BUSINESS ORGANIZATIONS OUTLINE
Unity of Ownership
No legal existence or identity separate from the owner
Proprietor owns and controls; Agent is under fiduciary duties to principal
SP: Indefinite, not perpetual; coterminous w/ proprietor’s life
Free to sell the business to another party; if P has hired an agent, sale may terminate the agency relationship
Unltd personal liability on P’s part for the business obligations
Taxed as an individual
Only requires explicit or implicit agreement to act as co-owners of a business for profit
Legal entity separate from that of the partners under RUPA
-Corp can’t be a GP
Default is equal shares amongst partners, but subject to agreement
UPA: dissolves whenever one partner dies, resigns, or otherwise leaves
– Subject to agreement by partners
Only eco. rights are freely assignable
Right to mgmt not assignable (unless K)
UPA: All jointly & severally liable for tort or breach committed by a partner if w/in the scope of the firm’s business
Partners taxed as individuals; Losses pass through to individual partners
Agreements have broad latitude
Ltd Liability is achieved by filing w/ state official; (have to elect to be treated as ltd liability entity), name reqs, agents of service req., annual reports
GP w/ an LLP shield
Sometimes just ltd to tort liability; other times extends to K liability; FL has a full shield statute for K and tort liability; in FL maintain liability for supervisory negligence for subordinates
$1M Ins or separate segregated fund for claims against you; not available in all jurisdictions
Unlike GP, requires certain formalities; Must file certificate w/ Sec of State; there must be at least one GP (who is personally liable for all the debts)
Doesn’t exist at C/L; gov by ULPA & RULPA; RULPA §101: LP is a partnership formed by 2 or more persons, w/ 1 or more GPs & 1 or more LPs; Name must inc “LP”
Day-to-day mgmt. Is in the hands of the GP; LPs don’t participate, except in extraordinary matters; LP who participates in mgmt may lose LP status if creditor believes LP was a GP
Can be dissolved judicially or when a certain event occurs (written consent of partner/time stated on certificate. Upon dissolution, must be wound up & assets must be distributed, 1st to creditors and then to partners
Partner may assign interest in whole or in part; Partner who assigns all interest ceases to be a partner (RULPA §701); Assignee of LP, unless she becomes subst. Partner, is only entitled to profit share & return of contributions
LP is not liable for debts beyond their contribution
GP has all the liabilities of a partner in general partnership; i.e. personally liable for LP’s debts
Have some tax advantages over GPs
Profits aren’t divided equally, but are divided in proportion to each of the partners contributions
Ltd Liability is achieved by filing w/ state official (have to elect to be treated as ltd liability entity), name reqs, agents of service req., annual reports;MORE onerous than LLP
Provides a full, corp. and LLC like liability shield; Sometimes just ltd to tort liability; other times extends to K liability; FL has a full shield statute; in FL maintain liability for supervisory negligence for subordinates
$1M Ins or separate segregated fund for claims against you; not available in all jurisdictions
File Art. of Org.; may adopt an operating agreement; maintain registered office & keep certain records
Legal entity w/ a personality separate from that of its members; may sue and be sued in its own name; may own prop in its own name
Mgmt. is vested in members; # of votes cast is determined by proportional share in the book value of interests; Agreement may be made contrary to default
Durational restrictions have lately fallen away
Default rule is that admission of a new member requires the unanimous consent of all members; subject to contrary agreement
Members not personally liable for the firm’s obligations; however, some cts allowed the LLC veil to be pierced; liability ltd to amt. Invested in firm
Pass-through tax. for members; Members taxed only on profits; Members can deduct losses of the LLC
A. Basic Principles
B. Who is an Agent?
1. Gorton v. Doty
a. Facts: Doty lends her car to coach to drive the team to the game. Car accident occurs. Father of one of the athletes, Gorton, sues Doty on agency theory. Jury verdict for Gorton. Doty files motion for new trial and is denied. This case is an appeal on that motion.
b. Issue: Was Coach an agent of Doty?
i. Certain statements may as a matter of law give rise to an agency relationship
ii. If agency relationship exists, liability incurred by agent goes to principal
c. Holding: Evidence sufficiently supports the jury finding; there was an agency relationship
d. The relationship of “principal and agent” need not necessarily involve some matter of business, but, where one undertakes to transact some business or manage some affair for another by authority and on account of such other person, the relationship arises, irrespective of existence of a K or receipt of compensation by either party.
