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Business Organizations
Touro Law School
Miller, Meredith R.

Miller, Business Organizations, Fall 2016


Business Organization = Study of how people engage in business and how the law facilitates and regulates the operation of such businesses
Closely Held Business Organization

Defining Characteristics:

Not publicly traded (Cf. General Motors)
Absence of ready secondary market (i.e., Stocks)
Lack of ready exit

Sole Proprietorship: Is a business owner by a single individual [only one owner]


Takes no formality to create (i.e., No need to file with State)
BUT you must file with State if the name of your business is not in your actual name


Owner has unlimited personal liability for the obligations of the business [no insulation]

Ex. Debts of business = Debts of the owner

Cf. Limited Liability à As owner, you are not personally liable [i.e., Your most valuable possession is protected]


Creation of Agency Relationship

Always first question to answer: Is there an Agency Relationship?
R3d §1.01: Agency is the fiduciary relationship that arises when one person (“principal”) manifests assent to another person (“agent”) that the agent shall act on behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act [can be through circumstantial evidence] Elements:

Mutual assent [manifestation of assent can be through written or words or conduct R3d §1.03] Agent must act on behalf of the principal; and
Agent must be subject to principal’s control

R3d §1.02: As long as 3 Elements are met, it is irrelevant whether parties understood that they were creating an agency relationship or desire to create such a relationship [labels are not controlling]

Case: Groton v. Doty: Appellant teacher volunteered to lend coach Garst her car to drive his football team for a game, which included minor child Groton. Teacher was not compensated for lending her car; While both teacher and coach were employees of the school, their transaction were separate from their job in the school. Garst got into an accident, severely injuring minor.

Issue: Whether the coach and the teacher had a relationship as principal and agent when the coach got into a car accident, thereby allowing 3P to sue teacher.
Rule: Agency relationship is created when three elements are met. Compensation or contract is irrelevant.

Case: Gay Jansen Farms v. Cargill: Cargill loaned money to Warren, grain elevator operator, to finance his business. Under their contract, Cargill had right to access Warren’s finances and bookkeeping; Cargill must approve any and all renovations; Cargill would also receive a large percentage of the grains. Warren contracted with several farmers, but did not pay them. Farmers sued Cargill for Warren’s indebtedness.

Issue: Whether Cargill, in its capacity as creditor to Warren, may be held liable for the contracts of Warren with the plaintiff
Rule: Existence of agency may be proved by circumstantial evidence [i.e., Course of dealing between two parties]. A creditor who assumes control of his debtor’s business may become liable for the acts of the debtor in the business

Principal’s Liability in Contract – Agent’s Authority

Always second question to answer: If there is an agency relationship, is the agent authorized to act?

NOTE: A principal will be liable to 3P in contract if his agent has authority to effect the contract

Actual Authority

R3d §2.01: An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act

At the time of acting
Agent reasonably believed that he had authority [perspective of Agent] Based on Principal’s manifestations to the agent [express or implied]

Express: A principal has expressly communicated to an agent, normally in spoken words, or in writing, the power to perform some act on the principal’s behalf
Implied: An agent has implied actual authority when the principal does not expressly confer authority, but the principal’s words or conduct, reasonably interpreted, causes the agent to believe that he has authority

TEST: Whether a reasonable person in the agent’s position would interpret the principal’s communication to encompass a particular act
NOTE: This is based on the agent’s reasonable belief/interpretation of the principal’s manifestation
Case: Williams v. Dugan: Dugan was appointed as attorney-in-fact, which authorized him to make certain decisions for Bassie. Williams lent Dugan money under the belief that Dugan was acting as Bassie’s agent and that he money was to pay for Bassie’s taxes. Taxes, however, were never paid, and Williams sued for repayment of loan.

Issue: Whether having a general power of attorney creates express authorization for Dugan to enter into transaction with Williams
Rule: Powers of attorney-in-fact to borrow money must be expressly granted in the terms of the instrument granting this power. This type of authority cannot be implied.

Case: Mill St. v. Hogan: Bill Hogan was hired by Elders of Mill St. Church to paint the building. Hogan hired his brother to assist him, as he has done in prior work with the church. Brother got injured during commission of work, and sued church for compensation benefits for his injuries.

Issue: Whether Hogan had implied authority when he hired his brother
Rule: Existence of implied authority rests on the agent’s understanding of his authority. Specific conduct by the principal in the past permitting the agent to exercise similar powers is crucial [past practices between church and Hogan]

Apparent Authority

R3d §2.03: Apparent authority is the power held by an agent or other actor to affect the principal’s legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations

Third party reasonably believes agent had authority
Based on manifestations traceable to principal

Case: ESSCO Geometric v. Harvard Industries: Harvard a

led the customer to believe that he was the proprietor’s agent


R3d §4.01(1): Ratification is the affirmance of a prior act done by an another [does not have to be an agent], whereby the act is given effect as if done by an agent acting with actual authority

(2): A Person Ratifies the act by:

Manifesting assent that act shall affect the person’s legal relations; or
Conduct that justifies a reasonable assumption that the person so consents


Manifesting assent to the unauthorized act [express or implied]

Ex. (1) Having knowledge of transaction;

(2) Accepting benefits; and

(3) Failing to repudiate

Having knowledge of material facts to the contract/agreement
Case: Evans v. Ruth: Ruth had a lumber company and was awarded 2 purchase orders by the state to supply crushed stone. Ruth contracted with Darr, who was an independent contractor, who then sub-contracted two foremen. Evans was hired by an unidentified foreman to haul stone. Evan’s was told that Ruth was in charge of the work. Upon completion of the work, Evans and others went to Ruth to collect their pay. Ruth acknowledged their work, but they were never paid. Evans sued for breach of contract and to recover payment.

Issue: Whether Ruth ratified the unauthorized oral contract between Evans and the unidentified foreman when Ruth acknowledge the weigh slips and Evans’ completion of work
Rule: Ratification is the affirmance by a person of a prior act which did not bind him, but when professedly done on his account, whereby the act, as to some or all persons is given effect as if originally authorized by him

Case: Botticello v. Stefanovics: Married couple owned a farm as tenants in common. Botticello became interested in the property. Wife said she would not sell the property for a said amount. After negotiations between husband and Botticello, they signed an agreement. Wife was not involved in these negotiations. Botticello moved in and later sought to exercise his option to purchase. Couple refused to acknowledge this agreement.

Issue: Whether wife ratified the unauthorized agreement between her husband and Botticello when she was passive during the transactions, but had knowledge of Botticello’s presence and received benefits from this agreement
Rule: Ratification is invalid where the person does not know the material facts to the agreement. ratification requires acceptance of the results of the act with intent to ratify, and with full knowledge of all material circumstances