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Business Organizations
University of Connecticut School of Law
McClane, Jeremy R.

Business Organizations

Prof. J. McClane

Spring 2016

AGENCY

Formation – Consent

“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.”

Restatement (Third) Agency § 1.01

Three things:

1. Assent (both ways)

Explicit or Implicit

2. For A to act on P’s behalf
3. Subject to P’s control

Jenson Farms Co. v. Cargil (wheat elevator-Creditor had too much control-paternalistic; liable for Agent’s actions)

Liability in Contract – Forms of Authority

Actual Authority: that which a reasonable person in A’s position would infer from P’s conduct.

Express if communication was explicit;
Implied (or incidental) if A’s actions were reasonably calculated to discharge P’s explicit instructions
Re (3d) Agency §2.01

Apparent Authority: authority that a reasonable third party would infer from the actions or statements of P.

Re (3d) Agency §2.03

Inherent Authority (Inherent Power): general A can bind P to an unauthorized contract, if A would ordinarily have the power to enter such a contract and T does not know that matters stand differently.

Re Agency (2d) §8A; see Re (3d) Agency §2.05 Estoppel to Deny Existence of Agency Relationship

White v. Thomas (assistant only had actual authority to buy land as a special agent; she did not have apparent or inherent authority to also sell land from the transaction. Selling isn’t inherent in, or incidental to, buying. Third parties cannot rely solely on Agent’s actions, there must be something also from the Principal to establish apparent authority.)

Gallant Insurance v. Isaac (Insurance Agent had the apparent authority to bind the insured who relied on the common practices of Agent (along with no interaction with undisclosed Principal insurer) to believe she was covered.)

Tort Liability for Agent’s Actions

Humble Oil v. Martin (gas station Commission Agent was just essentially a store manager so his Principal oil company was liable for his actions) §2.04 Respondeat Superior

Hoover v. Sun Oil (gas station Dealer was essentially an independent proprietor and not an Agent so the oil company he dealt with was not liable for his actions)

Agent Secret Commission

Tarnowski v. Resop (juke box route; if buyer’s Agent gets secret commission by double dealing with seller in a way not in the best interest of the buyer/Principal, then the Principal is entitled to whatever enrichment the Agent secretly obtained)

Agent as Trustee

In re Gleeson (a trustee/agent has a duty to always act in best interest of beneficiary/principal; unlike the tenant farmer who became the executor/trustee and rented to himself)

PARTNERSHP

Partnership Law Issues

All partners are owners – principals
All Partners are also General Agents

RUPA §301

All General Partners are Jointly and Severally Liable for the debts of the business

Just like single principals
RUPA §305

All partners share equally in control

(unless they agree otherwise)
RUPA §301

Meinhard v. Salmon (managing partner has the utmost fiduciary duty to passive partner to disclose all opportunities arising out of the venture; akin to an Agent’s duty to his Principal)

Cardozo: The Puntilio Paragraphs

Joint venturers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. . . . Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.”

Implied/Statutory Partnership

Vohland v. Sweet (if owner shares the profits with salesmen he is a partner even if they call it a “commission” and don’t expressly set out to enter into a partnership) RUPA § 202(a)

Partnership Relations with Third Parties

– UPA § 6(1)

“A Partnership is an association of two or more persons to carry on as co-owners a business for profit”

– UPA § 7(4)

Sharing of profits is prima facie evidence of partnership (if not as loan repayment, wages, etc.)

– UPA § 18(g)

Need consent of all partners to be a member of a partnership
Evidence of Intent? (Vohland v. Sweet) Control?

– UPA § 13

Each partner is bound by other partners’ wrongful acts or omissions

The rights of Partnership Creditors (Tort and Contract):

– UPA §15: Partners are jointly and severally liable on partnership torts; jointly liable on P’ship contracts.
– RUPA §306: Partners are jointly and severally liable on partnership torts and contracts.
– BUT: RUPA §307(d): Must exhaust business assets before pursuing personal assets.

Partnership by Estoppel

UPA § 16

IF: a person represents itself as being a partner in an enterprise (or consents to others making the representation)
AND: a third party reasonably relies on the representation (actual reliance required) and does business with the enterprise,*
THEN: the person who was represented as a partner is personally liable on the transaction, even though that person is not in fact a partner
* While UPA § 16(1) refers only to those who “give credit”, RUPA § 308 expands this to all transactions and case law has made this clear even in the UPA context.

