Business Associations Outline

 
Business Associations
Joo
Fall 2013
 
 
Chapter 1: Economic and Legal Aspects of the Firm
Introduction to Business Associations
What is a “Business Association”?
Firm = A business that includes more than one person
Business Association = legal form of ownership for a business/firm
·         Issues in BA
o    Internal relations – how would you organize these relations?
§  Ownership (profits and losses)
§  Fiduciary Duties
§  Control (right to manage business)
§  Withdrawal (in pships: “dissociation”)
o    External relations          
§  3rd party liabilities for debts, torts, Ks, etc
·         Partners: personal liability (unlimited liability)
§  State role: Regulation v. “free markets,” taxation
·         BA issues decided by:
o    Law: Statutes and judicial decisions
o    Contract: Agreement of parties
 
Agency Law
Agent’s Fiduciary Duty
Agent’s Duty
Agent owes “fiduciary” duties to Principal (duty is one way)
A is in position of trust
Must put P’s interests first
Specific duties depend on the agency context] CCS v. Reilly (4th Circuit, 1963) – pg. 22
Facts: While still working for CCS, Reilly solicited and negotiated Ks with potential CCS clients for his future business.
Held: Reilly violated fiduciary duty.
Hamburger v. Hamburger (Mass. Sup. Ct., 1995) – pg. 26
Facts: Hamburger solicited some workers after he quit working at ACE.
Held: He didn’t violate fiduciary duty.
Rule: The duty to not compete with employer ends after one’s employment (unless K says otherwise).
Employment at Will
Principal owes no FD to agent, but only contractual duty.
Default rule: Employer can fire employee at any time for any reason
Foley v. Interactive Data Corp (Cal., 1988) – pg. 30
Facts: IDC had written termination guidelines setting express grounds for discharge. Foley blew whistle on his supervisor, and asked to resign or be fired. Foley argues the termination guidelines altered the at-will employment relationship.
Held: There is no public policy prohibiting employer to fire employee for whistleblowing. But there may be implied K with IDC that limited its right to dismiss Foley for good cause and not at-will, so he may proceed to trial. There is an implied covenant of good faith and fair dealing in K, but not in torts.
Rule: If there is an employer termination guideline, it could limit the company’s rights to dismiss an employee at-will.
Agency and Relations with Creditors
Agent: Authority
Agent has power to perform (some) acts that make Principal liable to 3rd parties (in tort or K)
If A is acting “within the scope” of his/her “authority”
Types of authority
Actual: Principal manifests his consent directly to the agent
Apparent (or ostensible): Authority that a principal intentionally or by want of ordinary care, causes or allows a third person to [reasonably] believe the agent to possess
[Inherent]: Gap-fill device used by courts to achieve fair and efficient allocation of losses from an agent’s unauthorized actions.
Blackburn v. Witter (Cal. Court of Appeal, 1962) – pg. 40
Facts: Long, an agent of Witter, advised Blackburn to buy fake stocks.
Held: Witter has vicarious liability over Long’s actions on theory of apparent/ostensible authority.
Rule: A principal, who puts an agent in a position that enables the agent acting in his authority to commit fraud upon a third person, is subject to liability to the third person for the fraud.
Sennott v. Rodman & Renshaw (7th Circuit, 1973) – pg. 43
Facts: Son works on side for father who works for Rodman. Son defrauds Sennott in buying fake stocks. Son is NOT an agent for Rodman. When Rodman tried to investigate, Sennott refused.
Held: Rodman is not liable to Sennott for the son’s attempt to defraud Sennott.
Rule: If principal didn’t cause one to believe another had apparent authority, then no liability.
 
