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Business Organizations
(OUTLINE) I. INTRODUCTION LECTURE
AGENCY: this principle will be present throughout course Issue: How is an agency formed? Threshold Question: whether the parties are in an agency relationship? Difficulty: agency is an informal relationship. It may exist with or w/out a writing, filing, or explicit ackowledgment look at Rest 2d Agency sec 1 three major elements:
consent by both principal and agent control by principal action by agent on behalf of principal
why consent? Explicit consent is not required, but we still need something that shows some basis for concluding there was consent principal in control - agent must follow principal’s instruction. If agent does not listen to principal, agency may be destroyed. Basic duties of agent: duty of loyalty to principal and duty of care. Both of these things arise in fiduciary relationships also. (These are important for shareholder suits) behalf of principal - agent must disregard his own interests and act for the benefit of principal EXAM: must be able to distinguish agency relationship from non-agency relationship. For example, a trust is not an agency because the trustee is not subject to beneficiary control. Ask: whether individual (the asserted agent) is under the control of the principal? Does the principal have the right to control? EXAM: the dividing line between agency and non-agency relationship is not clear (that’s why it’s perfect for exam question) look at Servant - Rest 2d Agency sec 2(2). Master can be held responsible for torts committed by servant (tort law). Ask:
1. Was indiv acting w/in scope of her employment?
2. Was servant using master’s chattels during tort? If yes, master was responsible w/out fault
we generally don’t talk about servant - now we say employee. An employee will gen qualify as a servant for litigation purposes partnership - definition under Unif Partn Act (1914) sec 6 - an assoc of 2 or more persons to carry on as co-owners a business for profit ask: is it for profit? Limited partnership can be formed under Limited Partnership Act. The liability is limited. For example, I put in $10, the most I can lose is $10. The rules are different for regular (general) partnership Note: how do you protect your client? What kind of system do you set up? The options are: general, limited, and limited liability Note: tax liability. Partnership gen has favorable tax consequences. There are many devices to deal w/tax or liability questions another way to deal w/liability is w/bonds and insurance Sole proprietorship - operated by one person, generally exposed to unlimited personal liability (can be adjusted by insurance) hypo:
1. Indiv - Monica writes movie script about law student. She puts up all the $ herself, does all work herself. This = sole proprietorship
a. Assume she makes alot of $. What else can she set up besides sole prop? She could form a corp, find partner, or become employee, limited liab co, limited partnership. She also gets $ for managerial services. Assume she needs to hire someone to manage business part.
b. Taxes - she wants to minimize them
2. I create internet based company. Going public means losing control. How do you protect yourself? Should draft agreements to protect client. Is there a buyout clause?
II. Agents and Employees
Section 1 - INTRO
1. Fowler v Penn Tire Co
bankrupt entity - manuf tires should we focus on agreement of parties or conduct of parties? Has there been a breach? Does this necessarily determine who takes possession of the tires? Breach of contract does not necessarily put non-breaching party in better position how could penn tire have protected itself? By appropriate filing of a security interest. Penn did not do this, so all that’s left to argue is consignment bankruptcy is not the way to protect yourself - generally, it’s considered an equit remedy MAKE SURE YOU PROTECT YOURSELF BY PERFECTING SECURITY INTEREST IN GOODS also, look at who had control in this situation - Martin did not comply completely with the contract how else could penn tires have sold its tires? Franchise, company owned stores (note this req alot of capital)
Section 2 - EMPLOYEE VS INDEP CONTRACTOR
1. Humble Oil v Martin
ct made distinction between indep contractor and servant respondeat superior - master responsible for employees acts w/in the scope of employee employment this case concerns actual authority the gas station was owned by Humble, operated by Scneider, the car was owned by Mrs Love Humble leased to Schneider right to sell gas Schneider provided service (fix car) the contract was between Humble and Schneider argue ct was correct in control Humble exercised - but Humble does not have strict control of tort component (service end) NOTE: distinction in sec 2 of Rest Agency is not clear, and the cases are not clear. ASK: whether or not individual, who is putative agent is acting on behalf of principal AND whether principal exercises some control over agent
2. Hoover v Sun Oil Company
less control exercised by Oil Co here than Humble Look at Rest Agency sec 2,3,4,6,7,8,8A,13
Section 3 - FRANCHISES
1. Murphy v Holiday Inns, Inc