Creditors’ Claims

Departing Partners

– Tension: Liable for old debts, but no longer exercise control. But, should not allow them to escape legitimate debts.
– UPA § 36(2): If creditors agree (agreement can be inferred)
– UPA § 36(3): Material alteration to terms, with notice to creditors
– RUPA § 703(d) – almost identical

Partnership Property

Partnership is “entity” RUPA § 201
Property belongs to entity, distinct from individuals (RUPA § 203 and UPA § 8)

Partnership Governance

UPA §18(h):

“Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners;
But no act in contravention of any agreement between the partners may be done rightfully without the consent of all the partners.”

National Biscuit Co. v. Stroud (1 of 2 partners is not majority so 1 partner is free to bind partnership with third parties while conducting the ordinary business; like buying bread)

Partners’ Authority to Act

UPA §9

– (1) Every partner is an agent of the partnership for the purpose of its business….
– (2) An act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not bind the partnership unless authorized by the other partners.

UPA §18(h)

– Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners;
but no act in contravention of any agreement between the partners may be done rightfully without the consent of all the partners

Dissolution & Dissociation

Under UPA:

Dissolution (§29): any change of partnership relations, e.g., the exit of a partner.
Winding up (§37): Orderly liquidation and settlement of partnership affairs.
Termination (§30): partnership ceases entirely at the end of winding up.

Under RUPA:

Dissociation (§ 601): a partner leaves but the partnership continues, e.g., pursuant to agreement. Leaving partner is paid out according to RUPA (§ 701)
Dissolution and Winding up: (§§ 801, 805, 807): the onset of liquidating of partnership assets and winding up its affairs.
Termination (§ 802): partnership ceases entirely.

Adams v. Jarvis (agreement b/w Dr’s expressly states how Dissociation will occur so as not to dissolve, wind up, and terminate partnership upon a partners withdrawal)

How to Distribute?

Does the Partnership Agreement say? If not:

Under UPA (§§38, 40):

Figure out residual value

After payment to creditors
After paying amounts owed to partners
Capital accounts of partners (if these are negative, partners will have to pay)

Divide Equally

(But how to value?)

Under RUPA (§ 701):

Figure out residual value
Must buy out leaving partner at higher of:

Liquidation value
Go

director-privilege (and possible defense against shareholder derivative suits))

Standard Based Duties

North American Catholic Educ. V. Gheewalla (Del. 2007) (didn’t read)

Creditors cannot assert a direct claim (alleging injury to their own interests as creditors) but do have standing to assert a derivative claim (alleging injury to the corporation) against an insolvent corporation.
Directors in the zone of insolvency “must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners.”

Fraudulent Conveyance & UFTA §4

(a) A transfer made . . . by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made . . . if the debtor made the transfer . . .

(1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or
(2) without receiving a reasonably equivalent value in exchange for the transfer. . . and the debtor:

(i) was engaged or about to engage in a business transaction for which the remaining assets of the debtor were unreasonably small. . . or
(ii) intended to incur. . . or reasonably should have believed that he [or she] would incur debts beyond his [or her] ability to pay as they came due. . .

STANDARD BASED DUTIES: VEIL PIERCING DOCTRINES

Veil Piercing Doctrines

Tests go under various names: “agency test;” “instrumentality of the individual”; “alter ego of the individual;” (Van Dorn test in Sea-Land Services) etc.
Generally consist of two components:

Evidence of “lack of separateness,” e.g., shareholder domination, thin capitalization, no formalities/co-mingling of assets (“Tinkerbell test” – to be protected, shareholder must believe in the separation)
Unfair or inequitable conduct – this is the wildcard in veil-piercing cases.

Probably no piercing: against public corporation; against passive shareholders; minority shareholders; if all formalities are observed and nothing “funny” with the accounts.

Sea-Land Services v. Pepper Source (peppers; 5 corps of D were just his alter egos and enabled him to commit fraud and unjust enrichment)

Kinney Shoe Corp. v. Polan (sublease to his shell corp with no assets = no protection against veil piercing; nothing in, nothing out, no protection)

Walkovszky v. Carlton (splitting up taxi cab subs and getting min. insurance was not fraud (or other injustice) and a valid use of LLC)

Formulations of the Doctrine

Lowendahl test (NY): veil-piercing requires (1) complete shareholder domination of the corporation; and (2) corporate wrongdoing that proximately causes creditor injury
Van Dorn test (7th Circuit – applied in Sea Land): (1) such unity of interest and ownership that the separate personalities of the corporation and the individual [or other corporation] 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.
Laya test (applied in Kinney Shoe): (1) unity of interest and ownership such that the separate personalities of the corporation and the individual shareholder no longer exist; and (2) would an inequitable result occur if the acts were treated as those of the corporation alone. BUT: if both prongs satisfied, there is still a potential “third prong” — D might still prevail by showing assumption of risk.

THE ROLE OF THE SHAREHOLDER (I): STATE LAW SHAREHOLDER RIGHTS