Chapter 2: General Partnership and Other Noncorporate Business Associations
Introduction
Traditional noncorporate business associations/Emergence of Limited Liability Entities
Types of non-corporate BAs
Sole proprietorship
One person owns and runs everything
General partnership (“Partnership”)
Relationship between 2 or more people to co-own business for profit.
If you don’t specify what the business is to be, the default rule is a partnership.
Subjective intent DOES NOT matter à Look at conduct
All partners exposed to liability and have fiduciary duties to one another.
Joint ownership means equally sharing profits/losses/control.
If one partner withdraws, the partnership dissolves and is over.
Joint venture
Like a partnership, but with respect to a discrete project or opportunity only
Limited partnership
Both general and limited partners. Some partners have limited liability while others have unlimited liability
[Limited liability company] [Limited liability Partnership/Limited liability limited partnership] RUPA 201: Partnership is an entity distinct from its partners
RUPA 202: Formation of partnership
Association of 2 or more person to carry on as co-owners of a business for profit forms a partnership, whether or not the persons intend to form a partnership.
Common property or part ownership doesn’t by itself establish a partnership even if co-owners share profits made by the use of the property.
A person receiving a share of profits is presumed a partner, unless profits were received in payments as independent contractor, employee, debt, loan, rent, etc.
RUPA 202: Property acquired by a partnership is property of the partnership and not of partners individually.
Determining the Nature of the Relationship
Byker v. Mannes (Mich. SC, 2002) – pg. 56
Facts: Two individuals went into business but relationship soured. Byker wanted his money back but Mannes refused to say they were in a partnership.
Rule: If parties carried on as co-owners of a business for profit, then there is a partnership. Subjective intent to form a partnership DOES NOT matter.
Hynansky v. Vietri (Del. Ct of Chancery, 2003) – pg. 60
Facts: Partnership agreement signed, but Vietri says it was never a partnership and doesn’t want to pay Hynansky the initial capital contributions.
Held: Motion for SJ denied as to the business being a partnership.
Rule: Even if a partnership agreement exists, but post-agreement conduct shows the business isn’t a partnership, then it may not be a partnership.
Sharing Profits and Losses
RUPA 103: Effect of Partnership Agreement; Nonwaivable Provisions
Partners can K around default partnership rules; But if there are no K rules, the default rules apply.
Partnership agreement may not eliminate the duty of loyalty but:
Can identify activities that don’t violate duty and partners may authorize a specific act that would violate duty.
Can’t eliminate obligation of good faith and fair dealing but can prescribe standards on which obligation is to be measured.
RUPA 401: Partner’s Rights and Duties
Each partner is to have an account that is CREDITED with an amount equal to what the partner contributes and his share of profits and CHARGED an amount equal to the money distributed to the partner and his share of the losses.
Each partner is entitled to an equal share of partnership profits and is chargeable with a share of partnership losses in proportion to partner’s share of profits.
A partner is NOT entitled to remuneration for services performed for the partnership.
Each partner has equal rights in management and conduct of business.
Kovacik v. Reed (Cal. 1957) – pg. 69
Facts: Kovacik put in money and Reed put in labor. At end, Kovacik wants Reed to split the losses even though he didn’t put in contributing capital in beginning. Agreement didn’t specify how they would share in any losses.
Held: Reed does not have to pay half the losses.
Rule: In partnership where one gave capital and the other labor, it’s not fair to split the losses since the one providing services would lose both services and money. Let each one of them eat their losses.
 
Fiduciary Duty of Partners
RUPA 404: General Standards of Partner’s conduct
Only FD a partner owes are the duty of loyalty and the duty of care.
Duty of loyalty: Limited to accounting to the partnership for any benefit derived by the partner, including a partnership opportunity, to refraining from dealing with interest adverse to the partnership, and refraining from competing with the partnership.
Duty of care: Limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct; exercise rights consistent with good faith and fair dealing.
Duty of Loyalty
Meinhard v. Salmon (NY Court of Appeals, 1928) – pg. 76
Facts: M and S in partnership. In written agreement, S has sole power to manage. G asks S to join new opportunity. S agrees but doesn’t include M. Did S violate FD to the partnership?
Held: S owed M high duty of loyalty. Heavier weight of duty on S because of “sole power” to manage.
Dissent: New lease wasn’t partnership opportunity, so no disloyalty.  
Rule: Partners have duty of loyalty to not compete with partnership and hide other partnership opps.
Self-Dealing
Vigneau v. Storch (Conn. Sup. Ct., 1995) – pg. 83
Facts: V was partner in Storch and partner in HCA. He negotiated Ks for Storch to do work for HCA. Ks had fair prices.
Held: V breached FD by having a conflict of interest to the partnership. Doesn’t matter if Ks were fair.
Rule: A partner breaches duty of loyalty by engaging in self-dealing.
Management of the Partnership
Covalt v. High (New Mex. Ct. of Appeals, 198