i. There is a 3 part test for the existence of an agency:
ii. She said he might use her car “if he drove it” and Coach actually did the car (control and consent)
i. Agency means more than passive permission; this was just a kindly gesture
ii. Takes issue w/ jury instructions which said to “draw on experiences as businessmen”
2. MJ & Partners Restaurant LP v. Zadikoff
a. Facts: MJ sued Zadikoff, CEO of Michael Jordan for trademark infringement, unfair competition and misappropriation, deceptive business and trade practices, breach of fiduciary duty, and misappropriation of trade secrets. MJ claims Z was their agent and had fiduciary duty to principal. Z filed a motion to dismiss.
Beginning the requested taskà agency attaches regardless of whether the parties had the legal concept in mind and regardless of whether the parties contemplated the consequences of having the label applyà mixed question of fact and law
1 — Consent by principal for agent to act on principal’s behalf
2 — Agent was subject to principal’s control — he had to drive it.
3 — Consent by the agent to so act – he agreed to drive it and he did.àJump à 23 FoodàMJ&P à RMI ßà Hyatt
President License Sub-license owns K affiliate
MJ Restaurant Cornerstone Mgmt.
b. Issue: Was Zadikoff an agent?
i. Z argues that he is an independent Kor b/c by K he is an employee of Cornerstone
ii. Zadikoff argues that he was a sub-agent, so he only had obligations through RMI
c. Holding: Motion to dismiss denied
i. Mixed question of fact and law. To determine whether an agency relationship exists under Illinois law, ct must consider two factors: (1) whether the principal has the right to control the manner and method in which agent performs his services, and (2) whether the agent has the power to subject the principal to personal liability
ii. Existence of an agency relationship is determined based on the actual practices of the parties, and not merely by reference to a written agreement.
3. A. Gay Jenson Farms Co. v. Cargill, Inc.
a. Facts: Action to recover losses when Warren defaulted on the Ks. P alleged Cargill and Warren were both liable b/c Cargill was in an agency relationship w/ Warren. Cargill argued that they weren’t the principal; said Warren was on of their suppliers. Cargill was financing and also purchasing grain. Jury verdict in favor of P. Cargill appealed.
b. Issue: Whether Cargill by its course of dealing w/ Warren, became liable as a principal.
i. 3 Part Restatement Test
ii. Restatement §14 O: A security holder who takes over management of debtor’s business may become liable as principal for acts of debtor in connection w/ the business
c. Holding: Affirmed.
i. Financial and managerial control assumed by corporation, which was a major grain dealer, over operations of local grain elevator established an agency relationship b/w the parties.
ii. Since all portions of local grain elevator’s operation were financed by corporation, and since elevator sold almost all of its market grain to corporation, the relationship which existed b/w the parties was not merely that of buyer and supplier.
iii. Even if corporation operated as an undisclosed principal w/ respect to local grain elevator, fact that it settled w/ elevator prior to notice of any claims by farmers who were owed money by elevator, against corporation on basis of agency relationship didn’t discharge corporation from its liability to farmers
iv. An undisclosed principal is not discharged from liability to the other party to a transaction conducted by agent by payment to, or settlement of accounts w/, the agent, unless he does so in reasonable reliance upon conduct of the other party which is not induced by the agent’s misrepations and which indicates that the agent has settled the account
v. Restatement § 14K compares an agent w/ a supplier as follows: One who Ks to acquire prop from a 3rd person and convey it to another is the agent of the other only if it is agreed that he is to act primarily for the benefit of the other and not for himself.Factors indicating that one is a supplier, rather than an agent, are: (1) That he is to receive a fixed price for the prop irrespective of price paid by him. This is the most important. (2) That he acts in his own name and receives the title to the prop which he thereafter is to transfer. (3) That he has an independent business in buying and selling similar prop.
vi. Under the Restatement approach, it must be shown that the supplier has an independent business before it can be concluded that he is not an agent. The record establishes that all portions of Warren’s operation were financed by Cargill and that Warren sold almost all of its market grain to Cargill. Thus, the relationship which existed b/w the parties was not merely that of buyer and supplier.
