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Business Organizations
UMKC School of Law
Luppino, Anthony (Tony) J.

Bus Org Outline – Fall 2003 – Luppino

I.       Agency Law
a.       Terms
i.      Actual authority: an agent acts w/ actual authority when, at the time of taking action that has legal consequences for he principal, the agent reasonably believes, in accordance w/ the principal’s manifestations to the agent, that the principal wishes the agent so to act
ii.      Agency: fiduciary relationship that arise 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 the agent manifests asset or otherwise consents so to act
iii.      Agent: one who is authorized to act for or in place of another (principal); a representative
iv.      Co-Agent: Two agents that share the same principal. May be appointed by the principal or by another agent actually or apparently authorized to do so.
v.      Dual-Agent: agents on behalf of more than one principal with regard to the same transaction. (also called joint-principals)
vi.      Apparent authority: power held by an agent or other actor to affect a principal’s legal relations with 3rd 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 principals manifestations
1.      3rd party involved
2.      they have to have the reasonable believe of the 3rd party that the agent has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestation
3.      an agent cannot create extra authority by saying that they have it
4.      3rd party has to rely on manifestations by the principal not the agent
5.      manifestations is a very broad term – reasonable inferences, oral, written, etc
6.      what position the principal put the agent in
7.      this authority ends when the party has reason to believe/knows that the authority ended – need to give notice that the relationship is over
>> Employer – Employee – personal authority over another’s services (principal) – person who
is employed by another to work under control and directions of the employer (agent)
vii.      implied authority: either means when the agent and principal are tying to figure out what the authority is but it also can be implied apparent authority
viii.      incidental authority: standard is that you have incidental authority to get to the end point the principal has manifested to agent
ix.      independent contractor – one who is hired to undertake a specific project but who is left free to do the assigned work and to choose the method for accomplishing it
x.      inherent authority: along the lines of implied authority
xi.      respondent superior: employer is liable for torts by employees while acting in the scope of their authority
1.      who tend to be an employee will vary in degree by how much control an employer has over the agent
2.      key differentiation is be distinguished b/t independent contractor – torts by an individual contractor not usually imputed to the employer
3.      factors to differentiate employee from independent contractor
a.       basically the more control the employer has the more likely to be an employee
b.      actual control/more control = employee
c.       office location
d.      equipment – own equipment start looking more like individual contractor
e.       length of relationship
f.       limited skills so need other employees or do everything themselves
xii.      principals
1.      disclosed principal: 3rd party has notice that the agent is acting for a principal and has notice of the principal’s identity
a.       general rule: if have a disclosed principal relationship where 3rd party knows that it is an agent situation and knows who the principal is, the agent isn’t liable for a contractual obligation unless the agent agrees to be liable
2.      undisclosed principal: 3rd party has no notice that the agent is acting for a principal
a.       where the agent acts as if no agent relationship that agent is liable but the principal is liable also as long as the agent had the actual authority to act and acted w/in that authority
3.      unidentified principal: 3rd party has notice that the agent is acting for a principal but does not have notice of the principal’s identity
a.       general rule: agent is typically liable if won’t tell who the principal is unless the 3rd party agrees not to hold the agent liable – principal is on the hook as long as carrying out agents authority
xiii.      Dual agent/joint principals: acts on behalf of more than one principal w/ regard to the same transaction
xiv.      Fiduciary relationship: special type of relationship where 1 person has a special duty to another
1.      duty of loyalty: should not be acting in a negative way to the principal
2.      duty or care: reasonably and prudently

b.      Hamilton Hauling [agent did purchase order w/ Hamilton for woodchips for 1yr – Hamilton wants to enforce deal – lower court said principal not liable – appellate court ruled for GAF b/c jury instructions were faulty and was really looking at the authority of the agent to see if he had apparent authority – big question is dealing w/ apparent authority] i.      The manifestations of GAF [principal] are the ones that matter
1.   A 3RD PARTY may not simply rely on statements by agent
a. Principal may directly manifest authority to 3rd Party
b. If Principal gives a “position” title (purchasing agent) may give apparent auth.
