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Business Organizations
UMKC School of Law
Downs, Robert C.

BUSINESS ORGINIZATIONS OUTLINE

I. AGENCY
a. Authority…
1. Actual = arises from manifestation of a principal to an agent that the agent has power to deal with others as a representative of the principal

2. Apparent = arises from the manifestations of a principal to a third party that the other person is authorized to act as an agent of the principal…

3. Inherent = arises form the agency itself and without regard to either actual or apparent authority. It is authority arising by implication from the authority actually or apparently granted…

4. Incidental = authority to do incidental acts that relate to a transaction that is authorized…

5. Implied = authority that is inferred from prior course of conduct by the principal…

II. THE PARTNERSHIP
a. Sharing Profits and Losses
1. Divided according to agreement…
2. UPA § 18 – each partner is repaid his contributions; share equally in profits; share in losses according to share of profits…

Richert v. Handly pg. 38
The court viewed the share of losses as follows: If A puts in $100,000 and B puts in none, but they are to split the profits, if the partnership losses money…under UPA §18, B would have to pay back to A $50, 000 of the loss of his monetary contribution.
The minority view is to view A’s contribution of money and B’s contribution of services as equal contributions. Thus, when the company loses money, B would not have to pay A for the loss of his monetary contribution because he has already shared in the losses by the loss of the value for his services…
However, usually money counts and services do not…and under UPA § 18(f) it expressly provides that one is not entitled to receive payments

b. Limited Liability Partnerships
1. Narrow Shield Statutes
a. Limits liability only for negligence or malpractice…
2. Broad Shield Statutes
a. Limits liability for all debts of the partnership
b. Exceptions…
i If a partner is personally involved in act
ii If a partner was in direct control or supervision of the person who committed the act.
3. Stacking problem
a. This occurs where a partner will want those liabilities for which he is liable to be the priority of for the partnership to pay.

c. Management…
1. Limiting Authority…
a. Limit by Agreement…
i UPA § 18 provides that unless otherwise agreed, any partner has equal rights in the management and conduct of the partnership…
b. Limit by majority vote…
i UPA § 18… differences arising from ordinary matters connected with the partnership…may be decided by majority vote…
ii Therefore, if authority is concerned with “ordinary matters” may limit by majority vote.

2. Acts binding on Partnership…UPA §§ 13 – 15
a. Acts within the scope of the partnership business…AND performed on behalf of the partnership are binding on all copartners…
b. Acts within the apparent scope of the partnership business…
i SCOPE OF BUSINESS…determined by past transactions indicating custom or course of dealing…
c. Acts, which a third party could reasonably have thought to fall within the purpose of the partnership…

National Biscuit v. Stroud pg. 62
FACTS:
Stroud and Freeman entered into a partnership to sell groceries. There was nothing in the agreement limiting the power of Freeman to act for the partnership with regard to “ordinary and legitimate business of the partnership.”
Stroud told P he would not be responsible for any additional bread bought by the partnership. Following this declaration, Freeman purchased bread from P for the partnership.
ISSUE:May a partner escape liability for debts incurred by the partnership by notifying the creditor in advance that he will no longer be responsible for future transactions?
HOLDING: NO…
1) UPA § 18…under a partnership, without any agreement to the contrary, any partner has equal rights in the management and conduct of the partnership.
2) Any difference arising as to “ordinary matters connected with the partnership,” may be decided by a majority of the partners…
3) Because Freeman was under no restrictions to his authority by any agreement, and the purchasing of bread was an “ordinary matter connected with the partnership business,” Stroud alone could not restrict Freeman’s authority to buy bread from P. Stroud represented only ½ of the partners…not a majority…
4) Thus, because Stroud accepted the assets and the charge to dissolve liabilities of the partnership, and the partnership owes P for the bread it purchased, Stroud must discharge the liability or obligation.

RULE: The acts of a partner, if performed on behalf of the partnership and within the scope of the partnership business, are binding on all copartners.

Smith v, Dixon pg. 64

FACTS:
The suit resulted from refusal to convey land, and thus a breach of a sales agreement between the parties. Dixon sought specific performance or an alternative judgment of damages, the latter of which the lower court awarded.
Following the purchase of land, The Smiths formed a partnership called E.F. Smiths, whose principal operation was farming. The partnership agreement was oral and was never written. W.R. Smith was the predominant member of the Smiths. The partnership authorized W.R. to negotiate the sale of the land, but the price at which W.R. sold the property being lower than what was agreed upon, the partnership contends the contract is unenforceable since it was not signed or agreed upon by all the partners.

ISSUE:
Is a partnership bound by the acts performed by a partner?

HOLDING:
The argument presented by the partnership was that they agreed and authorized W.R. to sell the property at $225, 000, but that W.R. sold it at $200,000; a price at which the partnership did not agree to sell, thus rendering the contract unenforceable.

