Business Organizations I Outline:

I. Sole Proprietorships
a. Is there a law of Business Organizations?
i. Setting up a business is similar to buying a suit. The attorney must determine what is the
closet fit for the client’s needs. Business Organizations are fundamentally about
contracts. There are default rules that you must contract around or else they govern.
b. Characteristics of a Sole Proprietorship
i. Sole Proprietorship is a business owned by one single individual. No statutory formalities
are required to create one. The sole proprietor has two identities: himself and the
business. It is often called a business organization because although there is only one
owner, the sole proprietor may employ many employees.
ii. Creation: No formalities, you create a sole proprietorship by starting your operations.
iii. Governing Law: Tort and Contract Law. No statutory authority.
iv. Ownership & Control: The sole proprietor is the only own and controls the entire
business. He many employ others thought.
v. Share of Profits: The sole proprietor/owner has the right to all the profits.
vi. Risk of Loss: The sole proprietor/owner is liable for all the losses incurred by the
business. The owner is personally liable for all loss.
1. Example: Personal Injury, or Contract Liability.
vii. Taxation: The sole proprietor/owner must report all business income or losses on his
personal income tax statement. The sole proprietorship does not have a separate financial
identity.
viii. Duration: The sole proprietorship operates until the owner dies, ends the business, or
changes the type of business.
ix. Transferability: The sole proprietorship is freely transferable.
c. Sole Proprietorships and the Law of Agency
i. Law of Agency – this governs the rights, liabilities and duties of people who deal on
behalf of others. There are legal consequences for the principle based on the agent’s
actions. If a sole proprietor employs another person, than this person is his agent, which
may make the sole proprietor liable for the agent.
ii.
II. Fundamental Principles of Agency
a. Creation of Agency: Who is an agent?
i. Restatement (Third) § 1.01 states that an agency is the fiduciary relationship that arises
when one person (principle) manifests assent to another person (agent) that the agent
shall act on the principle’s behalf and subject to the principle’s control, and the agent
manifests assent or otherwise consents so to act.
1. Gorton v. Doty:
a. Facts: The Defendant, teacher, allowed Coach Garst to use her car to
drive students to a football game conditional on the fact that Coach Garst
drive the car. Coach Garst crashed and a student and his parents are suing
the Defendant claiming that the Coach was her agent.
b. Holding: The Court holds that Garst was acting on behalf of the
Defendant and under her control.
c. Reasoning: The Court states that the requirement that Garst drive and
Garst accepting this condition and driving demonstrates that he was under
the Defendant’s control. Thus, the Defendant is liable for Garst’s actions
since Garst was found to be the Defendant’s agent.
d. Policy: The Court is most likely finding this way to encourage people to
obtain auto insurance.
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 2. How can the Defendant avoid liability?
a. Indemnity Clause.
b. Stating, “you are not my agent” does not work because Restatement
(Third) § 1.02 states that an agency relationship arises only when the
elements in § 1.01 are present. The language of the parties regarding their
agency relationship is not controlling, which means the Court must look to
the conduct of the parties.
ii. Restatement (Second) § 1 states that agency is the relationship which results from the
manifestation of consent by one person (principle) to another (agent) that the other
(agent) shall act on his behalf and subject to his (principle) control, and consent by the
other (agent) so to act.
1. Jenson Farms v. Cargill
a. Facts: Jensen’s sold grain to Warren who processes the grain. Cargill
gives Warren financing and Warren also supplies grain to Cargill so there
is a supplier/buyer relationship as well. Cargill has all types of control
over Warren’s business. Cargill exercises this control to secure their
investment. Warren owes the Plaintiffs money.
b. Holding: The Court holds that the relationship between Warren and
Cargill go further than debtor/creditor and supplier/buyer. Thus, Warren is
Cargill’s agent and Cargill is liable for the money Warren owes Jensen’s
and etc.
c. Reasoning: Agency is a relationship that results from the manifestation of
consent by one person to another that the other shall act on his behalf and
subject to his control, and consent by the other so to act. No contract
needed for agency. Look to the conduct of the parties.
d. Policy: Court holds that the banks will not stop lending if Cargill is found
to be Warren’s principle because this is not an average lender/borrower
relationship, but substantial control by the lender.
b. Liability of Principle to 3rd Parties in Contract
i. Authority: the principle only liable if the agent is acting within the scope of their
authority.
1. Actual Authority – Restatement (Third) § 2.01 when the agent reasonably
believes that he is acting within what the principle wants them to do.
a. Express – the principle expressly tells and authorizes the agent to do
certain conduct.
i. Example: Seller says to his real estate agent, “I want you to sell my
house.” So the agent has the authority to find buyers.
b. Implied – a situation where the principle does not say anything, but part
of what the agent has been hired to do requires the agent to do X or in the
past the agent has done X.
i. Characteristics: Implied, Incidental, Customary, Pattern, Course of
Conduct.
ii. Example: Seller says to his real estate agent, “I want you to sell my
house.” So, the agent has the authority to put up a sign on the home
and take out a classified ad. This is implied. You cannot sell the
house with these actions and normally agents do such things as
these.
2. Apparent Authority – focus is on what a third party reasonably believes about
agent’s authority. Restatement (Third) § 2.03. This is the power held by an agent
to affect the principles relations with a 3rd party when the 3rd party reasonably
believes that the agent has the authority to act on behalf of the principle and this is
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 based on manifestations traceable to the principle. Indirect manifestations are
sufficient for apparent authority
a. Example: Seller tells his real estate agent that he can sell house, but not
the fixtures. The Agent makes a contract with a Buyer including the
fixtures. Does the Agent have the apparent authority to sell the fixtures to
the Buyer? This depends on what the Buyer, as the third party, reasonably
believes the Agent’s authority to be with manifestations traceable to the
Seller.
3. Inherent Authority – the power of an agent to bind the principle is derived solely
from the existence of an agency relationship. Restatement (Second) of Agency
§8A.
a. This is NOT in the Restatement (Third) of Agency and is dealt with under
Apparent authority and Estoppel. Catchall concept removed from R.3d Ag
ii. Mill Street Church v. Hogan
1. Facts: Hogan was hired to paint the building. In the past, Hogan hired Sam, his
brother, to help out with the painting. Hogan hired Sam this time and Sam was
injured on the job. Mill Street Church paid Sam for the ½ he worked. In order for
Sam to receive Worker’s Compensation Benefits, Sam had to be an employee.
2. Whether Hogan has express actual authority to hire Sam? No, because Hogan was
never told to hire Sam. Hogan was told he could hire someone else and was given
a name of Petty who would probably be hard to reach. NO EXPRESS ACTUAL
AUTHORITY.
3. Whether Hogan has the implied actual authority to hire Sam? Yes, Hogan did so
in the past. Church implied he could hire someone. Sam was paid for his work the
day of the accident. It is reasonable for Hogan to believe that he could hire Sam.
YES IMPLIED ACTUAL AUTHORITY.
4. Whether Hogan has the apparent authority to hire Sam, from Sam’s perspective?
Yes, Hogan previously hired Sam; therefore, Sam is reasonable in believing that
Hogan could hire him. Sam was paid each time he was hired by Hogan. YES
APPARENT AUTHORITY.
5. Holding: Since there was implied actual authority and apparent authority, Hogan
had the authority to hire Sam and Mill Street Church on the hook for this action.
Therefore, Sam will receive Worker’s Compensation benefits because he was a
valid employee.
iii. Dweck v. Nasser
1. Facts: Dweck and Nasser are both owners of a corporation. Nasser fires Dweck
(for operating a competing business out of the office) and hires his own nephew to
replace Dweck. Dweck alleges that this is a breach of fiduciary duty. Dweck’s
attorney is Wachtel and Nasser’s attorneys are Heyman and Shiboleth. Wachtel
knows that Shiboleth has represented Nasser so starts to discuss settlement with
Shiboleth. Everyone thinks a deal has been reach where Shiboleth tells Wachtel
that the deal is done. Nasser gets the papers and refuses to sign.
2. Issue: Whether Shiboleth had the authority to enter into an agreement with
Dweck as an agent of Nasser. Shiboleth is clearly an agent of Nasser, but the issue
is whether he has the authority to settle the case on Nasser’s behalf.
3. Express Actual Authority? The Court states that there is express actual authority.
There was a previous relationship and Nasser expressly said, “do what you want
and you can talk in my name in the settlement”. YES EXPRESS ACTUAL
AUTHORITY.

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 4. Implied Actual Authority? The Court states that there is implied actual authority
based on their previous relationship where Shiboleth has settled many cases. YES
IMPLIED ACTUAL AUTHORITY.
5. Apparent Authority? The Court states that there is apparent authority because
Nasser held up Shiboleth to have the power to settle. Nasser told others that
Shiboleth would sign the agreement and that Nasser would not review the final
agreement. Dweck and Wachtel reasonably believed that Shiboleth had apparent
authority because the letter from Shiboleth to Nasser stating that Nasser told the
above facts to Dweck’s husband, her brothers and to Heyman. Indirect
manifestations are sufficient for apparent authority (talking to Dweck’s husband
as opposed to Dweck directly). YES APPARENT AUTHORITY.
iv. 370 Leasing Corporation v. Ampex Corporation
1. Facts: 370(Joyce) sues Ampex for breach of contract. Kays a salesman sends a
contract to Joyce (the Plaintiff) to sign. Kays is a salesman and the company told
Kays that he cannot enter into contracts on behalf of the company. After Joyce
signed the document, Kays sent a return letter to Joyce to confirm the delivery
dates. In the memorandum written by another employee (Mueller) Kays was
identified as the point person in dealing with Joyce. The company policy is that a
contracts manager or supervisor must sign off on all contracts.
2. Holding: The contract is enforceable because Kays had apparent authority to bind
the company (Ampex).
3. Reasoning:
a. There was no express authority because Kays was told explicitly that he
could not bind the company.
b. There cannot be implied actual authority since the company policy said
that salesman could not bind the company.
c. However, there was apparent authority because Joyce, as a third party,
could reasonably assume that a salesman had the ability to bind the
corporation to the sale since Kays was the point person for dealing with
Joyce. Ampex never told Joyce that Kays could not bind the company.
v. Restatement (Third) of Agency § 1.04: Principles
1. Disclosed Principle – the 3rd party has notice that the agent is acting for a
principle and has notice of the identity of the principle.
2. Undisclosed Principle – the 3rd party has no notice that an agent is acting for a
principle.
3. Unidentified Principle – when the agent and 3rd party interact, the third party has
notice that the agent is acting for a principle, but does not have notice of who the
principle is.
vi. Watteau v. Fenwick (Inherent Authority)
1. Facts: Humble sold his beerhouse to Fenwick, but Humble was kept on as a
manager. Humble was only authorized to buy bottle ale and mineral water.
Humble purchased cigars and Bovril. The Plaintiff (creditor) did not know that
Fenwick owned the beerhouse.
2. Holding: Fenwick is liable for Humble’s purchases.
3. Reasoning: There cannot be apparent authority because the creditor does not
know that Humble is an agent of Fenwick, the principle. Fenwick is an
undisclosed principle. Since there is an agency relationship, the principle will be
liable for all acts the agent does within the scope of the agency relationship
a. Restatement (Second) of Agency § 194: Liability via Unauthorized Acts
i. A general agent for an undisclosed principle authorized to conduct
transactions subjects his principle to liability for acts done on his
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 account, if usual and necessary in such transactions, although
forbidden by the principle to do them.
vii. Estoppel – alternative argument when there is no agency or authority.
1. Restatement (Third) of Agency § 2.05: Estoppel This will apply when someone
acting purportedly as an agent, there is a 3rd party who justifiably makes a
detrimental change if the principle has intentionally or carelessly cause the belief
or noticed the belief and did not take steps to correct it. (1) The person
intentionally or carelessly caused such a belief; or (2) having notice of such belief
that it might induce others to change their positions, the person did not take
reasonable steps to notify them of the facts.
2. Hoddeson v. Koos
a. Facts: Ms. Hoddeson (the Plaintiff) seeks to be compensated for the loss
by an imposter salesman in Koos furniture store.
b. Holding: Koos is liable for the imposter.
c. Reasoning:
i. There cannot be an agency relationship because there was no asset
by the principle to have the agent act on the principle’s behalf
subject to the principle’s control. Restatement (Third) of Agency §
1.01.
ii. Normally if there is no agency relationship, then the Court will not
get to authority, but the Court does anyway.
iii. Since this is an imposter we can never have actual express or
implied authority. The Court finds no apparent authority because
there are no manifestations by the principle only by the agent.
iv. The Court holds that the Plaintiff relied to her detriment that the
imposter was an agent of Koos and the Plaintiff was reasonable in
her reliance; therefore, Koos is estopped from denying an agency
relationship. It is because the principle, Koos, was careless that the
Plaintiff was fooled; therefore, they are liable.
1. Koos has a duty to protect customers from imposters.
d. Policy: Department store is in a better position to bear the risk of the loss
and in a better position to prevent it.
3. Compare Estoppel to the Undisclosed Principle in Restatement (Third) § 2.06.
This demonstrates that an undisclosed principle is also subject to liability for
agents actions.
viii. Ratification
1. Restatement (Second) of Agency § 82: Ratification - Ratification is the
affirmance by a person of a proper act which did not bind him but which was
done or professedly done on his account, whereby the act, as the some or all
persons is given effect as if originally authorized by him.