i. unless, these is absolute knowledge that not so
c. a course of dealings outside of actual authority may manifest apparent authority
ii.      Don’t have to be crystal clear; could be course of dealings
iii.      The court doesn’t think there is enough apparent authority b/c:
1.      didn’t think there was anything inherit in agents role to think that it was normal for the agent to do such a large deal
2.      no track record for previous deals like this
iv.      it doesn’t matter what the agent says the court is going to look past the agreement and look to facts such as the course of dealing
3 basic ways to manifest authority
1. Express consent
2. Prior acts
IF there were previous acts that the Principal allowed
3. Position or title

c.       Barton [car accident and the attorneys negotiated for a settlement and P’s attorney  accepted the settlement but P is saying that the attorney didn’t have the authority to accept the settlement] i.      Rule followed Leffler:
1.      there is a presumption that attorney’s have the authority to settle cases – manifestations don’t necessarily have to be express
ii.      seems to be at odds w/ the general rule that what matters is the manifestation of the principal
d.      How to figure agents actual authority
i.      Basically what the principal told him to do and the actions that it takes to get to that end
ii.      Standard is that you have incidental authority to get to that end point that principal has manifested to the agent
e.       IOS Capital v. Allied Home Mortgage
i.      IOS is trying to enforce a 1 year lease with Allied. IOS buys the products from IKON and then leases them out. Crisp was a branch manager of allied who signed the lease. His employment contract stated that he did not have authority to do it.
ii.      The court states that they could not imply authority do to his express authority that he could not enter into the contract.
iii.      The court goes for apparent authority failed also
f.       Disclosed principal – third party knows there is an agency relationship and knows the identity of the principal
g.      Undisclosed principal – third party does not know about the agency relationship
h.      Unidentified Principal – third party knows there is an agency relationship, but does no know who it is.
i.        Duties owed between principal and agent
i.      Agent owes the principal a duty of loyalty and good faith and a reasonable duty of care in carrying out the principal’s instruction
j.        Principal owes the agent reasonable compensation unless it is agreed otherwise and the duty to cover reasonable expenses, and indemnify the agent for carrying out his duties, the principal owes the agent a duty of reasonable cooperation

IF it is a fully disclosed principal the agent is not bound, in an undisclosed and an unidentified principal both the principal and the agent are bound.
II.    Basics of Business Organization
a.       Broad Categories
i.      Incorporated: follow the articles of a corporation
1.      filed the articles of incorporation
2.      forms a corporation
3.      specific types: corporation
ii.      unincorporated: include sole proprietorship, general partnership [LLP variation], limited partnership [LLLP], limited liability company [may resemble a corporation] iii.      closely held: not publicly traded
iv.      publicly held: there is a market for the publicly traded shares
1.      there are such things as publicly held unincorporated company
b.      Business Forms
i.      Proprietorship
1.      single owner and there is no separation b/t the owner and the business
2.      unincorporated and single owner
3.      owner is personally liable on all business obligations since no legal separation b/t owner and the business
ii.      General Partnership
1.      liability is the big thing here b/c jointly and severely liable – all the partners are liable for debts against the partnership and claims
a.       they can limit there liability by filing to be an LLP
i.      the filing will not turn them into a Limited Partnership
ii.      effect is that it limits the liability of the partners
iii.      358.150
1.      off the hook to partnership liabilities but still responsible for own liability and people under you control
2.      default form for businesses that are owned by more than 1 person
3.      formed when 2 or more persons go into a co-owned business w/o any thought or planning or understanding of what the relationship is
4.      oral agreement to share profits is some agreed upon ratio may be sufficient to establish existence of general partnership even though initial  financial contributions are unequal
5.      a partner may always leave the partnership at any time = dissociation
iii.      Limited Liability Partnership [LLP] 1.      is not a limited partnership
2.      form of a general partnership
