Business Organization I
Sole Proprietorship – the default business organization that is owned by a single individual and not cast in a special legal form. The differences between the legal organization and the individual are (a) separate identity/name; and (b) use of agents to act on behalf of business.
General Partnership – the default business organization once you have more than one owner. Can arise by law without the parties even realizing it. Other forms of partnerships or business entities typical require a formal act for creation.
A.) Restatement (3d) of Agency – The fiduciary relationship that arises when one person (principal) manifests assent to another person (agent) that the agent shall act on the principal’s behalf and subject to the principal’s control, and agent manifests assent or otherwise consents to act. If sufficient control over the operations of the other, then one party (principal) can become liable for the torts on another (agent), through an agency relationship (actual agency).
B.) There are five categories of agency power: (a) actual authority (express or implied); (b) apparent authority; (c) estoppel; (d) ratification; (e) inherent agency power. The 3rd Restatement eliminates this last category, because it makes absolutely no sense.
C.) Actual Express Authority – Restatement (3d) of Agency §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. Translation: Actual authority is based on A’s belief that P has authorized A to take that action. The authority exists even if A is mistaken, so as long as A was acting based on P’s manifestations.
D.) Actual Implied Authority – The actual authority of an agent that the principal has not specified but has purposely or through negligence allowed the agent to believe authority has been granted.
E.) Apparent Authority – the power held by an agent or other actor to affect a 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.
F.) Ratification – requires acceptance of the results of the act with intent to ratify, and with full knowledge of all the material circumstances. Steps needed for Ratification:
(a) Express affirmation, OR
(b) Implied affirmation by accepting benefits when it’s possible to decline them, OR
(c) Implied affirmation by prolonged silence & inaction, OR
(d) Implied affirmation by suing to recover on the contract.
G.) Estoppel – To make claim for estoppel, 3rd party must show:
(a) principal created appearance of authority (through words, actions or even negligent omission);
(b) 3rd party reasonably relies on this; AND
(c) 3rd party has “change in position” due to this reliance.
1.) Gorton v. Doty
Agent: Garst Principal: Doty Injured 3rd Party: Gorton
Ø Proof of agency relationship: condition precedent – “if you drive the car, you can have it.” She directed him to drive the car.
Ø School wasn’t sued because they had sovereign immunity.
Ø There was no formal contract. More of a gratuitous loan.
Ø Presumption for car owners- when you lend your car, that person becomes your agent.
Ø Advising Ms. Doty – drive the car herself; saying her car is for anyone to drive – not directions; Indemnity Clause – though Doty still gets sued, Doty can go after Garst for reimbursement.
2.) A. Gay Jenson Farms Co. v. Cargill, Inc.
Agent: Warren Principal: Cargill, Inc. 3rd Party: Farms
Ø Warren agrees to buy and sell the grain for the Farmers but never gets the money to give to the Farmers.
Ø Under Restatement (2d) of Agency §140
Ø Creditor – Debtor relationship / How Cargill is classified as Principal?
Ø Court finds that Cargill is the principal and that this is a principal-agent relationship.
Ø For Cargill to get out of being a principal but still want to make sure Warren does his job properly? Hire independent contractors; don’t keep pumping money to them; hire auditors, check up on them; direct where the money should be exactly going; monitor their debt.
Ø Do nothingà assume more control
3.) Mill Street Church of Christ v. Hogan
Agent: Bill Hogan Principal: Church 3rd Party: Sam
Ø Church hired Bill to paint the Church. No specific direction to hire someone specifically.
Ø Implied authority used to hire Sam because it was necessary to hire someone to paint.
Ø Doesn’t matter what Sam believes because the Church gave permission to Bill.
4.) Lind v. Schenley
You must prove (a) agency relationship existed and (b) what kind or kinds of authority agent possessed.
5.) Botticello v. Stefanovicz
Burden of proving agency is on the plaintiff. Must be proven by a fair preponderance of the evidence. Marital status cannot in and of itself prove the agency relationship. Nor does the fact that the defendants owned the land jointly make one the agent for the other. Agent is liable when there is a hidden principal.
6.) Hoddeson v. Koos
Estoppel only binds the principal, not the 3rd party to the deal.
H.) Fiduciary Duty of Agent
Breach of Fiduciary Duty – An agent does something where the principal explicitly told them not to. Breach can trigger restitutionary recovery.
1.) Reading v. Reagan
Master: British Army Servant: Reading Recovery Theory: Unjust Enrichment/Restitution
No fiduciary relationship because the plaintiff was not acting in the course of his employment.
Ø Agent may not receive payment from 3rd party related to transaction between principal & 3rd party;
Ø Agency may not profit by secretly transacting with principal as adverse party; AND
Ø Agent may not profit from 3rd party with no connection to principal as a result of the agent’s position.
2.) General Automotive v. Singer
Master: Gen. Automotive Servant: Singer Recovery Theory:Unjust Enrichment/Restitution
Breached a fiduciary duty. Not a damage remedy.
A.) Partnership: an association of two or more persons to carry on as co-owners of a business for profit. (NYPL §10) A contractual relationship, though there might be no written document or even an explicit agreement. The receipt by a person of a share of the profits of a business is prima facie evidence
-When there are only two partners and they disagree, the preference is to allow status quo to govern. This is unstable.
-Third parties can recover from the partnership on the theory that each partner has the right to bind the partnership, but the partners can not necessarily recover from one another.
-Partners are different from employees. Typically, a partnership can seek indemnification from an employee, but not from a partner. This too is subject to the partnership agreement.
1.) Putnam v. Shoaf
In an LLC you split the profit proportionally.
In a partnership you split the profits equally.
NY Partnership Law §40(1)
Each partner shall . . . share equally* in the profits and surplus remaining after all liabilities…;…and…each partner must contribute toward the losses, whether of capital or otherwise, sustained by the partnership according to his share** in the profits.
*Default general partnership rule = equal (50/50 division) of profits.
** Default general partnership rule = if agreement provides for profit-sharing, assume that losses mirror the agreement. If agreement does not specify either profits OR losses, then losses are also split evenly (50/50).
D.) Partnership Dissolution
Dissolution is caused by the express will of any partner when no definite term or particular undertaking is specified.
1.) Owen v. Cohen
Judicial determination of status of loan required
Receiver probably needed for orderly liquidation
Potential for wrongful dissolution
a. UPA (1914) § 31(1)(b) v. § 31(2)
b. Dissolution of a “term partnership” (a.k.a. “partnership for a term”) prior to expiration of the term is “wrongful”
c. Adverse consequences; see UPA (1914) § 38(c)
i. Hence, “there always exists the power, as opposed to the right, of dissolution”
Why a dissolution?
d. Dissolution is an appropriate remedy because of Cohen’s misconduct
e. See UPA § 32(1)(c) and (d), which provide that a partnership may be judicially dissolved where a partner’s conduct prejudices the carrying on of the business or where the partner willfully and persistently breaches the agreement or where he conducts himself in such a way as to make it impractical to carry on the business with him
Proper to repay loan before distributing profits?
f. UPA § 40(b), the following order is observed: (1) The claims of the firm’s creditors are paid; (2) Claims of a partner other than those for capital and profits
g. So Owen is entitled to repayment of his loan before Cohen gets anything