2. Botticello v. Stefanovicz
a. Facts: Walter and Mary Stefanovicz offer to sell their farm to Botticello.
Walter negiotiated with Botticello with a lease with an option to purchase.
Botticello makes improvements and attempts to exercise his option to
purchase. Botticello claims that Walter was Mary’s agent, so Walter can
bind Mary as well. Botticello claims that Mary ratified the contract by
accepting the payments.
b. Holding: The Court holds that Walter was not Mary’s agent and Mary did
not ratify; therefore, the contract is not enforceable against Mary.
c. Reasoning:
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 i. The Court said that Walter was not Mary’s agent because Mary
never assented. Just because you are husband and wife does not
mean that you have an agency relationship.
ii. In order to ratify there must be an intent to ratify and the person
making the ratification must know all material circumstances.
rd
c. Liabilities of Agent to 3 Parties
i. A disclosed principle will be liable for the agent’s contracts with 3rd parties.
ii. An undisclosed principle and partially disclosed principle allows for the agent to be liable
for contracts with 3rd parties.
iii. Atlantic Salmon v. Curran
1. Facts: Curran bought salmon from Atlantic. Curran signed everything as an agent
of Boston Seafood Exchange Inc. Curran argues that he is not personally liable
and that Marketing Design is liable. Atlantic never knew of Market design.
2. Holding: The Court holds that Curran is liable personally because the principle
was a partially disclosed principle.
3. Reasoning:
a. Marketing Design is a Partially disclosed principle because Atlantic knew
there was a principle, but just did not know who.
b. When you have a partially disclosed or undisclosed principle, the agent is
liable on the contract.
c. The agent has the duty to inform the 3rd party who he is acting on behalf of
because it is easier and reduces business costs.
d. Agent is in the best position to reveal who they are acting for.
d. Liability of Principle to 3rd Parties in Tort
i. Restatement (Third) of Agency § 2.04: Respondeat Superior – An employer is subject to
liability for torts committed by employees while acting within the scope of their
employment.
1. Questions to Ask:
a. Is this person an employee or independent contractor?
b. If so, is this employee acting within the scope of their employment?
2. Employee is a person who is controlled and subject to the employer’s right to
control with respect to physical conduct in the performance of the undertaking.
Restatement (Second) of Agency §2(2).
3. Independent Contractor is a person who is not controlled nor subject to the
employer’s right to control with respect to the physical conduct in the
performance of the undertaking. Restatement (Second) of Agency § 2(3).
4. Restatement (Second) of Agency: Factors to determine if a person is an employee
or independent contractor.
a. Attorneys are usually independent contractors for clients, while paralegals
are employees for an attorney.
ii. Humble v. Martin
1. Facts: Mrs. Love parks her car on Humbles lot. Due to gravity, car rolls off the
lot striking Mr. Martin and his daughters. Schneider and Manis worked the
station. Agreement between Humble, Schneider and Manis is that there is no
employer-employee relationship. Schneider’s rent is based on his sales.
a. Facts Support Employer-Employee Relationship: Humble controlled
hours of operation, Schneider terminable at will of Humble, Schneider had
to listen to Humble, Humble paid 3/4ths of the operational costs, Humble
furnished all equipment, advertising, and products.
2. Holding: The Court holds that Schneider and Manis are employees of Humble
and were acting in the scope of their employment; therefore, Humble is liable.
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 3. Reasoning:
iii. Hoover v. Sun Oil
1. Facts: Sun Oil owned a service station. Barone operated the station and John
filled the Plaintiff’s car with gas negligently when the fire occurred. Peterson
from Sun Oil inspected the facilities weekly, but Barone was not obligated to
follow their recommendations. Barone made no written reports to Sun Oil and
assumed the risk of lost profit himself, determined his own hours of operation,
pay scale, working conditions, and Barone was posted as the proprietor. Barone
pays a fixed rent plus a percentage.
2. Holding: Barone was an independent contractor; therefore, Sun Oil is not liable.
3. Reasoning:
a. Barone’s control of the service station made it insufficient to warrant an
employee-employer relationship.
iv. How do we reconcile Humble and Hoover?
1. Since Barone bears more of a financial risk than Schenider it makes sense to find
Barone to be an independent contractor and Schneider to be an employee. The
person who bears the financial risk is in a better position and has the incentive to
avoid these types of accidents.
v. Ira S. Bushey & Sons Inc. v. U.S.
1. Facts: Lane, who works for the government, turned a wheel, while drunk, causing
damage to the Plaintiff’s dry dock and the U.S. Coast Guard ship. Government
claims that they are not liable because Lane was acting outside the scope of his
employment.
2. Holding: The Court holds the government liable for Lane’s actions.
3. District Court’s Reasoning: The employer is in a better position to bear the risk
of damages and the employer can change its hiring practices to prevent further
incidents such as these.
4. Circuit Court’s Reasoning: There is a foreseeable risk that seamen having
access to the ship, as required by the Government, would cause damage to the dry
dock. It is not sufficient to say that the Government is in a better position to bear
the risk, more is needed.
a. Court does not use the Motive Test: Whether the employee was acting
with a purpose to serve the employer as opposed to a personal motive? Is
this a frolic or detour?
vi. Manning v. Grimsley
1. Facts: Spectators were heckling Grimsley, who worked for the Orioles. After
some heckling, Grimsley threw the ball into the bleachers and hit the Plaintiff.
2. Holding: The jury could find that the Orioles were liable.
3. Reasoning:
a. The Court uses the Motive Test to see if when Grimsley threw the ball,
could a jury believe that the hecklers were preventing him from doing his
job. If so, then eliminating the hecklers serves the employer.
vii. Apparent Agency:
1. Miller v. McDonalds
a. Facts: 3K Restaurants owns McDonalds. Miler is suing because there was
a sapphire stone in a Big Mac. McDonalds argues that 3k is not an agent
or employee, but independent contractor because McDonalds did not have
sufficient control. There was lots of control – for example McDonalds
controlled food handling and preparation, and set standards.
b. Holding: A jury could find that 3K was McDonald’s agent and employee.

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 i. Alternative Argument: The Plaintiff argues that even if 3F was not
an actual agent of McDonald’s, 3K had an apparent agency
relationship based on the idea of apparent authority.
ii. Restatement § 267 – Apparent Agency: One who represents that
another is his servant or other agent and causes a 3rd party
justifiably to rely on the care of skill of such apparent agent is
subject to liability to the 3rd person for harm caused by the lack of
care or skill of the one appearing to be servant or other agent as if
he were such.
1. Thus, even though 3K is not an actual agent of McDonalds,
it could still reasonably appear that 3K was an agent and
there was a holding out of 3K as an agent.
2. We DO NOT ask about apparent authority because no one
would give authority to place a stone in a Big Mac.
a. For Torts: Apparent Agency
b. For Contract: Apparent Authority
iii. For Agency you just need the right to exercise control, the
principle does not actually have to exercise control.
e. Agent as Fiduciary: (1) duty of care and (2) duty of loyalty.
i. General Automotive Manufacturing Co. v. Singer
1. Facts: Singer is an employee/agent of Automotive. Singer was the general
manager who would procure orders, solicit orders for purchase of parts that
Automotive manufactured. Singer’s reputation in the industry helped the
company. On the side Singer would broker out parts that Automotive could not
handle and take commission for doing so. Employment agreement requires Singer
to spend all working hours on Automotive (this is technically a breach of contract,
but Automotive sues under breach of fiduciary duties).
2. Holding: Singer violated his fiduciary duty to Automotive.
3. Reasoning:
a. Singer kept these dealings a secret, but should have disclosed them
because Automotive might have wanted to expand to accommodate these
new opportunities.
b. Rule: Agent must first disclose the opportunity and then gain the
principle’s consent in order to take the opportunity for himself. An agent
breaches a duty of loyalty to act against the principle’s wishes. Agents
cannot place their own interests at odds with the employer.
c. Automotive gets more damages under a breach of fiduciary duty suit, than
a breach of contract suit. Automotive can get the profits that Singer
received.
i. This is a windfall for Automotive because they are receiving
damages for something they never had the capacity to do.
ii. The purpose of damages is to deter the agent’s behavior. If the
agent knows that the profits will be given to their employer if they
are caught, then this will deter.
ii. Town & Country v. Newbery
1. Facts: T&C is a home cleaning business and it is unique because T&C tailors the
cleaning needs to the clients and uses mass production methods. Newbery worked
for T&C, but started his own cleaning business when he left. Newbery steal
T&C’s clients. T&C’s lists were trade secret, but the techniques of cleaning were
not trade secrets. Customer lists were not readily available.
2. Holding: Newbery is liable because they breached their fiduciary duty.
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 3. Reasoning:
a. Most duties terminate at the end of the agency relationship. A fiduciary
duty exists separate from the contract; therefore, the duties do not have to
be mentioned in the contract.
b. Newbery cannot contact T&C’s customers because the list was not readily
available, the only way Newbery knew about the members on the list was
by working at T&C.
III. General Partnerships
a. General Partnership Defined:
i. Creation: It is defined as the carrying on of business by co-owners for profit of two or
more persons. No statutory formality. It is created by agreement or just by conduct.
ii. Governing Law: Contract/Agency Law, Uniform Partnership Act, Revised Uniform
Partnership Act (not enacted in N.Y.).
iii. Ownership and Control: Partners co-own and share control. Decentralized control
because each partner has equal say.
iv. Profits: Partners have the rights to share the profits equally.
v. Liability: The partners are jointly and severally liability for the torts and breaches
committed by the partnership. Thus, the partner’s home, car, and bank account can be
restrained. There is a risk of unlimited partnership liability.
vi. Taxes: Partnerships do not pay taxes on the money. Each partner pays taxes on their
personal income tax.
vii. Duration: This ends when a partner dies, leaves the partnership, or transfers his or her
interest. Bankruptcy and insanity end the partnership.
viii. Transferability: Need to have an agreement between all partners. Not very transferable.
ix. How to Sue: You sue the partnership and all the partners. Some tension regarding
whether a partnership is a separate legal entity from the partners.
b. Creation of Partnership:
i. Partnership Law § 10: Partnership defined: A partnership is an association of two or
more persons to carry on as co-owners a business for profit and includes for all
purposes of the laws of this state, a registered limited liability partnership.
1. This is not limited to persons. There could be a partnership between corporations.
ii. Partnership Law § 11(4): The receipt by a person of a share of the profits of a business is
prima facie evidence that he is a partner in the business, but no such inference shall be
drawn if such profits were received in payment: (a) As a debt by installments or
otherwise, or (b) As wages of an employee or rent to a landlord.
1. Creditor-Debtor relationship can seem like a partnership.
i. Fenwick v. Unemployment Compensation Commission
1. Facts: Fenwick wanted to give his employee Chesire a raise, but worried that he
could not afford to. Fenwick agreed to give Chesire a percentage of the profits
based on the profits for the year and the agreement stated that they were partners.
Chesire did the same duties and did not gain control. Chesire made no capital
investment.
2. Issue: We need to determine if Chesire was an employee or a partner, because if
Chesire was an employee then Fenwick should have paid more towards
unemployment funds.
3. Holding: Chesire is not a partner because the purpose of the agreement was to
provide Chesire with new wages.
4. Reasoning:
a. Court cannot just rely on the agreement; the Court must look to the
conduct of the parties to see if there is a partnership.

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 b. In this case, the conduct indicated that the cut of profits was just
compensation for Chesire and that she was not truly a partner because she
had no control and no risk of loss.
iii. NY Partnership Law § 11(d) indicates payment of profits will not be prima facie case of
a partnership relationship when the payment is “as interest on a loan, though the amount
of payment vary with the profits of the business”
iv. Martin v. Peyton
1. Facts: KNK received a loan from PPF for $2.5 million (securities loan). KNK
was going to use the loan as collateral to obtain bank loans. PPF was entitled to
40% of KNK’s profits (min: $100,000, max $500,000). To secure their loan,
because KNK is a bad risk, PPR requires conditions on the loan where they keep
some control (beneficiaries on life insurance policy, inspect books, veto risky
business transaction, assignment rights, PPF securities cannot be co-mingled with
KNK’s assets).The Plaintiff is a creditor who is arguing that there is a partnership
so he can go after the assets of PPF to satisfy KNK’s debt (KNK is broke).
2. Holding: The Court held that KNK and PPF were not partners.
3. Reasoning: Although payment of profits is prima facie evidence of a partnership
relations, the measures of control were ordinary precautions for a risky loan and
not sufficient to warrant a partnership relationship.
a. The control by PPF is passive control and not active day to day control,
which would illustrate a business relationship.
c. Partnership by Estoppel – there must be a holding out or representation that the
person/corporation is a partner and there must be detrimental reliance by the 3rd party and the 3rd
party extended credit.
i. NY Partnership Law § 27(1): Partner by estoppel. When a person, by words spoken
or written or by conduct, represents himself, or consents to another representing him to
any one, as a partner in an existing partnership or with one or more persons not actual
partners, he is liable to any such person to whom such representation has been made,
who has, on the faith of such representation, given credit to the actual or apparent
partnership, and if he has made such representation or consented to its being made in a
public manner he is liable to such person, whether the representation has or has not
been made or communicated to such person so giving credit by or with the knowledge of
the apparent partner making the representation or consenting to its being made.
1. When a partnership liability results, he is liable as though he were an actual
member of the partnership.
2. When no partnership liability results, he is liable jointly with the other persons, if
any, so consenting to the contract or representation as to incur liability, otherwise
separately.
ii. Young v. Jones
1. Facts: The Plaintiffs deposit $550,000 in a South Carolina bank, which the
Defendant sends to a Bahamian partnership bank. The Plaintiff is going after the
U.S. bank because it has deep pockets.
a. Plaintiff can argue that there is an actual partnership or a partnership by
estoppel.
2. Holding: The U.S. firm and Bahamian firm are not partners by estoppel because
the Plaintiff did not rely on the representations that they were partners when she
decided to invest.
3. Reasoning:
a. The Court states that there is not an actual partnership between the U.S.
bank and the Bahamian Bank.

