BUSINESS ASSOCIATIONS OUTLINE
Owner’s Equity – Leftover after all liabilities: k and tort are paid. //rid yourself of judgments and you increase owner’s equity
Incorporated Business – inc. or limited
Agency
AGENCY – Is there an agency relationship? What is its scope?
Is the fiduciary relationship that results from the manifestation of consent by one person to another that the other shall act on his behalf subj. to his control, and consent by the other so to act. Handout Jenson [grain elevator operator, controlled by creditor] //requires mutual consent //note that this case probably cannot be extended to all buyer supplier relationships and creditor/debtor relationships. REQ: MUTUAL CONSENT, but can be implied
– Course of dealing can show an agreement with circumstantial evidence.
Action – Agent – special = one transaction – general = continually acts; Action for – Principal
Actual Authority – express authority. §2.01 – Depends on statements from the principal to the agent. Can be incidental if reasonably necessary to accomplish actually authorized transaction, or that usually accompany it.
– An independent business does not equal an agency relationship. R2d §14k. // This was significant in Jenson and the court seemed to overlook //Lambert says wrongly decided
– “Creditors who assumes control of debtor’s business may become liable as a principal…when he assumes de facto control over conduct of debtor” R2d 14 O
– //Looks more like a lender transaction where they want to make sure their investment does not go south.
Implied Authority/Incidental Authority – A1→A2. Task given and steps to complete task are necessarily accomplished by agent.
Apparent Authority – conduct on the part of the principal had RP 3d party believe that there was authority. §2.03 //Think of the PO example in class, what happens when you steal a car and then represent to a buyer that you are able to sell. Reasonable??
– Even if later revoked, if the 3d party does not know this then still bound
– Agency by Estoppel – 3d party changed position based on belief that transaction was entered into by/for P if:
o P intentionally/carelessly caused belief
o Knowing of belief, P failes to take reasonable steps to notify 3d party of contrary facts
Ratification – after the fact acquiescence; obj. manifested. § 4.01 MUST OCCUR before: (1) 3rd party has withdrawn; agreement has otherwise terminated; situation has so materially changed that it would be inequitable to bind 3rd party and 3rd party elects not to be bound.
Types of Disclosure: Disclosed; Undisclosed – not known to third party and still liable; Partially Disclosed – principal existence but identity not know to third party
Revocation – P can revoke at any time, even if it violates k between P and A, and even if authority stated as “irrevocable”.
Tort Liability; K Liability; Liability of 3rd party to P
–Principal–
– Vicarious Liability – “respondent superior” – R3d §2.04 – turns on express authority – enterprise authority; must be acting within the scope of employment
UCC Governs Pledge of Assets unless real property (Art. IX)
– K Liability – when disclosed or partially disclosed, P becomes liable to a 3rd party as a result of a transaction by the A if the A had actual, apparent or inherent authority
– Liability of 3rd Party to P: if A and 3rd party enter into K under which A’s P liable to 3P, then 3P liable to P E: 3P not liable to undisclosed P if A or P knew that 3P wouldn’t have dealt with P if she had know P’s identity
–Agent–
– Tort liability – if the agent is force dto satisfy a judgment rendered against him for a tort committed within the scope of his employment, then the agent can seek indemnification from the principal. But A can also be sued in his own right
– K Liability –
o Undisclosed P: the gen. rule is that the agent IS LIABLE along with the principal if some for of authority is present. Theory is that 3P must have expected the agent to be a party to the contract because that is how it was presented. MAJ: if 3P has judgment against P then A not liable; MIN: sue both, neither released until entire judgment satisfied.
o Partially Disclosed P: Gen rule is that A IS LIABLE. A liable as surety
o Disclosed P: Agent is NOT LIABLE.
o No authority: agent LIABLE
– A to P: If A acting w/ apparent authority, A may be liable to P for any ks P is bound by, or any damages. If A takes action that she has no actual authority to perform, but P nevertheless bound b/c A had apparent authority, A LIABLE to P for any resulting damage!
Alternatives to Agency (Similar Relationships that produce no liability): lender or creditor/debtor (totality of the circumstances: 1. control of management, 2. directing what ks may or may not be made, 3. interfering with internal affairs, 4. forcing company to comply with recommendations, 5. rights of entry onto property); Buyer/Supplier (totality of the circumstances: 1. charging fixed price rather than percentage of profits //can price float in the mkt, 2. acts in his own name and receives title to property //like middleman?, 3. independent business in buying and selling similar property); contract rights
Fiduciary Duty is owed under the agent/principal doctrine as described in Tarnowski (Juke box). Can recover from the agent if wrongfully enriched and recover tort damages. Agent must act solely for the benefit of the principal.