Murphy slipped and fell at Holiday Inn this is a negligence action, 4 elements basic argument: liability and imputation. Can it be imputed to larger entity? Betsy owns hotel. Holiday inn helps her w/advertising, etc. Ex: McDonald’s - What’s your expectation when you walk into one in Hong Kong or Paris? That you’ll get the same quality food. Holdiay inn is trying to do the same thing here. Franchise wants to avoid liability. How do you do this? What advice would you give franchise? Each Holiday inn is indep owned & operated. Sign (because of this case) arg is for actual agency assume you’re bringing claim on behalf of plaintiff
2. Parker v Dominos Pizza
holding - p 25 p 23 -24 factors why is hiring potentially important for control issue (agency)? EXAM: use facts for consistent analysis right to control exposes principal to liability. The more standardization there is, the more likely to evidence control remember, this is another franchise look at everything - all factors - to justify liability to the principal all we’re trying to do is establish a sufficiently strong relationship, find principal, hold them liable for torts of agent watch out for cases where borrower goes belly up, doesn’t pay (p 26 creditors)
Section 4 - CONTROL AND THE LIABILITY OF CREDITORS
1. Jenson Farms Co v Cargill Inc
debt was getting larger Cargill started to monitor Warren’s internal operations how did line of credit get so big? Which entity could have prevented this? Cargill Cargill was being sued by farmers p 30 - 9 factors always look for element of control look for control of day to day management what could Cargill do to reduce exposure to liability? Go to outside consultant, who could provide some advice, shows arms-length transactions affirmatively take steps to force Warren into bankruptcy could buyout Warren and purchase grain directly from farmers
Section 5 - APPARENT AUTHORITY AND APPARENT AGENCY
1. INTRODUCTION LECTURE
EXAM: look at actual implied authority & apparent authority most students don’t have trouble w/actual express authority. For example: principal tells agent do this, agent does it, principal is liable Actual Implied Authority - generally you have express agency. Example: I hire you as travel agent. I want to arrive in Paris on sept 3. Most people would check airline sched, pick an airline, get best deal. But I haven’t given you express authority to contract w/American Airlines. Is there implied authority here? Probably yes agent is empowered to do everything including incidental things principal will not specify every detail example: I hire you to do party (as party planner). The planner calls in clown, singer, w/out me expressly telling her to do so. This is example of incidental. This concept suggests that principal cannot always think of everything. If agent is going to be granted implied authority, make sure you hire a good agent if I get poor agent, and this agent puts me on flight to paris which leaves from detroit, la, houston, ...to paris - the principal should still be liable to airline. It’s my fault in hiring stupid travel agent. Apparent Authority - ask whether there has there been a communication between the principal and a third party. This is the primary issue. Rest agency sec 27 do not need direct communication between principal and 3rd party example: I grant you authority to hold yourself out as agent for purchase of GM. GM relies in some way, Morgan Stanley is involved. Ask whether this is case of: actual agency actual implied agency apparent authority need to have reasonable belief (3rd party) pure econ perspective - more efficient to hold principal liable - could have prevented it, wasted econ resources THE IDEA IS TO ENSURE LIABILITY IS ATTACHED TO PARTY THAT COULD HAVE PREVENTED WASTE OF RESOURCES (under apparent authority) Ratification - see Rest Agency sec 82 Apparent authority by virtue of custom (this concept not in textbook) Actual auth by virtue of custom (also not in book) - can arise where the principal has given the agent no instructions. If it is customary in trade or commerce for certain agent to have certain powers, then the agent has actual authority to exercise such powers, unless the principal expressly directs otherwise NOTE: even where the principal has expressly forbidden the agent from doing customary acts, apparent auth by virtue of custom may still exist. 2 conditions must exist: 3rd party must know that the principal has placed the agent in a certain position it must be customary for an agent in that position to have authority to enter into the type of agreement in question doctrine for liability goes back to the principal: to ensure that one who can prevent harm will, to select an agent, to purchase insurance, and principal likely has greater access to info than the 3rd party
2. Lind v Schenley Industries
apparent authority case salary in dispute Herrfeldt said Kaufman will tell you (Lind) what salary you’ll get NOTICE: the salary quadrupled here. If your’re the defense attorney, you would focus on this for reasonableness factor and credibility of Lind the jury found for Lind. Trial judge entered jnov on basis that Lind had not proven apparent auth and Lind could not reasonably believe that his commissions would be 4x his salary note: p 35 “garbled” - facts can give rise to apparent auth by virtue of custom Exam tips: always refer to the Rest Agency definiton final exam heavily grounded in understanding of corporate law - agency not heavily tested Lind tried to prove all 3 kinds of agency: actual, apparent, and implied look at p 37 dissent other grounds of recovery for Lind: ratification (note for exam) - just state another possibility
3. 370 Leasing Corp v Ampex