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 b. The Court refuses to allow partnership by estoppel because there was no
reliance by the Plaintiff even though there was a holding out that the U.S.
bank and Bahamian bank were partners.
d. Partners as Fiduciaries
i. NY Partnership Law § 43(1) - Partner accountable as a fiduciary: Every partner must
account to the partnership for any benefit, and hold as trustee for it any profits derived
by him without the consent of the other partners from any transaction connected with the
formation, conduct, or liquidation of the partnership or from any use by him of its
property.
ii. Meinhard v. Salmon
1. Facts: Meinhard and Salmon are partners and leasing property from Gerry. When
there is 4 months left on a 20 year lease, Gerry asks Salmon about another venture
that included a continuation of leasing the building they were in and adding
another building on next door. Salmon took it for himself and did not tell
Meinhard.
2. Holding: The Court held that Salmon breached his duty of loyalty to Meinhard.
3. Reasoning:
a. Fiduciary Duties are that of finest loyalty, which are stricter than the
morals of the marketplace, not honesty alone, but a punctillo of an honor
the most sensitive. All thoughts of self should be renounced.
b. Salmon had a duty to disclose the venture to Meinhard especially because
the opportunity was presented due to the partnership. (Partnership
Opportunity).
i. No breach of loyalty if it was no a partnership opportunity.
ii. It does not matter if Meinhard could have followed through with
the opportunity (similar to Singer), it just matters that it should
have been presented to Meinhard in fairness.
c. Salmon should have had both their interests in mind.
d. Cardozo only gives a standard and not a brightline rule because wants
partners to err on the side of caution.
iii. NY Partnership Law § 42: Duty of partners to render information. Partners shall
render on demand true and full information of all things affecting the partnership to
any partner or the legal representative of any deceased partner or partner under legal
disability.
iv. Meehan v. Shaughnessy
1. Facts: Meehan and others started planning a new business partnership while still
working with the Defendant partners. Meehan and others lied that they were not
leaving, obtained client’s consent to move with them in secret, and recruited
others to join their new partnership. Meehan and etc could have taken the clients
if they disclosed to partnership and paid a fee pursuant to the partnership
agreement.
2. Holding: The Court holds that the Plaintiff’s breached their fiduciary duties when
obtaining clients consent in secret, secrecy concerning which clients they would
take, method of communications with clients, and took an unfair advantage over
the Defendant partners.
3. Reasoning:
a. Partners can plan a new business venture, but cannot compete, while a
member of the old partnership.
b. In this case, planning to compete was not a breach of the fiduciary duty,
but the secrecy was. Meehan and etc had an obligation to disclose they
were leaving when asked.
11
 c. Partnership duty of care and loyalty is derived from their agency
relationship.
v. Duty of Care – this is not in the UPA, so it is a matter of common law in New York.
Most courts says that gross negligence is needed to breach the duty of care.
e. Partnership Management
i. New York Partnership Law § 40(5), (8): Rules determining rights and duties of
partners. The rights and duties of the partners in relation to the partnership shall be
determined, subject to any agreement between them, by the following rules:
1. (5) All partners have equal rights in the management and conduct of the
partnership business.
2. (8) Any difference arising as to ordinary matters connected with the partnership
business may be decided by a majority of the partners; but no act in contravention
of any agreement between the partners may be done rightfully without the consent
of all the partners. These are default rules; you can contract around it.
ii. You need a majority vote when there is a disagreement in the partnership.
iii. Anything that goes against the partnership agreement or outside the ordinary business of
the partnership’s business, then the consent of all partners is needed.
iv. When you have an even number of partners (2 partners), then you can have a dead lock.
v. New York Partnership Law § 20: Every partner is an agent of the partnership for the
purpose of it business, and the act of every partner, including the execution in the
partnership name of any instrument, for apparently carrying on in the usual way the
business of the partnership of which he is a member binds the partnership, unless the
partner so acting has in fact no authority to act for the partnership in the particular
matter, and the person with whom he is dealing has knowledge of the fact that he has no
such authority.
vi. National Biscuit Company v. Stroud
1. Facts: Stroud tells Freeman that he does not want to be responsible for any orders
of bread from Nabisco. Nabisco sues to be paid for bread supplied via Freeman’s
order.
2. Holding: The partnership is liable for the bread purchased by Freeman from
Nabisco.
3. Reasoning: The partner attempting to change the status quo bears the burden of
obtaining a majority or else the status quo remains.
a. Stroud cannot restrict Freeman because Stroud could never be a majority
of the partnership. So, Freeman has actual authority to buy the bread
because Stroud cannot take away actual authority without a majority of the
partners.
i. If there was another partner who agreed with Stroud, then there
would be a majority and Freeman would not have any actual
authority.
b. To determine if Freeman had apparent authority, which does not really
matter because he has actual authority, we look to NY Partnership Law §
20. NY Partnership Law § 20 requires that the partner act in the usual way
of his partnership, but if the partner has no authority and the 3rd party
knows that there is no authority, then there cannot be apparent authority.
vii. Summers v. Dooley
1. Facts: Both parties operated a trash collection business. Dooley became sick and
hired a supplemental employee, when Dooley returned to work, Summer asked to
hire a 3rd employee for help. Dooley said no. Summer did anyway and paid the 3rd
party-employee. Dooley refused to pay the 3rd party-employee out of partnership
funds.
12
 2. Holding: Dooley is not required to pay ½ the wages to the 3rd party employee.
3. Reasoning: The Court held that Summers never obtained a majority and since he
wanted to change the status quo, he could not do so without a majority.
Additionally Dooley objected to the use of the employee. Summers must pay all
the wages.
viii. Day v. S&A
1. Facts: Day sues his former firm and sues because of a merger. The Executive
Committee made the decision, but Day was not a member of the executive
committee.
2. Holding: No breach of fiduciary duties.
3. Reasoning:
a. There is no breach of fiduciary duty because the merger was not made in
self-interest, it was for the benefit of the firm.
f. Partnership Property
i. New York Partnership Law § 50. Extent of property rights of a partner. The
property rights of a partner are (a) his rights in specific partnership property, (b) his
interest in the partnership, and (c) his right to participate in the management.
1. In order to use partnership property for personal use, you need the consent of all
the partners.
ii. Two Views of a Partnership
1. The partnership is a separate entity from the partners.
2. The partnership is an aggregate of the individuals who make up the partnership.
iii. A partner can assign a right to profits from the partnership, but not the right to possession
or use of the asset of the partnership.
iv. Putman v. Shoaf
1. Facts: Putnam sold her share to the Shoafs and sues the Shoafs to receive a
portion of the judgment for embezzlement due to the bookkeeper.
2. Holding: Putnam transferred her partnership interest; therefore, she is not longer
entitled to any money from the partnership.
3. Reasoning:
a. The Court does not allow Putnam to obtain part of the judgment because
on the day that she sold her rights and interests in the partnership she sold
all assets in return for not being responsible for any liabilities.
b. She cannot comeback and claim an interest in the judgment. The judgment
belongs to the partnership and Putnam is not longer part of this
partnership.
v. Kovacik v. Reed
1. Facts: Kovacik approached Reed to do the estimating and superintendent work.
Kovacik provided $100,000 capital and Reed provided labor only. The agreed to
share profits 50/50 and did not discuss losses.
2. Holding: Reed is not liable because he is a service only partner.
3. Reasoning:
a. General Rule: When partners do not discuss losses, then they split the
losses equally. If profits are discussed, then losses split in that proportion.
b. Service Only Partner Exception: The Service Only Partner is not liable for
losses because he lost his labor.
i. The law presumes capital and lablor is of equal value.
g. Capital Accounts and Raising Additional Capital
i. Capital Investment: A capital contribution makes you an owner who is repaid via
profits, but you also suffer losses as well. A loan does not make you an owner and you
expect to get paid back on a repayment schedule.
13
 ii. Balance Sheet: is a financial condition of a partnership at one point in time including
assets, liabilities, and equity.
iii. Income Statement: states the profits and losses for a set period of time.
iv. Equity = Assests – Liabilities
1. Business and finance of the partnership are separate from the partners individual
finances, which is strange since a partnership is not a taxable entity.
v. Capital Accounts: this is adjusted to reflect profits, losses, withdrawals. If there is a
negative number, upon dissolution, the partners would have to pay into the deficit.
h. Dissolution of Partnership
i. New York Partnership Law § 60: The dissolution of a partnership is the change in the
relation of the partners caused by any partner ceasing to be associated in the carrying on
as distinguished from the winding up of the business.
ii. NYPL § 62 are the automatic causes of dissolution. 1. Without violation of the
agreement between the partners (a) By the termination of the definite term or particular
undertaking specified in the agreement, (b) By the express will of any partner when no
definite term or particular undertaking is specified, (c) By the express will of all the
partners who have not assigned their interests or suffered them to be charged for their
separate debts, either before or after the termination of any specified term or particular
undertaking, (d) By the expulsion of any partner from the business bona fide in
accordance with such a power conferred by the agreement between the partners;
1. 2. In contravention of the agreement between the partners, where the
circumstances do not permit a dissolution under any other provision of this
section, by the express will of any partner at any time;
2. 3. By any event, which makes it unlawful for the business of the partnership to be
carried on or for the members to carry it on in partnership;
3. 4. By the death of any partner;
4. 5. By the bankruptcy of any partner or the partnership;
5. 6. By decree of court under section sixty-three.
iii. NYPL § 63 where a partner does have grounds to have a court ordered decree of
dissolution. On application by or for a partner whenever: (a) A partner has been
declared incompetent in any judicial proceeding or is shown to be of unsound mind, (b) A
partner becomes in any other way incapable of performing his part of the partnership
contract, (c) A partner has been guilty of such conduct as tends to affect prejudicially the
carrying on of the business, (d) A partner willfully or persistently commits a breach of the
partnership agreement, or otherwise so conducts himself in matters relating to the
partnership business that it is not reasonably practicable to carry on the business in
partnership with him, (e) The business of the partnership can only be carried on at a loss,
(f) Other circumstances render a dissolution equitable.
iv. NYPL § 66. Power of partner to bind partnership to third persons after dissolution.
1. After dissolution a partner can bind the partnership except as provided in
subdivision three
a. By any act appropriate for winding up partnership affairs or completing
transactions unfinished at dissolution; (ACTUAL AUTHORITY)
b. By any transaction which would bind the partnership if dissolution had
not taken place, provided the other party to the transaction (APPARENT
AUTHORITY)
i. Had extended credit to the partnership prior to dissolution and had
no knowledge or notice of the dissolution; or
ii. Though he had not so extended credit, had nevertheless known of
the partnership prior to the dissolution, and, having no knowledge
or notice of dissolution, the fact of dissolution had not been
14
 advertise in a newspaper of general circulation in the place (or in
each place if more than one) at which the partnership business
was regularly carried on.
2. The liability of a partner under subdivision one, paragraph (b), shall be satisfied
out of partnership assets alone when such partner had been prior to dissolution
a. Unknown as a partner to the person with whom the contract is made; and
b. So far unknown and inactive in partnership affairs that the business
reputation of the partnership could not be said to have been in any degree
due to his connection with it.
3. The partnership is in no case bound by any act of a partner after dissolution
a. Where the partnership is dissolved because it is unlawful to carry on the
business, unless the act is appropriate for winding up partnership affairs;
or
b. Where the partner has become bankrupt; or
c. Where the partner has no authority to wind up partnership affairs, except
by a transaction with one who
i. Had extended credit to the partnership prior to dissolution and had
no knowledge or notice of his want of authority; or
ii. Had not extended credit to the partnership prior to dissolution,
and, having no knowledge or notice of his want of authority, the
fact of his want of authority has not been advertised in the manner
provided for advertising the fact of dissolution in subdivision one,
paragraph (b), clause (II).
4. Nothing in this section shall affect the liability under section twenty-seven of any
person who after dissolution represents himself or consents to another
representing him as a partner in a partnership engaged in carrying on business.
v. NYPL § 65 Right of partner to contribution from copartners after dissolution.
1. Where the dissolution is caused by the act, death or bankruptcy of a partner, each
partner is liable to his copartners for his share of any liability created by any
partner acting for the partnership as if the partnership had not been dissolved
unless
a. The dissolution being by act of any partner, the partner acting for the
partnership had knowledge of the dissolution,
b. The dissolution being by the death or bankruptcy of a partner, the partner
acting for the partnership had knowledge or notice of the death or
bankruptcy, or
c. The liability is for a debt, obligation or liability for which the partner is
not liable as provided in subdivision (b) of section twenty-six of this
chapter.
vi. Actual Authority: Dissolution terminates all authority of the partners to bind the
partnership except where the partner is acting in a way to wind up the business.
vii. Apparent Authority:
1. When a creditor has done business with partnership prior to dissolution and the
creditor has no notice of the dissolution, the partnership can be bound by this
creditor post dissolution.
2. When a creditor has not done business, but knew of the partnership, did not know
of the dissolution and dissolution was not advertised in a local newspaper, then
the partnership can be bound by this creditor post dissolution.
3. Process:
a. Winding Up:
i. Sale of business as a going concern OR
15
 1. Settling up (§71) – a buyout usually occurs before settling
up.
ii. Sale of assets
1. Settling up (§71) - a buyout usually occurs before settling
up.
b. Continue Business
i. By Agreement OR
ii. Because of Wrongful Dissolution (acting in contravention of the
partnership agreement).
viii. Owen v. Cohen
1. Facts: The Plaintiff and Defendant were operating a bowling alley with an oral
partnership agreement. There was no express time period for the partnership
agreement. The Plaintiff gave $7,000.00 loan to the partnership to be paid out of
the profits. The partnership only lasts a few months before the Defendant starts
acting out. The Defendant partner was teasing the Plaintiff, had different ideas
about running the business, and stole money out of the accounts. Plaintiff seeks
Court Ordered Dissolution and a Sale of the Assets.
2. Holding: The Plaintiff is entitled to dissolution because the Defendant
prejudicially affected the carrying on of the business, not reasonably practicable
to carry on the business, and other circumstances make dissolution equitable. §
63(1)(c),(d),(f).
ix. Page v. Page
1. Facts: The Plaintiff and Defendant both started a partnership for a linen supply
business. Both contributed $43,000. Business did not do well. The Plaintiff owns
the Corporation Creditor who the Partnership owes money to. Once the
Partnership starts earning money, the Plaintiff seeks a termination because he
argues that it is an at will partnership. Defendant argues that the Plaintiff wants to
get out because they are making money and he wants to move the clients to his
other corporation (breach of duty of loyalty and good faith).
2. Holding: The Court holds that this is a partnership at will and can be dissolved at
any time as long as there is no bad faith.
3. Reasoning:
a. Partnership At Will – a partner may withdraw at any time in good faith.
b. Partnership At Term – Either partner cannot terminate the partnership
until the term expires. Terminating earlier is a breach of allows for a
wrongful dissolution.
i. The Court says that the argument that the term was until they
turned a profit is crazy because all partnerships are started with the
hope of making a profit.
c. Consequences of Wrongful Termination: Breaching partner is liable for
damages, not allowed to participate in the winding up of the partnership,
remaining partners can opt to continue the business, breaching partner
does not get a payment based on good will either.
x. Pav-Saver Corp. v. Vasso Corp.
1. Facts: Pav Saver Manufacturing Corp. includes a partnership of (1) PSC Corp
(Dale) and (2) Vasso Corp. (Meersman). PSC brings the patent and Vasso
supplies the money. Meersman wrote the partnership agreement, which was to be
a permanent partnership, but the agreement discussing terminating partners and
what happens to the patent. If there is a termination, then the breaching partner
must pay liquidated damages.
a. Dale’s Three Arguments:
16
 i. PSC has a right to the return of the patents.
1. Paragraph 3(B)(2) of the partnership agreement states that
the patents will be returned to PSC at the expiration of the
partnership.
2. The Court says that PSC unilaterally terminated, which is a
wrongfully dissolution, so you are not entitled to return of
them or the value either. The Court invokes the UPA and
says that PSMC cannot continue without the patents.
ii. PSC is entitled to the value of the patents.
1. The Court says that PSC unilaterally terminated, which is a
wrongfully dissolution, so you are not entitled to return of
them or the value either. The Court invokes the UPA and
says that PSMC cannot continue without the patents.
iii. Liquidated damages are void as a penalty.
1. The Court says this is enforceable because it is not a
penalty.
2. Holding: The Court holds that Vasso is entitled to retain the patents so they can
continue operating for the term.
3. Reasoning:
a. Good will is not distributed when there is a wrongful dissolution.
Partnership Agreement trumps the parties agreement.
xi. NYPL § 69
1. If the business is continued under paragraph (b) of subdivision two of this section
the right as against his copartners and all claiming through them in respect of
their interest in the partnership, to have the value of his interest in the
partnership, less any damages caused to his copartners by the dissolution,
ascertained and paid to him in cash, or the payment secured by bond approved by
the court, and to be released from all existing liabilities of the partnership; but in
ascertaining the value of the partner's interest the value of the good-will of the
business shall not be considered.
xii. Continuity Provision – we are going to contract out of § 62 (automatic grounds for
dissolution) likewise it would give the remaining partners to continue the business if they
so choose.
xiii. Buyout Provision – providing the remaining partners to buy out the dissolving partner
and sets out a formula for the buyout.
xiv. G&S Investments v. Belman
1. Facts: Century Park Ltd. Includes G&S 51%, Nordale 25.5%, and Jones/Chapin
23.5%. Nordale started using cocaine and could not carry on the day to day
operation of the company. G&S was a general partner and Nordale was a general
partner. Even though G&S was had an larger ownership interest, each are partners
and have an equal say. Nordale dies after G&S file complaint seeking dissolution.
Article 19 of the partnership agreement provide that upon the death of a partner
the other general partners may continue with the partnership as long as they
purchase the interest of the partner who died. This is a buyout provision. The
trigger is death of a partner.
a. The interest will be calculated as the capital account plus the amount of
the average of the prior three year’s profits and gains actually paid to the
partners or as the partners have agreed.
b. Nordale’s Estate does not want this formula to apply so they argue for an
interpretation of the formula that capital accounts are ambiguous and that

