Corporations Outline – Fall 2013- Prof. Felix Chang
1. Agency
i. Agency = “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.” Rstm-3rd Agency § 1.01.
1. Begins @ will, terminates @ will
2. Agency relations may be implied even when parties have not explicitly agreed to an agency rltp- Jenson Farms Co. v. Cargil (where ∆ was active participant in Warren’s operation rather than just a financier; made key economic decisions and kept Warren in business)
ii. Types
1. Special- limited to single act… v. General- series of acts
2. Disclosed- 3rd party knows A is acting on behalf of P… v. Undisclosed- 3rd party thinks A is acting on his own behalf
3. Partially Disclosed- 3 knows A acting on behalf of P but doesn’t know who P is
iii. Scope of Agent’s Authority
1. Actual authority- A’s objectively reasonable belief that P has authorized him to act in such a way (manifestation from P to A), NOT P’s subjective intent
a. Incidental authority- the authority to do those implementary steps that are ordinarily done in connection w/ facilitating the authorized act
2. Apparent authority- 3rd party reasonably infers from actions of P that P has given authority to A (manifestation from P to 3rd Party).
a. White v. Thomas- P tells A she could bid up to 250k for farm, she exceeded her actual authority when she bid 325, and thereafter sold 3 acres to 3rd party, and exceeded her apparent authority b/c P manifested NOTHING to 3rd party, (note that A had told 3rd party that she had promissory note but this was manifest from A to 3rd party)
3. Inherent authority- the power of A that is derived from the existence of the agency rltp itself, when A would ordinarily have power to enter into K (manifestation from A to 3rd Party), not recognized by the 3rd Rstm, instead looks to estoppel
a. Gallant Ins. Co. v. Isaac – Isaac (3rd) buys car insurance from Gallant (P) through its agent, Thompson-Harris (A). A tells 3 he is covered before paperwork is completed, A then crashes. Court upholds insurance policy under inherent authority doctrine- reasonable for 3 to believe that A could change the policy because A had done so before
iv. Liability from P to 3rd Party for A’s wrong
1. An employer is subject to liability for torts committed by employees while acting within the scope of their employment- Rstm (3d) Agency §2.04
2. ‘Acting w/ in scope of employment’ – Depends on how much control P has over A- Rstm (3d) Agency § 7.07
a. More control = Agency/employee = P will be liable in tort
i. Humble Oil- 3 injured by neg. of gas station attendant (A), Court held that agency existed and thus P held liable for A’s actions because: (1) P pays ¾ of A’s operating expenses; (2) P furnished the station equip ads, products; (3) P told A what the stations hours of operation would be; (4) the agreement between P and A basically required A to do whatever P said
b. Less control= Independent Contractor = P will NOT be liable in tort
i. Hoover v. Sun Oil Co.- Court found independent contractor rltp NOT agency, thus P was NOT liable for actions of A b/c: (1) I.C. assumed all profit/loss risk; (2) I.C. determined own hours @ work; (3) I.C. under no obligation to follow the advice of quasi-P
c. Policy- incentivize the one w/ control to change behaviors to avoid injury AND we can’t punish principal who doesn’t have control
v. Liability from A to P
1. A will be liable to P if he breaches his fiduciary duty of loyalty, or his fiduciary duty of fiduciary duty of care.
a. Duty of Loyalty- An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency rltp- Rstm (3d) Agency §8.01… see other duties of loyalty- pg 36
i. A does not breach his fiduciary duty of loyalty if P consents to the conduct, provided that A (1) acts in good faith (2) discloses all material facts to P; and (3) otherwise deals fairly w/ P – Rstm (3d) Agency § 8.06
ii. If A profits from the agency rltp, he will be liable, notwithstanding consent, and good faith – See In Re Gleeson
b. Duty of Care- A has a duty to P to act with the care competence, and diligence normally exercised by agents in similar circumstances- Rstm (3d) Agency §8.08
2. Tarnowski v. Resop- P hired A to investigate/negotiate purchase of music machines, A relied on false rep of sellers and got commission from sellers. P won action against sellers & rescinded K
a. RULE- All profits made by A in course of Agency belong to P whether they are fruits of performance or violation of A’s duties
3. In Re Gleeson- Curtin was executor and trustee of land, leased land to himself @ high price w/ consent of beneficiaries, HELD- Curtin’s profits belong to the beneficiaries
a. RULE- If A profits b/c fiduciary rltp, liable even if no breach of trust
2. Partnerships
a. Introduction
i. A partnership is simply two or more persons associating to carry on as co-owners of a business for profit. UPA § 6(1). Partnerships are more advantageous than other ventures, because it allows the partners to more easily raise capital. However, partnerships certainly pose risks to the individuals involved, as each partner will be jointly & severally liable for their partner’s actions in tort or contract. See UPA §§13 & 15.
ii. Problems- personal liability of those who contribute capital, instability of the firm, illiquidity of an individual’s investment and cumbersome joint management
iii. Partners may contract around any of the below-listed default rules under the UPA/RUPA- Adams v. Jarvis
b. Problems among Co-Owners
i. Opportunities that arise from the existence of the partnership belong to the partnership- Meinhard v. Salmon
1. Meinhard v. Salmon- Salmon- manager, Meinhard- passive investor, they leased out building together, @ end of lease Salmon contracted w/ investor who bought building, didn’t disclose to Meinhard
a. Salmon owed Meinhard undivided loyalty, i.e. duty to disclose this future opportunity
b. Dissent (Andrews)- this was a joint venture thus had a limited object and ended at a fixed time, the new lease containing new and unusual terms, was more like a purchase of the reversion, not a renewing of lease like the majority thought
2. RUPA – Any benefit derived by a partner in the course of conducting partnership business, including a business opportunity, must be accounted to the partnership; otherwise the partner will be found to have breached his duty of loyalty. RUPA§ 404(b)(1).
