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Business Associations/Corporations
Rutgers University, Camden School of Law
Ryan, Patrick J.

HOUR 1

AGENCY ISSUES
What is it in transactional terms? Liability terms?
Common situations
Basic labels
How is relationship created?
Contract required? In what sense of the term?
Limited to business/commercial situations?
Gorton v. Doty
Dad & Son sue car owner for HS coach’s negligence in driving
Modern legislation typically makes Owner responsible as a matter of law
Here there is a need to establish agency
Owner is a HS faculty member unrelated to any other party or witness
Coach died in the crash
Principal’s control of agent turns for MAJ on selection of driver

Should court ask whose purpose is the ultimate one?
Doty’s or the school’s agenda here?
Individual/collective problem
What is really improper about D counsel’s closing argument?
Barely concealed reference to insurance would violate collateral source rule
A.Gay Jenson Farms Co. v. Cargill, Inc.
What was the agency dispute?
Why was this important?
Lender liability problem _ distressed debtor rarely is cut off by lender
Lender usually asserts control as condition of further credit
Agency law result? Can C really do anything else?
Why not shut the credit window sooner rather than later?
Who makes those decisions?
Farmer’s alternatives
Most efficient risk bearer issues
Agency typology
Confusing, no doubt about it
Actual authority (P to A relationship)
Express (written or parol- oral)
Implied
Apparent authority (P to third parties re: A)
Comparison to contract principles _ where do they fit?
“Parties expectations”
“Reasonable reliance”
Church loses here on which theory?
Both: C recognizes Bill’s need for help, and Sam had worked for C before
Apparent Authority
Family of ideas grows with Restatement 2d
Actual (express and implied)
Apparent
Blurred area between the two allocated partly to “inherent agency”
Definitions in Hogan discussions focused on apparent authority and the impressions created by principal in dealing w/ 3d parties
“Inherent agency” is a combined law/fact categorization attaching liability to P’s use of particular types of agency without specific control or definitions
Complex organization and responsibility for its employees’ efforts on its behalf
Kaufman’s authority is crucial here.
Agency authority and failure of contract
Formal contract rules fail– no “meeting of minds” or “closing” between Ampex and 370
Agents’ potential power to bind is what makes this area interesting
It allows principals to act without delay
Opens a control gap
Creates temporal opportunity for “principal’s remorse”
Train your agents before you turn them loose

Recapitulation
Hour 2
Principals, agents, 3d parties affected by A
Actual authority (express) _ Gorton v. Doty
Factual support not strong (don’t let the boys drive)
Issue is control
Cargill shows the consequences of needing agents to do the work, and of “lender liability” when Creditor controls the Debtor
Actual Authority (implied) (Hogan)
Apparent Authority (Hogan, too)
3d party’s perception becomes important
Ampex needed to train its agents to take lower profiles or shunt deals to higher levels
Inherent agency
Fully detailed express actual authority is impossible to concoct, and P needs to get things done
“Inherent agency power” protects 3d parties who deal with P’s employees or designees
Making intermediaries into independent contractors or brokers is a theoretical way to break the liability chain, but it adds transaction costs (every K becomes a big deal, and contractor must be watched, or constantly defers to P
“The undisclosed P”
P-A relationship exists
P gives A actual authority, limits it
P “hides”
How easily should P be able to avoid 3d party claims against it based on Agent’s acts?
To limit that agent, wouldn’t you have to emerge so that 3d party didn’t “get the wrong impression”?
The basic rule is, the more control, the greater the potential liability
Kidd
Yes, this NJ’s own Thomas Edison
Inventor of the phonograph, how do we make it pay?
Edison, Inc. might have wanted to make Kidd bear the risk of the tour not happening; Kidd would want just the opposite
Maxwell’s authority not at issue
Maxwell’s deputation to Fuller, who dealt with Kidd
Evidence shows almost total handing over to Fuller
Learned Hand, too
Inherent agency_not by words alone, but by the setting and customary powers of such agents
We could get lost for hours in this case with status, tort, contract, and estoppel (last most important, says J.)
Nogales Service Center
Good idea gone bad
Serve an unserved market
Not enough services provided
Tucker’s authority as ARCO’s agent
Manager of “truck stop marketing” promises discount
Case turns on form of jury instruction:
In court’s view, apparent authority instruction sufficiently conflicts with inherent agency instruction to push the latter aside
What happened to alternative pleading?
The distinctions between these two theories are imprecise