17
 the triggering event moot because the dissolution occurred before
Nordale’s death. Capital Accounts is in the negative though!
i. Nordale’s Estate argues that the filing of the complaint acts as a
dissolution of the partnership requiring a fair market valuation of
the assets.
2. Holding: The Court holds that the partnership was not dissolved by the filing of
the complaint and the buyout provision was triggered when Nordale died.
a. This is better that the parties provided for the death of a partner because if
they did not then there would have been an automatic dissolution.
IV. Hybrid Partnerships
a. Limited Partnerships
i. NYPL § 90: A limited partnership is a partnership formed by two or more persons under
the provisions of section ninety-one, having as members one or more general partners
and one or more limited partners. The limited partners as such shall not be bound by the
obligations of the partnership.
ii. Characteristics:
1. Governing Law:
a. For Partnership, UPA is the law.
b. For limited partners, NYPL Article 9, which is RULPA applies to those
formed after 7/1/1991. NYPL Article 8, which is ULPA, which applies to
those formed before 7/1/1991.
2. Ownership and Control
a. For Partnership, owned and controlled by all partners.
b. For Limited Partnership, controlled by the General Partners, but owned by
both General and Limited Partners.
3. Profits/Losses and Taxation
a. Same for Partnerships and Limited Partnerships, the partners are taxed on
their income tax. A Limited Partnership is not a taxable entity.
4. Personal Liability
a. For Partnerships, all partners have unlimited liability.
b. For Limited Partnerships, the limited partners can only loose what they
invest.
5. Duration
a. For Partnerships, dissolution happens automatically unless § 63.
b. For Limited Partnerships, it is the same except there is no dissolution
when a Limited Partner dies.
6. Transferability
a. For Partnerships and Limited Partnerships, you need unanimous consent
of all partners.
iii. Limited Partners must contribute cash, while General partners can contribute only
services.
iv. Holzman v. De Escamilla
1. Facts: Russell and Andrews are limited partners. De Escamilla is a general
partner. The farm they run goes bankrupt. The trustee brings this case to seek
money for the creditors from Russell and Andrews personally. One partner can
only write a check with approval from another partner.
2. Holding: Russell and Andrews exerted too much control, so they became a
General Partner and are personally liable for the partnership’s debts.
3. Reasoning:

