´ Restatement Second §382. o Reasoning: Notwithstanding the above stated rules. 1242 (United States District Court. knew that specific product defects posed a threat of harm to consumers and a concomitant threat to the professional reputation of the sales agent. Became concerned about quality and marketability pace makers stemming from the frequency of recalls. Supp. 1986) o Facts: P was the agent of D. D fulfilled this duty.08. an agent is subject to a duty to keep. or violates a duty of loyalty owed the principal. Duties of Agent to Principal ± most of the duties run this way. Commencement of Fiduciary Relationship y Rule: An agent¶s fiduciary duty is limited to actions occurring within the scope of his agency and the creation of the agency relationship is not itself within that scope. Cordis Corp. 2. the defendants in this case did not breach the duties they owed to P because the duty cannot be interpreted to require the principal to distribute to the agent copies of consumer complaints relating to product performance or to report the progress of all ongoing research into product efficiency. a medical supply company selling pace makers.. or by negligence or fraud causes the principal to be liable to a third person.

and that the agent breached his or her fiduciary duty. that the fact was material. Because Lindholm wanted another piece of land besides the estate property (so he could control development of the Lower Pine Valley). y Notes: If an agent acts as an adverse party with the principal¶s consent he still has duty to deal fairly and disclose all facts the agent should know would reasonably affect the Principal¶s judgment. Restatement (Second) Torts §538(2)(a) . Lindholm. R2d §381. Parties can contract around this duty (only responsible for gross negligence the lower partner standard).´ o Rule: An agent is thus required to disclose to the principal any facts ³which might reasonably affect the principal¶s decision. Carrier v. o Rule: The degree of skill required by an agent in pursuit of the principal¶s objective is limited to the level of competence which is common among those engaged in like businesses or pursuits.s who were trying to sell land they inherited as well as the children¶s adjacent property. Vail Associates. If he doesn¶t do so the burden of proof is still on him to prove lack of full disclosure. There was also a letter from the supplier stating that the defendant ³acted in a normal manner as any dealer would under these circumstances. that the non disclosed fact is material. P. He didn¶t guarantee that he would get one.´ o Rule: The burden is on the principal to demonstrate that the agent was aware of the nondisclosed fact. Duty of Disclosure y Duty to inform the principal of all facts relevant to a transaction that the agent reasonably believes the principal would want to know. o Conflict of interest± when agent is acting on behalf of a third party whose interest is adverse to that of the principal.´ and ³was right to withhold credit . They reached an agreement contingent on the closing of the estate property and both properties were subsequently purchased by Lindholm for 2 mil for the Rickstreet prop and 8. o Rule: A breach of fiduciary duty occurs if the broker. as agent. he inquired through Ds about the Rickstrew property. o Rule: The matter is material if a reasonable person would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question. Vail Associates Real Estate. Olsens sued for breach of fiduciary duty. Inc. the owner of the Rickstrew property informed Ds that he would not negotiate through a real estate agent and demanded to negotiate one on one with the buyer. 3 Am. Jur. 1997) o Facts: D¶s.75 mil for the estate property. the Olsens decided not to include the children¶s property in the sale and withdrew that parcel from the negotiations.. o Issue: Was the information that D had regarding the sale of the Rickstrew property and the price material information such that it was a breach of fiduciary duty to conceal this from Ps? Holding: No. . introduced third party Lindholm to the Olsens. 693 A. the promise to act as an agent is interpreted as being a promise only to make reasonable efforts to accomplish the directed result.´ d.06 y Olsen v. o Rule: Under ordinary circumstances. ³information that bears upon the transaction in question. he is held to that level. (Carrier says ³a promise to act as an agent is interpreted as a promise only to make reasonable e If an agent purports to have an even greater skill. y Principal bears burden of proof that Agent was aware of the undisclosed fact. until the factory actually covered the unit. 2d Agency §2154 o Reasoning: The invoices and work orders only provided that D promised to attempt to obtain a credit from the manufacturer. . skill. . o Rule: The duties of an agent toward his principal are always to be determined by the scope of the authority conferred.2d 975 (Supreme Court of Colorado.e. 935 P.2d 76 (Supreme Court of New Hampshire. o Self dealing ± when agent is acting entirely or substantially for the agent¶s own interest. ³material´ information. Restatement (Third) Agency §8. conceals from the seller. Upon inquiry from D.y y y y For unpaid agent = roughly the same but courts may be more linient. o Rule: An agent cannot be held liable to the principal simply because he failed to procure for him something to which the latter is not entitled. i. o Rule: Agents have a duty to conduct the affairs of the principal with a certain level of diligence. Judgment affirmed. 1997) o Facts: See above. and competence. o Involves a duty of loyalty ± to deal fairly with the principal. o Issue: Did D breach his duty of care? Holding: No. They have to do with the return of an old water heater that may or may not have been under warranty. as principal. McLalarky. After offers and counteroffers. If the facts raise a conflict of interest the burden to prove full disclosure is on the Agent (Vail Associates) o principal must first prove the issue of conflict of interst. Most frequently litigated in the context of ³conflict of interest´.

(3) The court next determines that the amount D owed to P should be offset by the profit accrued to P¶s wife. When the agent places his own interests above those of the principal there is a breach of fiduciary duty to the principal. D terminated P¶s employment and withheld commissions owed to P. 1982)  Facts: Gefland.2d 1108 (United States Court of Appeals. Testimony that other potential buyers with Rickstrew had not caused the Olsen¶s to alter their position in regartd to the estate property.  More trust placed in an agent = greater the discretion an agent has. no self-dealing or conflict of interest through adverst T.  Rule: An agent occupies a relationship in which trust and confidence is the standard. for any purposes likely to cause his principal harm or to interfere with his bueinsss. o Misusing information = duty of loyalty includes a duty not to compete with the principal w/out his knowledge and consent. y Remedies of the principal: o agent forfeits bribe and any compensation he would receive out of the transaction. 675 F. o If the agent has made it possible for others to profit from his breach of loyalty he can be held accountable for those profits whether or not he receives any part of them.o Reasoning: The knowledge of this information was not material because the plaintiffs did not meet the burden of showing that it would have made any difference in their decision in this case. Even putting yourself in situation of conflict of interest is breach of loyalty.000. e. making land deals to his wife and other third parties and profiting off of the deals. o forfeits compensation for agency during period of disloyalty (not a per se rule though). o Gefland v. although hit is information not connected with the subject matter of his agency. P. he has made it possible for third parties to make profits. and  (2) not to use or communicate confidential information of the principal for the agent¶s own purposes or those of a third party. Duty of Loyalty = must place principal¶s interest ahead of his own. and prompt disclosure to his employer of all facts that threaten to affect the employer¶s interests or to influence the employee¶s actions in relation to the subject matter of the employment. R2d §387 y No self dealing = no benefit to herself to the detrmiment of the P.  Issue: Is D entitled to offset the commission owed to P for profits accruing directly to the P. Horizon Corp. was working for Horizon Corp.  This does not include matters of common knowledge. no w/r/t 3d parties. $20.  Duty of loyalty applies to all employees. or acquired by him through a breach of duty to the principal. The fiduciary is duty bound to make a full.  Reasoning: (1) The court determines that there was an agency relationship in (2) the agent did in fact breach his fiduciary duty. y A clear breach of loyalty occurs when an agent takes a bribe from a third party while acting for the principal. and/or for profits which accrued to third parties allied with the agent. the more demanding a court will be about loyalty.´ Restatement Second §395  This includes not only confidential information but information the agent should know the principal would not want revealed to others or used in competition with him. y (i) loyalty during the relationship o Scope of fiduciary duty = varies with the position held by the agent. P? Holding: Yes w/r/t profits directly to P.  Rule: A broker is not entitled to compensation where he acts adversely to his principal¶s interest. y No usurping the pringipal¶s opportunity y No secret profits = may not profit from doing business with employer w/out his full knowledge and consent. P sued to get his commissions. Tenth Circuit. This creates a windfall for the suing principal but the principle is to deter the agent from this kind of conduct. (Gefland) y These duties are default ± can be changed by agreement.  Rule: A fiduciary will be held accountable for the profits reaped by a third party when. o The duty not to compete is not violated if the principal knows or has reason to know that the agent believes he is privileged to compete or self-deal. fair. o An agent has a duty  (1) not to use property of the principal for the agent¶s own purposes or those of a third party. This is regardless of whether he has profited personally.. because P was using his wife . by violating his obligation of loyalty. This includes using confidential information in competition with or to the injury of the principal. y ³an agent has the duty not to use information acquired by him as agent of by means of opportunities which he has as agent to acquire it.

Texaco service station displaying credit card applications. all employers retain a right of control. No imputation in the other types of relationships. A principal though may be vicariously liable for the torts of its agent wven if the agent is not. The principal is also called employer or master. the principal is strictly liable for the Agent¶s tortious conduct towards 3rd parties. the new Restatement uses the terms employer and employee.  Examples ± attorney.  This is the only type of relationship that has vicarious liability.´  Notes: o The Restatement (Third) Agency abandons the terms ³master ³ and ³servant. building contract clause that authorizes the contractor to purchase certain items for the owner. vicarious liability only comes about if the agent is also a servant.e. Nonetheless. may exercise great discretion in operating the enterprises entrusted to them. According to the court it was an isolated incident in a long term of useful service by P to D.´ o Principal ± Agent Independent Contractor = principal has less control than that of agent/servant. (2) There is no evidence that the third parties were going to pay P back for his favor. is that building contractor your agent? He takes the plans and executes them but the builder is not your agent. Notes: The middleman = allowed to work for both parties in a transaction w/out owing anyone a duty of full disclosure.´ In their place. Hart = ³For whoever employs another is answerable for him.e.e.  Jones v. The Master-Servant Relationship 1. and undertakes for his care to all that make use of him. An agent/servant/employee¶s torts will be imputed to the principal. The act of a servant is the act of his master. like captain of ships. o Always look for direct tort action against principal: lack of due care in hiring or supervising agent. o ³Senior corporate officers. So if the builder commits a negligent act. He is a go between and has nothing to do with negotiation and thus it is of no importance that both parties pay him. Can you be an agent for one narrow purpose but not for another purpose? Even though there¶s no case law on this. But agent has a duty to indemnify principal for losses caused by the agent¶s negligence/departure from instructions nonfeasance. Also this relationship is missing the consent element. just as skilled professionals exercise discretion in performing their work. Horizon was aware of the sale.)  There are different consequences for the principal depending on which kind of above relationship. (4) Finally the court determines that while P should not be held accountable for the profits realized by third parties. Vicarious Tort Liability Terminology y Three types of principle-agent relationship.´ Restatement (Third) §7. for other purposes. Lowenstein thinks the answer is yes. but not nonfeasance (unless 3rd party beneficiary). o The agent will be directly liable to the third party for malfeasance. The purpose of the rule is both punitive and compensatory.  Presumption of right of control where employment is fulltime. where he acts by authority of the master. etc. in house counsel.  this can arise even when someone is helping someone else out for free. who remains personally liable for tortious conduct. and serves to deter the fiduciary from disloyalty.  Vicarious Liability = liability in addition to the liability of the employee. an employee of the principal. (i. Chapter 3.07 o so the president of GM is considered a servant for some purposes.  Biedenbach v.  These types of agents have a certain degree of independence. Neither party would consent to being agents o The contract b/w the parties can create agency authority. Teague from the notes has a pretty good definition of employed = ³the act of performing services even w/out wages. o Principal ± Agent/Servant/Employee = If the principal¶s control over the agent rises to the level of being able to direct the agent on how he should discharge his responsibilities. Even still.indirectly to profit b/c the profit could not be given to him directly. The Concept  Rule: When a principal has the right to control the manner and means of the agent¶s performance. however infrequently exercised. if someone is building an addition to your home. In other words. A. . This is because (1) Horizon did not have a policy forbidding land purchases by employees or required disclosure in such situations. Restatement (Third) introduces the terms employer/employee.  i. the homeowner is not liable b/c the homeowner has no control over that enterprise. o ³Principal´ ± Non-Agent Independent Contractor = i. even if no actual control exercised: staff doctor.

 But once this was adopted it stood on its own and became a reason in itself for making the master answerable. a. is subject to the other¶s control or right to control. The other D was driving a milk truck and crashed into them.e. Restatement. (ii) the Wigmore rebuttal  In Norman England.W. This is because the passenger retained no right of control over the vehicle. 1970) o Facts: D was driving the decedent (whose estate is the plaintiff) to get a part for a lawnmower on the request of the decedent. b. 497.W. The History of Respondeat Superior Liability (i) the Holmes thesis  Respondeat superior came about in early Roman and German law dealing with the unlimited liability of slaeholders for the torts of their slaves. 225  Class Notes: Only a lawyer would call this kid an employee. The master could exonerate himself by pleading that he had not commanded or consented to the act. It was based on substantive grounds of policy. The nephew was spilling water while bringing it back. Hanke. and the negligence of the driver is not ordinarily imputable to the passenger. Hart). o Reasoning: The only relationship b/w the driver and passenger was that of gratuitous social host and guest. Lowenstein says it seems like there¶s a moral basis for justifying the principal¶s liability for the acts of the agent.2d 455 (Supreme Court of Wisconsin. o Rule: One volunteering service w/out any agreement for or expectation of reqard may be a servant of the one accepting such services. 93 N. This refocuses our attention on the relationship b/w the principal and agent. p. Why is the uncle liable here? Deep pockets theory. o Issue: Was there negligence? Holding: Yes. 174 N. and plaintiff slipped and fell on it as a result.  This concept became too cumbersome with the advent of industry. Is an Employment Relationship Necessary to Respondeat Superior Liability?  Employer-employee relationship is not the threshold ± a master could still be held responsible for the torts of his servant even in the absence of paying that person i. with respect to his phycisical conduct in the performance of the service. o Rule: Negligence of a driver is not imputable to a passenger except where the driver is the servant or agent of the passenger. not because ³the act of the servant was the act of the master´ (quoting Jones v. Therefore. Taylor.  Heims v. the water froze. Hart adopted the current version. and a person is injured as a result. The mere fact that the trip was for the passenger¶s benefit and that he happened to have a business purpose does not make the driver a controlled agent and the passenger a controlled principal. the concept of ³se hoc non conscium esse.   . gratuitous relationship. o Issue: Is the uncle responsible for the negligence of his nephew even though he was not paying him? Holding: Yes because of respondeat superior. Legal fiction that the agent and the principal are really one. These affected our common law. The uncle was directing the nephew to get water in a pail and bring it back to the car. sec. the driver¶s negligence would not be imputed to Sandrock as it would be if Sandrock was the principal. not that of agent/principal. o Rule: A servant is one employed to perform service for another in his affairs and who. who was just a passenger in the car. 1 Agency (2d). Rochereau & Co. He could watch what he does or have chosen a better agent. such as a failure to repair certain property of the principal contrary to instructions. o Class Notes: Lacking was the degree of control b/w the driver of the car and Sandrock. The nephew was negligent. Liability of employee for nonfeasance? Delaney v. Enterprise theory is that the uncle chose the agent and is presumably in the best position to take steps to ensure the safety. is a well known and frequently quoted case that stands for the proposition that agents are not liable for failing to perform a duty owed to the principal.2d 186 (Supreme Court of Nebraska. 1958) o Facts: Uncle and nephew were washing the uncle¶s car on a cold day. or where the driver and passenger are engaged in a joint enterprise or where the passenger assumes to direct operation of the automobile and to exercise control over it.´ (³this was not done with his knowledge´) reappeared throughout the law. It made a difference for the purposes of liability whether or not the employer knew about and consented to the acts of his servant. Sandrock v. killing the decedent.o o Liability of employee = employee personally liable for affirmative acts of wrongdoing committed while acting on behalf of the employer. and there is a notion of a fairness responsibility for the actions of the agent. So Jones v. The recently popular rationale drift away from the deep pockets. o Issue: Was D driver the agent of the decedent because the decedent asked him to drive him to town to get the part for the lawnmower thus his negligence being imputed onto the decedent so he cannot recover? Holding: No.

by the agreement. o Proc. (c) the kind of occupation.  Baty = Respondeat Superior was justified by the fact that the principal extended an invitation to the injured third party to have confidence in the employee. The Concept y Kane Furniture Corp. (d) the skill required in the particular occupation. Miranda.  Posner = under a negligence system. The business will adjust its price accordingly. are considered: (a) the extent of control which. the following matters of fact. o Reasoning: Perrone and Kraus had unbridled discretion in the physical performance of their tasks. it is difficult to prove negligence on the part of the employer. tools. the work is usually done under the direction of the employer or by a specialist without supervision. and the place of work for the person doing the work. but because he is best able to effectuate the spreading and distribution of such losses. Krause got drunk and drove home while taking one of his workers to Kane¶s furniture store after doing a job. It is better to spread among a large group of people the inevitable losses that come from running industry. courts are split as to whether agent¶s contributory negligence is imputed. e. Imputed Contributory Negligence = when a principal seeks to recover from TP for negligence (like in a car accident where agent was driving). Mrs. and have the power to closely supervise the work of their employees and thus can take the steps to minimize their exposure to liability. The Independent Contractor Exception = a. On one such occasion. 2d 1061 (Court of Appeals of Florida. The master should be made responsible not merely b/c he is better able to pay. o Rule: In determining whether one acting for another is a servant or an independent contractor. Smith = Entrepreneur Theory. whether by the time or by the job. Rationale for Respondeat Superior (i) Arguments questioning the theory  Holmes = common sense says that one man shouldn¶t have to pay for another man¶s wrongs.  Employers should be responsible b/c they initiate the activity. and disciplining employees. o Issue: Was Krause Kane¶s subemployee or an independent contractor? Holding: Independent contractor. sued.Secondly. and her husband. Limitation to Losses Caused by Tortious Behavior  Liability under respondeat superior is limited to the tortious acts of servants. in the locality. Restatement (Second) of Agency §317  This has been rejected in many states. . the courts would have to regulate the company¶s method of selecting. (f) the length of time for which the person is employed. with reference to whether. and (j) whether the principal is or is not in business. among others. d. (e) whether the employer or the workman supplies the instrumentalities. Imputation ± not only will an employer be liable for tortious conduct of employee. supervising. (ii) Arguments in favor of the theory  Seavey = the fact that the one who is responsible for all consequences is more apt to take precautions to prevent injurious consequences from arising. if it is. (g) the method of payment. v. principal is liable for damages to TP and her own recovery is limited by amount of agent¶s negligence. 2. 1987) o Facts: Kane sold its carpet installation business to Perrone who continued to install carpet for Kane. this introduces us to the notion of imputation.  Young B. profit by it. This suddenly switched to the ³course of employment´ losing the sense of the rule and the moral foundation on which it was based. Perrone did not report to anyone at Kane and had absolute discretion in contracting out installation jobs. c.  Rule: a master is barred from recovery against a third person who negligently caused a loss to the master if the servant also was negligent in the accident giving rise to the loss. Strict liability is better b/c of this. Also. o Economically the loss belongs to the employer b/c in reality most employers are businesses and sell products or services. (b) whether or not the one employed is engaged in a distinct occupation or business. Miranda. Hist: Trial court entered summary judgment finding that Perrone was Kane¶s employee and that Kraus was Kane¶s subemployee. One of these was Krause. but it will be impuyted onto the employer for certain purposes. the master may exercise over the details of the work. Miranda died in this accident. 506 So. (i) whether or not the parties believe they are creating the relationship of master and servant. Perrone hired other independent carpet installers to help him finish the jobs. (h) whether or not the work is a part of the regular business of the employer. Dr. o Carpet installing is a distinct occupation and each Kraus and Perrone had their own independent businesses.