1) A partnership is bound by the acts of a partner when he acts within the scope or apparent scope of his authority.
2) The scope of authority of a partner is determined by Past transactions indicating custom or course of dealing
No actual authority because they were in the business of farming…not selling land…Court found apparent authority by previous transactions…etc..
Therefore, since in the past it was customary for the partnership to rely on W.R. transact business, the court holds W.R. was acting within the scope of the his authority…

RULE: The acts of a partner are binding upon the partnership if he acted within the scope, or apparent scope of his authority…

Rouse v. Pollard pg. 67

FACTS:
P went to D’s law firm and spoke with F to take care of her legal business. P disclosed to F the value of stock assets and F suggested that she sell the stocks and turn the money over to the firm, who would in turn invest the money for her and send her the interest every six months. P obliged and began receiving checks.
The firm was unaware of the transaction between P and F, and was only aware of the legal fees of $350 paid by P to the firm.
The firm was dissolved in 1932, and in 1938, F was arrested for embezzlement and was found to have defrauded many persons. P’s money was never accounted for by F, and she was unable to recover it because F was insolvent. P sued the firm on the theory that they were liable, as partners, for the actions of F, a copartner.

ISSUE:
Are copartners liable for the negligent or illegal acts of a partner?

HOLDING:
Rules…
1) All partners are authorized to act as the general agent for his copartners in all matters within the scope of the partnership business.
2) All partners are responsible for the act of a copartner in so far as the act is within the scope of the partnership business.
a. Even in cases where the copartner represents that he is acting on behalf of the partnership, the copartners are not bound by such a statement if the act is not within the scope of the partnership business.
3) The scope of a partnership business is gauged by the usual and ordinary course in which the business is carried out by those engaged in it in the locality where the partnership is situated.

Application…
4) While the firm often held monies belonging to clients for the purpose of investing, the firm never held money for a client to invest at the firm’s discretion. This fact of firm practice is consistent of other firms in New Jersey and elsewhere. Therefore, because F’s practice of holding money for the purpose of investing it at his discretion is not a part of the practice of law according to the “usual and ordinary course of firm business,” D’s firm is not liable for the acts of F.
RULE: Partners are only liable for the acts of copartners only if those acts are within the scope of the partnership business.

Roach v. Mead pg. 71

FACTS:
D, an attorney, represented P on several occasions. P sought advice regarding the investment of $20,000 and D offered to take the money as a loan at 15% interest. P agreed to the loan and D asked whether P would like the loan secured by a mortgage on D’s house. P responded by saying “whatever you think is best.” D never secured the loan.
D eventually went bankrupt and the loan being unsecured, P lost the money loaned to D. P sought damages from D’s partner in the firm at which D worked on the basis that D negligently advised him about the loan and therefore D’s partner should be held liable for D’s negligent legal advice.

HOLDING:
1) Partners are liable for the acts of copartners if they h

2. BALANCE SHEET
a. Equity = Assets – Liabilities (fundamental equation showing Net Worth of company)

b. Balance sheet restates equation…
i Assets = Equity + Liabilities
c. Features…

Assets

Cash +
Accounts Receivable +
Fixtures +
Truck/Car

= Total Assets

Assets should = other side

Liabilities

Accounts Payable +
Notes/Loans
= total liabilities

(total assets – total liabilities) =

Equity
Partners Capital = assets – liabilities

Liabilities + Equity should = Assets

d. Book Value = Net Worth/ Equity portion of balance sheet (assets – liabilities)
e. Research and Development
i May be capitalized…in which case it becomes an asset and is added to the total assets (makes net worth appear larger…)
ii May be expensed…in which case it does not appear on balance sheet, but is listed as expense on income statement…(makes company look like they spent more and made less)

f. Goodwill/ Going Concern Value
i Not on balance sheet
ii Things that make a business up and running different than a collection of assets…
(a) Employees…experienced/ knowledgeable
(b) Customers…people who frequent store (customer base)
iii Dissolution in contravention of the agreement…lose “going concern value” and thus results in loss of money for share…

g. Dissolution…UPA § 29 – 32
1. Legal termination of partnership…subject to winding-up period
a. Does not mean business is terminated…but continues until winding-up period.
2. Power of Dissolution – exists at all times…may be consequences if done in contravention of agreement. (i.e. no participation in winding-up)
3. Causes of Dissolution –
a. Partnership at will
b. Death of Partner
c. Bankruptcy
d. Illegality of Business
e. Agreements… all partners agree to dissolve…

4. Dissolution by Court Decree (Legal Right to Dissolution) UPA § 32
a. If partner becomes a lunatic
b. Incapable of performing
c. Continuous willful breach of agreement
d. If partner is guilty of conduct which affects carrying on business
e. Can only be carried on at a loss
f. Other equitable reasons

5. Dissolution in Contravention of Agreement UPA § 38(2)
a. Partners who have not caused dissolution get…
i All rights to share of assets, etc…
ii Damages for breach of Contract…AND…
iii May continue the business…posses partnership property (as long as decreed by court or bad partner has been paid share of property)

Collins v. Lewis pg. 96
P and D entered into a partnership, whereby D would furnish a lease for a cafeteria and P would supply the money, and protected against loss up to $100,000. The agreement stipulated that D would receive a salary and all revenue would be applied to the repayment of P’s money.
The expenses involved in opening greatly exceeded the estimated cost provided by D. P argued that it was due to the mismanagement of D. P sought to have the business placed upon a profitable basis or he would no longer provide any money. After various exchanges of charges of fault to each other, D sought to buy P’s interest but failed. P sued to force dissolution of the partnership and a foreclosure on D’s interest in the partnership.

HISTORY:
The jury below found that 1) D was competent to manage; 2) there was no reasonable expectation of profit under continued management by D;