18
 a. Russell and Andrews has veto power over all spending, determined what
crops to plant, and visited the farm twice a week. They required De
Escamilla to resign. Too much control!
b. Advice is one thing, decision making is another think.
v. § 96. Limited partner not liable to creditors.
1. A limited partner shall not become liable as a general partner unless, in addition
to the exercise of his rights and powers as a limited partner, he takes part in the
control of the business; and the exercise of the rights and powers granted by
subdivision three of section ninety-nine of this chapter shall not constitute taking
part in the control of the business.
vi. NYPL § 121-303 (RULPA):
1. A limited partner is not liable for the contractual obligations and other liabilities
of a limited partnership unless he is also a general partner or, in addition to the
exercise of his rights and powers as a limited partner, he participates in the
control of the business. However, if the limited partner does participate in the
control of the business, he is liable only to persons who transact business with the
limited partnership reasonably believing, based upon the limited partner's
conduct, that the limited partner is a general partner.
vii. Safe Harbor Provision
1. (3) Consulting with and advising or rendering professional services to a general
partner with respect to any matter, including the business of the limited
partnership does not make a Limited Partner a General Partner.
b. Limited Liability Partnerships – these are only available to professional partnerships
(accountant, lawyer).
i. They must be registered with the State as per NYPL § 26(b) and (c).
ii. No partner is LLP is liable for debts or wrongful conduct of the LLP.
iii. Will be fully and personally liable when negligence or wrongful conduct is committed by
the partner or someone under his direct supervisor and control while rendering the
services on behalf of the LLP. This should be compared to a general partnership, where
are partners are liable regardless of who does the negligent or wrongful act.
1. In LLP, you do not loose limited liability shield by exercising too much control;
however, in an LP if you exercise too much control, then you may loose your
shielf.
V. Corporations
a. Corporation Defined:
i. Creation: You must comply with the statute and file documents with the Secretary of
State.
ii. Governing Law: Contract and Agency Law; Model Business Corporations Act (no
enacted in N.Y.; Business Corporations Law of New York.
iii. Ownership and Control: The shareholders own, while the Board of Directors (oversight
and make big decisions) and Officers (hired to handle day to day operations) control.
Control is really centralized with the Board of Directors.
iv. Profits: The shareholder receives the profits. The corporation pays dividends to the
shareholders. Also, the shareholders receive the assets of the corporation if the
corporation is liquefied.
v. Liability: There is limited liability in you can only loose as much as you invest and there
is no personal liability.
vi. Taxes: This is a taxable entity. Thus, the Corporation is taxed and when a dividend is
declared, the shareholder must pay personal income tax. This is a double tax.
vii. Duration: The Corporation has continuity. Just because ownership changes, this does not
change the nature of the corporation.
19
 viii. Transferability: You can sell your shares whenever you want. No real limit on
transferability.
ix. How to Sue: You can sue the corporation and not the individual shareholders. The
corporation is seen as a separate entity from its owners.
b. Incorporation
i. There are the Board of Directors (Control – overseers. They are also managers, but their
responsibility is oversight), Officers (Control – these are the day to day managers), and
Shareholders (Owners).
1. One person can hold two or more offices positions pursuant to NY BCL § 715(e).
ii. The Shareholders elect the Board of Directors. The Officers are appointed by the Board
of Directors. Often the slate for Board of Directors that the Shareholders vote from is
picked by the Officers.
iii. Shareholders are usually passive investors.
iv. New York Business Corporation Law makes very few distinctions between large and
small corporations.
1. Closely Held Corporation – this has no ready secondary market for its shares.
a. There are few shareholders and if the shareholders are not happy, it is not
easy for them to sell their shares because it is a local owned business.
b. Primary Market – the corporation itself is selling shares to investors.
2. Publically Held Corporation – this is traded publically on a secondary market.
a. Secondary Market – investors buying and trading, the corporation is not
involved.
b. Starbucks Coffee.
v. Corporation raises capital by selling stock (an equity stake), selling bonds (an IOU not an
equity stake because no ownership, just a return), loans, government loans.
vi. Voting Rights come with stock.
vii. Internal Affairs Doctrine – the rights of managers, and shareholders is controlled by the
laws of the State of incorporation.
viii. Model Business Corporation Act – not adopted in N.Y.
ix. Delaware Corporate Law – very influential because over 60% of Fortune 500 companies
incorporate in Delaware because (1) pro-management and most lenient in turns of
oversight of the managers or (2)quicker to get a decision in a DE court, (3) significant
case law on corporations in DE due to large amount of corporations, and (4) there is a
chancery court devoted to corporate law.
x. Federal law is concerned mostly with Publically Held Corporations.
1. Securities Act of 1933
2. Securities Exchange Act of 1934.
xi. Corporate Formation: The Corporation is formed when the certificate of incorporation is
filed with the Secretary of State.
1. NY BCL § 402 explain the requirements for an Article of Incorporation.
2. By Laws must be adopted once the corporation legally exists. It is the rules of the
corporation.
3. De Jure Existence (legal) – when the corporation files a certificate of
incorporation.
4. De Facto Existence (fact) – when you are missing something in the certificate that
makes your filing inapplicable. If you have made a colorable attempt of
compliance, then the Court will recognize this incorporation as a matter of fact.
c. Pre-Incorporation Transactions and Promoter Liability
i. Clinton v. Watkins
1. Facts: Clinton entered into a 3 year lease with Clifton Park Learning. Watkins
was the treasurer. However, Clifton Park Leasing only reserved a name with the
20
 Secretary of State and never filed Article of Incorporation, so they were not a De
Jure Corporation. Clifton Park Learning because delinquint on rent. Clinton sues
Watkins since the corporation does not exits.
2. Holding: The Court holds Watkins and White personally liable for the debts of
the “corporation.”
3. Reasoning:
a. The Court said that there was no De Facto existence because reserving a
name is not a colorable attempt at complying with the BCL.
b. RULE: Promoters are people acting on behalf of the potential corporation.
i. Even if the corporation had been formed, the promoter will be
personally liable on contracts entered into on behalf of the
corporation, unless once the corporation comes into existence it
ratifies the agreement and the other party to the contract must
release the promoter from personal liability (novation).
ii. Southern Gulf v. Camcraft
1. Facts: Southern agreed to purchase a vessel from Camcraft; Barrett and Bowman
signed repectively. Southern sent Bowman a letter saying they were incorporated
in the Cayman Islands and Bowman signed and accepted the agreement with this
new information. Camcraft never supplies the ship.
2. Holding: Southern has a cause of action regardless of their legal status.
3. Reasoning:
a. The Court stated that Camcraft was going to be estopped from asserting
that Southern was not incorporated because Camcraft acted as though it
was.
d. Shareholders
i. Quorum: A quorum requires 50% of the shares to be available. The bylaws can change
the amount for a quorum, but it cannot go below 1/3 of shareholders.
ii. Vote: 50% of the shares must vote yes.
iii. Liability: They are generally not liable for the debts and torts of a corporation pursuant
to BCL § 628.
iv. Shareholders are passive investors so they only have minor control – this encourages
investment.
v. 3rd parties do business with corporations because corporations often have more money
than the individual shareholders. Thus, the creditor only has to asses the credit of the
corporation and not each individual shareholder.
vi. We allow limited liability for corporate torts because there is a lack of control by the
shareholder and deep-pocket/better able to shoulder the judgment/insurance. Without
limited liability for shareholders only wealthy people could start corporations.
e. Board of Directors
i. Elections: Require a plurality and not a majority.
ii. Quorum: Majority of the Board, unless certificate of incorporation/bylaws say otherwise.
BCL § 707. A tie is not a majority. A Quorum cannot be below 1/3 of all directors. BCL
§ 707.
iii. Vote: When voting on a resolution, there must be a majority vote. BCL § 708(d).
iv. If all members of the board consent in writing to adoption of a resolution, then a meeting
does not have to be held and the resolution can pass. NY BCL 708(b).
f. Officers
g. Limited Liability and Exceptions to Limited Liability
i. Walkovszky v. Carlton
1. Facts: Walkovszky was severely injured in New York City when he was run
down by a taxi owned by the Defendant, Seon Cab Corporation and operated by
21
 Defendant, Marchese. Carlton is a stock holder of 10 corporations, including
Seon, where each corp. has two taxis registered in its name. Each corporation only
has the minimal amount of automobile liability ($10,000). Although the cabs
seem independent, they are operated as a single entity.
a. Walkovszky has two theories…
i. Piercing the corporate veil and hold Carlton liable for the debt of
Seon Corp and
ii. Enterprise liability, which means that the Plaintiff can collect from
all corporations since they are acting as a collective enterprise.
2. Holding: Walkovszky’s complaint is dismissed against Carlton because no
evidence that he was using the corporations like this for his own personal gain.
a. Piercing the Corporate Veil: If the corporation is a dummy of the
individual stockholders carrying on for their own personal ends as
opposed to the corporation’s actions, then he will be held personally
liable.
i. However, it seems that Carlton set the corporations up this way in
order to prevent loosing all assets.
ii. Sea Land v. Pepper Source
1. Van Dorn Two Prong Test (How to Protect yourself from personal liability in a
Corporation)
a. Unity of Ownership and interest
i. Factors
1. Failure to maintain separate records
2. Commingling funds
3. Undercapitalization
4. One corporation handling assets of another corporation as
own
b. Fraud or injustice if adhere to fiction of separate corporate existence.
(Some jurisdictions do not require this, but New York does; some only
require it for contracts because of the nature of these claims).
iii. Veil Piercing Recap:
1. Forward Veil Piercing - corporation has a debt and the creditor seeks to go after
the shareholders personal assets to satisfy debts.
2. Reverse Veil Piercing – the shareholder has a personal debt and because he is
disregarding the corporation as a separate entity, we would hold the corporation
liable for the shareholder’s debt.
3. Enterprise Liability – hold many corporations liable for one corps debt because
they are a large enterprise all acting together. Founded in agency principles.
Between many corporations and not between a corporation/shareholder.
iv. In Re Breast Implant Litigation
1. Facts: Groups claim that they got breast cancer due to implants sold by MEC and
they want to collect from Bristol-Meyers (Parent Company). The Groups have
two theories (1) Piercing the Corporate Veil (hold Bristol Meyers liable for
MEC’s debt) and (2) Direct Liability (Bristol Meyers had a duty and did not fulfill
that duty and act reasonably). Bristol-Meyers had a lot of control over MEC.
2. Holding: Bristol Meyers should be liable on a corporate veil theory.
3. Factors looked to: same directors or officers, common business department,
consolidated financial statements and tax returns, parent finances the subsidiary,
parent caused incorporation of subsidiary, subsidiary has grossly inadequate
capital, parent pays salary and other expense, subsidiary receives all business by
parent, parent uses subsidiary property as its own, daily operations are not
22
 separate, and subsidiary does not observe basic corporate formalities. Look at
them all in the totality of the circumstances. Substantial domination of the
parent over the subsidiary.
v. Corporate Purpose, Ulta Vires Doctrine
1. BCL § 402 requires the Articles of Incorporation to state the purpose of
corporation. BCL § 201(a) allows the corporation to be formed for any lawful
business. Most corporations state purpose broadly as conduct of any lawful
business.
2. Ultra Vires – means outside the authority. Ultra Vires gives a defense for a
corporation acting outside the Articles of Incorporation when other people try to
void it.
3. Example: J and M’s purpose is to run a café. They expand and start selling books
and music. They want out now on the books and music. They would normally
have a defense by saying that these actions are outside the authority of the articles
of incorporation.
4. To prevent this, many corporations state that their purpose is “any lawful
purpose” to prevent voiding any activities for exceeding the scope of the authority
of the Articles of Incorporation.
h. The Role and Purpose of the Corporation
i. A.P. Smith v. Barlow
1. Facts: The Plaintiff is a corporation. They have started donating money to
Princeton University ($1,500) for maintenance. The Shareholders seek to prevent
these donations.
2. Holding: These donations are within the corporation’s authority.
a. Modern Purpose of the Corporation is to increase the wealth of its
shareholders via profits.
b. The Court upholds this donation because there is a policy argument that
the Corporation has a place in society; therefore, it has an enormous power
in that most capital is in Corporations.
c. New York does not require a benefit to the Corporation.
d. Cannot be made indiscriminately or in furtherance of a personal goal. In
this case it was a modest amount made with the belief that aids the public
welfare and advance the interests of the corporation.
ii. Dodge v. Ford
1. Facts: Ford refused to pay special dividends to shareholders, but wants to reinvest
to create an iron ore smelting plant to build its own parts. Dodge Brothers own
shares, but were not on the Board of Directors and were not employed by Ford.
Ford refused to buy Dodge’s shares because Dodge would use the money to
invest in their competing business.
2. Holding: Ford must pay special dividend, but Court cannot enjoin the building of
a new building/project.
a. The goal of a corporation is shareholder wealth maximization.
b. The discretion of the directors is to be exercised in the choice of the means
to attain that end, and does not extend to a change in the end itself. The
end is to make money for the shareholders and the directors can determine
the best way to accomplish that end. However, the directors cannot change
the end.
c. The Court held that the Board was acting against the interest of the
company/shareholders.
3. Shlensky v. Wrigley

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 a. Facts: Minority shareholder seeks to have lights installed at Wrigley Field
because having night games would increase profits. Wrigley is concerned
about the deteriorating affect night games would have on the community.
b. Holding: This is a pure business decision not to install lights (no evidence
that it will increase profits), so Court cannot interfere.
i. Wrigley is just exercising his discretion on how to best reach the
goal of helping the Corporation obtain a profit. Wrigley is not
changing the ends by considering the community.
ii. There is a presumption that the Board’s actions are in good faith
and for the benefit of the corporation.
iii. Shlensky did not just sell his shares because if there is bad action
by the managers, then it is reflected in the share price.
i. Fiduciary Obligations of Directors and Officers
i. BCL § 717 – sets forth a duty of care on the part of the directors and the directors must
exercise good faith with that degree of care, which an ordinarily prudent person in a like
position would use under similar circumstances.
1. Stakeholder Theory: The Board can take into account the community,
environment, employees, retirees when making decisions.
ii. BCL § 718(a) “directors have a duty o good faith and must exercise a degree of care
which an ordinary prudent person in a like position would under similar circumstances.
iii. BCL § 718 (b) “directors may take into account long-term and short term considerations
and constituencies other than shareholder.”
iv. Kamin v. Amex
1. Facts: Two minority shareholders sue Amex. The Company could sell the stock
and distribute to the stockholders or (which they adopted) distribute the DLJ
shares to the stockholders. The Directors do not want to sell at the loss because it
would have to go on the books, which would make the stock price of AMEX go
down, even though selling them would allow for a tax savings.
2. Holding: The Court will not substitute their judgment for that of the Board of
Directors.
a. Business Judgment Rule: The Directors have a presumption of acting in
good faith and honestly, in the best interests of the corporation and do not
have to justify their decision making. So, the shareholders have the burden
to prove that the Directors were acting bad faith, self interest, or to
defraud. Next, the burden shifts to the Directors to justify their decision
making.
i. Only 4 of the 20 directors were inside directors (salaries were
based on profits, which means they do not want the company to
suffer a loss). This is not sufficient to show bad faith.
ii. This allows the Board of Directors to take a risk without being
overly concerned for breaching their duty of care.
iii. To breach the Business Judgment Rule it is not sufficient that there
are better alternatives, but must be gross negligence.
v. Francis v. United Jersey Bank
1. Facts: Mrs. Pritchard inherited a reinsurance brokerage. Her two sons, Charles
and William, took $12 million in loans from the corporation. Mrs. Pritchard never
paid any attention to the corporation, did not understand it, and did not review
annual financial statements.
2. Holding: The Court holds that Mrs. Pritchard had a duty to the clients due to the
trust relationship, she breached that duty by not taking part in understanding the

24
 company/reviewing financial statements, and she caused, along with her son’s
actions, the losses. Mrs. Pritchard is held liable.
a. Directors should acquire a rudimentary understanding of the business. If
you do not have this knowledge, you can refuse the director position or get
the knowledge through inquiry. There must be a general monitoring and
not a day to day analysis of the corporation.
b. The Court compares this business to the business of a bank where the bank
owes a fiduciary duty to people who deposit with them. The insurance
companies in this case were depositing funds with Pritchard’s company to
be held in trust.
i. Generally creditors or not owed a fiduciary duty by the Directors,
but it was the nature of the business that required a duty of care.
c. Had Mrs. Pritchard done a cursory review, then she would have seen what
her son’s were doing and she could have assented or fixed it.
d. This is not the Business Judgment Rule because Pritchard never made a
business judgment, just did nothing. Since the Business Judgment Rule did
not apply, Mrs. Pritchard must justify what she did.
vi. Smith v. Van Gorkom
1. Facts: TUC is a publically held corporation that has a cash flow problem, so they
cannot take advantage of tax advantages. TUC wants to merger to be able to
utilize these tax advantages. Van Gorkom is the CEO, Shareholder, and Chairman
of the Board of Directors, Lawyer and CPA. Plitzker offers to merge with TUC
via a Leveraged Buyout. Shareholders claim that Directors breached their duty by
agreeing to the merger.
a. Leveraged Buyout: a financial sponsor acquires a controlling interest in a
company's equity and where a significant percentage of the purchase price
is financed through leverage (borrowing). Leverage is debt. This is a
buyout where the buyer takes a lot of debt to purchase it. The collateral for
the debt is the asset of the business being acquired.
b. Plizter purchased for $55.00 per share, which was not a fair market value,
but based on the feasibility of the payback.
c. The Board meeting regarding the merger was only 2 hours and the Board
did not have the merger agreement in front of them.
2. Holding: The Court holds that the Directors did breach their duty to the
shareholders because they were not reasonably informed.
a. Business Judgment Rule gives the Directors a presumption that they were
acting in good faith when approving the merger. The Shareholders have
the burden of proving a breach.
b. Under the Business Judgment Rule the Directors must have been
reasonably informed when making a decision.
i. How quickly the approval was received, no emergency situation,
no review of merger agreement and no intrinsic value of the shares
demonstrates that they Board was not reasonably informed.
c. Market Test: If you do not place an advertisement in the newspaper, then
you are not testing the market.
3. Dissent: Argues that the Court is substituting its judgment for that of the
Directors, which violates the Business Judgment Rule.
vii. NY BCL § 402(b:)
1. The certificate of incorporation may set forth a provision eliminating or limiting
the personal liability of directors to the corporation or its shareholders for
damages for any breach of duty in such capacity, provided that no such provision
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 shall eliminate or limit: (1) the liability of any director if a judgment or other
final adjudication adverse to him establishes that his acts or omissions were in
bad faith or involved intentional misconduct or a knowing violation of law or
that he personally gained in fact a financial profit or other advantage to which
he was not legally entitled or that his acts violated section 719, or (2) the liability
of any director for any act or omission prior to the adoption of a provision
authorized by this paragraph.
2. Shareholder MUST approve any amendments to the Certificate of Incorporation.
viii. Bayer v. Bayer
1. Facts: The Directors agreed to use a radio program for advertising that the
President’s wife was an employee/singer for. It cost the Corporation 1 million
dollars, but the President’s wife received very little salary for the program.
2. Holding:
a. The Court refuses to look and see if $1,000,000 should have been spent on
the program because under the Business Judgment Rule the presumption is
with the Directors, unless there is bad faith.
b. The Court does look to a breach of the duty of loyalty claim since the
President’s wife worked on the program.
i. No breach of loyalty because wife paid the same as other singers,
cost is not excessive, directors did not know of wife’s participation
before the vote, wife did not receive a large salary. The Directors
had to prove that they were fair and reasonable in using this radio
program that the wife worked under.
c. THE BUSINESS JUDGMENT RULE YIELDS TO THE DUTY OF
LOYALTY. So, once we allege a breach of the duty of loyalty, this falls
outside the Business Judgment Rule and the Directors have the burden to
show that they were fair and reasonable.
d. Business Judgment Rule applies absence fraud, bad faith, self interest
and as long as the Directors are reasonably informed.
e. The Court said that the Shareholders ratified this resolution even though
there was never a formal vote because the Shareholders accepted and
retained the benefits of the advertising campaign.
ix. Lewis (Donald) v. SL&E (Alan, Leon Jr., Richard)
1. Facts: LGT and SLE are two corporations. Leon Sr. was the principle shareholder
in both. He is the father of the parties. Leon Sr. gave 15 shares of SLE to all of his
6 children (Donald, Richard, Alan, Leon Jr, and two others). Richard, Alan, and
Leon Jr. were already shareholders, officers, and Directors of LGT. All 6 children
agreed that if a child was not an LGT shareholder (Donald), then they would sell
their SLE shares to LGT in 30 days at the price of book value the day of the
agreement (June 1, 1972). Richard, Alan, Leon Jr. were running SLE for the
benefit of LGT.
a. Donald argues that SLE is undervalued so the book value is not accurate
and he wants to receive more for his shares.
2. Holding:
a. Richard, Alan, Leon Jr. bear the burden because they have a conflict of
interest. Thus, the Business Judgment Rule does not apply.
b. WHEN THERE ARE INTERESTED DIRECTORS LOOK TO BCL §
713.
x. Interested Director 713(a) – self interested directors must prove this…
1. Disclosure of self-interest in good faith of material facts AND sufficient vote