o Concurrence: There was probably control here on the part of D over the three neighborhood kids. Hunter v. United States. the more likely they will be found to be an agent. 644 N. 110 N. Mak¶s Trading Co. An employer can¶t be held liable for assault on behalf of his employee because the employee was not acting in the scope of his employment when he assaulted P and he was not furthering the interests of his employer when he did it either. 1970) o Facts: A truck operated by Davis. He did not contract for any specific piece of work and was paid a per diem of $175 plus expenses and accounted to Quasar at two-week intervals. (Sandrock) The greater degree of control over a non-servant agent. 366 (Court of Appeals of Oregon.E. The accident happened that day at about 5pm when Davis was on his way back to his apartment. While D was driving to check on some of the leases. the court held that this factor alone was not dispositive and alone is insufficient to sustain a holding that they are employees. Contract not dispositive = if contract claims only Independent Contractor relationship. i. They were paid on a per yard basis. 1994) o Facts: P truck driver delivered a shipment of rice to D who hired three neighborhood guys to help him unload it. 1982) Soderback v. not hourly. the court said that this was an anomaly and that the majority of states do not have this rule. 568 (N. the employer did not authorize the violence and the use of force is not within the discretionary authority afforded the employee.2d 1350 (Court of Appeals of New York.. Inc. 537 F.App. See Wright v. If that party fails to exercise its right to supervise and inspect and injury occurs as a result. Lazo v.y y y y y y y They both did work on an ³as needed´ basis. o Non-agent IC = building contractor o Agent IC / non-servant agent = ³on your behalf´ ± lawyer ± fiduciary duties but no Vic. 243 (Supreme Court of New Hampshire. Furthermore. right to fire. while the court did find a couple factors that tended toward employee. D was told generally the areas in which Quasar was interested. Kraus and Perrone each supplied their own tools. the fact that the work was part of the regular business of the employer. this does not mean that party has the right to control. etc. It is only when the right to control physical details as to the manner of the performance is added to the principal agent relationship that the person in whose service the act is done becomes subject to liability for the physical conduct of the actor. Class Notes: LOWENSTEIN: DON¶T SHY AWAY FROM THE RESTATEMENT FACTORS. o Rule: Although an employer is often held liable for the torts of employees. non-compete. Davis was instructed to pick up the part needed to fix the truck and bring it back to the job site the next morning. They decided to change it and lay out a new o o o o o o . However liability should not be found on the part of the D.. o Rule: A principal employing another to achieve a result but not controlling or having the right to control the details of the physical movements is not responsible for incidental negligence while such person is conducting the authorized transaction. There is a high degree of training and skill involved. R.G.e. an employee of D. Notes: o If a contract gives one party the right to inspect and supervise. One of the neighborhood guys assaulted P. He left in his own car at about noon. but if right of control over manner means. WALK THROUGH THESE ONE BY ONE FOR EACH PROBLEM. Liab. stopping at his apartment and in Salem on the way there and back from getting the part to run errands.H. show master/servant. o Issue: Was Davis an employee of D or was he an independent contractor when he got in the accident? Holding: Employee. the party cannot be held liable for the injury because there was not a legal duty to exercise that right. an employer cannot be held liable for an employee¶s assaultive acts where the tortious conduct was not undertaken within the scope of employment. . 57 Or.Supp.D. broke down. o A P will not have RS liability for non-servant agents. he was involved in a car accident. Ill. o Issue: Was D an agent of Quasar or independent contractor? Holding: Independent Contractor. o Reasoning: Quasar had no control over D¶s actions. disregard what contract calls the relationship. . o Reasoning: D did not exercise actual or constructive control over the performance and manner in which the work of the unloaders was performed. Townsend. o Issue: Were the three neighborhood guys employees or independent contractors? Holding: Independent Contractors. P sues D on the theory of respondeat superior. They worked on an ³as needed´ basis and the time spent on each job varied. o Reasoning: The court recognized that the rule in New Hampshire at the time was that the employer was not liable for this type of accident because he was not exercising any control over the employee¶s in the management and operation of the employee¶s automobile. However. but otherwise the manner and means by which he obtained leases were up to him. 1982) o Facts: D was retained by Quasar to negotiate gas leases. Watkins and Son. He set his own work schedule and had no quotas. Quasar placed maximum limits on D¶s negotiating authority as to the price and duration of the leases.

undertakes to do a specific piece of work for other persons. o Rule: An employer cannot insulate himself against the burdens of the employer-employee relationship by a contract that leaves him with the control benefits of that relationship. D Co-op was joined on the allegation that D Taylor was its servant driving in the course of its business. The right of control must be determined by reasonable inferences shown by the evidence. Nor can he escape his liability under the doctrine respondeat superior by a contract that expressly provides that the workman is an independent contractor. This last one is another indication of control b/c it means that the drivers were dependent on the co-op. Co. using his own means and methods. L.W. Taylor. 1970) o Facts: D Taylor was driving a milk truck.. o Reasoning: Despite the appearance of lack of control in the contract. o Class Notes: The key factors that caused the co-op to lose: they continued to give instructions to the drivers. Limitation to the Independent Contractor Exception = a principal is liable for the torts of an independent contractor only in 3 situations. American States Ins. of b/c of gravity of public policy attached to farmed-out work (Rheingold = service of process is nondelegable. using his own car with the knowledge and permission of the employer. . This part of the claim involves the claim by the passenger against the co-op that had a contract with the driver of the milk truck. They hired Hixon to put in new linoleum floors. Rev. 1982) o Facts: The Chess¶s insurance company. Rule: Control should not be overemphasized and is not a controlling factor. it was purely illusory as the Co-op had provisions in the contract allowing it to terminate w/in 30 days whenever they wanted as long as they gave written notice. y Hixon v. and the Co-op was the only people Taylor delivered milk for. but has indemnification (breach of K): y 1) Inherently dangerous activity = work itself and not one input creates peculiar risk of harm (Hixon) y 2) Non-delegable duty = usually originates in statute of K (landlord/tenant). o Taylor did not own his own milk delivery business.. Because he was acting within the scope of his employment and with the knowledge and permission of the employer. Rule: When a regular employee is sent upon a specific errand. in pursuit of an independent business. representing the will of his employer only as to the result of the work and not as to the means by which it is accomplished. if in fact. . which lists factors relevant in determining whether an employer employee relationship exists. The court is usually concerned with whether on all the facts the community would consider the person an employee. the workman only possesses the same independence that employees in general enjoy. and it is agreed he was acting within the scope of his employment at the time of the accident. under the entire contract. Benkovich used a glue that was extremely flammable and did not read the warnings . the employer is liable for his acts whether it had control of his detailed operation of the motor vehicle or not.2d 1005 (United States Court of Appeals. 671 F. and they also stated that they would consider the payments Taylor made toward the truck voided if he worked for anyone else. 28 Mich. ³The term independent contractor has come to be used with special reference to one who. and the drivers were bound to the co-op yearly while the co-op could terminate at any time w/30 days notice. o Co-op paid him by the delivery.´ Sandrock v. 174 N. 370 (1930) laid out the alternative approach to identifying servant status. Seventh Circuit. Sherwin-Williams Co. they had a non-compete clause with the ³independent contractors´ which is an odd thing in b/c you expect independent contractors to work for as many people as they can handle. 365. o So he worked solely for Co-op. Passenger vehicle had a passenger and a driver. hard to prove b/c burden to check out IC only when aware of facts lead to believe IC is not competent. o The independent calling test: Professor Leidy in Salesmen as Independent Contractors. the true test of a ³contractor´ would seem to be that he renders the services in the course of an independent occupation.) y 3) Negligence in selection of IC = direct tort liability. Hixon in turn hired Sherwin Williams who in turn hired Louie Benkovich who had been in the linoleum business for many years and had a good reputation. b. y y Notes: o Inferring the right of control: The fact that the employer did not exercise the right to control does not show that it did not have the right of control. o He wasn¶t in business for himself. without submitting to their control in respect of all its details .2d 186 (Supreme Court of Nebraska. Also the Co-op owned the trucks Taylor used to deliver the milk with. The issue in this case in the previous chapter was whether or not the passenger was the agent of the driver. but it might be evidence of this.o o rule following the Restatement (Second) Agency. the employer should be liable. This is a simple respondeat superior claim claiming the co-op is responsible for the driver¶s actions. from the special status of D (common carrier). o Issue: Was D Taylor an independent contractor or a servant/agent/employee of D Co-op? Holding: Employee. had to put in new floors in their home b/c of water damage.

. o Issue: Is Sherwin Williams liable for the negligence of Benkovich. timeliness and accuracy or service of process is an integral part of the task that the attorney undertakes. o Reasoning: Service of process is a critically important duty that a lawyer undertakes when he is retained to commence an action. 614 N. excavations in or near a public highway. and  instances in which the employer is under a specific nondelegable duty. on the theory that they negligently selected him to perform the work? Holding: No. This appeal followed. S-W is not liable under this theory. Judgment reversed. Company had to pay $27. or his personnel. the higher is the cost-justified level of care.2d 712 (Court of Appeals of New York. o Rule: The general rule is that a party who retains an independent contractor as distinguished from a mere employee or servant is not liable for the independent contractor¶s negligent acts. the adequacy of his equipment. The district court granted the motion and dismissed the complaint on the merits. o Notes:  Rule: Inherently dangerous has been defined as work ³which. o Proc. Rheingold. the principal is not liable for injuries caused by independent contractors. o Rule: The exceptions to this rule are:  Negligence of the employer in selecting. o Rule: A duty will be deemed nondelegable when ³the responsibility is so important to the community that the employer should not be permitted to transfer it to another. The doctor in turn retained Fischer¶s service agency to serve the papers on the doctor. i. As a result the glue exploded and the Ins. o Rule: The hazardous activity exception to the independent contractor rule = The more hazardous an activity is. o Green checkmark = generally. o Proc. for example. their negligence would not have been the proximate cause of the accident because his lack of experience may have actually caused him to look closer at the bottle of glue because he had never used it before.´ o Rule: Nondelegable duty is when the responsibility is so important to the community that the employer should not be permitted to transfer it to another. Prosser and Keeton at 512. on the theory that Benkovich was engaged in an inherently dangerous activity? Holding: This case does not fall w/in the hazardous activity exception. and if it is hazardous enough. Even if they were negligent. Reasoning: Benkovich had a good reputation as an installer and they didn¶t have a duty to quiz him on his experience laying linoleum with glue. Fischer in turn selected a licensed process server to deliver the papers. o Rule: A principal is liable for the consequences of negligently failing to select a competent contractor. in its nature.y on the bottle that said to ventilate the room and turn off the pilot light. o Sub-issue: Is the service of a summons a non-delegable duty? Holding: Yes. even though he be an independent contractor. so the plaintiff was non-suited when the suit came before trial. o Issue 2: Is Sherwin Williams liable for the negligence of Benkovich who is not their employee but an independent contractor. Service of process is also a critical component of a lawyer¶s overall responsibility. instructing or supervising the contractor  employment for work that is especially or ³inherently´ dangerous. the principal should take his own precautions even though he does not supervise the details of the independent contractor¶s work.  Rule: Basically the only duty an employer has w/r/t choosing the independent contractor is to look into his reputation. The lawyer delivered the summons to Fischer 2 days before the statute of limitations and told him to serve them immediately. Fischer¶s process server delivered the papers on time but to the wrong person. Hist: The trial court determined that a process server is an ³independent contractor´ rather than an agent of the employing attorney. A lawyer shouldn¶t be able to evade responsibility for its careful performance by the simple expedient of ³farming out´ the task to independent contractors. There are two exceptions that could be collapsed into one ± if the independent contractor is engaged in an .e. will create some peculiar risk of injury to others unless special precautions are taken 0 as. at the close of the plaintiff¶s evidence the defendant moved for a directed verdict. Courts have held that there is no duty to look into whether or not he is insured. o Rule: Nondelegable duties = requires the person upon whom it is imposed to answer for it that care is exercised by anyone.´ Prosser and Keeton on Torts 472. who is not their employee but an independent contractor. Hist: American States brought this lawsuit in a federal district court in Indiana against Sherwin Williams . . when an individual retains an attorney. since ³the attorney does not have control over the manner in which the task is performed´ he can not be vicariously liable.E. to whom the performance of the duty is entrusted. o Issue: Can an attorney be held vicariously liable to his or her client for the negligence of a process server whom the attorney has hired on behalf of that client? Holding: Yes. 1993) o Facts: plaintiff retained law firm to sue doctor for malpractice.000 in additional damage to the Chess¶s house. Kleeman v. It is a non-delegable duty.

§229: must be same general nature as that authorized or incidental to authorized.E. Rep. y Frolic = new and independent journey. which. would journey have continued ± Fioco ± dominant purpose was not to serve master¶s business o (2) Conduct of the kind employed to perform . 172 Eng. The Scope of Employment Limitation a. Could make an argument if it is an assigned errand. 3. These general employers provide payroll services and benefits to the employees. (2) dominant purpose is once again to serve master¶s purposes (Fioco. 1834) o Class Notes: This case introduces the notion of detour and frolic. Nisi Prius Exchequer. 135 N.ultrahazardous activity or engaged in a duty. y What is the difference between re-entry in Restatement Second and Third o The Restatement Third focuses on intent of the employee. for public policy reasons. o Cases after this try to identify what is a frolic and what is a detour. I think this is like AdminiStaff. 2) Where the general employer is only nominally an employer. 1338 (England. then tells general employer they want so and so. y Joel v. Clover) o break b/w frolic and resumption of duties must be clear (no ³divided loyalty´) o Accident cannot be caused by forces set in motion by or during frolic. and picks an employee. They say that if the course of conduct shows that the employee was intending to serve the purpose of his employer. Morrison y Restatement Second §228 factors: o (1) Intent to serve the master ± did business create necessity for detour or. §230 forbidden acts may be w/in scope o (3) Substantially within authorized time and space limits ± de minimis departures not µfrolics¶ y Restatement Third §7.  in this situation.e. it depends on who was exercising control at the time of the accident. if the loaned employee acts negligently. y Detour = mere departure from assigned task. Remain intent to serve. if business had been dropped. y Acts of a personal nature (especially for intentional torts) = generally not within the scope of employment b/c not done with intent to serve master and not kind of thing hired to do. 1922) y The general principal will remain liable for acts of borrowed servant so long as borrowed servant is furthering business of general principal in rendering services to special principal. Barrett. when an employee has been on a frolic.  the general employer is hardly ever liable in this business model. This is increasingly common in business in the United States. o May be w/in scope if employer exerts sufficient control over personal acts (i. Morison. They don¶t provide any training or even hire the employee that they are loaning. Charles v. o Restatement Second looks at temporal and special limitations. o Going and coming rule = commuting to and from work is generally not within the scope b/c the benefit is lacking. Borrowed Servants y 2 different kinds of loaned employees 1) Where the general employer is in the business of training and supervising the employees that it loans out and typically loans them with some equipment. o May be w/in scope if negligent way of doing job (lighting cig. Negligent Acts = a principal is liable for the negligent acts of its servant only when it is w/in the scope of employment. Business of servant¶s own. 4.07 simiplifies the test: ³an empllyee acts within the scope of employement when performing work assigned by the employer or engaging in a course of conduct subject to the employer¶s control.e. But if control is totally relinquished then no longer servant of general principal and the special principal is vicariously liable for torts of borrowed servant. o Smoke/lunch break and commutinc not within (even if paid) b/c not hired to perform/course of conduct subject to master¶s control. the special employer does all the interviewing. An employee¶s act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employer to serve any purpose of the employer. when does the frolic end and new employment begin? .  i. Charles v. while driving) b/c incidental to performance of assigned work. is deemed to be a nondelegable duty ± then the employer of the independent contractor could be liable. Also. Rather. o If employee is only on a detour = employer remains liable o If employee is on frolic of his or her own = employer is not responsible. then he is acting within the scope of his employment. an off-site HR department. 199 (Court of Appeals of New York. y Re-entry = (1) once again near authorized time and space limits (route employee would have traveled without frolic). Barrett. tells employee where to smoke).