3.      ex. have a law firm and offices everywhere and you are operating as a general partnership and something happens somewhere to screw the firm – so should everyone be held liable
a.       general partnership would say yes
b.      depends on what side of the argument you are for
4.      special filing to be an LLP which is a type of general partnership – modern variation of general partnership
5.      general partnership in all respects except that the statute provides that partners have no personal liability for firm obligations that exceed the assets of the general partnership
6.      have full personal liability for claims arising from own misconduct
iv.      Limited Liability Limited Partnership [LLLP] 1.      form of limited partnership where try to protect even the general partners from liabilities of the partnership
2.      applies LLP concept to a limited partnership in which some or all of the general partners have no personal responsibility for obligations of the LLLP
3.      LLLP gives limited liability to general partners of a Limited Partnership 
v.      Limited Liability Companies [LLC] 1.      owners/no one is personally liable for the debts/liabilities of the equity
2.      have a good tax result and have no one that is liable for the entity
3.      provides limited liability for all participants, whether or not they are active in the management of the business and permits total flexibility in internal management
4.      provides benefits of incorporation w/o the limitation and rules applied to corporations
5.      replacing general and limited partnerships
vi.      Corporations
1.      generally shareholders not personally liable for liabilities/debts of the corporation
2.      formed by following procedures set forth in the corporation statutes
3.      results in creation of new legal entity, a fictitious person w/ sole responsibility for its own obligations
4.      provides limited liability for all invests and participants, whether active or passive
5.      publicly held: shares that are traded on public securities markets subject to federal regulations
6.      closely held: corporations that don’t have publicly traded shares
7.      black letter law that only the corporation is liable for corporate obligations however in a closely held corporation it is relatively easy for participants [director, officer, or shareholder] to incur personal liability
8.      3 tiered: shareholders who are traditionally viewed as the ultimate owners of the enterprise; board of directors who are the managers of the corporation’s affairs; officers who act for the corporation to implement the decisions of the directors
9.      big disadvantage is the tax treatment
c.       Limited Liability
i.      Do not have personal liability
ii.      This doesn’t mean that a person cannot ever become liable for actions that occur
1.      if to active can become liable
2.      corporation ex.: closely held w/ 5 people
iii.      exceptions that a shareholder/owner cannot be held liable
1.      the person is a tortfeasor [negligent, fraud, etc.] 2.      piercing the corporate veil: it is just not right to allow the owners to stand behind the corporate veil and not be held liable
3.      contractual undertaking: someone like a creditor could force them to sign a personal guarantee forcing them to undertake personal liability [contract idea; secure the loan] d.      Tax Classifications
i.      Under state law it’s not necessarily true that the type of business you form will be the same for tax considerations
ii.      Classifications
1.      Disregarded Entity: tax equivalent to sole proprietorship; not incorporated and have a single owner
2.      Partnership: has flow through [1 level of tax]; has 2 or more owners
3.      “C” corporation: 2 levels of taxation; corporation pays on income while shareholders pay on dividends if they are distributed
4.      “S” corporation:    gets flow through status which means that the shareholders will pay the taxes on the earnings and not the corporation; 1 level of tax
iii.      “C” and “S” corporations are not state law forms of corporations à they are tax classifications
iv.      tax law classifications is separate then state form classifications
v.      unincorporated LLP, LLLP,

iduciary duty to run the firm well then it went to the current partners
b.      business judgment rule: no standard of perfection as long as they are acting reasonable and in good faith
iii.      court said that the business just went bad and P is out of luck b/c no statutory, tort, or fiduciary claim (fiduciary claim is above at (b)(ii)(2)(b), contract and tort, below)
iv.      contract claim: no promise to keep the business running
v.      tort claim: no precedent for imposing tort liability on careless managers for the financial consequences of the collapse of the firm to all who are hurt by that collapse.