26
 a. Quorum - interested directors count towards the quorum AND a majority
of the directors present.
b. Majority - of those present in favor of the resolution not counting the
interested directors.
2. Disclosure AND unanimous vote of all disinterested directors.
a. (If there is only one disinterested director who votes for the resolution,
then this complies with the statute, but the Court will likely still make
them comply with 713(b)).
xi. BCL § 713. Interested directors.
1. No contract or other transaction between a corporation and one or more of its
directors, or between a corporation and any other corporation, firm,
association or other entity in which one or more of its directors are directors or
officers, or have a substantial financial interest, shall be either void or voidable
for this reason alone or by reason alone that such director or directors are
present at the meeting of the board, or of a committee thereof, which approves
such contract or transaction, or that his or their votes are counted for such
purpose:
a. If the material facts as to such director's interest in such contract or
transaction and as to any such common directorship, officership or
financial interest are disclosed in good faith or known to the board or
committee, and the board or committee approves such contract or
transaction by a vote sufficient for such purpose without counting the
vote of such interested director or, if the votes of the disinterested
directors are insufficient to constitute an act of the board as defined in
section 708 (Action by the board), by unanimous vote of the disinterested
directors; or (DIRECTORS)
b. If the material facts as to such director's interest in such contract or
transaction and as to any such common directorship, officership or
financial interest are disclosed in good faith or known to the shareholders
entitled to vote thereon, and such contract or transaction is approved
by vote of such shareholders. (SHAREHOLDERS)
2. If a contract or other transaction between a corporation and one or more of its
directors, or between a corporation and any other corporation, firm,
association or other entity in which one or more of its directors are directors or
officers, or have a substantial financial interest, is not approved in accordance
with paragraph (a), the corporation may avoid the contract or transaction
unless the party or parties thereto shall establish affirmatively that the
contract or transaction was fair and reasonable as to the corporation at the time
it was approved by the board, a committee or the shareholders.
3. Interested Directors count for a quorum.
xii. Northeast Harbor v. Harris - A fiduciary violates their duties when they fail to disclose
a cooperate opportunity and fail to seek consent.
1. Holding: The Court holds that the ALI test should be used to see if a Director has
complied with its fiduciary duties.
a. Line of Business Test: If an opportunity is presented, which the
corporation can undertake, in the line of the corporations business, and the
corporation has an interest or reasonable expectancy and the officer is
brought into conflict by taking this opportunity, the law will not allow the
officer to take the opportunity for himself and he breached his fiduciary
duties.

27
 b. Fairness Test: This states that it is a factual determination of whether it
would be unfair for a director as a fiduciary to take advantage of an
opportunity for his own profit when the interests of the corporation calls
for protection. This provides practically no guidance.
c. ALI Test: the director make an offer to the corporation, discloses the
conflict of interest and the corporation rejects the opportunity (rejection
must be fair OR by disinterested directors/satisfaction of business
judgment rule OR rejected by disinterested directors and not a waste of
assets by the corporation). The basis of this is full disclosure first.
j. Shareholder Derivative Actions
i. NY BCL § 626: Shareholders' derivative action brought in the right of the
corporation to procure a judgment in its favor.
1. (a) An action may be brought in the right of a domestic or foreign corporation to
procure a judgment in its favor, by a holder of shares or of voting trust
certificates of the corporation or of a beneficial interest in such shares or
certificates.
2. (b) In any such action, it shall be made to appear that the plaintiff is such a
holder at the time of bringing the action and that he was such a holder at the time
of the transaction of which he complains, or that his shares or his interest therein
devolved upon him by operation of law.
3. (c) In any such action, the complaint shall set forth with particularity the efforts
of the plaintiff to secure the initiation of such action by the board or the reasons
for not making such effort. DEMAND REQUIREMENT!
4. (d) Such action shall not be discontinued, compromised or settled, without the
approval of the court having jurisdiction of the action. If the court shall
determine that the interests of the shareholders or any class or classes thereof
will be substantially affected by such discontinuance, compromise, or settlement,
the court, in its discretion, may direct that notice, by publication or otherwise,
shall be given to the shareholders or class or classes thereof whose interests it
determines will be so affected; if notice is so directed to be given, the court may
determine which one or more of the parties to the action shall bear the expense of
giving the same, in such amount as the court shall determine and find to be
reasonable in the circumstances, and the amount of such expense shall be
awarded as special costs of the action and recoverable in the same manner as
statutory taxable costs.
5. (e) If the action on behalf of the corporation was successful, in whole or in part,
or if anything was received by the plaintiff or plaintiffs or a claimant or claimants
as the result of a judgment, compromise or settlement of an action or claim, the
court may award the plaintiff or plaintiffs, claimant or claimants, reasonable
expenses, including reasonable attorney's fees, and shall direct him or them to
account to the corporation for the remainder of the proceeds so received by him
or them. This paragraph shall not apply to any judgment rendered for the benefit
of injured shareholders only and limited to a recovery of the loss or damage
sustained by them.
ii. PLAINTIFF MUST BE A SHAREHOLDER AT THE TIME OF THE ALLEGED
MISCONDUCT AND THE TIME THE ACTIONW AS BROUGHT.
iii. If shareholders are sucesstive in their derivative claim, then the damages goes to the
corporation and NOT the individual shareholders.
iv. Direct or Derivative?
1. Who suffered the harm? The Corporation or the individual shareholder?

28
 2. Who would receive the benefit of any recovery or other remedy? The Corporation
or the individual shareholder?
3. Example: Board of Director A steals 1 million worth of inventory. The
Corporation has lost 1 million dollars, while the shareholder is harmed
derivatively by the theft being reflected in the value of your share prices. So, as an
individual you cannot sue because the wrong was done to the corporation.
v. Marx v. Akers
1. Facts: Out of 18 directors, 15 Directors were Outside Directors and 3 were Inside
Directors. The Shareholders are claiming that excessive compensation for the
Directors and Executives is a breach of fiduciary duty. This is a derivative claim
because it is a harm to the corporation. If the directors are being paid too high,
then this is less available to the corporation, which means the stock price could
suffer or the shareholder is not receiving the proper dividends.
a. Marx never demanded suit by the Corporation, so in order to bring the
derivative action, the Demand must have been excused (prevent too much
Court interference with Demand Requirement). Fear of too much
derivative suits, so we want to limit them. Micromanage by the
shareholder of a corporation is not good.
2. Futility Occurs: (usually when the Board is involved in the problem they will not
likely bring suit and demand is pointless). If Demand is futile  Demand is
excused  Suit can be brought…
a. A majority of the directors are interested in the transaction,
b. Directors failed to informed themselves to a degree reasonably necessary
about the transaction, or
c. The directors failed to exercise their business judgment in approving the
transaction – so egregious on its face.
3. IF YOU DEMAND A SUIT AND THE BOARD SAYS NO, THEN YOU MUST
SUE FOR WRONGFUL REJECTION, BUT YOU MUST OVERCOME THE
BUSINESS JUDGMENT RULE, WHICH IS DIFFICULT TO DO.
4. Holding:
a. Director Compensation (15 ppl)
i. This is a majority – therefore, the demand probably would not have
worked and it was futile. Suit can be brought on this regardless of
the demand being made or not.
ii. However, there is no showing that this payment was so high – so
the Court dismisses this on the substantive part of the claim and
not on the procedural grounds.
b. Executive Compensation (3 ppl)
i. This is not a majority – therefore, the demand could have worked
and it was NOT futile! Suit cannot be brought on this unless a
demand was made.
ii. This is dismissed on the procedural grounds and does not get to the
merits.
vi. In New York, to bring a shareholder derivative suit: You can either
1. Make a demand OR
2. Plead with particularity that the demand is excused (Futile).
vii. Universal Demand Requirement: There would be no futility excuse requirement and
you need to make a demand everytime. If no response in 90 days, then the shareholders
can bring suit. If the Board does respond with a rejection and the shareholder can
challenge this decision, but subject to business judgment rule, which is not favorable.