If that were the rule it would swallow up scope of employment. In this case.  2) The employee¶s conduct must occur substantially within the hours and ordinarily spatial boundaries of the employment. Instead he took 4 more runs. by the purpose of serving the employer¶s interest. he was actually on a special errand. o Was it foreseeable? Is it fair to hold liable? BUshey (drunk sailor ± VL) o Was the tort engendered by employment? Lisa M. Spencer v.e. it is not per se outside the scope of employment doctrine starts from the premise that the employee may be violating the employer¶s directions. 1991) o Facts: Skier employee of the ski resort crashed. o Proc.2d 1037 (Supreme Court of Utah. The general rule in going and coming cass is that the employer is not liable because the employee is serving her own purposes by coming. Why not here? Theoritical control including the power to specify where the employee drives. o Rule: The acts within the scope of employment are ³those acts which are so closely connected with what the servant is employed to do. assume that it wasn¶t intended to overrule the going and coming rule. o Rule: Test to figure out when employees are acting w/in the scope of employment:  1) an employee¶s conduct must be of the general kind of the employee is employed to perform. it was a complete departure in that he was not where he was supposed to be. o When you return to the scope of employment = depends on each case and underlying circumstances. Intentional Torts ± a P is not liable for the intehtional torts b/c it is rarely w/in the scope of employment. 910 A. The court of appeals reverses. and what he was supposed to be doing. Snowbird Ski Resort. o Issue: Was employee acting in the scope of his employment at the time of the accident? o Rule: Under the doctrine of respondeat superior. Court says that having started back does not put him back within the scope of employment. the more the court would require in order to demonstrate return to the scope of employment.  3) The employee¶s conduct must be motivated at least in part. 137 N. This is clearly outside the scope of employment isn¶t it? No. o Dual Purpose Doctrine = Did the court create an exception to the going-and-coming rule? o One of the rationales for non respondeat superior liability in the going and coming rule is that the employer has no control over the way in which the employee is driving.I.. 2) He took extra runs. 2006) o Class Notes: This is a going and coming case. This rule is based on flexibility that turns on the degree of deviation from the scope of employment. o A presumption exists that the employee is acting within the scope of employment when he is using the company vehicle. (assault during exam ± no VL)  watt her ea nexus b/w employment and the tort? o R2d §219(2) = was A ³aided in accomplishing the tort by existence of agency relationship? Costos (manager of hotel raped guest ± VL) . b. And the greater it is. The problem is that it would justify a finding of liability in any going and coming case. o Class Notes: Argument that he wasn¶t acting w/in scope of employment? 1) he was told not to jump off the jump that he took. 808 P. and does it anyway. If the employee is instructed not to do something. when the employer has given the employee special instructions w/r/t the vehicle in which the employee was driving. So he had to shoe A LOT in order to overcome and show the return. Marches through §228 factors. o Cardozo seems to be saying that the greater the frolic. To fulfill his duty he just had to go up and back down.y y y Fiocco v. of carrying out the objectives of the employment. that they may be regarded as methods. o Court doesn¶t use the term special errand. Hist: Lower court granted summary judgment to the ski resort. There are exceptions to the going and coming general rule i. o Reasoning: A jury could find that taking 4 runs is not a TOTAL abandonment of employment.2d 366. assume that his driving to and from this place on this occasion. Clover v. 2006 ME 120 (Supreme Judicial Court of Maine. Carver. employers are held vicariously liable for the torts their employees commit when the employees are acting within the scope of their employment. V. Lowenstein thinks this case needs to be narrowed. y Various tests: o Did the conduct further the interest jof the employers? Bremen (stold bank money ± no VL)  but maybe a bartender who overreacts there is intent to serve. even though quite improper ones. A mechanical application of those factors is sufficient to find respondeat superior liability. In other words. the employee must be about the employer¶s business and the duties assigned by the employer. He settled with the injured party and all that is left is the respondeat superior claim against the ski resort. as opposed to being wholly involved in a personal endeavor. 309 (Court of Appeals of New York.E. and so fairly and reasonably incidental to it. This is what the dissent is arguing. 1922) o Class Notes: Facts say that he already had it in his mind to return back to work. the greater the court will require in order to show return.P.

o The Enterprise Test = is it fair to impose this type of cost on a business engaged in this enterprise? Note: When you¶re dealing with an abstraction like fairness you could obviously come out either way on it. Even if the employer made it clear that the type of behavior was not going to be tolerated. Class Notes: The mere fact that the tort was intentional doesn¶t necessarily mean that the employer won¶t be liable. but when the act is committed solely for the benefit of the employee. They said that the drunken sailor¶s conduct was not unforeseeable and thus the Coast Guard should be liable for his actions. o Issue: Is the Coast Guard liable for the drunken sailor¶s drunken stupidity? Holding: Yes. The valves he turned let water into the drydock causing it to rise. The contract the Coast Guard had worked out with the drydock owner called for the personnel of the ship to have access to the vessel at all times. Hist: The drydock owner sought and was granted compensation by the District Court for the Eastern District of New York in an amount to be determined. at least in part by a purpose to serve the master.y y  was there but-for causation? Was there an implied contract where the plaintiff couldn¶t leave? Nazareth (assaulted in ambulance)  almost always restricted to common carriers. Neither the employer nor the bank gave him permission or even had knowledge that he had the money. malicious. The court here in Bushey rejects this test and instead employs an Enterprise Test.2d 167 (United States Court of Appeals. o Class Notes: What is the best argument the plaintiff can make for respondeat superior? He was where he was supposed to be. Bremen State Bank v. Bushey & Sons v. (c) it is actuated. o Reasoning: there is no contention that the employee stole the money in furtherance of the business of his employer. o Restatement Third Rule = Motivation test = was the employee intending to serve the purpose of the employer? o Lisa M. and they all have to do with theft.2d 425 (United States Court of Appeals. o Note: The book lists a bunch of cases that concur with the result reached in this case. Second Circuit. Moving company moved the locker and an employee found and stole the $10k. o Rule: The employer is liable for the negligent. o (i) The assault on Restatement Second §228(1)(c) y Ira S. 398 F.07 = simplifies the R2d §219(2) o Under either test. The district court judge rejected §228(1)(c) instead focusing on the larger purposes respondeat superior is supposed to serve concluding that §228(1)(c) did not serve these purposes. Hartford Accident & Indemnity Co. the employer is not liable to the injured third party. 1968) o Facts: A drunk coastguard shipman came back to the ship through the drydock and turned some valves on the drydock. . The ship then slid off the drydock. This sinks almost all intentional torts. While the sailor¶s actions were not actuated by a purpose to serve the master. o Issue: Is the moving company Bekins civilly liable for the loss occasioned by the criminal act of its employee? Holding: No. o Reasoning: The court rejects the motive test and finds liability on another ground. the court rejects the rule and adopts a new rule of vicarious liability. o R3d §7. Bank is suing the moving company to recover it on the theory that it is responsible for the misconduct of its employee. always look for direct liability. An exception would be an overly aggressive bouncer. etc. o Proc.´ Restatement of Agency 2d §228(1)(c) o If the court applied this rule the employer would not be liable because his actions were not in furtherance of his employer¶s purposes. It rejects the lower court¶s policy arguments because respondeat superior does not rest so much on policy grounds as it does in the sentiment that a business enterprise cannot justly disclaim responsibility for accidents which may fairly be said to be characteristic of its activities. 427 F. but only if: . The foreseeability in the context of respondeat superior is different from the foreseeability in the context of negligence. o Rule: §228 Motive Test = ³Conduct of a servant is within the scope of employment if. negligent hiring. Even in the case of Scott Bertuzzi the Canucks could be liable for. o Instead the court employs a foreseeability test. or criminal acts of its employees when such acts are committed during the course of employment and in furtherance of the business of the employer. But it fails here because the tortious conduct wasn¶t in furtherance of the employer¶s purposes. Seventh Circuit) o Facts: Bank was moving locations. Rule = employer might be liable even if employee wasn¶t intending to serve the purposes of the employer under certain explicit exceptions. Bank employee accidentally put over $10k in a locker. during the time he was supposed to be there. willful. .. negligent supervision. . United States.

The risk that seamen going and coming from the drydock might cause damage to the drydock is enough to make it fair that the enterprise bear the loss. o Rule: Foreseeability test = if the actions of the employee are reasonably foreseeable. The court relied only on the theory of respondeat superior and expressly declined to reach the question of direct negligence. Henry Mayo Newhall Memorial Hospital. o Rule: a sexual tort will not be considered engendered by the employment unless its motivating emotions were fairly attributable to work-related events or conditions. v.2d 358 (Supreme Court of California.S. That the employment brought tortfeasor and victim together in time and place is not enough. and dishonest. The underlying rationale he comes up with is fairness. o Rule: The tortious occurrence must be a generally foreseeable consequence of the activity. Judge Friendly says. o Proc. o Rule: Foreseeability test = While the employee thus need not have intended to further the employer¶s interests. It seems fair because if you look at the nature of this enterprise.´ Now he has to embark on a different analysis. Carr  this nexus is different than ³but for´ causation. 1995) o Facts: While getting an ultrasound from the defendant¶s technician. One that looks at the nature of the business enterprise and the nature of the precise tort involved and makes a factual judgment as to whether imposing liability on that enterprise for that particular tortious conduct would be fair or unfair. the risk of tortious injury must be ³inherent in the working environment´ or ³typical of or broadly incidental to the enterprise the employer has undertaken. o Issue: Was the technician¶s sexual battery of Lisa M.  varied language to describe the nature of the nexus = the incident leading to the injury must be an ³outgrowth´ of the employment. The Court of Appeals reversed. within the scope of his employment? Holding: No but it may be directly liable. confusing. o Rule: vicarious liability has been deemed inappropriate where the misconduct does not arise from the conduct of the employer¶s enterprise but instead arises out of a personal dispute or is the result of a personal compulsion. o Reasoning: he took advantage of the situation to commit the sexual tort for reasons unrelated to his work. Hist: Plaintiff sued on a direct negligence theory and a respondeat superior theory. His work provided no occasion for any type of emotional involvement with the . The superior court granted the Hospital¶s motion for summary judgment. According to Lowenstein one of the great things that the court does right is say that this type of forced analysis is B. o Class Notes: Court is cognizant of the 228 test and said that prior precedent would take a place like this and go out of its way to make it look like it served the interest of the employer. o Rule: an employee¶s willful. o Sub Issue 1: were the technician¶s acts ³engendered by´ or an ³outgrowth´ of his employment? Holding: No. it¶s not so startling that this type of thing would happen. The judgment of the Court of Appeals is reversed to try the issue of direct liability. malicious and even criminal torts may fall within the scope of his or her employment for purposes of respondeat superior. It was not unforeseeable that a sailor is going to get drunk. o Rule: Ask the question.y The rationale for using foreseeability is that the employer should be held to expect risks that arise out of and in the course of his employment of labor.  Basically all this is saying is California courts are asking whether the tort was foreseeable from the employee¶s duties. o Wrap up = this case departs from §228 and for the most part from traditional tort analysis and stakes out a really new test for liability. o Rule: California does not use the motive test but the employee¶s motive is still relevant. Lisa M. may generate outcomes that are less predictable than intent-based formulations. They do so because of the confusion caused by the differences between negligence foreseeability and respondeat superior foreseeability. is this a deeply rooted sentiment that a business enterprise that cannot justly disclaim responsibility for accidents which may fairly be said to be characteristic of its activities? o Note: The Restatement Third rejects the use of the foreseeability test. ³we¶re not going there anymore. the employer shall be held liable. even though the employer has not authorized the employee to commit crimes or intentional torts. the employer will not be held liable for an assault or other intentional tort that did not have a causal nexus to the employee¶s work. a girl was sexually assaulted by him under the auspices of necessity for the treatment. 907 P. Difficulty to apply. Foreseeability = in the context of the particular enterprise and employee¶s conduct is not so unusual or startling that it would seem unfair to include the loss resulting from it among other costs of the employer¶s business.

and that the last part of subpart (d) can stand alone in finding liability for their agent¶s actions even when acting outside the scope of employment. The employment must be such as predictably to create the risk employees will commit intentional torts of the type for which liability is sought. Defendants appeal. 137 F. The circumstances of his work made the tort possible but the tort didn¶t arise out of his performance of his work. o Issue: Is the defendant owner of the hotel vicariously liable for the intentional tort of its employee? Holding: Yes. e. the use of apparent authority is not required for such a finding.. it DID happen! In the course of delivering newspapers all over the city of New York. Restatement (Second) of Agency §219(2)(d) o Discussion: The defendants are trying to case the last part of §219(2)(d). y Costos v. or through conduct associated with the agency status. give it to the jury. ± o ³engendered by. Either measure liability on either motivation/intent of the employee. 220 ± New York Tribune deliveryman lost it and assaulted the person whose car he hit when he went to get the license number of the driver. for purposes of respondeat superior. o Dissent = let the jury decide. Analyzes it in terms of whether or not it is foreseeable and concludes that it is not. It was merely the result of propinquity and lust. o Rule: An intentional tort is foreseeable. give it to the jury. Hist: P sued the defendants in federal court. the part that says ³. (ii) Restatement (Second) §219(2)(d) = aided in accomplishing by agency relationship.´ With a hindsight bias it¶s always going to appear that it could happen. alleging the defendants were negligent and were vicariously liable for its employee¶s torts. Denied. or you¶re not. o Rule: A master is not subject to liability for the torts of his servants acting outside the scope of their employment. . How would this come out under Bushey? Whose interest was the driver serving at the time he hit the victim? His own. or he was aided in accomplishing the tort by the existence of the agency relation. In other words. o Reasoning: What about the physically intimate nature of the work? The court says that this alone is not sufficient to impose vicarious liability. or he was aided in accomplishing the tort by the existence of the agency relation´ as a reiteration of the prior language in subpart (d). the employer here is still liable. . Defendants moved for directed verdict.3d 46 (United States Court of Appeals. o Class Notes: Majority here holds that there is no liability for the employer here. . This is not the result of a mishandling of the feelings predictably created by the therapeutic relationship. could this happen? Yes of course. Affirm. but Lowenstein thinks they are the same thing. pg.´ Restatement (Second) of Agency §219 cmt. Uses some other constructs to analyze the question that sound different. It¶s because of all these problems that the Restatement Third rejects this enterprise test and retains the intent/motive based test. There is no evidence of emotional involvement arising from the medical relationship. Even though other courts have accepted defendant¶s argument based on the fact that in all of these cases. it could happen that a driver could get into an accident. Bottom Line = it¶s difficult to predict the outcome of these cases using the Bushey Enterprise test. o Proc. Although the procedure involved physical contact it was not the type expected to give rise to intense emotions on either side. What is the Bushey test? In the course of conducting the larger enterprise. The question is one of a relationship b/w the nature of the work involved and the type of tort committed. o Sub-issue2 = Was the sexual tort foreseeable? Holding: No. Lowenstein thinks it all comes together in the Lisa M. or is typical to the employment´ = outgrowth of the employment. 1998) o Facts: The manager at a hotel in Maine let himself into the room where plaintiff was staying at and raped her in her sleep. Coconum Island Corp. Court says no. case in the dissent that says if this is the test. only if in the context of the particular enterprise and employee¶s conduct is not so unusual or startling that it would seem unfair to include the loss resulting from it among other costs of the employer¶s business. adds context to the foreseeability test we saw in Bushey. unless the servant purported to act or speak on behalf of the principal and there was reliance upon apparent authority. It¶s too fuzzy and too unpredictable. So there are two different camps. Shines a light on it because he basically says ³the jury could come out the other way. If you¶re not. you¶re basically going with the Enterprise test that focuses on fairness. The court says that even with this narrowing comment.y y y y patient. The court says that this is not the law in Maine. there will be some kind of supervisory authority that puts the tortfeasor employee in the proximity to and contact with the victim also pointing to a narrowing comment in §209(2)(d) which states that an employer is liable only if the tort ³was accomplished by an instrumentality. Basically if this is the test. First circuit.

. Lowenstein says it is plain and simple a breach of contract b/c he had no authority under his relationship to convey the property to his estranged wife b/c the contract did not give him the authority to gift the property. o 2) majority rule = allows the imposition of punitive damages on the employer only on the basis of culpability. Everything the agent will now give rise to respondeat superior liability because it is basically a ³but for´ test. the majority rule makes sense.´ The Restatement Third does not embrace the use of §219(d)(2) reflected in the Costas case. 1985) o Principal leaves power of attorney with his attorney that authorizes him to deal with some real property that the principal. or employee vested with some supervisory or decision-making responsibility. 1. It must be a high level of managerial authority in relation to the nature and operation of the employer¶s business. Criminal liability? Sometimes but only in cases where the employee committed a crime of strict criminal liability. Restatement Second of Agency §217C = Complicity Rule. owned. i. This put him in the position to commit the tort. o The court says he has a claim for negligent breach of fiduciary duty. he had keys to all the rooms and the information as to where Costas was staying. The point being you can carve out principal agent relationships out of principal-independent contractor relationships. authorizing or ratifying the tortious behavior. See also Daniel M. consented to. prevent the aided-by-agency-relation basis for liability from potentially swallowing agency law¶s general scope of employment rule. health. a limo driver on the way to pick you up and you ask him to stop by your office to pick up your briefcase and you¶ll pay him for his favor. or when the employee¶s conduct involves misrepresentation or deceit . In general. such statutes deal with offenses of a regulatory nature and are enforceable irrespective of criminal intent or criminal negligence. 98 (Court of Appeals of Maryland. the Maine Supreme Court said this. or ratifies outrageous conduct. Authority may be either express or implied. Contractual Powers of Agents A. Lowenstein¶s game plan for going after independent contractor y Establish they are agent or employee y Negligent hiring y Other exceptions is they are applicable Chapter 4. He doesn¶t like this.e. Rule: A principal is not criminally liable for the criminal act of his agent unless he authorized. King. It was referring to agents who defrauded people out of money and they were only able to defraud those people only because of their agency status. Express Authority y King v. y We¶re not talking about independent contractors here. advised. peace and safety. (iii) y y y y Punitive damages There are two divergent lines of authority: o 1) assessment of punitive damages is permitted in a case where the employer would be liable for compensatory damages under respondeat superior. o Since the rationale behind punitive damages is punishment and deterrence. Shareholders and owners are blameless in cases where they did not authorize the wrongful behavior and holding them responsible for them would be unfair. Lowenstein says the Restatement was not referring to cases like this one. 303 Md. o A superior officer = connotes more than an agent. o This case explores the interpretation of a power of attorney.e. However. . An exception to this rule is the doctrine of criminal liability without fault which has been applied to criminal statutes enacted for public morals. The principal comes back to claim property and finds out that his property has been conveyed to his estranged wife. Notes: 5 years later.o o o o o Reasoning: The employer is liable because by virtue of his position at the hotel. be on the look out for independent contractors who have a piece of agency in their independent contract. i. participates in. Combs Colorado Law Review article from 2002 which states that ³the limitations contained in Comment e . Malum prohibitum v. Authority ± the ability of A to affect the legal relations of P by acts done in accordance with P¶s manifestation of consent to the Agent. ³comment e to section 219(2)(d) acknowledges that the section is limited in its application to cases within the apparent authority of the employee. The agent deeds the property to the estranged wife of the principal. that of manager. Malum en se. more than ³ordinary´ officer. . . The principal does not benefit from this transaction and if he wanted the agent to have that power he should have put it in the contract expressly. aided or encouraged the specific act. Bankerd. . Employer is liable for punitive damages only when a superior officer in the course of employment orders.