how could joyce have protected herself? Make sure there is a stmt, certified by a corporate secretary that a particular indiv has a particular level of authority (board resolution certified by a corp secretary, who is an officer of the corporation) apparent authority is arguably a misnomer. The focus is on power to bind - NOT right to bind. It is derived from appearance of legit authority why does a doc of apparent authority exist? Equitable doctrine, designed to protect individuals who are misled by appearance and designed to induce the principal to prevent the occurrence of such appearances 370 sued for breach of contract against Ampex assume Kays does not have authority to bind Ampex, what then? There is no contract 11/3/72 - joyce received doc, agreement, never executed by ampex contract issues: was the doc at issue an offer to sell or a solicitation to make an offer? 11/3/72 was offer to sell. Now we need to find valid acceptance by ampex = nov 17 confirmatory memo primary legal issue: did kays have apparent authority to accept joyce’s offer on behalf of ampex? Agent has apparent auth to do those things that are usual & proper in the business she is employed (look at p 40) ask: is it customary for ampex sales people to deal w/sales of that size? Who had actual auth to bind ampex and sign contract w/joyce? What could ampex have done to protect itself from litigation? Better training, ampex could have created a form contract w/clearer rules what could joyce have done to prevent litigation? Gotten proof of kays authority (maybe through corp resolution) bottom line question: how can this litigation be prevented in future?
4. Billops v Magness Construction co
Billops sues magness and hilton we’re trying to hold hilton liable w/out fault - just claiming relationship what could hilton have done to prevent this incident from occurring? If you’re going to open franchise, engage in affirmative investigation was the manager at issue an agent, servant, or master? Probably an agent or servant. This could expose magness to liability trial ct ruling p 41-42 p 42 issue of control - remember hoover v sun oil what was ct holding here? NOTE: when there is reasonable belief, there may be apparent agency - you need reliance and reas belief plaintiff must show reliance on indicia of authority which originates from the principal - AND that such reliance must have been reasonable apparent agency theory (note Holiday inn was control theory) ask: whether alleged manifestations give rise to a reas expectation or belief that the alleged agent possesses the auth she claims
Section 6 - INHERENT AGENCY POWER
1. Watteau v Fenwick
Watteau is the D (undisclosed principal), Fenwick is P (supplied goods to Humble, runs beer place for Watteau) who was in the best position to avoid the litigation? Principal (agent acts on behalf of principal). Ask: could the principal have done a better job in selecting agent? (Prevention tip) the principal could have taken out insurance agency is a consensual relationship - principal must consent to it majority of us juris have rejected inherent agency concept gen rule: if you’re gonna rep principal, remember that most agents will violate the agency relationship and the principal will be held liable did Watteau hold Humble out as his agent? NO assume holding out as occurred - what agency theory comes to mind? Apparent Judge Boydell p 46-47 goods were ord used in business purchase w/in reas scope of authority Humble was Watteau’s agent inherent agency and apparent agency by custom are kind of alike. How are they different? ASK: is there any holding out by the principal? Don’t forget to always look for actual agency in gen, under inherent agency, an agent’s false statements are atributable to the principal when: the principal is disclosed or partially disclosed and a true stmt concerning the same subject would have been w/in the agent’s actual or apparent auth we don’t need to be experts on inherent agency - it’s confusing EXAM: but we must be clear on distinction between: actual & apparent agency actual authority (agency) and actual implied auth ratification look at old exams
2. Kidd v Thomas Edison Inc
if there is holding out, it’s prob an agency case fuller reported to maxwell, who entrusted fuller w/a task kidd alleged breach of contract under inherent agency (look to rule above) ct used doctrine of apparent auth in holding we impose liability despite fact that principal expressly limited agent’s authority. This goes to fairness - principal was in best position to prevent litigation
Section 7 - FIDUCIARY OBLIGATION
1. Gen Auto Manuf Co v Singer
in gen, agent owes fid duty to principal duty to act in good faith and consistently w/duty of loyalty, duty to keep & render accounts, to disclose all info relevant to principal duty of care & loyalty are most important securities action (will come back to later). Under fed law 16B - action for disgorgement w/out fault 10B(5) - duty of full disclosure under employment contract, d was supposed to (p 58) why does gen auto win here? There’s a conflict here, breach of duty of loyalty singer was earning an undisclosed profit singer could have gone to another shop - w/the principal’s knowledge and consent ct said you have to give all profit back - to let other agents know that they need to disclose and get consent. Remedy, punishment - full disgorgement. If there was a breach of contract employment action, remedy might be same as above Rest of Restitutution sec 197 - where a fiduciary violates a duty, recovery of the gain received by the fid is recoverable under a constructive trust assume this section applies here - why req full profit to go back to principal? Agent is held to higher standard of care as a fiduciary secret money making is no good our society places heavy burden on people in fiduciary positions - can have harsh penalties example: partnerships are gen fiduciaries as well