29
 viii. Delaware Approach: Once you make a demand, your waiving the argument that the
demand is excused and you only have wrongful refusal approach left.
ix. Roy v. Vayntrub
1. Facts: Shareholders are employees in Communicar limo service. The
shareholders are not happy because of the systematic overbilling of clients, which
allowed for loosing clients, favoritism in dispatching, some corporations do not
pay for waiting time, the corporation is sued for discrimination and disciplinary
actions, unhappy with worth of shares, misappropriating funds, using the
subsidiaries to hide and steal funds, denied access to corporate books/records,
discrimination in giving loans to drivers. This is a mix of direct and derivative
claims. Onlly derivative claims can be brought now.
2. Holding: The system overbilling claim is allowed to go forward.
3. Reasoning:
a. The overcharging of client is so egregious that the Courts did not require a
demand because it would be futile.
4. PROCEDURE FOR SHAREHOLDER SUITS:
a. Is the claim derivative or direct?
i. If direct, do not continue with questions…
ii. If derivative, continue with questions…
b. Contemporaneous Ownership requirement – the shareholder must own
shares at the time of the alleged wrong and at the time of suit. (NYBCL §
626(b)).
c. Was a demand made? (NY BCL § 626(c))
i. Explicitly ask for a lawsuit to be initiated.
ii. If demand made and refused, then is it a wrongful refusal under the
business judgment rule.
d. If no demand, is it excused?
i. Majority directors interested in underlying transaction.
ii. Directors failed to fully inform themselves of underlying
transaction.
iii. Director’s actions egregious on face – failed to exercise business
judgment.
k. Concepts in Corporate Finance
i. Par Value: the minimum price that the corporation can sell their shares. The concepts of
Stated Capital and Surplus depend on whether the company has set a par value for its
stock.
ii. Stated Capital: is the number of shares issued x the par value.
1. If there is no par value, then the Stated Capital is the money received x the shares
issued.
iii. Dividends can only be declared out of a surplus.
1. If there is no Par Value, then the Directors allocate the amount that is reasonable
for a surplus.
iv. Watered Stock: A and B start AB Corp. They had personally owned a building worth
20k and transferred it to the corporation, Authorized 100 shares; assigned par value of
$1,000. A and B issue themselves the shares for no consideration.
1. Stated Capital: is 100 x $1,000 = $100,000.00; However, the Corp is only worth
20k.
2. This is Watered Stock, which means that the shareholders are personally liable for
the difference between what they paid and the par value.
v. Directors will set the Par Value at a penny to prevent liability on the Shareholders.
vi. Types of Dividends and Stocks:
30
 1. Cumulative Dividends - this means that it is compounded in that if in year 1 you
cannot get your money, you will get your year 1 money in year 2, plus your year 2
money.
2. Convertible Stock – it can be changed at the option of the shareholder owning
the stock.
3. Reedemable/Callable Stocks– the Board of Directors can redeem the stock so
that the stock will be given back to the corporation in return for a price.
l. Fiduciary Obligations of Dominant Shareholders
i. Zahn v. Transamerica Corporation
1. Facts: Zahn owns Class A stock. Axton Fisher owns a wearhouse of leaf tobacco.
With the knowledge that the tobacco was worth much more money, Transamerica
(controlling shareholder) cause Axton Fisher to redeem the class A stock, gives
them $60 each and then liquidate the asset and makes a lot of money at the
appreciated price. Zahn is upset because he does not get a portion of the
liquidation and this is a breach of fiduciary duty by Transamerica. If
Transamerica notified the Class A stock holders of the appreciation, then the
Class A stockholders would have converted to Class B.
2. Holding:
a. Majority or controlling shareholders of a corporation that have managerial
power cannot act in contravention of the interests of the minority.
i. Otherwise, A shareholder voting you have the right to act with a
view toward your own selfish benefit.
b. As a Director, you must vote in the interest of all shareholders and cannot
act for your own benefit at the expense of the shareholders (redeeming
stock is by directors not shareholders).
c.
m. Closely Held Corporations
i. Publically Held Corporation: There is a secondary market for its shares.
ii. Closely Held Corporation: This lacks a secondary markter for its shares. This lack of a
ready exit underlies the policies of some of these rules and distinctions made for closely
held corporation.
iii. Proxy Voting (§609): a shareholder authorizes someone else to vote for them. The
shareholder is the principle and the proxy holder is the agent. This is really important in a
publically held corporation in order to obtain a quorum. So, you can sign a proxy to have
someone else vote your shares at a meeting.
1. Ringling v. Ringling – Haley Ringling had her husband vote for her by proxy.
Proxy vote counts for quorum.
iv. Types of Voting:
1. Straight Voting:
a. Corp with 100 issued shares. 2 shareholders: Joe and Milo. Joe has 70
shares; Milo has 30 shares. Electing 3 directors: ABCXYZ. Joe can vote
his 70 shares three times by picking 3 directors, while Milo can vote his
30 shares 3 times by picking 3 directors.
2. Cumulative Voting: (Minority Shareholders have a larger voice; Exception to
Default Rule) THIS IS ONLY FOR ELECTING DIRECTORS!!!
a. Corp with 100 issued shares. 2 shareholders: Joe and Milo. Joe has 70
shares; Milo has 30 shares. Electing 3 directors: ABCXYZ. Milo can vote
all of his 90 votes to one candidate. Joe can vote 210 shares for one
candidate as well. You take the amount of shares and x by the amount of
directors and you can put that amount of shares towards any number of
parties in any amount less than the total amount of shares you have.
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 3. Voting Trust:
a. Shareholders take their shares and hand them over to a trustee and the
shares are held in the name of the trustee who votes them for shareholders.
As a shareholder, you get the financial part of the shares, but you loose
control.
4. Vote Pooling Agreement: THIS CAN BE FOR ANY TYPE OF VOTES!
a. The shareholders do not give up title to their shares, but agree as a matter
of contract to vote in concert.
b. BCL§ 620(a) – Ringling Bros:
i. Agreements as to voting; provision in certificate of incorporation
as to control of directors.
1. (a) An agreement between two or more shareholders, if in
writing and signed by the parties thereto, may provide that
in exercising any voting rights the shares held by them
shall be voted as therein provided, or as they may agree, or
as determined in accordance with a procedure agreed upon
by them.
v. Shareholder Voting
1. Ringling and Ringing
a. Facts: Haley and Conway had a Vote Pooling Agreement. 1000 shares
issued. Haley has 315, Conway has 315, North has 370. Seven Direcotrs
were to be elected. So, Haley and Conway can vote 315 x 7 = 2,205, while
North can vote 2,590. Under the agreement, they would confer and vote
for the same fifth director because alone they can each elect 2 directors,
but together they can elect a fifth director. If they could not agree on the
fifth director then they would submit the agreement to the arbitrator.
b. At the Shareholder Meeting, Conway voted for herself and her son. Haley
voted for herself and her husband. They disagreed on whether to adjourn
or not to determine who should be the fifth vote. No adjournment allowed.
c. Holding: Haley breached the Vote Pooling Agreement by not voting in
the way the arbitrator decided.
i. The arbitrator (Loos) was never allowed to vote the shares because
no right of proxy vote. His power ends at deciding who should be
voted for.
ii. Court upholds the Vote Pooling Agreement and says it does not
violate public policy. Vote Pooling is allowed as long as it does not
violate any duty to other Shareholders.
vi. Director Voting
1. McQuade v. Stoneham
a. Facts: Stoneham sells to McQuade and McGraw. Stoneham is majority
shareholder and there are other minority shareholders. In 1919, all three
above make agreement to elect each other as officers and continue
themselves in this position. They also agreed to a certain set salary. They
also agreed to make best endevours to keep each others as directors and
maintain officers salaries at a set level. In 1928, at the directors’ meeting,
McQuade is replaced by Bondy as Treasurer. Stoneham and McGraw
refrained from voting. McQuade also looses his director position. This
occurred because of personal reasons and Stoneham’s ego.
i. McQuade sues under their agreement.
b. Holding:
i. As a City Magistrate, McQuade cannot be on the board.
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 ii. Agreement to keep each other as Directors: Shareholders elect
directors. So, they are agreeing as shareholders. Shareholders can
make agreement pursuant to §620(a) and Ringling v. Ringling.
iii. Agreement to keep Officers salaries and keep each others as
Officers: They have fiduciary duties to the corporation and cannot
abrogate these duties. So, by contract the parties cannot minimize
or increase the amount of discretion they have. The Directors need
to keep their independent judgment or discretion. So, any
agreement that infringes on that discretion is against public policy.
1. This agreement is making a duty to the individual and the
duty is supposed to be to the corporation when you are an
officer and/or a director.
2. NOT ALLOWED.
iv. Duty of Loyalty extends only to a Shareholder and NOT to a
Shareholder as an employee.
v. RULE: Contracts are void or against public policy is so far as
they preclude the board from exercising its discretion as far as
hiring and setting salaries for officers.
2. Clark v. Dodge
a. Facts: They are shareholders and directors. Clark is an officer (treasurer).
No other shareholders. Clark has 25% and Dodge has 75%. Dodge did not
actively participate in the business, so Clark ran it. Clark knew the secret
formula.
i. In order to induce Clark to give up the formula if
1. Dodge agreed to keep Clark as a director of Bell & Co.,
2. Clark continue as general manager as long as Clark
remained faithful efficient and competent,
3. Clark receive 1/4th of the net income of the corporations
either by way of salary or dividends and
4. No unreasonable or incommensurate salaries should be
paid to other officers or agents which would so reduce the
net income as material to affect Clark’s profits.
ii. Dodge fails to use his controlling stock position to keep Clark as a
Director and prevents him from getting the promised income.
b. Holding: Contract is valid.
i. Since Dodge and Clark are the sole shareholders and the contract
requires Clark to be faithful, efficient, and competent, Dodge can
agree, as s Director, to keep Clark as an officer.
ii. This is different from McQuade v. Stoneham.
iii. Rule: As a matter of public policy directors cannot abrogate their
public policy/discretion unless all shareholders are directors and all
agree to the arrangement because then there is no harm.
3. NY BCL 626(b):
a. A provision in the certificate of incorporation otherwise prohibited by
law because it improperly restricts the board in its management of the
business of the corporation, or improperly transfer to one or more
shareholders or to one or more persons or corporations to be selected by
him or them, all or any part of such management otherwise within the
authority of the board under this chapter, shall nevertheless be valid:
i. (1) If all the incorporators or holders of record of all outstanding
shares, whether or not having voting power, have authorized such
33
 provision in the certificate of incorporation or an amendment
thereof; and
ii. (2) If, subsequent to the adoption of such provision, shares are
transferred or issued only to persons who had knowledge or
notice thereof or consented in writing to such provision.
4. NY BCL § 626(c):
a. A provision authorized by paragraph (b) shall be valid only so long as no
shares of the corporation are listed on a national securities exchange or
regularly quoted in an over-the-counter market by one or more members
of a national or affiliated securities association. (B) ONLY APPLIES
TO A CLOSELY HELD CORPORATION AND NOT A
PUBLICALLY HELD CORPORATION.
vii. Wilkes v. Springside Nursing Home (Closely Held Corporation)
1. Facts: Shareholders/ Directors/Officers: Wilkes, Riche, Quinn, Pipken – they all
shared the responsibilities for working. They all received money as a salary and
not as a dividend. Quinn wants to personally purchase corporation’s property and
Wilkes get him to pay a higher price for it. This caused a falling out between
Quinn and Wilkes. Wilkes intends to sell the shares as long as he gets the correct
valuation; they offered him a price, but it was a very low price. At the Board
Meeting, they continue Q,R,P’s salaries, but leave no salary for Wilkes. Q gets a
higher salary. At the Shareholder Meeting, Wilkes is no longer a director.
a. Wilkes sues for breach of fiduciary duty because he is not receiving a
return on his investment since there are no dividends and Wilkes has no
salary.
2. Holding: This was a freeze out.
a. As Directors, the Court does not want to encroach on their discretion.
b. As Shareholders, might own a duty of loyalty to each other as if they were
partners.
c. RULE: CLOSELY HELD CORPORATION; CONDUCT THAT LOOKS
LIKE A FREEZE OUT OR INCONSISTENT WITH REASONABLE
EXPECTATIONS OF THE MINORITY SHAREHOLDER….then we use
the rule below….
i. The burden will be on the control group to show a legitimate
business purposes, then the burden shifts to the minority
shareholder to show that an alternative method of reaching the
same purpose with a less harmful route could have been used.
The purpose is to protect the minority in a closely held corporation
because there is no ready exit.
d. In this case, there was no legitimate purpose by O,P, and R because there
was no misconduct by Wilkes; therefore, this is a freezeout.
i. *If Majority here could show a legitimate purpose that Wilkes
cannot use the computer. Wilkes could come back and say well
what about training me – low cost, must less restrictive. The
Court will weigh the alternatives to determine if it is worth it.
ii. **We found someone to do it cheaper. Wilkes will say well what
about Q,R, and P’s job – cheaper labor? If this applies to all
positions, then it looks like a freeze out.
viii. Ingle v. Glamore
1. Facts: Ingle wanted to purchase shares from Glamore, sole shareholder. Instead
Ingle was hired as a sales manager. Two years later, Glamore sold 22 shares to
Ingle and gave him a 5 year option to purchase another 18 shares. In return,
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 Glamore would vote Ingle as Director and Secretary. If Ingle was no longer an
employee, then Glamore can repurchase Ingle’s stock.
a. Ingle had 40, Glamore had 82, and two sons later purchased 19 shares
each.
b. Ingle claims that Glamore violated fiduciary duties as majority
shareholder.
2. Holding: No breach because Glamore does not owe a duty to Ingle as a At Will
Employee
a. The Court is not saying that there is no duty, but that the duty does not
extend to Ingle as an employee, but only to Ingle as a shareholder. Being a
shareholder does not counteract the employee at will doctrine.
b. The agreement counteracts any expectation of future employment by Ingle
(for a freezeout we look to “reasonable expectations being frustrated”).
c. This can be reconciled with Wilkes because Wilkes did not have an
agreement, while Ingle did.
ix. Brodie v. Jordan
1. Facts: Brodie, Jordan and Barbuto are all shareholders/directors/officers. Each
held 1/3 shares. Eventually Brodie was no longer involved and only met 2-3 times
a year with Jordan and Barbuto. Brodie asked for them to buyout his shares.
Brodie does not receive a salary or dividends from the corporation. Once Brodie’s
wife inherited the interest, Jordan and Barbuto refused to give her financial
information, there was no shareholder’s meeting for 5 years, and Mrs. Brodie
could not participate in decision making.
2. Holding:
a. Mrs. Brodie’s reasonable expectation is not for a buyout, but to be allowed
to participate in the decision making.
i. If injunction to allow her participation is granted, then Jordan and
Barbuto will probably just buy her out.
x. Dissolution applies more to closely held corporations. Public Corporations usually
go bankrupt or get bought out.
xi. NY BCL § 1001
1. (a) A corporation may be dissolved under this article. Such dissolution shall be
authorized at a meeting of shareholders by (i) for corporations the certificate of
incorporation of which expressly provides such or corporations incorporated
after the effective date (Feb 1998) of paragraph (b) of this section, a
majority of the votes of all outstanding shares entitled to vote thereon or
(ii) for other corporations, two-thirds of the votes of all outstanding shares
entitled to vote thereon, except, in either case, as otherwise provided under
section 1002 (Dissolution under provision in certificate of incorporation).
xii. NY BCL § 1102. Directors' petition for judicial dissolution.
1. If a majority of the board adopts a resolution that finds that the assets of a
corporation are not sufficient to discharge its liabilities or that a dissolution
will be beneficial to the shareholders, it may present a petition for its dissolution.
xiii. NY BCL § 1104. Petition in case of deadlock among directors or shareholders.
1. (a) Except as otherwise provided in the certificate of incorporation under
section 613 (Limitations on right to vote), the holders of shares representing
one-half of the votes of all outstanding shares of a corporation entitled to vote
in an election of directors may present a petition for dissolution on one or more
of the following grounds: (1) That the directors are so divided respecting the
management of the corporation's affairs that the votes required for action by the
board cannot be obtained. (2) That the shareholders are so divided that the votes
35
 required for the election of directors cannot be obtained. (3) That there is
internal dissension and two or more factions of shareholders are so divided that
dissolution would be beneficial to the shareholders.
xiv. NY BCL § 1104-a. Petition for judicial dissolution under special circumstances.
DOESN’T APPLY TO PUBLIC CORPS!
1. (a) The holders of shares representing twenty percent or more of the votes of
all outstanding shares of a corporation, other than a corporation registered
as an investment company under an act of congress entitled "Investment Company
Act of 1940", no shares of which are listed on a national securities exchange
or regularly quoted in an over-the-counter market by one or more members of
a national or an affiliated securities association, entitled to vote in an election
of directors may present a petition of dissolution on one or more of the
following grounds: (1) The directors or those in control of the corporation have
been guilty of illegal, fraudulent or oppressive actions toward the
complaining shareholders; (2) The property or assets of the corporation are
being looted, wasted, or diverted for non-corporate purposes by its directors,
officers or those in control of the corporation.
xv. 20% or more of voting shares can bring petition of dissolution for oppression, fraud
or illegality.
xvi. Oppressive Acts are the frustration of the reasonable expectation of the shareholder.
Once there is an dissolution, there is a winding up (sale of corporation/assets), then
a settling up (pay off creditors and then to the shareholders). This will trigger NY
BCL §1118.
1. NY BCL § 1118. Purchase of petitioner's shares; valuation.
a. In any proceeding brought pursuant to § 1104a, any other shareholder
or shareholders or the corporation may, at any time within ninety days
after the filing of such petition or at such later time as the court in its
discretion may allow elect to purchase the shares owned by the
petitioners at their fair value and upon such terms and conditions as may
be approved by the court, including the conditions of paragraph (c)
herein. An election pursuant to this section shall be irrevocable unless the
court, in its discretion, for just and equitable considerations, determines
that such election be revocable.
i. Either parties agree to fair value or the Court determines the fair
value.
xvii. Pedro v. Pedro
1. Facts: Alfredo, Carl, and Eugene each own 1/3 interest in the Pedro Corporation,
which manufacturers and sells luggage and leather products. Alfred was fired.
Each brother had an equal vote in the management of the company. In 1979, the
three brothers changed the agreement to reduce the value of the stock to 75% of
the net book value upon purchase, which includes good will. Upon finding
$300,000 missing, Alfred’s relationship with Carl and Eugene deteriorated. Alfred
wanted an independent accountant to determine where the money went and
Carl/Eugene agreed. After a month of no findings they fired the accountant whoe
eventually discovered the di. Alfred claims that he was told that if he did not
cooperate regarding the discrepancy he would be fired. In October 1987, another
accountant was hired who found the same discrepancy and claims that he was
denied access to information. During this month Alfred was placed on mandatory
leave and was fired in December.
a. Alfred petitions for involuntary dissoution.