E. etc. negligence for not seeing who was on the floor of your store. 2d 972 (1994) o Rule: Powers of attorney will be construed strictly. even if given to A with instructions not to diplay it. the plaintiff should be able to maintain an action for respondeat superior liability against the employer. ³Reasonableness´ = words. 237 (Supreme Court of Minnesota. o Notes: P is bound by acts of those he leaves in charge of his business. o Rule: One who accepts a power of attorney covenants to use the power for the sole benefit of the one conferring the power and to use it in a manner consistent with the purposes of the agency relationship created by the power of attorney. she was sophisticated enough to realize that it was fishy. Theory = i.y o Powers of attorney are interpreted narrowly.. Theory = estoppel i. o RULE: the purported principal can be liable for the acts of someone who appears to be an agent. Second Circuit. Inc.2d 989 (United States Court of Appeals. restricting the powers to those expressly granted.. ³you should be estopped to deny that you issued this bond since we reasonably believed that Dixon was your agent as a result of y y . and soliciting their business.g. is hanging out in a stock broker¶s office. 643 So.e. Employer liable to retailer when retailer receives authorization over the phone to extend credit to someone purporting to represent the principal. Lamb v. walking up to customers.2d §7 y Incidental Authority: unless otherwise agreed.. o Rule: One who answers a business telephone has apparent authority to discuss matters relating to the business and it is binding. an Agent has authority to do acts incidental to expressly authorized transaction ± necessary.e. 1991) o Glass wall purchased from a supposed agent of glass company begins to leak and building renovators sue glass company. 427 N. So court has to move to the theory of apparent agency.e. Allard. o Cause of action = breach of K which is going to require some form of vicarious liability.  Lingering Apparent Authority y It has to be reasonably interpreted by the third party based on representations by the principal. Herbert Construction Co. 2. you¶ve done something that had led me to believe that this person is your agent (i. even if he is unauthorized if (1) P is responsible for appearance of agency authority in A to TP AND (2) TP¶s reliance is reasonable (Hansen & Jonhson). o The plaintiff will have to establish that Allard was an agent. usual. There are three sorts of apparent authority: o 1. Hansen. UNLESS ± emergency ± cannot contact Principal. authority to borrow = authority to execute promissory note y Delegation of Authority = authority to delegate to subagent must be express or implied: may be implied from type of work ± two man job. and reasonably necessary to protect Principal¶s interests B. This is a presumption that may be rebutted if evidence that P is not acting in good faith.2d §35. defendant says ³I don¶t have a contract with you. Apparent Authority y Rule: A person who professedly acts as an agent has authority to bind the Pincipal. Agent had power of attorney revoked but he misled company into believing that he had one by fixing it up AND company never told P that the agent could no longer issue bonds.2d 1127 (Court of Appeals of Washington. relations. P is liable for authority stated in a letter. Scott. Northland and Insurance Co. 931 F. Allard. y And must make the T believe that principal consents to having agent acting on his behalf.. So. Their claim is breach of contract.´ The plaintiff response. o Business cards and office does not make someone an agent. 818 P.2d 647 (Supreme Court of Minnesota. v. y Smith v. and proper. investing money is so he was acting in the scope of employment in that sense. o The plaintiff seeks to hold an insurance company liable on a performance bond that it never issued. Continental Insurance Co. o Is Merill Lynch liable if one of their sales people defrauds a customer? While fraud might not be in the scope of employment. She sues the stock broker¶s office where this guy was hanging out. answering and transferring phone calls like in Foley) and so you should estopped fro denying that this person is your agent. R. Court finds no apparent agency b/c to was unreasonably for her to believe that he was an agent b/c if was fishy. Statements made by P to TP ± i. She invests with him and loses everything. 251 Minn. 1958) o Sauber calls up insurance company over phone and girl on other end says he could transfer the policy. He tells the plaintiff that he can double her money or guarantee that he can return her principal at least. o The court holds however that there is no claim for respondeat superior of breach of contract here because he is no agent. 1988) o Facts: A customer.e. unless the plaintiff acted unreasonably. custom. Implied Authority = agent¶s reasonable interpretation of express instructions. 1990) o Lingering apparent authority. Foley v.W. Hansen & Johnson. R. y Sauber v. do work by himself.

o Apparent authority difers from estoppel in that the principal becomes immediately a contracting party irrespective of intent and with no reference to any change of position by the third party. 1957) o Shopping for furniture and Fake salesman steals cash from Plaintiff. o Inherent authority allows the third party to reach the personal assets of the agent Chapter 6. Co. So this is an apparent authority case. This court did not discuss its liability under apparent agency and said that Principal did not hold agent out. the agent needs the power of attorney because almost as a matter of law. o Notes: It costs a lot to take away power and these things are all over the place and often not relied upon. In estoppel. Continental Insurance Co. there¶s almost an assumption that in order to have a valid policy. but he exceeded scope of his authority. o Persons dealing with a limited agent have the duty to examine the agent¶s authority. o Dissent = this was on file w/county cleak and could have been relied opon. He was an agent though because he had the authority to do some things on behalf of Continental. Super. C. The law is encouraging deceptive conduct. o In this case. the law allows people to do business through agents w/out disclosing their identity.J. Fenwick . Inherent Agency Power Concept y Inherent agency = indicated power of an agent which is derived not from authority. Inc. A corporate officer is an employee of the company and a salesperson. o Inherent agency authority = principal bound by the actions that would normally be within the authority of the agent based on his position in the company. Estoppel y Hoddeson v. Rights of the Undisclosed Principal 1. This is what makes it different from the negligence theory when there is no agency relationship. failing to do so estopps a principal from claiming the agent is not his agent.also consider estoppel.. Continental says it was not liable even though the power was filed with the county clerk. Gazaway.2d 91 (Court of Appeals of Georgia. o Prior dealings can give apparent authority. He was part owner of the company. Koos Bros. Especially when the bond was not from Continental but from Transamerica Ins. Inc. Agency costs = You bear certain risks working through an agent. 816 N.E. 47 N. or estoppel. apparent authority.000 was filed in the probate court. 224 (Superior Court of New Jersey. it has to be signed by somebody and if the person with the authority to sign it. Assertion of Rights by the Undisclosed Principal . o So we start from the premise that in order to bind the insurance company. Dreyer and Reinbold. 453 S.2d 40 (Court of Appeals of Indiana. o A principal may be liable for failing to take reasonable precautions against an imposter claiming to be the principal¶s agent. o Apparent authority = alternative claim. v. Salespeople have the authority to tell people how to make payments. o i. 2004) o Actual authority = main claim. o If a person was once an agent and a principal failed to notify third parties that that person is no longer an agent. D.E. Continental Insurance was named as the surety but it was issued by George Robinson who did not have the authority to write bonds for Continental b/c his authority was revoked.. A. the agent doesn¶t have the actual authority to do that. o Issue = does the agent of an insurance company have the authority to bind the insurance company? What is the apparent authority of an insurance agent? o A customer who receives a policy from an agent might reasonably believe that the company is bound. but must be similar to the one at issue and have a degree or repetitiveness.e. The Undisclosed Principal y Absent special circumstances. the person who does sign it has to have the apparent authority. if the principal held the agent out to have a position with the company such as owner then they should be estopped from denying that they did not have the authority to do whatever.´ Dixon did not have the authority to issue bonds on behalf of Continental. 1994) o Facts: bond for $52. but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent. o The court rejects a notion of agency law that Estoppel requires some form of affirmative action on the part of the defendant.y actions you took to lead us to believe that Dixon was your agent and we relied on these actions. o Inherent Authority = alternative claim  How does the inherent agency authority differ from apparent agency authority? o Class Notes: They rely on the fact that he was a corporate v. Restatement (Second) §8A y Autoxchange. Watteau v. then the court will treat that person like an agent.

General Rule = Parties dealing at arms length with each other do not have a duty to disclose unless required by statute. Parol Evidence Rule y Ordinarily. 1914)  A competitor buys asphalt from its competitor case. The principal can¶t do it directly b/c he knows that if he was the one doing it the third parties would be able to drive a harder bargain and he would have to pay more.  Court says ³it played no role in his decision to sell the property to this agent. 68 (Court of Appeals of New York. made by the defendant. o Class Notes: b.03 y If the principal notifies the third party who entered into the contract with the agent to make payment under the contract directly to the principal. which the plaintiff relied upon. 211 N. the principal can enforce the contract.. If he obtains judgment against the agent with no knowledge of the identy of the principal. remedies of the third-party o The third party has the customary contractual remedies against the agent since the agent signed the agreement as a contracting party. .  It was not material because it wasn¶t for that reason that he sold the property.03 a. The landowner wants to rescind the contract because he was lied to.´  Plaintiff¶s claim of deception also fails. Authorized Transactions y General Rule: The principal is bound by the contract and can be sued by the party contracting with the agent.  What would have been material? It is possible that the seller owned an adjoining piece of property and the use of this piece of property would have been material. Finley v. Restatement (Third) §6. and which caused damage to the plaintiff. y Parol evidence is forbidden if the contract by its terms excludes the principal as a party. it is well settled that the principal may show that the agent who made the contract in his own name was acting for him.  Public policy of principals to act in an undisclosed fashion? This sanctions deceptions. y However. which. of course. Exceptions y o Kelly Asphalt Block Co. Restatement Second o The election rule has been the subject of criticism and the Restatement (Third) has abandonded the rule. So the landowner sells it to him.  It fails because he did not have any duty to disclose. This proof does not contradict the writing it merely explains the transaction. there might be a different outcome. he cannot have judgment against the other. Contracts are presumptively enforceable. Deception = buyer did not disclose that the undisclosed principal is Duke Power. So he sends an agent out there to solicit the sales for them.  Cardozo leaves the door open if there was an act of misrepresentation on which the third party relied then maybe that contract b/w the agent and the third party is voidable. 3.  Holding: The court does not grant rescission to the plaintiff. v. you have to demonstrate that the equities are in your favor by showing that there was some sort of fraud/deceit and there should be rescission. Agent outright lied to the third party when asked why he was buying the land. In order to get rescission. the election rule o Election Rule = Traditional American Rule = if the third person with knowledge of the facts obtains judgment against either one.  Plaintiff¶s claim of misrepresentation doesn¶t work because it was not material. the parol evidence rule would not allow variations from or additions to an integrated contract.2. y How do we resolve this policy dilemma? y If the seller straight out asked if the agent was working for someone else and the agent lied about that. is legal. Elements of fraud = misrepresentation. and payment to the agent after such notice will not relieve the third party of liability to the principal. he can later get judgment against the principal. Agent could have bought this and assigned it to anyone (including undisclosed principal)  This isn¶t all that different from an economic point of view from a transaction in which an agent purchases and resells to his principal. o B. Liabilities of the Undisclosed Principal 1.  He is seeking an equitable remedy for rescission. There was no misrepresentation made. Barber Asphalt Paving Co. Restatement Third §6.  Cardozo¶s rationalization for undisclosed principal = He says there is a contract in which the agent is bound. When a contract is made by an agent for an undisclosed principal. the third party is bound to do so. Dalton  Agent assembling parcels of property for the principal. Subsequently finds out that it¶s Duke Power that actually bought it.Y.

Humble¶s name was on the bar and the license of the pub. but Humble still entered into an agreement with Plaintiff for the purchase of cigars. . the third pary has to go after the the agent. 382). the whole situation came about because of the fact that the principal was operating as an undisclosed principal. o Court will not bind the undisclosed principal for acts of an agent beyond his actual authority. the principal has settled with the agent. Bangor Mills.B. o General Rule: An undisclosed principal who entrusts an agent with the management of his business is subject to liability to third persons with whom the agent enters into transactions usual in such business. o Reasoning: Humble was acting with an authority that was inherently reasonable for an agent in that position. Third Circuit. o Reasoning: The decision could not be based on apparent authority because the principal is disclosed under that doctrine. o The principal is held liable for actions by an agent that are expressly forbidden. 1893) o Facts: Defendant owned a hotel-pub that employed Humble to manage the establishment. The intermediary began to buy the yarn for more than was allowed by the Mills on their account for him. Payment by the Third Party y When an agent has made a contract on behalf of an undisclosed principal. the third party¶s payment to or settlement of accounts with the agent discharges the third party¶s liability to the principal. 1954) o Facts: Principal gave agent strict instructions about buying nylon yarn which was in limited supply. o Issue: Defendant is liable for damages resulting from an agreement between Plaintiff and Humble. This is because the third party ALWAYS believed that it was dealing with the agent. So it is more or less of a windfall when the third party finds out that there is another pocket out there. and on the principal¶s account. o Class Notes: We start out with a general principal = an undisclosed principal is bound by a contract made by its agent. Restatement Third abandons the rule completely and says that the relevant question to ask is whether the third party has gotten relief. 211 F. Watteau says that this is true even if the principal didn¶t authorize the agent to make that particular contract. The situation is analogous to a partnership wherein one partner is silent but is still liable for actions of the partnership as a whole. o Restatement Third is more protective of third parties = takes tehe position tbat a contract is a contract. Bangor was an undisclosed principal. 2. Fenwick. Plaintiff discovered that Defendant was the actual owner and brought an action to collect from Defendant. He can get it from agent or principal it doesn¶t matter. o Rule: An undisclosed principal can be held liable for the actions of an agent who is acting with an authority that is reasonable for a person in the agent¶s position regardless of whether the agent has the actual authority to do so. 1 Q. but the case limits a principal to actions of an agent that are reasonable under the circumstances. Payment to the Third Party 2. o Additionally. 346. Humble was the exclusive face of the business. And because of this it is ovbiouv that the third party was looking only at the credit of the agent. o When the principal in good faith has ssettled with the agent. y What happens if the third party settles with an agent? And the agent doesn¶t give the money to his principal. on pg. the third party is set out (this is the last para. (Queens Bench Division. until the third party has notice of the principal¶s existence. o The third party acted in good faith and shouldn¶t be required to pay twice. and therefore. C. although contrary to the directions of the principal. o Class Notes: This is an important case illustrating the general rule that an agent for an undisclosed principal. Holding: Defendant is liable for damages. o Does a settlement by an agent also bind a principal? o Even if Shetzline acted as an agent.2d 685 (United States Court of Appeals. Payment and Setoff 1. Defendant explicitly instructed Humble not to make any purchases outside of bottled ales and mineral waters. who is knowingly acting outside his actual authority as an agent for Defendant. Unauthorized Transactions y Watteau v. can bind the principal even to unauthorized contracts provided that the contract is one that one would otherwise think to be w/in the authority of the agent. End of story. So what is Bangor¶s defense here?  1) He wasn¶t an agent at all b/c he was acting on his own behalf. y Senor v. The principal sues the third party. it didn¶t even know aobut the principal.

. Liability When the Principal is Unintentionally Undisclosed Jensen v. o Hires was on notice merely by looking at shipping document (however. The cases were sent and received. These failings by Oil Supply were neglectful. An undisclosed principal is not discharged by payment to the agent unless he does so in reasonable reliance upon the conduct of T that indicates that A has settled the account. Alaska Valuation Service. Dolin was also indebted to Hires Parts Service. o Reasoning: Principals are generally in a better position to prevent potential fraud by their agents than are buyers. Hires has neither paid for nor returned the antifreeze. Accordingly. 2000) o Facts: William Dolin (a commodities broker) was indebted to Oil Supply (P) entered into an agreement with Dolin under which Dolin would arrange sales through Oil Supply. 688 P. Inc. Hence. o Reasoning: Here. What if Hires PAID Dolin after it received notice that it was working on behalf of an undisclosed principal? The rule is once the third party knows of the existence of the agent then that person must settle with the principal and can not longer settle with the agent. or by closer supervision of its agent Dolin. the third party may not set off any amount that the agent thereafter independently comes to owe the third party against an amount the third party owes the principal under the contract unless the principal consents. perhaps motivated in part because the agent owed the third party money. Inc. y Oil Supply Company. Hires should bear the loss. Dolin represented to Hires that he had a load of 720 cases of anti-freeze that he would ship to Hires in exchange for his debt to Hires. the loss should be placed on the party who has put the agent out to deal does not apply if the party seeking refuge in the principal haw wittingly or otherwise aided an unscrupulous agent to defraud the principal. Liability When the Principal is Disclosed: Special Circumstances . Chapter 7: Liability of the Agent to Third Persons A. 726 N.y y Majority Rule = that discussed in Senor. expecting that the agent will pay T. Liability on the Contract 1. Minority Rule = that preferred by the third restatement. Hires Parts Service. o (a) the third party may setoff:  (i) any amount that the agent independently owed the third party at the time the agent made the contract and  (ii) any amount that the agent thereafter independently comes to owe the third party until the third party has notice that the agent acts on behalf of a principal against an amount the third party owes the principal under the contract o (b) after the third party has notice that the agent acts on behalf of a principal. . 1984) 2. Oil Supply could have prevented this situation by making a confirmation of the sale. The profits would be split b/w Oil Supply and Dolin. Restatement (Second) §208 and Restatement Third §6. The principle that between two innocent parties. Hires might just as easily have prevented the defalcation by taking the time to ponder why some company it had never heard of had just deposited a truckload of antifreeze on its doorstep. Hires was not entitled to set off its Dolin debt in the lawsuit brought by Oil Supply. To remedy this debt.. 2d 246 (Supreme Court of Indiana. and because hires had the last opportunity to prevent the loss before the transaction was complete. Inc.07 3. If an agent is authorized only to contract in the principal¶s name. the other party does not have a set-off for a claim due him from that agent unless the agent has been entrusted with possession of chattels which he disposes of as directed or unless the principal has otherwise misled the third person into extending credit to the agent.2d 161 (Supreme Court of Alaska. the court affirmed. because Hired was chargeable with notice of the existence of Oil Supply as Dolin¶s principal before it accepted the goods. (Hire)(D). y Rights of a third party to setoff amounts owed to it by the agent when dealing with an undisclosed principal. o Issue: If an agent is authorized only to contact in the principal¶s name. On the other hand. v. Hires might have thought that Dires paid oil supply). does the other party have a set-off for a claim against the agent only if the agent has been entrusted with possession of chattels which he disposes of as directed or the principal has otherwise misled the third person into extending credit to the agent? o Holding: Yes. A principal who settles in good faith with his agent while still undisclosed. o The third party settles with Dolin after it receives its shipment. y Restatement Third provides that ³When an agent makes a contract on behalf of an undisclosed principal. here. Oil Supply and Hires were unaware of each other¶s existence. y Class Notes: o All of the shipping documents said that the shipment of anti-freeze came from Oil Supply so to say that Hires should have known that the anti-freeze didn¶t come from Dolin but from Oil-Freeze. Prior to this transaction. is protected fro liability to T if A neglects to discharge her duty to pay T.E. Setoff y Situations where an agent enters into contract for undisclosed principal.

y Husky Industries v. the third party can bring an action for damages against the agent.2d 458 (Court of Appeals of Missouri. and the agent is authorized (expressly or apparently) to receive such notice. or in excess of. o Here. 1989) 3. 1983) B. some indication that the persons who purport to be officers of the corporation are in fact officers of the corporation. certification from secretary. then the principal is bound by that notice. Power company promised to provide safety personnel whenever the Bridge companypainted the bridge upon receiving notice that they were going to paint. or all present or future persons who may have or claim an interest in the subject matter.. o Facts: Agent failed to set up an escrow account which caused the third party not to receive funds he otherwise would have been paid. 385 (1925) o Should an organization be held to the composite knowledge of several of its employees? o A power company entered into a contract with a bridge company to string high tension wires aboce the bridge. Still at some point you have to have faith that not everyone is lying to you. o Issue: Is power company subject to the composite knowledge of its two employees? o Holding: no. o One employee of Power company sees painters working on the bridge. Chapter 9: Notice and Notification. Rosenberg.2d 1302 (U. o If an agent breaches a warranty of authority is to place the plaintiff in the same position he would have been in had the tort not occurred. personally injures a third party. third parties cannot get judgment against the agent. Court of Appeals. Utah Junk Co. 1924) o The agents of Montana Power were also Agents of Montana Reservoir (P). o Is it enough that the corporate sends you a photocopy of the board of directors meeting? No. how can a third party verify the officer has the authority to make the transaction? o Need something from board of directors. Economic damages resulting from breach of duty to principal? Personal injury damages also arising from breach of duty to principal BUT ALSO arising from breach of duty to the third party (i. 846 F. y Rationale for this rule: We don¶t want principals to be able to isolate themselves from the imputation of knowledge by using an agent by saying ³I didn¶t know that.. agent negligently driving craches work truck. Another employee knoew that Power company is supposed to supploy safety personnel under that circumstance. 1988) o Bottom line: If agent breaches an obligation to the principal. in the course of executing an agency relationship. Liability When the Principal is Partially Disclosed or Inidentified Van D. review the bylaws of the corporation to make sure the corporation¶s secretary was in fact authorized to do that. o Copy of resolution. The Agent¶s Warranty of Authority ± an agent is personally liable to third party is he contracts without. y St.2d 656 (District Court of Appeal of Florida. Craig Industries. y Montana Reservoir & Irrigation Co. Imputed Knowledge A. v._ y AN agent is not liable to a person other than the principal for harm resulting from failiure to adequately perform his duties as an agent ± only Principal is responsible for NONFEASANCE ± Coker. 1981) o When dealing with a corporate officer.W. unless he states that he lacks such authority y Agent will be liable even if he has a good faith belief that he possesses the authority. Union Electric Light & Power Co.´ So if you choose to do business through an agent you¶ll be bound by notice given to the agent in the course of the relationship. unless this affair was entrusted to the agent tho observed the painters. . Louis & St. y P may still be liable under apparent authority/estoppel theorys. 618 S. on the contract. but also that the power company has to know that they¶re being given notice. B. o It¶s not only that the Bridge Company intended to give notice. 782 P. y Will not be liable if third party has actual knowledge that agent lacked authority/reason to know does not bar liability. you probably need something signed by the secretary of the board. 64 Utah 60 (Supreme Court of Utah. can¶t just be any agent). he breaches duty to both principal and third party.Copp v. but if an agent. but 3rd party beneficiary might make agent liable for nonfeasance. You have to trust but verify as much as you can. the agent is absolved from damages. Charles Bridge Co. Costas. v. Introduction y General Rule: If notice is given to an agent in the course of an agency relationship. Notification y Notification = deliberate effort to bring some fact to the attention of a person or group of persons. acting as agent does not confer immunity for personal torts.2d 1104 (Court of Appeals of Washington. This is a restitution case and not expectation damages y Coker v. App. Breskin. 11th Cir. He never told me. P¶s authority. Inc.e. So the third party sues the agent. 432 So. Dollar. (must be received in an official capacity. y Agent remains liable for MALFEASANCE ± stil lliable in tort.S. 216 Mo. v. so their knowledge (that Rosenblatt was an agent) is imputed to them.