– Liability for breach of loyalty:
o agent profits: agents are not allowed to make profits through their activities during the agency relationship. Tarnowski. All profits made by the agent are recoverable if the agent breached the duty of loyalty.
o Misrepresentation – agent responsible for all reasonable and foreseeable damages that incurred by the P in reliance on A’s representations.
o Adverse party – A cannot deal with P as an adverse party
Partnerships
(1) (A) LOOK TO 16202 TO SEE IF PARTNERSHIP; (B) LOOK TO PARTNERSHIP AGREEMENT TO SEE IF THE AGREEMENT LIMITS DUTY OF LOYALTY OR CARE; (C) CA, LOOK TO 16103 TO SEE IF THERE IS AN OPERATING AGREEMENT AND WHETHER IT OVERCOMES DEFAULT PROVISIONS FOR CAPITAL ACCOUNTS IN 16401
(2) IF PARTNERSHIP LIABILITY – TYPE OF ACTION; 16306 J/S LIAB. – AGENCY DOCTRINE (MAKE SURE AGREEMENT DID NOT TRUMP) DETERMINE LIABILITY BASED ON WHO: invested, managed, asserted control, held themselves out as members of entity
PARTNERSHIPS – carryon as co-owners of the business for profit. 16202
16202 – “the association of two or more persons to carry on as coowners a business for profit forms a partnership, whether or not the persons intend to form a partnership.”
– LLP must make election and file.
J/T and TIC not pshps; sharing of gross returns not pshp; sharing of profit presumption of pshp E: payment of debt; payment of rent; ind. Contractor or wages; annuity; interest on other loan; payment for sale of goodwill, or sharing in gross returns (ie money even if no profit).
– Factors must be taken as a whole and needs to point to “an association of two or more persons to carry on as co-owners a business for profit. P. 32 Martin (bank lending of liquid securities)
– Control is a dispositive issue as to whether a pshp is formed or not. P. 36 Lupien (auto shop and the Bradley automobile) “the right to participate in the control of the business is the essence of co-ownership. Dalton
– co-owners does not necessarily mean joint title – right to participate in business essence in ownership
– If NO AGREEMENT, partner must have the majority to make a binding decision on partnership if within the ordinary course of business. p. Summers [trash collection and hiring two new people to take over]
Scope – formation of a partnership creates an agency relationship: (1) every partner is an agent for the partnership; (2) acts bind; (3) an act that is not in the ordinary course of business will not bind; (4) usual way = bind; (5) unusual way ≠ bind.
You can change many things about the pshp under the pshp agreement 16103(b) limits:
May Alter E:
– Vary rights and duties under 16105, E: to eliminate the duty
– Unreasonably restrict access to books
– Eliminate the duty of loyalty under 16404 BUT if NOT manifestly unreasonable: (1) identify specific types or categories of activities that do not violate the duty of loyalty; (2) a spec. number of the partne
iolate the implied covenant of good faith
Alteration, YOU MAY NOT: (1) alter the obligation of good faith and fair dealing; (2) unreasonable reduce the duty of care; (3) completely eliminate the duty of loyalty (can limit)
Capital Accounts
Increase by FMV of property contributed NET of liabilities and cash. Distributions reduce CA
Transfer of Pshp Int.
– You cannot assign partnership membership and noneconomic rights, but can assign his partnership interest. //creditors can get to person pshp interest.
– Possible transfer interest in sale, but pshp agmt might not allow this
Winding up of a partnership is governed by 16807, under 16807(c) there is an obligation to increase the capital account if negative. Upon dissolution, each partner receives a share equal to the amount of his/her capital contribution and the excess is divided equally by default.
– Wrongful termination – 16602 – dissociation – p. if not wrongful has rt. to buyout at the amount of the liquidation //every pshp agmt contracts around this. Normally owe damages if wrongful termination
– Wrongful = in breach of express provision in agreement; before the date of termination if: (a) express will UNLESS within 90 days of another partners dissociation by death, (b) expelled by judicial determination, (c) by becoming a debtor in bk, (d) or not individual and dissolved willfully → LIABLE FOR DAMAGES CAUSED BY THE DISSOCIATION.
– p. 88 Page [a pshp may be dissolved by the express will of any p w/no def. term, but must act in good faith //question if this is still the case under 16602] (cleaning biz and one p as a creditor)
– p. 91 Leff [it is a violation to exploit pshp knowledge for your own benefit] (squib)
– if dissociation is not wrongful then partner has right to be bought out of remaining partners.
Corporation
THE CORPORATE FORM – Attributes: limited liability; free transferability except with shareholder agreement; continuity of existence; central management.
Terms
Closely held corporation – small amount of shareholders and not publically traded
Business Judgment Rule – presumption that the directors of a corporation exercise care and loyalty in making decisions, π must overcome this presumption in order to sue.
Begin: Articles of Incorporation – REQ: (1) name + corp. or inc., (2) address, (3) purpose of the corp., (4) and authorized stock (most important part of articles of incorporation), (5) agent of service of process. 202 OPTIONAL PROVISIONS: 204(a)(10) – limitation on personal liability of directors
– No shareholder has authority to control the board over the stock issue if in the A/I. Can amend.
– 212 – bylaws are created and never filed, this stipulates the number of directors, CA provides min and max where max = 2*min-1.
– 300(a) gives power to the board of a corporation – board is the ultimate authority under 309 and owes a duty of care, loyalty and G/F this is the basic fiduciary duty.
– Shareholders have fundamental right to vote
Capital Structure – common and preferred. CM – one vote per share, equal treatment for dividends (rt. to receive dividends when determined by corporation); PREF – right to dividends before cm. Pref has accumulation principle which pays out dividends if not paid in one year. CONVERTIBLE – ability convert pref. to cm. or debt to pref or debt to cm . . .