2. Bancroft v Glen
agency will apply in corp law setting p 68 note glen did alot of bad things. Glen misled his current employer and told competitor about confidential salary info. Possible breach of fid duty w/mathew bender glen should have just left bancroft immed - it’s not a breach to make plans to leave assume glen uses paid time to leave to bender. Is this a breach? Yes, breach of duty. No employment negot in his office while being paid by bancroft Rest 387 glen breached his fid duty as a matter of law
3. Town and Country Home Service v Newberry
plaintiff’s called to get those clients (painstaking effort) ds just took names from p. Taking the benefits of hard work of p. Trade secrets and customers This is really a breach of fid duty case. Duty of loyalty breached ds were enjoined from using lists & req to pay damages for customers they chased away sole basis for existence of d’s co is based on theft of confid info generally: duty not to disclose confid info and duty of loyalty. Fid duties can be breached even w/out written contract
III. Partnerships
Section 1 - PARTNERS COMPARED WITH EMPLOYEES
1. INTRO LECTURE
Unif Partnership Act 1914 - highly useful in determining whether a partnership exists. It’s useful in governing relationship between partners - and between partners and outsiders also good for determining when partnership ceases to exist judge made law here is very important UPA sec 6 - def of partnership note 3 things: other laws govern (agency, estoppel) flaws in UPA req judicial clarification rules in UPA can be displaced by agreement among the parties inter se rules UPA is useful in determining whether partnership exists. It has definitions, duties many UPA rules are default rules. THE RULES CAN BE DISPLACED BY AGREEMENT OF THE PARTIES. UPA rules - 2 distinct categories of rules: inter se rules - rules that govern relationship among partners inter se rules can be varied by partnership agreement. Most of these are default rules. Ask: whether the issue has been subjected to agreement between the parties? If yes, it can displace UPA NOTE: any agreement between partners may be oral or written, express or implied. Adoption of initial agreement (the one that sets up the partnership) requires unanimity. However, partnership agreement can provide for adoption of amendments by less than unanimity. rules which protect 3rd parties - rules which protect partners and outsiders in general, 3rd party rules are mandatory rules and the agreement of the parties cannot vary 3rd party rules. Partners cannot waive 3rd party rules 1992, only 3 states have adopted the revised UPA the 1914 UPA was adopted by all states all 50 states have legis which authorize new form of business entity LLC - limited liability company. This threatens to make general partnership obsolete. LP - limited partnership LLP - limited liability partnership GP - general partnership corporations sole proprietorship not all states recognize LLP, only about 50% the IRS has adopted view that you can adopt whatever, as long as you comply with filing req LLC threatens GP for general reasons: LLC is taxed like a general partnership
it can be structured like gp it has most, if not all of liability prot of corporation taken together, it gives rise to this conclusion: gp may cease to be entity of choice, may only come into existence accidentally in gen, clients will be more interested in LLC not gp Tax Issues: for lower tax liability, choose partnership over corp because of pass through taxation if you operate a corp, you pay corp income tax. Then when dividends are paid to shareholders of corp, the indiv have to pay personal income tax. There’s a possibility of double taxation. Partnership - gen have 1 tax - income is only taxed as it comes to you as indiv. This is pass through taxation. S Corporation (will not focus on this) - available for small co, can operate as corp for limited liability purposes but are treated as partnership for tax purposes EXAM - general partnership law (more tested, older) partnership def is sec 6 of UPA 1914. Basic rule. What is meaning of association? It implies and the law req consent so partnership is consensual relationship partnership must be business venture ask: whether all of indiv share a business risk? In the profits and losses - NEED TO HAVE BOTH alot of times, there are profit sharing schemes - but does this make people partners? Prob not we also have co-ownership, usually means co-management. This means every partner has right to manage business in absence of agreement to contrary look at UPA 1914 Partnership v Corporation (distinctions): tax differences corp has unlimited life (in general) partnership can be terminated when 1 partner leaves partnership in gen, can’t give your interest in partnership to kids, spouse for corp, you can give your stock to another person in corp, indiv investors are subjected to limited liability in partnership, members are subject to unlimited liability if you invest in corp, you are subjected to some liability (at least to extent of your investment in corp) in partnership, you can be sued personally by creditors, but you can deal w/this problem w/insurance in partnership, you cannot change rules as to 3rd parties client advice: how do you reduce liability to 3rd parties in partnership besides insurace? CHOOSE PARTNERS CAREFULLY. Conduct investigation. Look at indiv very carefully that you want to become partners with. Have some internal control can apply these ideas to any business. Always investigate people you will incorp with if you invest in corp, and are active in corp, still possibility to be exposed to personal liability. For example: taxes - not paying soc sec tax if you borrow $ for corp purposes - and you’re a new business, many banks req personal guaranty corp are in gen, good barrier for personal liability arising out of tort actions