The Adverse Interest Qualification o Rule: If an agent is acting adversely to the principal and entirely for his own or another¶s purposes. 125 (Supreme Court of New Jersey. o Auditor¶s defense = 1) we have fulfilled our contractual obligation. Question of fact. Disputed fact in the case = whether or not the Defendant had given notice to the plaintiff that they had terminated their agency relationship with Rosenblatt.Y. conflicting goals (desire to make a commission and thus keep silent about outstanding equity) does not rise to the level of an adverse interest. third parties would be discouraged from communicating with agents. o Even if Bevan called in sick that day and said to Kirk. 2003) o The insurance company is saying that they were defrauded b/c they made a material misrepresentation on the insurance applications. KPMG LLP. then it would be imputed.  2) Prominence of the transaction. They said because there was no control there couldn¶t be an agency relationship. 604 (Court of Appeals of New York. Penn Central Co. The right to control arises from the consent of the parties. Control turns not only on controlling what the agent does but the right to control. It¶s not a breach of contract b/c we contemplated that it would only void coverage as to the person who filled out the application not the other applicants. What more?  1) Time period between the two transactions. American Home Assurance Co. 111 N. is not imputed to the principal. . Imputed Knowledge y The doctrine of imputed knowledge involves holding a principal to the knowledge of. Odd circumstances a bunch of innocent policy-holders have coverage voided because A made a misrepresentation. ³No named insured is aware. It¶s one thing to forget what you had for breakfast 11 months ago. v. 2010) (in supplement) o Company¶s claims against the auditors = 1) breach of contract. 584 (United States District Court. Supp. y First American Title Insurance Co. o However. it seems coverage might still be denied. This is unfair because the policy covers not just the person signing the application. and sometimes the wrongs (broadly defined) committed by. obtained outside the scope of the agency relationship. 177 N. and 2) the company. o 3) it is more efficient for third parties to communicate with agents rather than directly with principals and if there was no doctrine of imputed knowledge. This presumption can be overcome though. 2010 WL 4116609 (N. his knowledge is not imputed. There are really two sets of insureds here 1) officers and directors. it arises out of their relationship with another party. y Constant v. o Presumption = A person¶s knowledge.o o In this case. y Shapiro v. o Adverse interest exception? It doesn¶t work here. 341 F. University of Rochester. 2) we were not negligent. o Applying this control criteria seems kind of artificial in this context.. o The relief they seek is rescission. 2) tort claim ± professional malpractice/negligence. 1972) o D&O said that A has known problems. o Defense = nonimputation of the agent¶s knowledge on the insured. The court says though that we do not impute knowledge from a principal to an agent. District of Massachusetts. o Kirschner v. Was A the A for everyone covered? Basically claimed that A made a misremresentation and thereby voided the policy. o Dealing with indirect proof. C. Longer the time period more likely the agent forgot about it.Y. 1984) o Shapiro court rejects the ratification argument that Bird accepted. D.´ o ratification theory = you can¶t argue that you get the benefit of the agent filling out the insurance application and at the same time argue that he wasn¶t your agent. 1889) o Issue = if an agent learns of information in a prior unrelated agency relationship. knowledge does not arise out of their relationship with the defendant.. y Bird v. o 2) discourages the use of agents to ³insulate´ principals from information of which principals consciously wish to remain ignorant. Eastern District of Pennsylvania. another thing to forget that you won the lottery 11 months ago. 291 (United States District Court. Lawson. Some of the directors and officers may have been unaware that the application was even being filled out and who was filling it out.J. How do you prove whether or not someone remembers? Ask them? Has to be something more than the agent¶s own testimony. is that agent deemed to still have that knowledge in a subsequent unrelated agency relationship? o Rule: If the complaining party can demonstrate by clear proof (more than a preponderance) that the agent remembered the knowledge at the time of the subsequent transaction. his agent by imputing the knowledge of the agent to the principal. y Rationale for this doctrine = o 1) creates an incentive on the part of the principl to select and monitor their agents with care. take care of insurance policy.

The bank was held to Harriman¶s knowledge b/c he dominated the loan committee. y Applies when agent. §18 y RUPA (1997) o Has replaced UPA in 32 states. o Company¶s response = management is acting adverse to the company thus. they have created a partnership.´ o Mandatory rules = §§11-15 o Default rules = i. also receives that property in the capacity of agent for the principal and iss the only agent acting in that capacity.auditors are saying that the company had knowledge of the agent¶s fraudulent acts b/c of imputation. committing fraud in the process. one as sole recipient of the property for the principal. o 3) To carry on as co-owners a business  UPA §6 & RUPA §202 = ownership includes ³the power of ultimate control. imputing the agent¶s knowledge to the principal. according to Lowenstein. including the loan committee that approved the loan. Harriman. o Exceptions to the adverse interest qualification: o 1) sole actor doctrine o 2) policy basis/accountability by the auditors ± this is exactly what they were hired to do.04 are very important and listed in the statutory supplement: o E. y It is in the latter capacity that the sole actor rule applies. o Reasoning: Harriman¶s knowledge was imputed even though he obviously was an adverse party borrowing money for his own benefit and even though the bank gave value for the securities and thus was not unjustly enriched. The other states have adopted the RUPA. A partnership is created by agreement. even though clearly acting as an adverse party to the principal. but these are really rare cases. Also. o Holding: Harriman¶s knowledge of the fraud was imputed to the bank. express or implied. 85 F. by for example. Chapter 11: The Creation of a Partnership A. The Sole Actor Doctrine y The sole actor rule is an exception to the adverse interest exception. Capacity to contract is only requirement b/c partnership agreement is a contract. It is still governing law in about 1/3 of states. In this case they are not because they were still doing things for the company.03 and 5. y Agent wearing two hats ± one as adverse party.e. y UPA (1914) = at one time it was adopted in all states except LA. Introduction y If two or more persons associate as co-owners of a business and take no steps to formalize their relationship. the adverse interest exception almost never applies. estoppel did not play any role in these facts. Harriman dominated the bank¶s other officers and employees. If you don¶t file any papers or formalize the relationship it¶s a partnership. allowing Munroe to rescind the transaction and obtain the securities from the bank. His will alone caused the making of the loan and the acceptance of the collateral. including delectur personae (choice of the person). o 2) Persons ± includes not only individuals but also corporations and other partnerships. o Defines partnership as ³an association of two or more persons to carry on as co-owners a business for profit.2d 493 (United States Court of Appeals. o Practically. Restatement Third §5. 1936) o Harriman borrowed securities from Munroe on a personal basis. while we may be negligent. selling some of his own property to the principal. o ´Harriman¶s domination was exerted to affect the action of the bank with respect to the particular transaction. y Munroe v. imputation is cut off because if they are acting adverse to the company they are no longer agents of the company. Second Circuit.´ . o All rules in RUPA are declared default in nature except for a list of ten set forth in §103(b). you are more culpable b/c you were committing a fraud and the law won¶t involve itself in a conflict b/w two wrongdoers. y Partnership = default way of doing business b/c of its lack of formality. Therefore he should be treated as the sole actor on behalf of the bank as fully as though he had physically placed the note and securities in the bank¶s vault. o Court says = must be acting completely adverse to the company. The only time it would apply is when the manager is looting the company itself. He then pledged the securities as collateral for a loan from a bank of which he was the president and used the loan proceeds for his own purposes. then. under in pari delicto.  fiduciary duties are mandatory in §103(b)(3)-(5) y Elements of a partnership relationship: o 1) Association = organized body of persons who have some purpose in common. o Defines partnership identically to UPA.

had three wealthy friends who were persuaded to make substantial sums of money available to the partnership but who wanted more than a mere loan with interest.o Refers to ownership of the business.J. 1 = business is defines as ³every trade. to be kept advised on the conduct of the business. D. then sure the negligent partner for personal tort liability. o When a partner assigns his entire undivided interest a new partnership is formed and the new partnership cannot sue to enforce Ks enteres into by previous partnership ± Fairway (title insurance ± inequitable decision!)  However creditors of first partnership are also creditors of the second if the business continued without liquidation. Partnership can agree that change of partners wil not cause dissolution and will continue to have standing to enforce Ks entered into by first partnership. So an employee may not sue a partner if he has recovered under Workers Comp.´ 4) For profit = self explanatory. they were given an option to join the firm as partners.  This minimizes the practical significance of distinguishing b/w joint ventures and partnerships. the resignation would be accepted and the partner forced to retire. Mazz invpked the rule in workers compensation that allows an injured employee to sue a third party tortfeasor for damages even though the employee has recovered workers compensation from his employer. The Partnership Relationship Defined and Distinguished From Other Relationships 1. o Court apply partnership law to joint venture situations. The Underlying Theory of Partnership ± Aggregate of Entity?  Aggregate (UPA) = a partnership is not a distinct entity. one of the partners of the firm.  Facts: An employee (Mazzuchelli) of a partnershio was injured by the negligent driving of a paetner iof the firm while on firm business. ± RUPA §801 o Fairway Development Co. o An elaborate agreement was entered into b/w the partnership and the three individuals. Finally each partner of the firm placed his resignation in the hands of Hall. 213 (Court of Appeals of New York. claiming that this combination of profits and extensive control created a partnership. It appears to sanction creditor control by veto power and to characterize a right to initiate transactions as inherently inconsistent with creditor status. or profession´ and consists of ³a series of acts directed toward an end. 62 . A unanimous court decided tht there was not enough evidence to support a fair inference that a partnership was created at the time the agreement was entered into and there was nothing in the subsequent conduct of the parties that added to the agreement. v.´ Their receipt of profits was as interest on their loan and thus did not constitute presumptive evidence of partnership status under UPA §7(4). The agreement provided that the three individuals would make a substantial loan to the firm. o UPA §15 = each partner immediately is suable for obligations of the partnership (adopts aggregate). adopts the aggregate theory. occupation. of Minnesota. noting that §15 of UPA.  The partner invoked the aggregate theory. Although they had the right to veto business. it is a collection of partners. Silberberg. Title Insurance Co. Admission of a new partner. In addition.  Court upholds this defense. The Uniform Partnership Act (1914) and the Revised Uniform Partnership Act (1997) y JOINT VENTURES o Joint ventures ± arrangements in which two or more parties combine forces to engage in a specific economic activity. they did not have the right to ³initiate transactions as a partner may do. o Creditors of the firm sued the three individuals. Therefore. y Martin v. retirement/death of old partner dissolves partnership. which mandates personal liability of each partner for the debts of the partnership. o The three were merely creditors with a very strong presence I nthe business. 1959)  This case provides a practical example of the aggregate theory playing a determinative role in a lawsuit. not of the capital contributed to the partnership. UPA §2 & RUPA §202. cmt. 15 (Supreme Court of New Jersey. and that the management of the firm would be placed in Hall¶s hands. and consulted on important matters. But they must agree that dissolution will not occur when a partner leaves. arguing that he was plaintiff¶s employer and thus in effect had already paid plaintiff for his injuries. ± Mazzuchelli. receiving 40% of the profits of the firm as interest on the loan. Also. 246 N. Hall. not a creditor relationshipo.Y. the three individuals were entitled to inspect the firm books. If at any time Hall and the three agrees. They had veto power over any business they considered injurious or highly speculative. ± UPA §41(1) o Mazzuchelli v. Peyton. a partnership exists only so long as the exact aggregate of partners remain the same. o This case is significant b/c of its express distinction b/w affirmative and negatice control by creditors. Mazzuchelli reovered in workers compendation for his injuries.   B. at least in ordinary situations.  Entity Theory (RUPA §201) ± partnership is an entity distinct from the partners. 29 N. 1927) o An investment banking partnership had gotten itself into serious economic trouble through a series of bad investments. with the exception that the contractual and tort liability of members of a joint venture may be more limited than that of partners due to the narrower scope of activities of a joint venture.

153 Ill. Miller. and C. even if used for partnership purposes. o Each individual partner is taxed directly on his share of the partnership¶s taxable income. o This is confusing because it¶s impossible to o ³When the intention of the partners to convert individually owned property into firm property is inferred from circumstances. E. o The court concludes that this is partnership. 244 (1894)  Under RUPA §§203 and 204 = more detail is provided but same approach as UPA. The insured is a partnership. Income Tax Considerations ± A Brief Summary  In this respect the Code adopts the aggregate theory: o Partnerships do not pay federal income tax on the income generated by partnership business.´ o P¶s argument = the money I didn¶t know was there is actually my personal asset and so I didn¶t sell it. This was not on the list so it is mine.W. y Putnam v. Contributions of Property to the Partnership 1.2d 510 (Court of Appeals of Tennessee. She makes a deal with someone who wants to buy her interest in partnership. Internal Revenue Code (IRC) §701. Citizens Bank of Clovis.  Title insurance company writes title insurance. The plaintiff (the lady who sold her partnership interest) says ³I should get part of that. It can be extremely limited in goals and purposes and still be a partnership. and E!´ The court accepts the title insurance company¶s argument. ³Who are you? We don¶t have a contract with you! We have a contract with these people (partnership consisting of A. You are A. They obviously think that this would only increase their chances of reaching the cattle. o Rule: §24 ± the property rights of a partner are:  1) rights in sspecific property  2) right to participate in management o §8 UPA 3.) We have a contract with is A. Shoaf. Two presumptions: o 1) property purchased with partnership funds is partnership property o 2) Property acquired in the name of one or more of the partners without an indication of their status as partners and without use of partnership funds is presumed to be the partners¶ separate property. and not individual property. the circumstances must be such as do not admit of any other equally reasonable and satisfactory explanation.  In this respect the Code adopts the entity theory: o Partnership is required to file tax return F.´ o Issue: What does a partner in a UPA partnership really own? What is owned by the partnership? Holding: Ms. and C. 2.2d 1475 (United States Court of Appeals Tenth Circuit. They ake a claim against bank and recover. .´ Robinson Bank v. o Just be cause there are only two and they are cooperating for a single purpose DOES NOT mean that they are not a partnership. Subsequent to deal they find out that bookkeeper has been stealing from company. The personnel of the partnership changes. 1990) o Defendant borrows money from bakn and secures with cattle including all after acquired and he goes into joint venture. o He also takes losses directly into his personal return.´ o Bank is trying to make an argument that a joint venture ought not to be treated as a partnership. o Issue: Can partnership assets also apply to joint ventures? o Defendants say that the property is partnership property.B. 620 S. This argument only succeeds if a creditor can convince a fact finder that this is not a partnership (two or more persons associating together to co-own a business for a profit. B. D. Then partnership has a claim on the title insurance policy and the title insurance company says. Putnam has no interest in the money b/c she conveyed her interest in the partnership and had no specific interest in the admittedly unknown choses in action to separately convey or retain. Ambiguities Concerning Ownership of Particular Property  Under UPA §8(1) & (2) there is a presumption that property purchased with partnership funds is partnership property. The Property Rights of a Partner y Groff v. 898 F. They are arguing that in a joint venture. each joint venturer continues to own all the property they brought into a partnership. ³It¶s not my cattle. The Special Matter of Title to Real Property y Doctrine of equitable conversion = realty will be deemed in equity converted into personalty to facilitate satisfaction of legitimate claims. 1981) o A lady wants to get out of partnership. She says ³I made a list and told you what I sold you. The joint ventures co-opperate but their cooperation is in the context of them owning their own property. So this case is fundamentally important to reaching the conclusion of whether or not a joint venture will be treated different from a partnership.

