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Business Associations
University of California, Hastings School of Law
Dibadj, Reza

Business Associations Dibadj Spring 2017

Chapter 1: Acting through others: Law of Agency

(pg. 1-32)

Firm = a form of business relation that has a temporal dimension, a social identity, and a separate pool of dedicated business assets

Kaldor-Hicks efficiency- as long as everyone gets compensated for their costs, it’s efficient

Three ways in which enterprise law can enhance the efficiency of enterprises:

By providing standard platforms for business entities as well as agency contracts and creditor protections
Enterprise law adds value by permitting business actors to modify 3rd party property rights in circumstances when contract alone cannot do the job
Enterprise law provides a variety of rules and standards (collectively termed “fiduciary duties”) that are intended to either prevent or remedy self-interested opportunism by parties within enterprises

Governance- Relationship between:

Corporation,

Board of directors,
Shareholders, and
Management

Topics:

Creditors

Consumers

Suppliers

Capital Markets

Employees

Community/local/state/federal government

Delaware is the source of the most corporate laws

Delaware Court of Chancery

Agency Formation

Agency Termination

Principal’s Liability

Agent’s duties

Shareholders can: Vote, Sue, and Sell

When someone engages in an agency relationship- (agent = employee)

“Agency is the fiduciary relationship that arises when one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.”

(e.g., selling a house, making a purchase, etc.)

Fiduciary duty- agent has to be fair, truthful, etc.

Agent must act in ways that are beneficial to principals

How can you get into an agency relationship?

Anytime someone understands that there is an agency relationship at hand

Agency- A fiduciary relationship

Termination

Either the principal or the agent can terminate an agency at any time

Nobody can force a person to be an agent, but if the agent signed a contract, it could violate contract law while not violating business association law

Agency relations may be implied even when the parties have not explicitly agreed to an agency relationship

Jenson Farms Co. v. Cargill (1981)

Facts- Warren Grain & Seed had creditors, and owed $2 million to plaintiffs, and owe $3.6 million to Cargill (the creditors who lent the money to Warren Grain & Seed). Plaintiffs are not paid because Warren Grain & Seed was bankrupt. They sue Cargill instead because of the act of Cargill’s agent: Warren Grain & Seed. Cargill loses though because Cargill was a principal and Warren Grain & Seed was an agent. Cargill was controlling Warren Grain & Seed, and became heavily involved in the company. Despite lacking the formal agency agreement, the 3rd party (Cargill) is liable to plaintiffs.


Issue- Is a creditor liable as a principal for the contracts of a debtor when the creditor takes control of the debtor’s business functions? Yes


 Rule- A principal-agent relationship exists between a creditor and debtor when the creditor intervenes in the business affairs of the debtor.


 Analysis- When a creditor exerts control over the operations of a debtor, a principal-agent relationship is created between the parties, and the creditor is liable for the contractual obligations of the debtor. Cargill contends that its business dealings with Warren were nothing more than that of a typical creditor-debtor relationship. But, the record shows that the main purpose of Cargill’s financing of Warren was to obtain a source of grain for its business, not to make money from its loans to Warren. Cargill kept purchasing grain from Warren while increasing its financing of Warren, even when it became apparent that Warren was becoming a great financial risk. Cargill also asserts that its relationship with Warren was that of a buyer-supplier, not a principal-agent. However, in order for two businesses to have a strict buyer-supplier relationship, they must be independent businesses. In this instance, Warren’s operations were financed by Cargill, Cargill established control over Warren’s operations, and Warren sold nearly all of its grain to Cargill. Hence, Warren’s business was not independent from Cargill’s. Therefore there was a principal-agent relationship in this case.

Conclusion-

Actual and Apparent Authority

What is necessary is for the agent to reasonably understand from the action or speech of the principal that she has been authorized to act on the principal’s behalf

Actual authority includes (unless specifically withheld) incidental authority-that is, the authority to do those implementary steps that are ordinarily done in connection with facilitating the authorized act. In addition to actual authority, there is another source of authority. Apparent authority is authority that a reasonable third party would infer from the actions or statements of P.