2. Fenwick v Unemploy Comp Comm
prof says good case issue: is there a partnership here? Is she an employee? Fenwick contends cheshire is a partner what does court look at? Intent of parties to the agreement. Ct looked at agreement, conduct of business. Ask 3 quest to ascertain intent: did she oblig to share in the losses? Did she have control, ownership, or shares? What are her rights upon dissolution? Fenwick has burden of estab partnership focus here is inter se parties (relationship among alleged partners, to determine liability for unemploy comp payments) fenwick lost - ct found no partnership agreement. Fenwick wanted to keep his fixed cost low and just give her a share of the profits
3. Frank v RA Pickens & Son Co
2 partnerships involved in this case: RA Pickens and Son Co - which was managed by RA Pickens, who was not a partner RA Pickens and Son - RA Pickens is partner here what issue arises here? Conflict of interest. For example, he would want to raise rental value as partner issue: does UPA apply? Alternative to UPA is agreement by the parties in gen, agreement between parties will override UPA on inter se issues (not for 3rd party issues) sec 18 UPA if Frank is a partner, does he have the right to co-manage partnership under UPA? YES under UPA, can RA Pickens dismiss him? YES what type of partnership do we have here? GP at will frank is attempting to gain leverage - how? Liquidate the partnership, refused check def of book value p 92 - artificial creation. House example in class notes partnership not easily definable. It’s simply a contractual relationship that might vary in form and substance does UPA provide for partnership dissolution? YES, sec 29 (partnership continues until winding up of partnership affairs is done) does UPA override agreement here? NO was Frank partner or employee that shared in profits? It was prob intent of parties that he be employee but that may have been contradicted by the parties
Section 2 - PARTNERS COMPARED WITH LENDERS
1. Martin v Peyton
compare w/Cargill p 26. The issue in cargill - was cargill principal, was operator of farm agent? Is there an agency principal relat here? YES, look at principal w/partnership issues. Can claim them in alternative cargill - we can argue - cargill operated a partnership EXAM: think of 2 possibilities w/these fact patterns issue: who is the partner? Important because each partner is potentially liable for all debts of partner P asserted actual partnership example: Rodman loans Madonna $ for movie - partners? NO. Issue: does loan constitute a share in losses or profits? Most loan arrangements do not share in losses, people charge interest on loans p 94, some explicit sharing in profits, proposal mortgage = pledge to give up house if you fail to pay when due collateral = ex is car, failure to pay note securities - speculative: bank won’t secure them did peyton manage business? No, but... in cargill, there’s long term relat, debt grew over time (no stated limit to cargill involvement) here, the loan was for specific amount of time. Ct was persuaded that these controls were necessary for lender close quest: whether peyton & his colleagues were really partners can alleged partners bind the firm? NO, peyton could not assignment would show more control think about agency here - control relationship def of indenture - pledge option p 96 - important for partnership quest ct held: ds were not partners p 97-98 In US 1960s, marginal tax rate was 91% on income more than $100k. People found way to avoid taxes, gives rise to abusive tax shelters partnerships were a favored vehicle. You invest $1 and the partners borrow $10 on your behalf. You get to write off $10 in losses for every $1 invested - this is an abusive tax shelter LLP can reduce personal exposure, but not completely eliminated look at p 98 note tax reasons example: you file tort action and you win. Some recoveries are free from fed income tax LLC Notes: combines advantages of limited liability with flexibility of partnership operation may have favorable tax conseq, vis a vis corp have advantage over LP because members of LLC are not exposed to personal liability if you participate in managment of facility most state statutes have attempted to ensure that all LLC’s are taxed like partnerships, but not entirely taxed like corp today, most firms in US are closely held firms. Should consider limited liability form may be easier to raise capital in trad corp form than LLC some gen partnerships have adopted limited liab structure - can get benefits w/out aband current governance structures most limited liab statutes today involve mergers of lim liab co
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