But the court says that there was an implied agreement among the parties that Beale would have full management authority and therefore was not acting in contravention of the agreement and the partners have no claim because they at least implicitly agreed to it. . Babbitt. 590 (Supreme Court of Oregon. Contractual Powers of Partners y Rule: Partners are regarded as agents of their partnership when dealing on behalf of the firm. o Class Notes: This is a common fact pattern. One of them wants to hire someone else. 1971) ± implied authority o Facts: The partnership is leasing tooling to the corporation. 1. 94 Idaho 87 (Supreme Court of Idaho. (b) if the right exists under the terms of any agreement . UPA §18(h) o Rule: UPA §18(e) bestows equal rights in the management and conduct of the partnership business upon all the partners. Partners can agree otherwise (forfeit. Dooley. y RUPA § 303: a partnership has the option of filing a statement of authority with the Secretary of State of the state where the partnership is located. y Elle v. (d) whenever other circumstances render it just and reasonable. 1971) o Facts: Two trash partners. prior authorizations or ratification of similar condut. The motivation is not tax driven but economically driven ± the corporation doesn¶t have the funds to do it. He complains about Mr. however.o §§203 and 204 RUPA CHAPTER 12: The Operation of a Partnership. Corporation engaged in some ongoing business activity and it has some connection to partnership with common principles to both common partnership and corporation.e. or limit the authority of a partner o w/r/t notice: filing a limitation of authority does not operate as constructive notice to third persons. etc. Beale himself b/c he was on both sides of the transaction. A. agree not to have management rights. o Rule: UPA §22 provides ³any partner shall have the right to a formal account as to partnership affairs (a) if he is wrongfully excluded from the partnership business or possession of its property by his copartners.) and this can come about by implication. UPA §18(h) o Rule: The members of a partnership may if they wish agree to leave the management of the business in the hands of a single managing partner. Actual Authority y Actual authority = a partner is actually authorized to act with express or implied consent of fellow partners. . i. 259 Or. ³ o Issue: Did Beale act without authority?  the source of Beale¶s authority would be either the partnership agreement or statute. except with regard to real property and then only if a certified copy of the filed statement is recorded in the office for recording transfers of that property. Babbitt (partners could tacitly agree to partner assumption of power by not objecting). In this particular controversy the partnership agreed to lower its lease fee to allow the corporation to put in a competitive bid on a job. acquiescencein assumption of authority. The other partner refuses. o Rule: Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners. Such an agreement may be implied from the parties¶ course of conduct. o This is a powerful holding b/c the statute does not say that. customary way business is run. unless otherwise agreed all partners have an equal right to participate in the management of the partnership. . o This statement can either grant. One of the partners complained that he has a larger stake in the partnership than he has in the corporation so he got screwed. o Rule: No act in contravention of any agreement b/w the partners may be done rightfully w/out the consent of all the partners. There used to be tax advantages to this. y Summers v. o Constructive notice also: 90 days after statement of disassociation or dissolution is filed.  did Beale exclude them from the management of the partnership? Their basis for this claim is §18 which says that each partner has the equal right in the management and conduct of the management of the business. o Implied authority = was the acting partner reasonable in assuming he was authorizd to act based on manifestation of fellow partner?  based on interpretation of partnership agreement. He does it anyway. o Holding: the court holds that Beale had this authority by implication. etc. often partnership will buy real estate and lease it to the corporation the shareholders of which are also partners in the partnership.

2d 692 (Supreme Court of North Carolina. One who asserts that the particular act of an agent is within the scopr of the agent¶s authority has the burden of proving the extent of such authority. or in the way in which the particular partnership usually transacts its business. o Statement of Authority (RUPA §303): = filed with Secretary of state. the burden of proving the ³usual way´ in which advertising agencies transact business is on the third party. Peoples First Community Bank. those who forbid a change must have their way. 1969) o Rule: Every partner is an agent of the partnership for the purpose of its business. and then only if recorded in property transfer office. o Rule: even if the partnership agreement denies the partner authority.´ Negligently failed to investigate. and the act of every partner. o Other Constructive Notice to T under RUPA: 90 days after statement of dissocation or dissolution filed. Apparent Authority y Act of any partner for ³apparently carrying on the business in the usual way´ binds partnership. Bank sought to foreclose. Grant = conclusive in favor of BFP. But. They delivered it anyway and seek to recover the costs. o Rule: If the partners are equally divided. o General partner exceeded his budget. not shall any lime item thereof be exceeded by more than 10%. o This is a very close case. including the execution in the partnership name of any instrument.´ o 2. It illustrates the problem of ³what is in the ordinary course of business´? y RNR Investments Limited Partnership v. Gonzalez.´ o The partner orders anyway. if (1) T knows that partner lacks authority or (2) not act carrying on in usual way (unless authorized) doesn¶t bind. Court says the co-partner could not recover what he shelled out personally to pay the new employee. or obligations of the Partnership which will cause any line item to be exceeded by 10%. o Reasoning: The partner who dissented did not sit idly by and acquiesce in the actions of his partner. you can¶t limit the authority of your partner. unless the partner so acting has in fact no authority to act for the partnership in the particular matter. National Biscuit Co. Limitation = only notive to T with real property. o Holding: The guy who hired despite objection from his partner screwed up. 1959) o One partner notifies a vendor ³we don¶t want anymore of your bread. o Power of position = two factors determine whether in ordinary course: (1) usual in the course of the particular business. The court said that partnerships have to have majority consent. liabilityes. Stroud. 812 So. the third party can hold the partnership liable. Third party acting in good faith with an agent of the partnership (partners) and settles a dispute with the partnership (promissory note). 439 S. The threat of dissolution may encourage the parties to work it out.2d 128 (Court of Civil Appeals of Texas. UPA §9(1) o Rule: The act of a partner binds the firm if such act is for the purpose of ³apparently carrying on´ the business of t he partnership in the way in which other firms engaged in the same business in the locality usually transact business.y Rule: Thus the only reasonable interpretation of UPA §18(h) is that business differences must be decided by a majority of the partners provided no other agreement between the partners speaks to the issues. Also restricted the general partner¶s ability to borrow. ³sorry. and the person with whom he is dealing has knowledge of the fact that he has no such authority. He was vocal about his opposition. v. o Class Notes: Explores the idea of forfeiture of management duties through implication principle even further. Partnership answered with defense of ³you failed to look at the general partner¶s limited authority before giving him the money.W. 106 S. cuts off lingering apparent authority. spend partnership funds and encumber partnership asets. o An act that makes it impossible to carry on business of partnership cannot bind without consent ± UPA §9(3) y Burns v. The partnership eventually defaulted. .E. o This case is a narrowing of authority. RUPA §301 explicitly endorses (2). What should he have done? Dissolved the partnership was basically his only option. Finally it also said that the general partner shall not incur debts. He says ³I told you I was not going to pay because he didn¶t have authority to order it. for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership.´ o Court says. (2) usual for similar businesses in same locale (Burns). o National biscuit ignored the instructions of the partner told them that the other partner had no authority to order. My partner has no authority to order it. o Rule: Under a reasonable interpretation of the language of §9(1).2d 561 (Court of Appeals of Florida 2002) o Partnership agreement required the general partner to prepare a budget covering the cost of acquisition of property in Destin and construction of the project and further provided that in no event w/out limited partner consent shall the approved budget exceet more than 5%. if the third party doesn¶t know that. which he did not have.

has received notification of the fact. y ³The ordinary course of business´ = similar to ³scope of employment.´ Class Notes: The drafters of RUPA were cognizant of the fact that it was very difficult to limit the authority of a partner AND treat third parties fairly.´ Comment states that this ³is intended to include a partner¶s apparent. y These three sections of UPA make it clear that the partnership and individual partners are vicariously liable for the wrongs committed by partners acting within the scope of business. 354 S. Rule: Third parties have no duty to inspect the partnership agreement or inquire otherwise to ascertain the extent of a partner¶s actual authority in the ordinary course of business . Further. You should make good on this loss. B. o (2) = Separate Transaction = if partner was harmed while acting in the capacity of a customer of the partnership (Farney) or an Independent Contractor hired by partnership (Hensley) the partner can recover damages minus his share of the liability. even if they have some reason to question it.´ o Issue: Since he had no actual authority.2d 801 (Court of Errors & Appeals of New Jersey. o This case involves an interpretation of UPA §13. Hensley. Also. or has reason to know the fact exists from all other facts known to the person at the time in question. 3. o Reasoning: The law firm/principal/partner never did anything to purport that the defrauding lawyer had actual authority.´ The client agrees and gives the lawyer money. Important innovation. The client says to the law firm ³He was your lawyer. a partner is entitled to reimbursement from the firm for losses suffered by him in the ordinary and proper course of the firm affairs. Pollard. a third party has notice of a fact if that party knows of the fact. y RUPA §305 and 306 = same as UPA sections above. Tort Liability for the Wrongs of Partners 1. A partnership is liable for a partner¶s wrongful act done ³with authority of the partnership.2d 744 (Supreme Court of Kentucky. 1962) o Rule: The law is well settled that a partner who has paid an obligation of the firm out of his own funds may obtain contribution from his copartners. y Injured partner¶s remedies under UPA: o (1) = could dissolve partnership and sue other partners for tortious conduct. y Smith v.W. authority.o o o o o Rule: Knowledge and notice under RUPA §102 = a person knows a fact if the person has actual knowledge of the fact. . The Fraudulent Partner y §14 UPA = a partnership is bound to make good the loss where ³one partner acting w/in the scope of his apparent authority receives money or property of a third person and misapplies it. y RUPA §305 = deletes the language in UPA §13 b/c entity theory ± under RUPA there can be liability. The Traditional View = partnership will not be liable for a partner¶s fraudlent misappropriation of another¶s property where his acts are unrelated to his partnership duties.´ Tort Liability of Partnership to an Injured Partner: The Co-Principal Doctrine y UPA §13 = a partnership is liable for the wrongful acts of partners to any person ³not being a partner in the partnership. RUPA said = if you file a limitation or grant of authority w/r/t real estate transactions. 2.´ The law firm¶s response is ³He wasn¶t authorized to take your money.´ y Co-principal doctrine = no vicarious liability under UPA when the injured party is a partner. The money disappears. was there apparent authority? Hold: No. y Rouse v. Rule: Under RUPA §303 a partnership may file a statement or partnership authority setting forth any restrictions in a general partner¶s authority. the lawyer disappears and the client sues.´ y RUPA §305(a) = says same thing though less clearly. No one wanted a situation in which a third party had to inspect a partnership agreement before dealing with a partnership.) The court can¶t find reason for disputed clause in §13. Can we give third parties the assurance that the partner does have the authority w/out making the third party go back and inspect the partnership agreement? Should there be some inexpensive way to put the third party on notice? None of this was addressed in UPA. as well as actual. In General y UPA §13 = partnership bound by ³any wrongful act of omission of any partner acting in the ordinary course of business of the partnership´ y UPA §14 = partnership bound by partner¶s breach of trust y UPA §15 = partners are jointly and severally liable for everything charged to the partnership under §13 and 14.´ a. 1941) o Facts: Client deals with a lawyer. this is binding on third parties. . This would be inefficient and add transaction costs. . The lawyer says ³I can help you out in some investments. 21 A. participate. o The court here resists this underlying notion and treats the partnership as an ENTITY (embracing the RUPA approach BEFORE RUPA is even drafted. unless they authorize. ratify.

2d 751 (Supreme Court of Texas. Law firm prevails on Summery Judgment motion. even though they follow UPA. o Rule: Good example of the principle that if a court is sympathetic to the plaintiff. 686 F. Money was lost. Law partnership may still be liable for fraudlent acts of partners that are unrelated to legal duties if (1) occurred during attorney/client relationship AND (2) within scopr of apparent authority. Keeping Track of Things ± A Brief Look at Partnership Accounting y Income statement = covers defined period of time. If no leg. Elliott & Churchill. the FDIC brought a cause of action against the partnership (aiding and abetting a breach of fiduciary duty) and the partner (breach of fiduciary duty). G. Suits Against the Partnership y RUPA §307 = a partnership is an entity and can sue and be sued. Notice and Notification to the Partnership y FDIC v. Reversed at this court. The difference is that in joint liability partners have the right to have all partners over whom jurisdiction can be obtained joined in the suit (if not joined can dismiss). You have to be acting completely adverse to your principal and then knowledge is not imputed. 533 S. Suit By the Partnership y Same as suits against the partnership. C. aka profit and loss statement. F.W. as the trial court found. With client¶s consent invested money. jointly liable for contracts. A Conflicting View = minority view. Fountain. absent contrary agreement. Brundidge. y Capital Account = shows the equity of each partner in the business. y Balance sheet = shows financial condition of a partnership at one particular point in time.. §12 captures pretty well the adverse interest exception and the imputation theory. then have to name all partners in a K action or all partners you want to sue in tort action. o RUPA §401 (counterpart to UPA §18) = ³each partner is deemed to have an account´ that is credited with the net amount of the contribution and share of profits of the partner and charged with distributions to and the share of losses of the partner.3d 429 (2008) o There was a cause of action available ± accounting. Seek dissolution of partnership. o sets forth revenues and the expenses of a business during an accounting period.´ Even though. The Nature of a Partner¶s Liability ± Joint As Opposed to Joint and Several Liability y UPA §15 = Joint v. y Adams v. Rights and Duties Among Partners . y Not allowed under UPA (aggregate theory). o statement of assets.2d 550 (United States Court of Appeals. After the bank went bust. o UPA says nothing about accounts of the partners. 194 P. H. and in connection of teht dissolution a full accounting to the partnerships assets. Land Services. D. o The rule here sounds a lot like the adverse interest exception. o Aiding and abetting breach of fiduciary duty? How could they aid and abet the president of the bank¶s breach of fiduciary duty if they didn¶t know about it? This is where UPA comes in and says ³you did actually have that knowledge because it was imputed to you. Fine under RUPA (entity theory). it will deny summary judgment. all partners must be named as Ps. Many states have adopted laws that allow a firm to sue and be sued in its name (instead of having to name all partners in a contract action). Client sues firm. Seventh Circuit. y Cook v. o Facts: One partner was a bank officer who committed a breach of fiduciary duty regarding the bank by not disclosing to the bank that the ultimate beneficiary of the loans that he was making was him and his partnership. E.b. 1982) o Notice case o §12 of UPA = imputation of knowledge that tracks the imputation of knowledge in agency law. they did not know or have reason to know this. 1976) o Facts: Lawyer sent money by a law firm in Champagne Illinois. y Liability does not extend to obligations incurred prior to jointing the firm. Can seek indemnity from partnership under §401(c). Couldn¶t have defrauded the client w/out this type of relationship. in joint and several partners have no such right and can be indemnification from other partners under §18(b). liabilities and the owners¶ equities at a given point in time. Partners are jointly and severally liable for torts. where firm is suing. Braemor Assocs. o RUPA §306 = partners are jointly and severally liable for all firm obligations. o What justifies this more liberal view? Restatement 219(2)(d) = would fit nicely in the context of the law partnership. Joint and several.

(2) cannot conspire with other employees or partners to leave in a way that would materially damage partnership ± but may invite personnel to join after serving notive of intent to withdraw. 458 (Court of Appeals of New York. y Meehan v. o Courts have §21 paired with common law in recognizing broad fiduciary duties of partners. if he is interested in going in on a re-development lease on his own. or a knowing violation of the law. RUPA 301(10). UPA specifically requires it for any transaction connected with formation (Corley). (2) duty not to deal on behalf of adverse party.2d 1255 (Supreme Judicial Court of Massachusetts.E. intentional misconduct.E. ³not honesty alone but the punctilio of an honor most high. Partnership may exist by implication. Duties under UPA §21 = does not include the duty of care and duty of loyalty. RUPA §404(e) recognizes that partner does not breach fiduciary duties because his conduct furthers own interest. o RUPA also specifies what the fiduciary duties consist of. y Meinhard v. 535 N. Fiduciary duties in Colorado ± CRS 7-64-404 o Uses the word ³include´ meaning there are additional fiduciary duties that may not be mentioned in the statute. o (a) You can do whatever you want (b) but 10 things you can¶t alter or contract around. The Duty of Loyalty = Under UPA §21: largely governed by CLAW. the managing partner. o The drafters of UPA were drafting against a rich body of common law case law that reflected the fact that partners are fiduciaries of one another. (3) duty to refrain from competing before leaving (i) Duty during formation of partnership = RUPA specifically excludes during formation. plus fees due for taking business as provided by agreement. o (d) duty of good faith. The lease comes up for extension. Duties under RUPA §103 = nonewaiveable provisions.2d 97 (Supreme Court of South Carolina. but must not violate fiduciary duties ± Meehan. y Before leaving: fiduciary duty applies. Partners are agents of the partnership and this imposes fiduciary duties UPA §9(1). even if no agreement has been signed. 1997) o Facts: (ii) Pre-empting business opportunities = information that is useful to the firm for any purpose within the scope of its business which is learned while a partner belongs to the partnership. o Basically all fiduciary duties. 1928) o Facts: 2 guys in a partnerhip/joint venture possess some real property under a lease.´ He thinks he had a right to participate in the new lease/venture. Shaughnessy. This is default. This is a contractual duty of good faith. using that infor for personal advantage is a breach of loyalty. o Why does he think that he has this right? Where does this right come from? o 1) good faith.y y y y y a. These come from common law. o Much more confining than UPA since UPA says nothing about contracting around and little about what the fiduciary duties really are. 249 N. Mostly deal with duty of loyalty. 485 S. The landlord asks Salmon. He can¶t hide anything from him and has to disclose to him everything that is going on. Ott. not a fiduciary duty. Salmon. protects parties reasonable expectation under the agreement and serves as a gap-filler. o (b) the duty of loyalty is described:  duty to account  to refrain from competing  (c) duty of care = refrain from engaging in grossly negligent or reckless conduct. Meinhard finds out about it and goes nuts! Says. The interpretation of the partnership agreement using the obligation of good faith in order to fill in any gaps.Y. Can¶t expect parties to think of everything that could happen so we have this duty of good faith. Partner must also disclose intention if useful and within scope. mandatory accounting pfor profits. Remedy is disgorgement of ill-gotten profits. Under RUPA §404(b): duty of loyalty limited to (1) duty to account for profits (generally self dealing). o (a) the only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections (b) and (c). (3) duty to disclose material info to partnership ± tell them you¶re leaving. so even under RUPA liability is possible if partnership has already been formed. Salmon says okay. y Corley v. Duties under RUPA §404 = This is the most controversial section of RUPA. o 2) fiduciary duty. o Cardozo¶s language has been often quoted b/c it justifies every result you want if you want to impose a duty on somebody. (Meinhard). (1) cannot unfairly solicit clients (joint-letter). ³I thought we were partners. even if used to compete only when partnership expires. Salmon has an obligation to act in the best interest of Meinhard and the partnership. is the standard of behavior´ (iii) Leaving the business = partners may plan to compete with the firm before leaving. 1989) .