Principal Agent 3rd party

Actual authorization (agency)- when principal expressly or impliedly gives power of agency to agent (Principal à agent)

Apparent authorization- apparent authority- any manifestation from the principal to the 3rd party (Principal à 3rd party) (e.g., blank check suffices)

Principals are liable under the apparent authority doctrine

Inherent authorization- any manifestation from agent to the 3rd party (Agent à 3rd party) (authority by estoppel, authority by ratification (waiving))

Principal is not liable

Estoppel is used as an argument when actual authorization or apparent authorization isn’t present

White v. Thomas (1991)

Facts- White (Principal) hired Simpson (Agent) to buy 217 acres of land at an auction for 220 acres (White wanted everything but the 3 acres the house is on), and gave a specific limit for money to spend. Simpson overbids, so she sells 45 acres to Thomas (3rd Party). White is angry at the selling to Thomas. Thomas argues that it’s apparent authorization because Principal gave a blank check to Agent, but this argument fails.

Issue- Will a principal be bound by a purported agent’s assertions regarding the scope of his or her authority? No. Agents can’t act outside the scope of their authority; the act might be upheld if 3rd party has strong estoppel claim.


 Rule- A purported agent’s claims regarding the existence or scope of his or her authority, without more, are insufficient to create apparent authority.


 A: White expressly authorized Simpson to buy the land for up to $250,000. Simpson did not have actual authority to sell White’s property, nor was such authority implied in White’s authorization to buy property at auction. White never held Simpson out as having authority to enter a land-sale contract on his behalf. The blank check may be evidence of Simpson’s authority to buy but not to sell. The Thomases questioned Simp

recommend anyone to go into a general partnership, because it exposes one’s personal assets to the other partners.

Legal power over property (including formation) held by the fiduciary is held for the sole purpose of advancing the aim of a relationship pursuant to which she came to control that property

Tarnowski v. Resop (1952)

Facts- Resop acted as an agent for Tarnowski to buy a jukebox company. Resop secretly was paid by a 3rd party to have Resop buy their company for Tarnowski. Tarnowski realized the fraud and sued Resop and the 3rd party and won on both.

Issue- Under Minnesota law, may a principal recover against an agent for breach of fiduciary duty? Yes.

Rule- Under Minnesota law, a principal may recover any profits an agent derived from the agency relationship or a breach of duty and any damages incurred as a result of the agent’s breach.

(duh…) A principal can recover:

1. Agent’s breach of duty- any damages incurred b/c of breach

2. No agent breach of duty- any profits agent received from agency relationship

Analysis- Even if there is no breach of duty or actual harm, a principal can always sue its agent. This preserves the idea of fiduciary duty. In this case, Tarnowski was entitled to recover the profits Resop earned from the commission. Tarnowski was also entitled to damages for expenses and litigation costs necessary for protecting his rights against the sellers. Those damages directly resulted from Resop’s breach of duty. Tarnowski’s recovery from the sellers in no way impedes the right to recover from Resop in tort.

Conclusion- Tarnowski wins.

Trustee = kind of like an agent who holds legal title to trust property in order to manage it for the benefit of another person (has a fiduciary duty)

Trust beneficiary = kind of like the agent who owns the property and lets trustee hold title in order to manage it

In re Gleeson’s Will (1955)

Facts- Colbrook leased farmland from Gleeson. Gleeson died, and named Colbrook trustee of the land for her children. Colbrook still lived there as a tenant without paying. Colbrook acting as a tenant and trustee amounts to self-dealing. Colbrook argued that it didn’t harm the Gleesons at all, but that doesn’t matter because it breached fiduciary duty.

Issue- May a trustee who is acting in good faith engage in self-dealing if the trust suffers no injury as a result? No.

Rule- A trustee who engages in self-dealing breaches his fiduciary duty regardless of whether he was acting in good faith and the trust suffered no injury as a result.

Analysis- The general rule of equity that a trustee must only deal with the trust property as trustee, and not in an individual capacity, applies regardless of the trustee’s good faith and whether the self-interested transaction causes injury to the trust.

Conclusion- Colbrook loses; Gleesons win.