vi.      at the outset of this he could have [if a partner] had a contributory plan or could have said that he wanted the other partners to guarantee to pay him if the partners went under
IV.Limited Liability Partners [LLP] a.       General
i.      If you file as an LLP it does not alter the management rights; it alters the liabilities
ii.      This is advantageous b/c a partner will not be liable for other partners
iii.      Most of the time for a general partnership you don’t need to file anything w/ the state [MO – if a partnership is going to operate under name that is not the names of the partners you need to file something saying what you are going to operate under] – LLP is different
1.      for an LLP you must file w/ the secretary of state
2.      358.440: Registration as a limited liability partnership – renewals – withdrawal of registration – amendment – revocation, effect – fees – false statements, penalty – foreign partnership requirements
a.       general ground rules for LLP
b.      expires unless you renew it
3.      358.170: Liability of Incoming Partner
a.       if there is an existing partnership and you come into it new your are liable for preexisting obligations of the partnership only to the amount in your interest
iv.      358.150: Nature of Partner’s Liability
1.      MO seems to be a full shield state [sub 2] 2.      people damaged the most by these statues are people that have tort actions against the partnership and people that don’t have a personal guarantee
3.      exceptions to limited liability [sub 3] a.       liable for your own wrong doing and for anyone that you supervise
4.      pretty broad protection in MO but need to watch who they supervise and control
v.      358.500: Legal existence of a registered limited liability partnership to be recognized – partnership formed in other jurisdictions, effect
1.      sub 4: laws will be governed by the laws of the state where it was formed
vi.      veil piercing: historically a corporate concept and not much of a concept w/ partnerships or limited partnership
1.      LLC didn’t have anyone personally liable so began to see some of these cases and LLP’s will be the same way
2.      conceivable that an LLP will come under a veil piercing attach
V.    Management
a.       National Biscuit Co. v. Stroud [Stroud advised the P that he would no longer be responsible for any additional bread sold by P to Stroud’s Food Center – after that notice partner of P, Freeman, requested that P sell bread to Stroud and they did] i.      The court believes that Stroud is bound by his partner
1.      interesting b/c the 3rd party had knowledge that one of the partners didn’t want any more bread
2.      Freeman has actual authority [not apparent] to act – 358.090.1
3.      Problem for Stroud is that when he told P that no more bread he didn’t dissolve the partnership so Freeman still had actual authority to act – once dissolved has less authority to bind the partnership
ii.      2 person [families] companies very problematic assuming 50/50 situations
1.      great potential for deadlock
2.      Stroud could/should have:
a.       Dissolved the partnership
b.      When he formed he could have contracted the management rights, what suppliers could buy from, who has to approve purchases, etc. à Freeman would have lacked actual authority
3.      great example as to why should draft agreement
b.      Smith v. Dixon [contract for the sale of land in which the father [partner] signed a sale agreement on behalf of the partnership – the partnership didn’t want to give up the land and the other obviously wanted it] i.      Another apparent authority case
ii.      Court said he might not have had actually authority but since he had done it before [course of action] he had apparent authority
1.      course of dealing
2.      the partnership put him out there b/c he had done the deals before – manifestation of consent
3.      the family members could sue dad
4.      if selling the business not in its usual course then P wouldn’t have been able to enforce
iii.      358.100: Conveyance of Real Property of the Partnership
1.      looks to where title is held
2.      if he didn’t have apparent authority may be able to get property back
3.      b/c real estate is special in the law the way in which the property is titled can have an effect on the outcome
4.      if you have a question of authority need to look at .090 and .100 if have real estate involved
5.      when get into large commercial transaction need to make sure that all the partners agree – legal opinion is the best
iv.      358.090: Partner Agent of Partnership as to Partnership Business
1.      dad wasn’t carrying on in the usually way of business of the partnership which he was a member
c.       Rouse v. Polland [7 D’s were partners in a law firm – P went to a partner and disclosed that she owned valuable securities and partner suggested that P turn them over to him and said he would invest them for P and give P interest payments – firm dissolved and partner arrested for embezzlement] i.      The question is whether the other partners of the firm are liable
1.      not w/in his apparent authority to become a mortgage banker
2.      outside the usual and ordinary course of dealings of a law firm
3.      P had no reasonable belief that this was w/in the ordinary course of dealings of a law firm; P would have no idea and this is what P thought was ordinary