C. Liability of Principal to 3rd Parties in K
i. Actual authority: communication b/w agent and principal
ii. Apparent authority
iv. Inherent agency power
b. Mill Street Church of Christ v. Hogan
i. Facts: Bill Hogan was hired to paint the church. Assistance was necessary, so Bill approached the person who hired him and they discussed hiring a specific person. Bill was not told he had to hire a specific person. Bill hired Sam. While painting, Sam fell off a ladder and broke his arm. He sued under Worker’s Compensation.
ii. Issue: Did Bill have authority to hire Sam?
iii. Holding: Affirmed. There was implied authority.
c. Karl Rove & Co. v. Thornburgh
i. Facts: Thornburgh was running for Senate. Dickman was the primary contact b/w committee and candidate. His committee hired Rove to send mailers. Some monies weren’t paid. Rove sued.
ii. Issue: Was Thornburgh jointly and severally liable? Was there an agency relationship b/w Thornburgh and Dickman? If so, scope of agency?
iii. Did D have implied actual authority?
2. Apparent Authority
3. Inherent Authority (“catch-all” doctrine based on fairness)
a. Applies in situations where agent has neither actual nor apparent authority, estoppel doesn’t apply, and yet the agent has the power to bind the principal.
i. IF the agent is a general agent w/ authority to conduct certain transactions,
ii. The agent is acting in the interests of the principal, AND
iii. The agent does an act usual or necessary w/ regard to the authorized transactions,
iv. THEN the act binds the principal regardless of whether the agent had actual authority and even if the principal has expressly forbidden the act
One type of inherent power subjects the principal to Kual liability or to the loss of his prop when an agent has acted improperly in entering into Ks or making conveyances. Here the power is based neither upon the consent of the principal nor upon his manifestations. There are 3 types of situations in which this type of power exists.
i. 1st is that in which a general agent does something similar to what he is authorized to do, but in violation of orders. In this case the principal may become liable as a party to the transaction, even though he is undisclosed.
ii. Second is the situation in which an agent acts purely for his own purposes in entering into a transaction that would be authorized if he were actuated by a proper motive.
iii. The 3rd type is that in which an agent is authorized to dispose of goods and departs from the authorized method of disposal.
iv. (The difference in here is that the principal is at times undisclosed, but can be disclosed, and the agents are all “general agents.” However, when there is an undisclosed principal, you would always argue inherent authority.
c. Policy- Based Limitations
d. False statements by the agent are attributable to the principal if:
i. The principal is disclosed or partially disclosed, and
ii. A true statement concerning the same subject would have been w/i the agent’s actual or apparent authority
e. Restatement §8A: Inherent Agency Power
Inherent agency power is a term used in the restatement of this subject, to indicate the power of an agent which is derived not from authority, apparent authority or estoppel, but solely from the agency relations and exists for the protection of persons harmed by or dealing w/ a servant or other agent.
f. Restatement §194: Acts of General Agents.
A general agent for an undisclosed principal authorized to conduct transactions subjects his principal to liability for acts done on his account, if usual or necessary in such transaction, although forbidden by the principal to do them
g. Restatement §195: Acts of Manager Appearing to be Owner.
An undisclosed principal who entrusts an agent w/ the management of his business is subject to liability to 3rd persons w/ whom the agent enters into transactions usual in such businesses and on the principal’s account, although contrary to the directions of the principal
h. Restatement §161: Unauthorized Acts of General Agent:
A general agent for a disclosed or partially disclosed principal subjects his principal to liability for acts done on his account which usually accompany or are incidental to transactions which the agent is authorized to conduct if, although they’re forbidden by the principal, the other party reasonably believes that the agent is authorized to do them and has no notice that he is not so authorized
i. **When principal is undisclosed, MUST rely on IAP**
i. Watteau v. Fenwick:
j. Kidd v. Thomas A. Edison, Inc.:
k. Nogales Service Center v. ARCO:
i. Facts: NSC and ARCO entered into a products agreement to fix prices set by ARCO. NSC was to build a hotel, restaurant & gas station. Tucker (of ARCO) promised NSC a loan and a 1 cent discount
ii. Issue: Did Tucker have the authority to offer this discount?