36
 b. Carl and Eugene argue that there was no breach of fiduciary duty because
there was no diminution in the value of the corporation or the stock value
of Alfred’s shares.
2. Holding:
a. Alfred receives lost wages because he had a reasonable expectation to
work there for his whole life, as his father did.
b. Alfredo received damages for breach of fiduciary duty because Carl and
Eugene should not be able to profit by making Alfred do a forced buyout
at 25% less.
i. This is not double recovery because Alfred wears two hats: owner
and employee.
xviii. Restrictions on Stocks
1. Right of First Refusal – limitation on a shareholders right to sell their shares,
which means that before A can sell, he must give a right of first refusal to the
other shareholders or the corporation.
a. This is a protection for those who are remaining investors.
b. UPHELD. Merely identify who the shareholder must sell to.
2. Mandatory Sell – if you cease to be an employee, you must sell your shares back
to the corporation.
a. This is done so the next employee can get the shares. You want to keep
loyalty, and employees will think twice about leaving if they have to sell.
b. UPHELD. Merely identify who the shareholder must sell to.
3. Cannot be transferred without the consent of other shareholders/Board.
a. You want the protection of not being in business with strangers.
b. Rafe v. Hindin – this says whether the shareholder can sell at all. This
restriction has raised issued in the courts.
i. This restriction was invalid because it did not expressly state a
reasonableness requirement.
ii. Parol Evidence rule issues.
xix. Rafe v. Hindin
1. Facts: Rafe and Hindin each have 50 % shares in a corporation. Stock says it is
non transferable except to another shareholder. Written consent required to sell to
someone else. (These are contradictory). Rafe finds a buyer, but Hindin refuses to
consent.
2. Holding: The Court says that this restriction is unenforceable as a matter of law
because there is no requirement of reasonable withholding of consent, which
makes it against public policy.
a. We must balance restricting alienation of property and freedom of
contract.
b. RULE: When there is a restriction on a transfer of shares requiring
consent of other shareholders, it should expressly state a
reasonableness requirement.
c. Restrictions being noted on stock certificate shows notice and subsequent
buyers of stock will be subject to the restriction.
VI. Limited Liability Corporations – new entity
a. Terminology/Characteristics
i. NY LLC § 203 is formation.
ii. NY LLC § 206 is publication requirement.
iii. NY LLC § 417 is operation agreement.
iv. First LLC available in late 1970s in Wyoming, but did not gain popularity until it was
recognized by the IRS for tax purposes in the 1990s. No uniformity of LLC laws.
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 v. The owners of an LLC are members.
vi. Management is up to the members. The theory is maximum flexibility in terms of
management and freedom of contract.
1. Member Managed LLC – looks like a partnership; owners managed it
2. Managers Managed LLC – the person in control is not an owner/member. It is a
3rd party hired by the members of the LLC.
b. Formation
i. Must file with the Secretary of the State because it is a legal existence.
ii. The LLC will adopt an operating agreement, which is not filed with Sec., but a private
contract between the members.
iii. So, it is like a limited partnership/limited liability partnership and corporation, but unlike
a partnership based on these procedural requirements for coming into existence.
Partnerships do not require procedures such as these.
c. Member’s Interest
i. Voting Rights:
1. A member has votes in proportion to his interest or right to share in profits. NY
LLC § 402.
2. NY LLC § 503: profits and looses shall be allocated on the basis of value of the
contributions of each member. So, if they do not discuss it, it is based on what
you invest in the LLC.
a. Partnership default rule is that they share equally. LLC differs from
partnership.
ii. Quorum: Majority of members must be present. NY LLC § 404.
iii. NY LLC § 411(Interested managers) disclosure AND sufficient vote of disinterested
managers OR fair and reasonable to the corporation.
iv. NY LLC § 409 Duty of Care – in good faith with degree of care that an ordinarily
prudent person in a like position would under the circumstances.
v. NY LLC § 601 – Property is owned by LLC and no personal right to possess of LLC
property. However, your interest in the LLC is personal property.
vi. Westec v. Lanham (agency law applies to LLCs)
1. Facts: Lanham and Clark are mangers and members of PII LLC. Clark contacted
Westec to do business for PII LLC. Clark never told Westect that they were an
LLC. Westec completed work and PII LLC refused to pay. Westec seeks Clark
and Lanham to be liable personally because no notice that they were an LLC.
2. Holding: The Court holds that Lanham liable and not Clark because Clark was
Lanham’s agent.
a. Members in an LLC are usually not personally liable because that is the
purpose of forming an LLC.
b. Filing with the Secretary of State is not Constructive Notice to the world
that you are an LLC. To allow it would invite fraud.
c. Thus, Clark and Lantham had to inform Westec that they were an LLC.
d. Just because there is an LLC Statute that does not mean that agency law
goes out the window.
e. Two Agency Relationships
i. Lanham as principle and Clark as agent
1. Since Clark disclosed his principle Lanham, Clark is not
liable.
ii. PII as principle and Lanham/Clark as agent
1. PII is partially disclosed principle – we know Lanham and
Clark are acting on behalf of some else, but we do not

38
 know exactly what the principle is – this makes Lanham
and Clark liable.
d. Piercing the LLC Veil
i. KLL v. Flahive
1. Facts: Flahive is an LLC with no assets. KLL entered into a contract with Flahive
allowing Flahive to use the surface of its real property. Roger Flahive is the
managing member of Flahive. KLL said Flahive caused contamination of real
property. There is no allegation of fraud.
2. Holding: Flahive can be personally liable because piercing the corporate veil
appies to LLCs. The factors might be different for an LLC though.
e. Freedom of Contract and Fiduciary Obligation
i. McConnell v. Hunt
1. Facts: McConnell and Hunt invested in CHL LLC in order to obtain an NHL
franchise. Insurance company agreed to build arena and lease it to CHL LLC.
Hunt rejected proposal, so when Insurance company approached McCOnnell he
accepted since Hunt did not want it.
2. Holding: McConnell did not breach fiduciary duties and Hunt breached the
operating agreement by suing on behalf of CHL LLC without obtaining a majoiryt
vote.
a. NY LCC § 409a – gives a duty of care for managers… “in good faith with
degree of care that an ordinarily prudent person in a like position would
under the circumstances.” This seems to NOT be a default rule, but a
mandatory rule! Same duty as for corporation directors.
b. The Court says that there is no breach of fiduciary duty because the
operating agreement allows competition by members for another business
interest. This clause limits the fiduciary duty of loyalty. The parties agreed
to allow each other to take actions that would otherwise be a breach of
fiduciary duty.
c. Tortious interference does not work out because McConnell waited to see
if LLC wanted the opportunity.
d. Hunt never got majority vote to approve instituting the suit. He never did
this, so he breached the agreement. Hunt did not have the actual authority
to reject this opportunity either.
e. Even if McConnell did not wait for CHL to make a decision, he would not
be in breach because agreement does not require him to wait. However,
this might allow for tortuous interference claim to be valid.
f. LLC Derivative Suits
i. Tzolis v. Wolff
1. Even though the LLC Statute does not address derivative suits, a member can
bring a derivative suit on behalf of an LLC.
a. Part of statute was only in assembly bill and not in senate bill. It was
evertually taken out. How do we interpret that? It should not be law
because it is not included? Or Common Law applies where statute does
not address?
2. The member must make a demand of the LLC to bring the suit OR show that the
demand is excused – WE ARE NOT SURE IF THESE APPLY FOR LLCs!!!!!!
3.
g. LLC Dissolution
i. Under Partnership there is automatic dissolution and judicial dissolution. For LLC, there
is similar provisions.
ii. Important Statutes:
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 1. Dissolution Occurs LLC § 701(a)
2. Grounds for Dissolution LLC § 702
a. NY LLC § 702.
i. Judicial dissolution. On application by or for a member, the
supreme court in the judicial district in which the office of the
limited liability company is located may decree dissolution of a
limited liability company whenever it is not reasonably
practicable to carry on the business in conformity with the
articles of organization or operating agreement. A certified copy
of the order of dissolution shall be filed by the applicant with the
department of state within thirty days of its issuance.
3. Winding Up LLC § 703
4. Settling Up LLC § 704
a. § 704. Distribution of assets.
i. Upon the winding up of a limited liability company, the assets
shall be distributed as follows:
1. (a) to creditors, including members who are creditors (this
is different from PARTNERSHIPS), to the extent
permitted by law, in satisfaction of liabilities of the
limited liability company, whether by payment or by
establishment of adequate reserves, other than liabilities
for distributions to members and former members under
section five hundred seven or section five hundred nine of
this chapter;
2. (b) except as provided in the operating agreement, to
members and former members in satisfaction of liabilities
for distributions under section five hundred seven or
section five hundred nine of this chapter; and
3. (c) except as provided in the operating agreement, to
members first for the return of their contributions, to the
extent not previously returned, and second respecting
their membership interests, in the proportions in which
the members share in distributions in accordance with
section five hundred four of this chapter.
5. Articles of Dissolution LLC § 705
iii. Automatic Dissolution: Bankruptcy, insanity, death  lead to winding up/settling up.
iv. NY LLC 701(b):
1. Unless otherwise provided in the operating agreement, the death, retirement,
resignation, expulsion, bankruptcy or dissolution of any member or the
occurrence of any other event that terminates the continued membership of
any member shall not cause the limited liability company to be dissolved or its
affairs to be wound up, and upon the occurrence of any such event, the
limited liability company shall be continued without dissolution, unless within
one hundred eighty days following the occurrence of such event, a majority in
interest of all of the remaining members of the limited liability company or, if
there is more than one class or group of members, then by a majority in interest
of all the remaining members of each class or group of members, vote or agree in
writing to dissolve the limited liability company.
v. New Horizons v. Haack
1. Facts: Haack signs the agreement between the LLC and the gas credit card
company. However, when Haack signs it, she does not indicate that she is acting
40
 on behalf of the LLC. LLC does not make the payments after charging $1,100.
This is a collection action by credit card company in small claims court. Credit
card wants to collect from Haack personally.
a. Assets of LLC: Truck, Accounts Receivable, Tool, customer lists. Haack
sells the car, customer lists, and tool to pay off the loan. No other evidence
to see what she did with this money.
2. Holding: Haack is personally liable.
a. Normally after dissolution, you wind up and settle up. Haack never settled
up. Court says no evidence that Haack settled up; it looks like Haack took
the money, so the Court holds Haack personally liable.
b. Personal Guarantor – since she did not explicitly sign on behalf of LLC,
she could be liable for this. Statute of Frauds problem though.

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