Chapter 1: Agency
a. WHO IS AN AGENT?
i. Control of a business is typically allocated according to risk- keep in mind the relationship between risk and control
ii. When a business is sold-
1. Secured creditors get paid first- (collateral)
2. The unsecured creditors get paid- like a credit card- more interest b/c no collateral.
3. Equity holders/shareholders get paid next
4. Whoever is at the bottom are the residual investors
iii. Gorton v. Doty (1937) (three part test for agency; woman lends her car to football coach- accident)
1. Three part test of whether an agency relationship exists (no magic words/substance over form)
a. manifestation of consent from the principal to the agent that the agent is acting on the principal’s behalf?
b. The agent agrees to be subject to the principal’s control?
c. The agent consents/agrees to so act?
2. Here the court finds that the three part test has been met so there is agency
iv. Jenson Farms v. Cargill (Agent v. creditor)
1. Three part test for agency met when a local grain operator goes out of business and the farmers who deposited grain want to hold Cargill liable since Cargill had exclusive buying rights from the grain operator and are the sole financier for warren
2. Cargill gave assurances to the farmers (the other creditors) that ‘they would get paid’ – this makes the relationship more like agency
3. TH: intentions of the parties do not govern whether there is agency- rather- the rights of third parties are often decisive (substance over form). CONTROL IS KEY!
1. These Depend on the agent’s reasonable belief in what the principal is authorizing them to do
a. Actual express authority- authority is expressly given orally or in writing
b. Actual implied authority- there is a communication from the principal to the agent that the agent is authorized to do whatever he needs to do to carry out the actual express authority
2. These Depend on the reasonable belief of a third party
b. Apparent authority- some manifestation from the principal to a third party that the agent has the authority to act on behalf of the principal (the theory behind this is based on the reliance of the third party)
c. This authority arises by virtue of custom- elements:
i. The third party knows the principal
ii. Agent has a certain job title
iii. It must be customary for an agent in that position to have authority to enter into the type of agreement in question
b. LIABILITY OF PRINCIPAL TO THIRD PARTIES IN A CONTRACT AND LIABILITY OF AGENTS
i. THE AGENT’S AUTHORITY:
1. Mill Street Church of Christ v. Hogan (1990)- Actual Implied Authority
a. Painter’s brother can use church insurance plan when he gets hurt on the job b/c painter had implied authority to hire him
b. Implied authority exists if the agent reasonably believes- b/c of present or past conduct of the principal- that the principal wishes him to act in a certain way or have certain authority
c. In this case the painter had hired his brother before (course of dealing), the job clearly took two people (providing actual implied authority- it was necessary to complete the job that they expressly authorized him to do), he was not told that he couldn’t hire his brother, and the church paid them for the brother’s work
d. Take Home: For actual implied authority look at all of the circumstances to see if its reasonable for the agent to believe that the activity at issue is within the scope of the agent’s authority. This depends on how the scope of that authority was presented to him by the principal.
2. Dweck v. Nasser (2008)
a. Holding: Shiboleth had actual authority to settle the case on Nasser’s behalf b/c Nasser had manifested numerous times that he would ‘blindly sign’ an agreement and that shiboleth could speak in his name.
b. Was there:
i. Actual authority- ct says yes
ii. Implied authority- the history of their relationship shows that shib clearly could have reasonably believed he could settle- he had done it many times before
iii. Apparent authority: nasser had also represented to dweck that shib could act on his behalf.
c. Take Home: actual authority depends on the reasonable beliefs of an agent as the result of communication of the bounds of the authority from the principal. Apparent authority can be created by indirect communication between the principal and the relevant third party.
1. Ratification Overview
a. Ratification – a principal can be bound by the actions of a agent if the principal later ratifies the action.
b. Ratification methods:
i. Express ratification
ii. Implied through acceptance of benefits once it is possible to reject them
iii. Implied through silence or inaction
iv. Implied by suing to enforce the contract- if they want to bind the third party they obviously have to be bound themselves.
2. Botticello v. Stefanovicz
a. Walter and mary own a property as tenants in common
b. Ct says M never gave W authority to act as agent, W didn’t represent to buyer that she did and M didn’t ratify.
A partnership ends when it is dissolved either by a partner’s wish to withdrawal, an expulsion of one partner by the others or expiration of the terms of the partnership.
c. Corporations can be partners with each other- the partners don’t have to be persons.
d. Tax benefit
a. Partnerships do not pay taxes, rather, profits are taxed as personal income of the partners.
b. Corporations DO pay a corporate income tax and then any dividends or gains shareholders receive are also taxed on those individual shareholders’ income tax. – taxed twice
a. To form a corp you have to file with the state- to form a partnership you just have to act like one- the parties don’t even have to know they are partners
f. Transferability of Shares
a. Corporate shares are generally much easier to transfer than partnership shares- partnership shares can only be sold for the percentage profit incident to that share- any other incidents of partnership can only be transferred by unanimous consent of the other partners.
g. Dissolution agreements (like a prenup) are incredibly important to partnerships given the unforeseeability of future changes in circumstances
3. PARTNERS COMPARED WITH EMPLOYEES
a. Fenwick v. Unemployment Compensation Commission
a. Beauty shop employee asked for a raise and the owner couldn’t afford it so he agreed to give her a cut of the profits if the shop’s profits increased –
1. The right to share in profits – did exist in this case
2. The right to share in losses- not in this case
3. Control of property and business- ee didn’t have control here
4. Language of the agreement- although they use the word ‘partner’ – the agreement gave her almost no rights of an ordinary partner
5. Conduct of parties toward third persons- did not hold themselves out to the community as partners
6. Rights on dissolution-she had no rights on dissolution
c. TH: Partners are co-owners of a business. Profit sharing alone is not enough to establish the existence of a partnership.
b. UPA sec 31:
a. Dissolution is caused
1. 1) without violation of the agreement between the partners…b) by the express will of any partner when no definite term or particular undertaking is specified
4. PARTNERS COMPARED WITH LENDERS
a. Martin v. Peyton
a. Lending arrangement where the creditors asked for written resignations which they reserved the right to accept at any time
b. No Pship here but the resignation thing was unusual
c. TH: the line between a concerned creditor and a liable partner is a thin one. Look for indications that a creditor can exercise true control over the business. If the creditor is really the one pulling the strings it can be liable as a partner.