ii. Either partner can bind the partnership, as long as the disputed course of action was done in the regular course of business, and was NOT something unusual or extraordinary (in that case must have been authorized by other partner(s) UPA §9(1-2)
1. National Biscuit Co. v. Stroud- in a partnership w/ 2 people neither has majority for purposes of making decisions on behalf of the firm, thus Freeman ordering bread form Nabisco against Stroud’s wishes was valid K
c. Formation
i. When determining whether or not a partnership exists, one must look to the intent of the parties; whether or not the parties split profits, and how much control the individuals have over the operation- Chang
ii. The sharing of gross returns does NOT necessarily establish partnership but receipt of share of profits is prima facie evidence that he is partner in business – UPA § 7(3-4); see also exceptions @ pg 44- UPA §7(4)(a-e).
iii. In Vohland v. Sweet we saw the court willing to find the existence of a partnership where an individual received on 20% of net profits, and where such individual supplied and increased the value of the partnership inventory. Chang hates this ruling
d. Dissolution
i. Traditionally, if a partner withdrew from a partnership, the partnership automatically dissolved. UPA § 31(1)(d). The modern rule under the RUPA is that a partnership will still remain in existence even after a partner withdrawal. RUPA §601.
ii. Opportunistic Dissolution – Even where a partner stands to gain from the dissolution of a partnership, said partner will not be per se liable to his fellow partner(s), unless he acted in bad faith, or did not give express notice to his partner(s) of his intent to dissolve the partnership. Page v. Page
iii. After dissolution, and in liquidation/distribution courts prefer partition by sale, rather partition in kind. Only in kind when there is no objection among partners, and no existence of other creditors- Dreifurst… see also UPA § 40- (stating default rule is equal share distribution)
e. Creditor’s Rights to Partner’s Personal Property – DRAW IN LINES from pg. 51
i.
ii. When a partnership goes bankrupt, the partners may also find themselves in bankruptcy. The creditors of the partnership, and the creditors of the individual partners are then at odds with one another. In this situation, the UPA
al Requirements – DGCL § 170(a) and RMBCA §6.40
i. Includes making sure there is enough money in the corporations reserves for creditors if corp goes bad. Benefits Creditors & Tort Vs- no question money will be there
ii. Requires corps only to give distributions if corp has surplus- i.e. any amount greater than the value of all the par value shares that corp issued at the start of existence
c. Fraudulent Transfer Doctrine
i. The fraudulent transfer doctrine permits creditors to void transfers by establishing that said transfers were either actual or constructive frauds on creditors.
ii. Creditors may attack a transfer on two grounds: “Present or future creditors” may void transfers made with the “actual intent to hinder delay or defraud any creditor of the debtor- UFCA §7 …OR “Creditors” may void transfers that were made without receiving a reasonably equivalent value if the debtor is left with “remaining assets… unreasonably small in relation to its business” or if the debtor intended, believed, or reasonably should have believed that he would incur debts beyond his ability to pay as they became due, OR if the debtor is insolvent after the transfer UFTA §§4(a)(2,5)
d. Equitable Subordination Doctrine
i. Equitable subordination is a judicially imposed remedy that forces a corporation to reorganize the priority of its creditor’s claims to its assets. This is a less extreme remedy than Fraudulent Conveyance doctrine; it just requires a creditor to get in line behind other creditors. See Costello v. Fazoi (where Partners formed a corp that was inadequately capitalized, essentially to protect the cap invstms of some of the partners in the original ptshp. Court subordinated the partners’ claims to other creditors)
e. Piercing the Corporate Veil
i. DEFINED- Courts will sometimes set aside the entity status of a corporation and make a shareholder of said corporation personally liable in tor or contract. This is commonly known as Piercing the Corporate Veil. TEST- In order to pierce the corporate veil, (1) there must be such unity of interest and ownership that the separate personalities of the corporation and individual no longer exist, and (2) circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice. Sea-Land quoting Van Dorn. In Kinney Shoe Corp, the court also examined (3) whether the creditor assumed the risk of entering into the contract with the debtor.
ii. Factors for (1)- failure to maintain records, comply w/ corp formalities, commingling of funds/assets, under capitalization, one corp treating assets of another corp as its own. An unsatisfied judgment is not enough to meet the “promote injustice” prong of this test. Sea-Land Services, Inc. Rather, the plaintiff needs to prove something akin to fraud, deception, or some public policy disfavoring the actions of the Defendant in order to satisfy the second prong of this test. Id.
iii. Kinney Shoe Corp v. Polan – when it would be reasonable for the plaintiff to investigate the credit of the defendant corporation, and such investigation would reveal that the corporation is grossly undercapitalized, the plaintiff will have assumed the risk of contracting with the corporation, and thus the court will not peirce the corp’s veil.
iv. Walkovszky v. Carlton – P was injured when run down by a taxi; ∆ owns several corporations, each of which has two cabs registered in its name, and each cab carries minimum of $10K liability insurance. No allegations that ∆ was conducting business in individual capacity; no stms that D shuttled personal funds in and out of corporations without regard to corporate formalities- NO VEIL PEIRCING.