o What is the argument here that the court was wrong/that this was not covered by the waiver of Paragraph 8? Why should they not have been able to get away with this?  Because they were basically stealing partnership confidential information. y Some states have altered §404 to provide that a partner¶s duty of loyalty included these three duties. o Paragraph 8 of the waiver promotes ³spirited if not out and outright competition among the partners´ according to the court. o This is a UPA case.´ §103(5)  If not manifestly unreasonable? This is the toughest part of §103. He took valuable information..3d 823 (Supreme Court of Washington 2007) Classic self dealing situation. o This is more a lenient case than normal. J&J Celcom v. 890 F. the only problem though is THAT IS NOT WHAT THE LAW IS. The Duty of Care. This is because we want directors to be willing to take risks on behalf of the corporation. if the standards are not manifestly unreasonable. burden shifted back to D. How do you determine this? b. o Mismanagement = gross negligence in handling partnership business.´ Loewenstein says that this is a decent rubric for dealing with this. then it should go forward. ATT was on both buyer and seller side! The exact type RUPA prohibits. Jax Restaurant. and duty to refrain from competing with partnership. and if it is fair. once gross negligence is shown though presumption goes away. And competing o Partnership agreement here includes a pretty broad waiver of fiduciary duty. unless involves self-dealing or conflict of interest. Salmon. if partnership agrees with transaction. Ferguson. 634 P. y Singer v. o Partner bought land behind other partner¶s backs. intentional misconduct. 679 N. y RUPA §404(c) = same rule but explicitly makes partners liable to partnership for grodd negligence. implying that the duty of loyelay may include other duties. duty to refrain from self dealing.W. Would this case come out differently under RUPA?  Yes. o In corporate world ± what is the stndard of care that the directors of a corporation have? o If you want to challenge a decision that the directors made. w/r/t fiduciary duties RUPA is more contractual.´ y this means partners can be negligent y Bane v. you have to demonstrate that they were grossly negligent with the way they came to that decision. 1989) o Posner says o this is a statement of what the standard of care of a partner is vis-à-vis co-partners. Singer. Normally courts will NARROWLY construe waivers and if there is an interpretation that will not cover the conduct in question then will normally use that interpretation. 169 P.2d 766 (1981) o Stands for the propositioan that partners can contract around the duty of loyalty under UPA (but not RUPA). or a knowing violation of law. Inc. then breach of loyalty. y Under UPA = partners not liable to partnership for mere negligence.2d 11 (United States Court of Appeals. When co-partners asked if they were leaving they lied. Seventh Circuit. So why was AT&T able to get away with this if RUPA explicitly forbids it? The judge in this case though cites a law review article for the principle that ³If there¶s full disclosure. (v) Fiduciary duties and freedom of contract.  RUPA §103 says that you may not limit the duty of loyalty but a partnership may prescribe the standards by which the performance of the obligation is to be measured.o Holding: the way in which they soliciteated their former clients violated their fiduciary duties.2d 165 (2004) . (iv) dealing with conflicts of interest y RUPA §404(b) = a partner¶s duty of loyalty is limited to three specified duties: duty to account for partnership property. y Moren v. What is the reasonable expectation of the parties in these circumstances? This is the position that Andrews (dissenter) takes in Meinhard v. intentional misconduct or violation of law. UPA is more fiduciary. the duty of care = ³refraining from engaging in grossly negligent or reckless conduct. It this waiver is EXPLICITLY prohibited by §404(b)(3). When they were asked about former clients they delayed. AT&T Wireless Services. (Jax) o Business Judgment Rule = presumption of care. Gross Negligence. He allegedly breached his duty of loyalt in this case by self-dealing. Court said this is just not right. y According to RUPA.

its magnitude may be exaggerated rightfully or wrongfully to the point of destroying a harmonious accord. Coie. App. there is a breach of good faith. under thestatute. Nosal o Limitation on the interpretation of the good faith principle = good faith requires only that the expulsion not cause a wrongful withholding of money or property legally due the expelled partner at the time he is expelled. (Holman) y Also. 1974) o Rationale for above rule. o Rule: Partner can in fact be expelled if the partnership agreement so provides.y The court notes that the partnership has the obligation to indemnify a PARTNER who suffers a loss. Inc. if (1) expulsion is solely to deprive partner of profits (Holman) or prevent from asserting rights under agreement (Nosal) OR (2) motivated by spite or malice. Once a schism develops. Plaintiffs arguing that Ds have a duty of good faith and expelling him violated that duty. o But as long as not either and interest is fairly evaluated and paid ± no breach.e. . y Rule: Generally courts will not look into the process of expulsion nor will they require reasons given so long as the expelled partner¶s interest was fairly evaluated and paid. o The Court notes that there are some contrary authorities but is not ready to eliminate the duties owed by partners when dealing at arms length. quick. Walter v. do they look out for their own interest? o There is a duty for partners to be somewhat paternalistic. 1993) o When partners deal at arms length. 522 P.´ o Reasoning: ³It is not difficult to understand why parties to such a professional relationship would find this method desirable. an expeditious severance is desirable. Loewenstein thinks that if they have the obligation to indemnify her. y Exception to spite or malice rule = where expulsion is to resolve a fundamental schism then no breach. which he contended would have revealed self-dealing on the part of the executive committee of the partnership. 985 F. Holiday Inns. y Expulsion Power must be exercised in good faith. a clean. she couldn¶t possibly have an obligation to indemnify them. What is material? If it would affect the parties judgment. i. claiming expulsion was in bad faith. Deals with the expulsion of a partner pursuant to a provision in the agreement. The executive committee determined the share of income for each partner. o UPA §31 = if a partner ship agreement doesn¶t provide for expulsion then under §24 the partners cannot decide to expel a partner. and good cause. Because the information that they wanted were the internal projections that the defendant (buyer/partner) had.. the heavier burden it is on the complaining party to demonstrate materiality. and expeditious severance. He was expelled soon thereafter. like whistle-blowing. does one partner owe to the other fiduciary duties? Do they have to look out fir the best interests for the guy across the table. o c. o Holding: Nosal raised a triable issue of bad faith. Even though they wouldn¶t be in violation of §31. y Good faithhinges on the reasonable expectations of the parties. The foundation of a professional relationship is personal confidence and trust.2d 515 (Wash. they would violate §24 b/c they would have deprived the expelled partner of his right to participate in the management of the partnership. o Fact: partner in a large law firm was denied the right to inspect the firm¶s books and records. hearing. not expressed in this partnership agreement frustrates the unambiguous language of the agreement and the result contemplated. (Bohatch) Look for p¶ner to do something uncool. When such occurs. o Facts: Expelled partner says he should have been given a notice and opportunity.2d 1232 (United States Court of Appeals Third Circuit. The Duty of Good Faith and Fair Dealing y UPA §31(1)(d) = only UPA section that mandates good faith. with a clear method of accounting. If agreement is silent on cause.´ y Winston & Strawn v. good faith expulsion means that interest was fairly evaluated and paid. Court recognizes that this is what the parties agreed to. o There is no duty to disclose material information. Nosal claimed that it gave unjustified increases to its own members. o UPA §32 = grounds for judicial dissolution o Holding: ³We conclude that these parties contractually agreed to the very method of expulsion exercised by the defendants. Court sets the bar low w/r/t fiduciary duties. or. He sued. RUPA also makes it a mandatory duty under §103. y RUPA §404(d) = increases the duty of good faith. To imply terms of notice. o RULE: The more adverst the parties are. given that the parties are dealing at arms length. y Holman v.

He recovered $54. Rights Against Partnership Assets y Under UPA = primary liability of partners. y Accounting required where partners sue each other over partnership business = usually strictly enforced (Manchester Management) o Two exceptions: (1) simple. Assignee is not owed any fiduciary duties or other duties arising from p¶ship agreement ± Bauer. However. d. (5) when circumstances make it ³just and reasonable´. many states insist that creditors first exhaust partnership assets. (Kroc) y if a creditor will not satisfy debt w/in a reasonable amount of time through distribution. Only the partner¶s economic interest is lost. Kroc did loan him the money. partner will have indemnity. (2) if wrongfully excluded. y b. by unanimous vote. i.e. Courts have broad discretion to modify order to meet circumstances. isolated transaction (Schuler). expel a p¶ner who has transferred substantially all of his interest. Creditors can¶t go after partners personal asssets until the assets of the partnership are firs dissolved. (ordinary and proper deleted). Tupper had financial problems and asked Kroc for a loan. and Kroc.Reasoning: Court relied heavily on the denial of the right to information Nosal was entitled to under both UPA and the p¶nship agreement. but filed an action to recover on the notes. But it is not explicitly clear under either whether a partner can seek indmenification for ordinary negligence. a general partner.609. (3) appropriation of business opportunity. many states statutes have allowed partnerships to be named as defendants. Could not sue partnership (agg. J. appoint receiver. theory). Under RUPA §601(4)(ii) other p¶ners may. Where joing can sue all and hit personal assets. y RUPA §401(c) = indemnity even where solely partner negligence. y Tupper v. (4) as provided by agreement. he forced the partnership into receivership. RUPA §401(c). especially where joint liability. which is different than from agency. but not partnership property (UPA §25 ± all partners must be joined in transfer of property rights). raising an inference that Nosal was expelled solely b/c he persisted in invoking these rights. UPA §28(2). Indemnity Rights y UPA §18(b) = right to indemnity for payments or liabilities incurred in ³ordinary and proper´ course or to preserve property of partnership. Claims by Creditors of the Partnership a. Under UPA. o the partner may redeem the interest before judicial sale and may use partnership property if they agree y The purchaser is an assignee of the partner¶s interest and has no management rights or right to inspect books ± §27. Rights Against the Personal Assets of Individual Partners y UPA §15 = where obligation is joint and several. can apply at any time in at-will. but certain claims may require. etc. he still has managerial rights and is still a partner. y RUPA converts partners from being primariliy liable to being secondarily liable (entity theory). Kroc = charging orders o Tupper. each with fifty percent interest purchased land together. eventually purchasing Tupper's share for $2500. Under RUPA accounting is not prerequisite for availability of suit. modify notce provision. courts will allow foreclosure on and sale of interest. but may apply for judicial dissolution under 32(2) if term p¶ship must wait until end of term. Apply for charging order from court under UPA §28 ± distributions (payments of profits and surplus) are made to creditor. a limited partner. Freedom to Contract around fiduciary duties y Under UPA = absent fraud or illegality partners can contract away fiduciary duties (Singer ± language disclaiming fiduciary duties upheld ± could preempt opportunities. i. Then to collect. However. can hit any partner¶s personal assets underl underlying claim is satisfiet.) o Some courts say basic fiduciary duties can¶t be contracted around (Appletree) y Under RUPA §103 = 10 things can¶t be eliminated by agreement including fid dut and GF y A partner owes no fiduciary duties to former partners ± (Bane) y o e. o Issue: Does the court have the power to charge one's partnership interest and have it sold to satisfy a money judgment? . I. The Right to an Accounting y Accounting = stands as an obstacle to bringing a lawsuit against your co-partners. should provide in agreement that suits for indemnification don¶t require accounting. Partner can seek indemnification for his himple negligence. y RUPA §307(d) = creditors may not hit personal assets until assets have been exhausted. (2) personal bligations between partners (Manchester). y UPA §22 RUPA §405(b) = entitled to accounting (1) on dissolution. f.e mismanagement. Claims by Personal Creditors of a Partner Against the Partnership Interest of the Partner = personal creditory may go after the partnership interest.

agree to continue business after dissolution. Take away:  partnership is not dissolved upon retention of charging order. yet had to keep the partner.e. as it closed off the ability of Tupper to collect his surplus or his share of the profits. Partnership had no partnership agreement. partners decided that they didn¶t like the creditor. Liquidation rights ± allows a p¶ner to have p¶ship property applied to discharge liabilities. not a free flowing obligation. Blomfield). Creditor sues. o Unless otherwise agreed. this is just another default rule K. (2) if all p¶ners. NOT liability of partners to other partners. default rule is that death doesn¶t trigger dissolution. doesn¶t come up often bec. Failure to follow through with dissolution caused the bankrupt partner to remain in control. (2) where a p¶ner wrongfully dissolves. remaining p¶ners may unanimously elect to continue the business under §38(2)  Some courts allow a p¶ner that wants to continue business to buy out other p¶ner. but many courts say no rights if hardship to p¶ship.  What is creditor¶s argument? The partners owe the creditor a duty of good faith. he lost the ability to terminate the partner. The LLP Shield y Ederer v. No partnership agreement can divest the court of the power it has to charge and sell an interest of a partner in a partnership agreement to satisfy a judgment against a partner. the creditor may be able to reach that too. even though agreement is silent. Judgment: Affirm Analysis: This was pretty harsh. can¶t ask the court to place you in there as a partner (i. Because he did not dissolve.e. surplus reduced to cash and paid out to p¶ners. Bauer v.  RUPA §504(e) = charging order and foreclosure this is the exclusive remedy. the judgment debtor does have some incentives here to protecte the interets of the creditor b/c if the debtor has any other property. y 3) Coases theorom y 4) Parties can contract around this. decide they¶re going to give him a hosing. o partner withdrew and got a judgment against other partners. The reduction to cash is effected though sale of the p¶ship and its assets. Partners can still be personally liablt to other co partners. if it is possible to establish value of interest by determining how much would be generated in a sale o Estate of deceased p¶ner possesses liquidation rights. o Dissolution does not trigger liquidation for (1) a p¶ner expelled in good faith. dissolution automatically triggers liquidation rights in each p¶ner . y either default provision in UPA y or agreement between parties y Here. o Lowenstein thinks the court is wrong.§38(1): (1) P¶ship agreement may provide for continuation of business and buyout of departing p¶ner¶s interest. you have to exercise it consistent with what the partners expected. Under RUPA. so the creditor should still have an advocate in the partnership. nobody owes the creditor a fiduciary duty. y 2) He could threaten foreclosure preventing that partner from ever realizing anything from that partnership. the creditor can¶t find a contractual source for the duty of good faith because he wasn¶t a party to the agreement  2) Fiduciary relationship = a fiduciary owes a duty of good faith to the beneficiary y here. Blomfield Co. including departing p¶ner. an LLP is not treated the same as other limited liability entities (i.o o o o o o o Holding: Yes.  Bottom line: y 1) there¶s still a judgment out there. y most courts find this as flowing from the contract. The court should have at least given policy reasons for it ± should give reasons why partners should remain personally liable for obligations to other partners. o As a result of this case. Kroc owned the entire corporation. Gursky o LLP deals with liability of partners to third parties. corporations and LLCs)./Holden Joint Venture  Facts: creditor had a charging order. partners give the creditor a hosing by distributing all the money among themselves (through commissions or some other form). . Chapter 13: Dissociation of a Partner and Dissolution of a Partnership Under UPA y Dissolution is the change in relation between p¶ners by any p¶ner ceasing to be associated ± UPA §29. What are the sources of a duty of good faith?  1) Contract = if you have a right under the contract.

 Wrongful dissolution ± 38(2): remaining p¶ners may continue business by unanimous agreement. (2) by express will of any p¶ner if no term specified (giving notice ± Haley). In a term p¶ship damages include profits that would have been received by non-breaching party if term would have continued ± Southern Oaks. (2) term expires. o Expulsion under §601(5): expulsion by judicial determination. Cannot be waived o RUPA does not refer to dissolutions as rightful or wrongful ± there is no wrongful dissolution under RUPA.  While there may have been an understanding in former p¶ships that profits would pay obligations. (2) bankruptcy of p¶ner. in evaluating interest the p¶ner must pay for newfound prosperity of p¶ship. if he attempts to appropriate the newly successful p¶ship to himself without adequate compensation to p¶ner then breach of good faith (and loyalty) ± Page. No liquidation: buyout rights = value of interest minus damages for breach of K. (c) dissociated by becoming a debtor in bankruptcy. y Causes of Dissolution: UPA §31: A p¶ner always has the power to dissolve. o Provisions of agreement irrelevant. Death or bankruptcy. Wrongfully dissociating p¶ners do not forfeit goodwill under RUPA. but have not provided for it in p¶ship agreement. happens under §801 when: Not waivable: (1) upon judicial decree under 801(5). (3) unlawful to continue business.  P¶ship Term may be express or implied ± but will be implied only where there is clear evidence. Court will dissolve if (1) incapacity.  RUPA §402 provides that no p¶ner has a right to receive nor can be forced to accept distribution in kind. Not entitled to payment until end of term ± unless court finds it will not harm p¶ship. but will also apply when breach of good faith involved. this means that misconduct has affected the p¶ship business ± Potter. Surplus after payment of obligations must be paid in cash to p¶ners §605. (2) application by assignee. (2) misconduct. (2) no market for assets. even if no right. Is not wrongful if withdrawal from term is w/in 90 days of another¶s dissociation by death/bankruptcy/wrongful dissociation. o Right to contribution from p¶ners for liabilities incurred on behalf of p¶ship outside wind-up: If dissolution by act: right exists unless p¶ner had actual knowledge of dissolution. Dissolution (Art 8) y Under RUPA dissolution DOES = termination of business. Also where there is a discrete and terminable objective (build and operate until can be sold). and the business continues unaffected. But. and in waivable situations if waived by agreement. (4) on application of assignee.only if: (1) breach of express provision of agreement. o Dissolution in contravention of agreement ± express will of any p¶ner. o NOTICE OF DISSOLUTION AND TERMINATION OF AUTHORITY Termination of Actual Authority y Effect of Dissolution on P¶ners Authority ± UPA §§33. (2) want to expel a p¶ner. then p¶ship is for term necessary to recoup loan ± Owen. bec. (2) for term: (a) left before term. or other conduct that adversely and materially affects p¶ship business.§32: a p¶ner should apply for dissolution IF (1) it¶s a term p¶ship and wants to preserve liquidation rights. o Dissolution w/o violating agreement ± (1) at the end of the term (date or undertaking). Must indemnify p¶ner against present and future p¶ship liability. Many trifling interferences may be sufficient if they destroy cooperation and affect business. (3) not reasonably practicable to carry on business w/p¶ner. 34: terminates all authority. Where a p¶ner loans substantial sums to p¶ship with the understanding that loan is to be repaid from profits. (3) fair to all p¶ners may distribution in kind be ordered. including willful breach of p¶ship agreement. if you give impression of on-going entity ± estoppel ± Royal Bank. there is a buyout of p¶ners interest under §701 (they are deemed to be dissociating). (3) dissolution by decree of court under §32. if there is no understanding as to present p¶ship then no term ± Page. (3) in term. . under disadvantageous circumstances) is not breach of GF. or other breach of agreement. y A p¶ner does not have the power to dissolve a term p¶ship during term ± p¶ner dissociates wrongfully and gets buyout under §602.. (4) becomes unlawful to carry on p¶ship business  Dissolution by Decree of Court . Liable for damages to p¶ship. If by death or bankruptcy: if any p¶ner had notice. p¶ship continues automatically. these situations cause dissolution ± (1) death. (3) expulsion of any p¶ner under terms of agreement.g. Just because dissolution causes harm to other p¶ners however (e.  Dissolution for misconduct results in wrongful dissolution for guilty p¶ner ± but courts generally require serious misconduct. y Wrongful Dissociation: §602 . no goodwill in valuation. (4) if all p¶ners in a term p¶ship elect to dissolve  An at-will p¶ship may be dissolved by express notice to any p¶ner but must be exercised in good faith ± good faith is satisfied when adequate compensation is paid to fellow p¶ner when purchasing interest. often applies in a term p¶ship. and a judicial decree of dissolution does not entitle other p¶ners to damages. Waivable: (1) p¶ner gives notice to withdraw in a p¶ship at will. except for wind-up and complete ongoing transactions. Either the dissolution was provided for by agreement or by §801(5) ± which cannot be altered by agreement ± or the decree was wrongful and should be reversed ± Southern Oaks. if at least ½ p¶ners agree to wind up w/in 90 days of a p¶ner¶s dissociation by death/bankruptcy/wrongful dissociation (under UPA all p¶ners must agree) o In all other situations. Under RUPA: Dissociation (Art 6) and buyout (Art 7). (b) expelled under §601(5).The default rule is that cash must be paid outside extraordinary circumstances ± Dreifurst: only where (1) no creditors to be paid from proceeds.