iii. Holding: Affirmed. Instructions given w/o objection told jury that a
he is employed to conduct
General agent: a principal authorizes the agent to conduct a series of transaction involving a continuity of service
Special agent: principal authorizes the agent only to conduct a single transaction or to conduct a series of transactions that don’t involve a continuity of services
Once the statements are attributed to the principal, the principal faces the same consequences that he would under K law for making the false statements himself
This rule doesn’t apply to false statements regarding the scope of the agent’s authority (otherwise every agent would have unltd ability to create apparent authority)
The cigars were such as would usually be supplied to and dealt in such an establishment
Person supplying knew nothing of the existence of a principal (undisclosed)
Here the Ds have so conducted themselves as to enable their agent to hold himself out to the world as the proprietor of their business, and they’re clearly undisclosed principals. All that the P has to do, therefore, in order to charge the principals, is to show that the goods supplied were such as were ordinarily used in the business – that is to say, that they were w/in the reasonable scope of the agent’s authority
Action in K, depended upon the authority of Fuller to make a K w/ P, engaging her w/o condition to sing for the D in a series of “tone test” recitals, designed to show the accuracy w/ which her voice was reproduced by D’s records
D said Fuller’s only authority was to engage P for such recitals as he could later persuade dealers in the records to book her. Dealers were to agree to pay for recitals and D would then guarantee her the dealers’ performance.
P said the K was an unconditional engagement for a singing tour
Jury found for P and D filed a motion to set aside a verdict.
Manager was hiring for recitals; there was no tradition for hiring performers for sound tests
Judge Hand: “It makes no difference that the agent may be disregarding his principal’s directions, secret or otherwise, so long as he continues in that larger field measured by the general scope of the business entrusted to his care.”
Appeal from the judgment entered on jury verdict in favor of ARCO.
NSC contends trial ct erred in denying certain instructions and in the admission and rejection of evidence.
Restatement §8A: IAP
Comment b to §8A: Power is based neither upon the consent of the principal nor upon his manifestations. This power exists in 3 situations:General agent does something similar to what he is authorized to do, but in violation of ordersAgent acts purely for his purposes entering into a transaction which would be authorized if he were actuated by proper motivesAgent is authorized to dispose of goods and departs from the authorized method of disposal
Apparent authority is the power to affect the legal relations of another person by transactions w/ 3rdpersons, professedly as agent for the other, arising from and in accordance w/ the other’s manifestations to such 3rd persons.
iii. Holding: Reversed judgment of the ct and reinstated jury verdict.
The agent has actual authority w/ respect to acts or types of acts designated in the principal’s manifestations to the agent, as well as acts necessary or incidental to achieving the principal’s objectives
The agent should interpret the principal’s manifestations in light of any meaning known by the agent to be ascribed by the principal and, in the absence of any meaning known to the agent, reasonably in light of the context, including facts known to the agent and the agent’s fiduciary duty to the principal
The agent’s understanding of the principal’s objectives should reflect the principal’s manifestations to the agent and the inferences reasonably to be drawn from the circumstances creating the agency.
An agent acts w/ actual authority in affecting the principal’s legal relations if, at the time of taking action, the agent reasonably believes, in accordance w/ the principal’s manifestations to the agent, that principal wishes the agent so to act.
iv. Holding: T is liable; D was his agent
v. How could liability have been ltd.? By forming a corp for the debts of the election committee (BUT, Ks aren’t dispositive)
Except for the execution of instruments under seal or for the performance of transactions required by statute to be authorized in a particular way, authority to do an act can be created by written or spoken words or other conduct of the principal, which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal’s account.
is the authority the agent is held out by the principal as possessing; a matter of appearances on which 3rd parties come to rely is actual authority circumstantially proven which the principal actually intended the agent to possess and includes such powers as are practically necessary to carry out the delegated duties
1. Agency is the label the law applies to a relationship in which:
a. By mutual consent (formal or informal, express or implied)
b. One person or entity (“agent”)
c. Undertakes to act on behalf of another person or entity (“principal”)
d. Subject to the principal’s control
2. Restatement §1: Agency is the fiduciary relation which results from the manifestation of consent by one person [the principal] to another [the agent] that the other [the agent] shall act on his [the principal’s] behalf and subject to his [the principal’s] control, and consent by the other [the agent] so to act.
3. Agency is a fiduciary relationship; not an arm’s length relationship
4. Manifestation of consent
5. Agency is not a subcategory of K law. Agency relationship is not a K.
a. An agency relationship CAN exist even if principal gives NO consideration to agent.
b. Agents working w/o consideration are gratuitous agents
7. Other roles of control in agency:
a. Control as a substitute for establishing agency status: creditor who controls debtors business
b. Control as an element of “servant” status
c. Control as a consequenc