Hour 3

Ratification

Agency from tenancy in common?
Mary never let Walter act as her agent for jointly held real property
Ratification is later acceptance of unauthorized act
She didn’t accept formally
Her conduct after the contract was consistent with lease only not w/option to buy
She’s now co-tenant with buyer, not Walter
Apparent Authority and Inherent Agency Power
Formal differences
Apparent authority argues 3d parties’ reasonable understandings of P’s relationship with A
Inherent Agency power looks to the structure of the P to A relationship
Covers a lot of the same factual ground
Tend to be argued as alternatives
Tend to impose liability, too
Estoppel
As between P and 3d party purchaser
Who is responsible that an imposter is walking the floors of P’s store?
“Agency by estoppel” or
“Tortious dereliction of duty to prospective customers”
Estoppel elements
P creates, negligently or intentionally, by act, word or omission, the appearance of authority
3d party reasonably and in good faith acts in reliance on this appearance
3d party “changes position” in reliance upon appearance
Agent’s liability on contract
So far, we’ve talked about P’s liability to 3d party based on agent’s behavior
If you’re agent for a fully disclosed principal, K is between P and 3d party
That’s everyone’s expectation and goal
If A has no principal, A isn’t an “A,” and is personally liable
To avoid personal liability, A must dislcose P’s identity
Otherwise who’s the counterparty to the contract?
Burden placed on most efficient cost bearer (A, not 3d party)
P’s liability for A’s torts
In legalese, master is employer, servant is employee
Control connotations
Compare M/S with independent contractors
Agent-type, acts on P’s behalf, but no direction of contractor’s methods
Non-agent type is the hub of a set of spokes, makes arms’ length deals with everybody
P. 47-8 garage builder hypos are better than I can do

HOUR 4

Humble Oil v. Martin
Hour 4
Car left for repairs gets loose, injures bystanders
Station land and fixtures owned by Humble
Humble set hours and prices
Most operational costs borne by Humble
Operator had significant reporting duties to Humble
Humble fails in its attempt to avoid liability for operator’s omission
Hoover v. Sun Oil
Another oil co. owned station
Fire occurs during filling operation
Oil co. attempts pre trial motion (summ.j.)
Again, Sun owns property and fixtures
Leased to operator
Trained operator in station operation
“Franchise” aspects (appearance, displays, uses of products) specified in contract and monitored by Sun’s sales rep, who also dealt with orders/prices of petroleum products
Close cases
Humble did assert more operational and financial control
Sun had more balanced (or mutual) terms
Bar tends to regard DE as pro corporate and TX as pro plaintiff
Risk/return _ should oil companies be able to push off liability for land/fixtures they own, retain activities they dominate, and products that are dangerous if mishandled?
Franchises
Unlike two previous cases, operator owns the land and fixtures in Holiday Inn
Operator gets access to franchiser’s training, products, advertising base, etc.
Pays revenue-based fees
Search for control gets more difficult, and without control, Principal status fades
Franchise doesn’t preclude agency (p. 56)
But as a whole, franchisee’s ownership and control of day to day operations are inconsistent with control required to reach franchiser’s assets
Apparent agency & tort
Billops is the real life version of your worst bar mitzvah or wedding nightmare
Ballroom rental K, paid in advance
On day of event, banquet director demanded more money
Another attempt to reach a deep pocket franchiser
Summary judgment for D reversed on appeal
Look at second full ¶ on p. 59 _ preventing actual authority in franchise agreements _ legal subspecialty
DE S. Court thinks actual agency is a jury issue
So too, apparent authority (estoppel language used)
Scope of employment
Somewhat familiar ground, I hope
Liability found if within scope
At least in part, A must being trying to serve P’s interests
The motive test from 2d restatement
Here, court uses a foreseeability test
Had to reconcile liability findings w/out resort to motive _ motives aren’t easy to fathom
Acts occurred physically proximate to ship, and had much to do with drydocking
Grimsley
Pro baseball pitcher heckled by home fans
Intentionally throws ball at fans after 3 innings
Recall from TORTS that intentional torts break causation and vicarious liability chains
Mass law recognizes possible liability in P for A’s intentional torts
If A’s act is a response to conduct that interferes with A’s work for P