Dissolution ± point in time when p¶ners cease to carry on business together. (4) balance distributed equally as profit.g. but court will fashion new price if unfair y Continuation Clause ± this prevents not only liquidation. Under §704. wrongfully dissolving p¶ner (breach of GF) is only entitled to buyout so could have avoided sale to begin with.§§702. However. (2) liability of new p¶ner for debts of old p¶ship is satisfied out of p¶ship assets only. unless that p¶ner acted in bad faith by attempting to avoid paying adequate compensation for the other p¶ner¶s interest or otherwise acted fraudulently ± Prentiss.g. if no agreement then equally. but also dissolution. Unless p¶ship agreement specifically includes costs incurred on purchase in evaluation of buyout then FV ± Seattle First. 40(d) y Distribution order may be varied. The departing p¶ner argues that UPA controls and not agreement to avoid unfavorable buyout terms ± Straube. (3) capital contributions returned. so liquidation rights are waived by that provision. any p¶ner may bid at that sale even when that p¶ner wrongfully excluded another. this argument would fail because regardless of whether continuation clause succeeds. indemnity). Langhoff ± p¶ners accomplish this by. But. o Two standards for evaluating interest: (1) fair value ± total value of p¶ship as going concern X % interest. Jensen. any p¶ner has the right to wind-up so long as he is not wrongfully dissolving. p¶ship may file a statement of dissociation. y Buy-Sell Agreement ± calls for remaining p¶ner to purchase withdrawing or deceased p¶ner¶s interest and avoid liquidation. o When all p¶ners agree to continue under UPA ± (1) creditors of first p¶ship are creditors of second. Income collected by p¶ner for winding up affairs is distributed by % interest. but this doesn¶t really make a difference bec. ± 18(a). but cf. (2) fair market value ± includes discounts like minority interest and market demand. there is no doubt that buy-sell provision succeeds under UPA. (2) claims of p¶ners other than capital distribution (e. under 18(f) if dissolution is caused by death. y Under UPA §37: subject to agreement. in which case p¶ship is bound. No fiduciary exist with respect to the ³new business´ ± Langhoff Termination ± Order of Distribution of Assets upon Liquidation ± UPA 40(b): (1) creditors outside p¶ship.o Under RUPA §806 ± a p¶ner is entitled to contributions for any liabilities incurred after dissolution. Under RUPA §401(h) ± a p¶ner is entitled to compensation for winding up. unless creditors agree to change. y P¶ners owe each other fiduciary duties in the course of winding up. 703. agreeing that departing p¶ner will take certain business upon payment of a fee and that surviving firm gets the rest (Meehan). e. This is why it best under UPA to draft these provisions in the alternative. then surviving p¶ners entitled to compensation. subject to contrary agreement (default rule is that profits are shared equally in Gen p¶ship). CHAPTER 14: THE LIMITED PARTNERSHIP . o Under UPA this is not permitted under §§29. However. Business continues as if dissolution had never occurred. Lingering authority terminates after 2 years w/o filing. Ability to bind P¶ship to Ts: effective when no notice of dissolution (Apparent Authority) y Under UPA §35 ± Ts who extended credit to p¶ship prior to dissolution require individualized notice to cut off lingering apparent authority.. still must include buyout terms for withdrawing p¶ner. y If assets are insufficient to discharge obligations to creditors: losses are shared by solvent p¶ner equally or in the proportion that they share profits if they agree to share profits differently.. y No Compensation Rule ± a p¶ner owes a duty to wind-up old business and is not entitled to extra compensation for doing so. p¶ners may eliminate winding up and proceed directly to termination. Similar provisions for dissolution under RUPA §804-5 y Look for problems when p¶ship incorporates or otherwise becomes a limited liability entity ± is there sufficient notice? Some say continuous use of corporate checks is good. If insufficient to return capital. y Under RUPA Dissociated P¶ner binds P¶ship to Ts with no notice of dissociation . even if there is no prior agreement to do so. except that outside creditors may not be prejudiced w/o agreement. which operates as constructive notice 90 days after filing. ± Resnick. there are no fiduciary duties owed after termination. This is the most common way for liquidation to be avoided under both UPA and RUPA. and would otherwise be able to obtain winding up by the court. RUPA §803 same. 31. There is no question as to the validity of this type of provision under RUPA §801 (except with nonwaivable causes). 32. o P¶ners may also agree to set buyout price every year. CONTINUING THE BUSINESS All P¶ners Can Agree to Continue Business and waive Liquidation Rights ± except wrongfully dissociating p¶ner. (3) withdrawing p¶ner is still liable to creditors but is entitled to indemnity from p¶ship. y Judicial Sale ± when a sale is ordered. p¶ners still liable for unsatisfied outside debt. Ts who merely knew of firm get constructive notice through publication. again losses share shared as they have agreed to share profits. Termination ± when all p¶ship affairs are wound-up. but she pays damages to p¶ship. y Under RUPA §807 ± abolishes priority of outside debt over inside debt (p¶ners as creditors). unless she had actual knowledge. Winding Up ± the process of settling p¶ship affairs after dissolution.

Definition ± form of doing business made available by statute and created by filing a certificate for a p¶ship consisting of at least one general and one limited p¶ner. so long as makes clear that he is acting in the capacity of director of the corporation. y Duty of Disclosure ± RULPA §305 ± LPs have a right upon reasonable demand to obtain info from GPs. Has tax advantages of p¶ship form and shields L p¶ners from personal liability so long as (1) it is properly formed and (2) the L p¶ners are careful not to exercise control over the business. o Gotham ± the trend. . o A LP who secures credit in the p¶ship¶s name exerts sufficient control to be held personally liable ± Pitman (the creditor is deemed to have reasonably relied on this participation) o Outside of exercising substantially the same control as a GP. he take part in the control of the business. (4) profits are shared according to capital contributions. (5) LPs do not have agency power. he is liable only to creditors with actual knowledge of control. specifically with regard to fiduciary duties. It also recognized another approach where the GP is not liable IFF it has accurately applied a provision supplanting CLAW fid duty. Thus the provisions of UPA and RUPA apply to GPs. o RULPA §303 is pretty much the same. GP has intensified fiduciary duties ± but Courts are split on the extent to which a GP would be able to tailor their duties to allow them to take personal benefits or otherwise breach default duties: o Appletree ± while p¶ners are free to vary many aspects of their relationship. but may otherwise be actively involved in day-today affairs of p¶ship. though they may have misinterpreted the agreement. a LP is liable only to those who relied on the LP¶s control and thus regarded him as a GP o Control of the Corporate General P¶ner ± a LP does not incur liability as a GP solely by serving as officer or director of a corporate GP. y Differences from Gen P¶ship ± (1) filing required to create.. they are not free to destroy its fiduciary character. The Limited P¶ner The Control Question y Generally ± ULPA §7: a L P¶ner shall not become liable as a G P¶ner unless. personal liability (unless LLLP). ± Gateway Potato  RULPA is reluctant to hold LP liable if he had no direct contact with the creditor. DRULPA §1101(d) ± allows for expansion or restriction of duties and creates a Safe Harbor for a p¶ner who relies in good faith on the provisions of the agreement. in addition to exercising his rights and power as a L P¶ner. This does not supplant broad CLAW duty to disclose all material facts that GP should know LP does not know ± Appletree (sophistication of buyer revealed nothing because they still would not have known that building contained asbestos). especially in DE. (2) liability protection for LPs. rather than equally in Gen. Thus. (3) LPs do not have an equal right to management under default rule. thereby cutting off any reliance on his personal status as a GP in virtue of the control exercised . (6) Limited P¶ships are harder to dissolve.§303(b)(1) ± Safe Harbor provisions ± Wilf. the required GP to resign and selected his successor) o However in times of severe financial crisis LPs may take control w/o incurring liability under §7. not whether he provides advice and counsel. by providing that specific powers may be exercised at the ³sole discretion´ of the GP. but only where the terms of the provision were ambiguous. under default rules. it has been recognized with GPs). even if he participates in the management and control of the p¶ship The General P¶ner ± has the rights and powers and is subject to the liabilities and restrictions of a p¶ner in a Gen p¶ship ± RULPA §403. Therefore. o For reliance ± look to the other party¶s understanding ± sophistication? Knowledge of the entities involved? Personal guarantees by LP? Did LP make clear that he was not dealing on a personal basis or acting in his capacity as a LP? o Re-RULPA §303 ± states that a LP will not incur personal liability. where the terms of the agreement supplant CLAW duties e. agreement could not substitute narrow disclosure obligation (only upon demand) for broad CLAW one (omission is fraudulent and breach if knew material to affairs of p¶ship and should have known that p¶ners did not know) because it would encourage fraud. and managerial rights y Generally. o Definition of control: ultimate decision making responsibility. Gotham interpreted the provision to mean that such p¶ner is not liable though they may have breached the agreement (and breached CLAW fid duties) as a result of the misinterpretation. agency powers.g. an LP may be held liable to T if the GP revealed the control and the T never had any contact with the LP. o De Escamilla (two p¶ners had power to withdraw p¶ship funds from banks w/o knowledge or consent of GP. The question is whether LP has exercised at least an equal voice in making p¶ship decisions. they voted on which crops would planted and got their way sometimes against the wishes of the GP. Whether this can be varied by agreement will depend on jurisdiction ± above ± Appletree said no. is to increase flexibility to eliminate or reduce fiduciary duties (although elimination is controversial with regards to LP. Actual knowledge need not come from direct contact with the LP the reasonableness of the creditor¶s belief in control is not based on the LPs conduct it needs only to arise from some actual knowledge. o If a LP¶s control is not substantially the same as the exercise power of the GP.

no meetings held  Inadequate capitalization  Funds withdrawn for personal use/corp¶s property used as if it were owned by user ± in Howell: funds used to pay personal expenses. y Management: can be member managed (informal like a p¶ship) or manager managed (like a LP ± non-managers are passive) o This is relevant to the question of whether investment in an LLC is a ³security´ (something is a security when a person invests his money in a common enterprise with the expectation of profits solely from the efforts of others) and thus whether registration and disclosure are required. LLC will be funded by contributions of property or Ks for services ± ULLCA §401. Creditors of Members ± similar rights to creditors of LPs ± ULLCA §504 Piercing the Veil ± when a creditor asks the court to disregard the corporate or LLC entity so as to make the personal assets of its owners available to satisfy the liabilities of the entity. free transferability of interest. y After AOO are filed. even if it waives jurisdiction granted by statute and even if it classifies those claims as derivative (individual suit by shareholder to enforce a corporate cause of action against directors. and option to manage the business.ditto  Payment or guarantee of dominated corp¶s debt  Majority or even complete stock ownership by itself is not enough o (2) Such control was used to commit a wrong ± fraud.  Whether the corporations are treated as independent profit centers . limited liability. at a minimum: name. purchase gifts and give interest free loans to family members  Overlapping officers/personnel ± in Howell owned 97% and 100% of each LLC (the overlap was between her personally and the entity). Must file annual reports with state. y A forum selection clause is conclusive.CHAPTER 15: THE LIMITED LIABILITY COMPANY ± LLC Generally ± (1) Have freedom from personal liability for business debts (K or tort). the corporate entity had no separate mind. designation as LLC. centralized management) and be taxed as p¶ship by default. but before enforcement in home jurisdiction.  Howell ± started LLCs after had obtained DJ against her in a foreign jurisdiction. y Will happen when a corporate entity has been so controlled and dominated that justice requires liability to be imposed: two disjunctive test: y The Instrumentality: 3 elements o (1) Control: complete domination of finances. and policy and practice such that with respect to the transaction attacked. This is quite concerning. or sole proprietor that it had before conversion . officers. Manager managed LLCs (like LPs which are normally securities) may require compliance with securities law.ULLCA §903 (as applied to p¶ships. address of principal place of business. Factors: o Don¶t Need to Know  Absence of corporate formalities ± regular distributions not made. A T maintains all suits against the p¶ship or p¶ners of the p¶ship in their individual capacities. The Agreement ± the policy of the ULLCA is to give maximum effect to freedom of K and enforce the agreements . The LLC may sue on and enforce Ks to which the previous entity was a party and is a successor in all other interests. but lack of one is not fatal . that converts to an LLC retains by operation of law all of the rights and obligations of the previous entity. and name/address of agent for service. whether Gen or Lim. which contain.ULLCA §103 (will be governed by default provisions). but derivative actions are not non-waivable. C & J Builders as applied to sole proprietorships). She used the LLCs to pay her expenses directly instead of getting . essentially stripping the power of a claimant of his power to enforce his rights. Owners are liable for personal wrongdoing.Must file articles of organization.Elf y The LLC itself does not need to sign the agreement ± requires signature of ³member or members´ ± Elf y An operating agreement can probably contract around derivative actions. Elf o In Delaware there are certain non-waivable provisions. She was GM of both entities  Common office space (address/phones) ± both entities operated out of same space in ¶s house  The amount of business discretion by the allegedly dominated corp  Whether corporations dealt with each other at arms length ± retention of revenue generated by other corp w/o reimbursement. or else face administrative dissolution. P¶ship or sole proprietorship. Creation of an LLC . o Taxation ± Check the Box Regulations allow LLCs to have corporate characteristics (continuity of life. dishonest or unjust act. Reverse piercing is when the creditor asks that the corporate assets be made available to satisfy the personal debts of the owner (even though ownership of entity property is vested in the entity itself ). or Ts. violation of statutory duty. y Conversion into an LLC ± an entity. organizers enter into Operating Agreement. these are allowed against management of LLC provided that managers will probably not bring it) or direct± Elf. p¶ship taxation.

or by a majority of the managers if there is more than one. intentional misconduct or violation of law  Duty of good faith ± duties under statute or agreement must be performed in good faith. Equilon (holding that contribution of gas stations to LLC was a ³transfer´ bec. etc.§409 distinguishes between member and manager managed: o Member Managed: The only fiduciary duties owed by members are (1) loyalty ± limited to (a) account for benefit received in the course of business. title. including appropriation of an opportunity. y Fiduciary Duties . ratification of acts that would violate duty of loyalty. o In a manager managed LLC ± each manager has an equal right to management. but Identity might not Entity Theory and the LLC ± an LLC is a ³person´ for purposes of sale. so they kept their plans from him. Factors: stock or interest ownership. Unless. It is effective even against BFP¶s giving value without knowledge of lack of authority. Identity Rule ± T must show that there was such a unity of ownership and interest that the independence of the corp ceased or had never begun. (b) acting as or on behalf of a party having an adverse interest.). possession. In so doing they violated their duty of loyalty to him and also failed to exercise their rights in good faith (equity looks to intent rather than form)  A member may lend money/transact business with LLC ± is treated as nonmember for purposes of said transaction.g.) o It is difficult to square Premier and Equilon. o Manager Managed ± a member is NOT an agent in this case. it is not a ³sale´ under a brokerage agreement. In a member managed LLC each member has equal rights in the management of business and majority vote is required for any matter relating to business except some crucial matter in (c) (admission of a new member. it must be authorized under §404.y y salary or distribution. thereby depriving of any means of collecting judgment against her (by getting a charging order). was prevented from getting satisfaction of judgment. IF not in the ordinary course of particular company¶s business or businesses of that kind. A manger is an agent as above. transfer. but as in the other entities. o But. If act was not in ordinary course. and control were relinquished) o But if the owner of property transfers title and retains some ownership/risk characteristics.  Raghipour ± a manger has apparent authority to execute a mortgage on the property even though the OA expressly forbids it. o (3) The aforesaid control and breach of duty was the proximate cause of injury ± because she transferred her personal assets (liquidated life insurance policy) to the LLC. apparent authority terminates for a dissociated member 90 days after statement of dissociation is filed. unless it would violate fid duty and then ratification by all members required. Court held that it was not a sale and the broker did not receive a commission. 1 person with 60% outvotes 2 with 20% apiece) y Authority and Apparent Authority of Members ± depends on whether the LLC is member or manager managed ± ULLCA §301: o Member Managed: (a) each member is an agent for the LLC and act of a member for apparently carrying on in the ordinary course binds the company. they knew that disclosure of plans to majority manager would have foiled them. a limitation on authority of anyone to affect the LLC¶s interest in RP is effective if reflected in the Articles of Organization when filed. (c) refrain from competition with business before dissolution AND (2) care ± gross negligence. winding up. o Instrument Transferring or Affecting LLC¶s Interest in RP: signed and delivered by any member of a member managed LLC or any manager of a manager managed LLC is conclusive in favor of a BFP for value who gave w/o knowledge of lack of authority. and observance of fiction of separate existence would sanction a fraud or promote injustice. o Members may base voting rights on capital contributions rather than the default per capita rule (e. or 2 years after dissociation if no filing both are effective even against persons w/o knowledge of dissociation. . which provides that manager has sole discretion. then binds only if authorized. Note that Instrumentality required a fraudulent conveyance. and maybe loyalty or care. dissolution. Premier Van Schaack (Owner transferred property into development LLC and retained some interest and remained liable on the debt. the wrongful member or manager will be liable for breach of K/duty to obey. y Members of an LLC have no interest in specific LLC property. using control of company to manage assets as if it were the dominator¶s own. Operation of an LLC y Management ± ULLCA §404: Unless otherwise provided.. o Restrictions on the authority in the OA do not affect apparent authority. and all matters may be decided exclusively by the manager. o Also. or assignment. in contravention of maj¶s right to notice inferred from structure and purpose of agreement. had no authority and T knew it.  VGS ± although technically members vote was proper. once members contribute assets to an LLC those members lose any interest they had in the assets and therefore any individual control over them that they formerly had ± ULLCA §501(a). not fiduciary duty.

o Terminates on Dissociation ± but member may not use confidential info obtained adversely to LLC. Also must exercise care in completing on going transaction and account for profits from old. Manager has all duties.  A member in a manager managed LLC may have duties imposed if he exercises some or all the rights of a manager pursuant to the agreement. even in a member managed LLC because the duties imposed are those created by agreement among members ± McConnell (provision allowing competition applied to case where member took advantage of opportunity declined by LLC. all duties are imposed with respect to said exercise of authority. as in Salmon) Many agreements say that reliance on advice of counsel is conclusive evidence of good faith: this will save manager/member only if advice was sought for purpose of benefiting LLC ± Flippo o .e. i. if agreement allows a member to exercise managerial powers. o Agreement may not waive or eliminate any of the duties ± but may identify activities and determine standards for measuring performance of them if not manifestly unreasonable ± ULLCA §103(b).Manager Managed: NO duties owed by member to company or other members in this case..  An agreement that allows members to compete with the LLC will be upheld and a member will not be liable if he competes. might be manifestly unreasonable if provision was interpreted to allow direct/secret competition.