Hour 4
Humble Oil v. Martin Car left for repairs gets loose, injures bystanders
Station land and fixtures owned by Humble
Humble set hours and prices
Most operational costs borne by Humble
Operator had significant reporting duties to Humble
Humble fails in its attempt to avoid liability for operator’s omission
Hoover v. Sun Oil
Another oil co. owned station
Fire occurs during filling operation
Oil co. attempts pre trial motion (summ.j.)
Again, Sun owns property and fixtures
Leased to operator
Trained operator in station operation
“Franchise” aspects (appearance, displays, uses of products) specified in contract and monitored by Sun’s sales rep, who also dealt with orders/prices of petroleum products
Close cases
Humble

rities
2 year term
Use to secure cash loans from others
Receive in return
Undescribed amount of below-lending-grade securities
Right to receive 40 % of profits until borrowed collateral returned, >100k, not >500k
Option to “join” the firm
Limits placed on KN&K
“Care” of loaned collateral
No commingling w/ KN&K’s other assets
Reporting obligations, and pay over of earnings
Right to substitute other loaned collateral
Must be enough to function as collateral for $2 mill loan
Consent to sale of securities held by “trustees,” but proceeds remain w/ T’s
Arguably managerial powers
Designate and keep Hall as managing P
Financial condition monitoring rights
Veto undesirable transactions
Transfers of equitable interests
KN&K partners assign PSP interests to T’s
No PSP loans to P’s
Fixed PSP draws (against profits or reinvested returns)
Other distributions to P’s prohibited
Profit calculations
40% return needs a baseline
Hall & T’s must agree; arbitration otherwise
No restraint on dissolution
Creditors
Covenants giving lenders some control over debtor’s financial and business decisions are fairly common
Especially with smaller firms as Debtors
See p. 101, q. 3
Option to convert to equity can’t be used to argue that only equity stake is created, or convertible interests become legally impossible to write
Why did KN&K go broke, finally?
How good were those covenants? Why didn’t they work?
P. 101 Questions
How much did PPF risk?
2.5 million in securities, WHICH THEY LOST!
Not their entire fortunes
Why?
Possible 40% return for 2 years on whatever profits KN&K able to make (GREED)
Lack of info about KN&K’s true state (misplaced TRUST)
Big risk, but possible large return
Less risky investments will pay less
What’s your risk preference profile?
Cargill actually exerted control
Southex
Why no partnership finding here?
Risk
Control of actual decisions
Exclusivity
Partnership property
Profit sharing presumption (UPA § 202)
Irrebuttable?
What was this relationship?
Young v. Jones
Great opening line here
P’s are suing PW’s US partnership, trying to link it to PW-Bahamas as deeper pocket
PSP by estoppel
Claimed to arise from common name elements
Limited elements (not a wide net)
Benefits only creditors of putative partners (SAFIG was the debtor, not PW-Bahamas)
Reliance upon “estopped” parties behavior

Fiduciary duty in Partnerships
Hour 8
Meinhard v. Salmon
Famous case, basic fiduciary duty cite (p.112)
Complex facts
Partnership of leased property that becomes part of redevelopment deal
Change of landlord during partnership; landlord seeks changes
“Managing” partner agrees to join bigger project near the end of the partners’ lease that involves the leased property
When non-managing partner learns of changes, suit to claim share of new operation
Trial judge says ½ of original lease, so 1/4 of total new project
App. Div. modifies judgment to half interest with partner
Is this a partnership?
If not, what is it?
Could S have terminated the partnership w/M?
Some disclosure occurs
Failure to reveal co-venturer creates misapprehension in Landlord
Does it really matter?
Another disclosure issue
Why are Cardozo and Andrews at it again?
Could this have been clarified? When? Where?
Remedies
Does M get half of the whole building?
For free?
Is S still in operational control?
P. 116-17, Q.5 _
Does RUPA or newest UPA (text or supplement) change the result?
Sec. 404(b)(1) language
“Appropriation of a partnership opportunity”
Additional fiduciary situations
Continuing duty to former partners?
Pension law are worth studying in itself
Federal ERISA a major topic
Bane is duty of care, not loyalty
How about a basic theory of negligence, rather than fiduciary duty?
Certainly foreseeable that firm mismanagement would harm pensioners
More law firm cases
Just like house cleaners, aren’t we?
Stars are upset at the “slackers”
Does the partnership agreement contemplate that partners might leave and take clients?
Does the law let you plan to leave?
How do these folks get into trouble?
Client lists, non-disclosure, and untrue denials