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Business Associations
University of Kentucky School of Law
Michael, Douglas

BUSINESS ASSOCIATIONS OUTLINE
1. BA is the law of nonhuman legal persons
2. Reasons for BA: (1) Limited Liability/Exposure; (2) Provide for multiple owners and raising equity; (3) Structure for having other workers
 
I. AGENCY
 
A) Creation of an Agency (principal and agent)
 
    1) RST 1.01: Manifestation of consent (written or spoken words, or other conduct) for A to act:
                a) On P’s Behalf
                b) Subject to P’s control
    2) Examples
                a) Babysitter (you are entitled to instruct how to feed, play with, and care for your child)
                b) Painter (independent contractor
                c) Cab Driver (you can tell route to take
                d) Agents
 
Employee
Ind. Cont.
 
 
 
 
 
 
 
                e) See agency problem handout (Part 1)
 
    3) Termination of Agency (RST 3.06 – 3.09)
                a) Manifestation by either A or P
                b) Death/ Lack of Capacity
                c) As agreed upon
 
B) Fiduciary Duties (principal and agent) – when acting on behalf of another, their interest trump yours
 
 1) Of Agent to Principal (RST 8.01 – 8.12)
 
    a) Loyalty (No self interest or adverse interest)
 
1. No self interest
    i. No competing while on the job (Reilly Case) – he was soliciting customers while still working
    ii. “Logistical” arrangements can be made while employed (Hamburger Case)
– can hire employees after termination
– can use customer lists if they are published
– can use general knowledge, experience, memory and skill in competing, including        “remembered information”
               
    iii. Cannot hire away employees until the termination of the agency/employee relationship
    iv. Using Customer Lists: (RST 2d §396(b) sets the boundaries)
– §396: Unless otherwise agreed (agreement must be reasonable in time and scope), after the                 termination of the agency, the agent:
(1) Has no duty not to compete with the principal
(2) Has a duty to principal not to use or disclose to third persons, in competition with the              principal or to his injury, trade secrets, written list of names, or other similar confidential                 matters given to him only for the principal’s use or acquired by agent in violation of duty. The             agent is entitled to use general information concerning the method of business of the principal          and the names of the customers retained in his memory, if not acquired in violation of his duty       as agent.
    v. May arrange for financing and leasing of office space
    vi. Can these duties be modified? (p. 15) “In part, if not completely….fiduciary duty substitutes             for an express contractual specification of exactly what the agent may or may not do.”
 
 2. No adverse interest
 
    b) Performance
 1. “care, competence, and diligence”
 2. Provide information to P
 3. Other duties as agreed upon
 
 2) Of Principal to Agent (RST 8.13 – 8.15) – these are not fiduciary duties
                a) Act fairly and in good faith (protect the agent)
                b) Indemnification
                c) Other duties as agreed upon
 
 C) Ability of Agent to Bind Principal (events between agent and third parties)
– All employees are agents, but not all agents are employees
 
 1) In Contract (Authority)
 
    a) Types of Authority
 
1. Actual (Implied, Incidental, and Inherent; RST 2.02 and intro note) – Manifestation to A
                    i. Definition (RST 2.01)
                    ii. Creation (RST 3.01 – 3.02)
                    iii. Termination (RST 3.10)
2. Apparent – Manifestation to 3rd Party by P, not A
    i. Definition (RST 2.03)
                    ii. Creation (RST 3.03)
                    iii. Termination (RST 3.11)
                    iv. There is a lot of overlap between apparent authority and estoppel
                    v. There is NO agency relationship here
 
                                                                Manifestation
 
      Principal                                                        Agent                                                             3rd Party
                                 No Relationship                                               Transaction
 
    b) Effect of Authority
1. Allows the Agent to bind the Principal without being bound himself (RST 6.01(a))
2. Allows the Agent to contract on the Principals behalf without being bound to K (RST 6.01(b))
                3. Special rules for Undisclosed, Unidentified, and Nonexistent Principals (RST 6.02 – 6.04)
 
    c) Your 3 Choices: (If plaintiff can’t establish actual or apparent authority, would argue P is estopped)
– In a major transaction, you would want to include in document who has authority to bind principal.
                1. Actual authority (manifestation of P to A)
                2. Apparent authority (manifestation of P to 3rd party)
                 i. Still binds the Principal even though no real authority
                3. Some other theory on which the P is directly liable (RST 2.05 – 2.07)
                    i.  Estoppel (§2.05)
                    ii. Restitution (§2.07): If a principal is unjustly enriched at the expense of another person by                   the action of an agent or a person who appears to be an agent, the principal is subject                        to a claim for restitution by that person.
 
 2) In Tort
    a) Respondeat Superior [§2.04 / §7.03(2)(a)] – must be within the scope of employment
    b) Authorized Agent [§7.03(1)(a) and (c)]     c) Apparently authorized agent [§7.03(2)(b)]                 1. Rest. 3d §7.08: A principal is subject to liability for a tort committed by an agent in dealing or  communicating with a third par

a partnership.
    a) Helpful hints [§202(c)]                 1. Joint ownership is INSUFFICIENT
                2. Sharing of returns is INSUFFICIENT
                3. Sharing of profits is SUFFICIENT (unless it is proven to be something else)
 
 2) Problem 2-1 (p. 60): appears Shady is just an employee and there is no p-ship where Shady bids on waste disposal projects and uses Dale’s land to complete.
 3) Problem 2-2: the AC should affirm either decision of TC because it is close call where Gary sold restaurant to Nova and helps him out in the transition.
 4) Cases:
    a) Martin v. Peyton (Handout): Peyton and others loaned securities to partnership, which eventually failed. Partnership trying to get Peyton to share in the losses, arguing they are really partners. Court finds that Peyton is just a lender who took proper precautions to secure their loan. Court says Peyton may not initiate any transaction as a partner may do, and they may not bind the partnership by any action as a partner may do.
 
B) Profits and Losses [§401 & §807(b)]  
 1) Partner’s Rights and Duties (§401)
    a) Capital Account
                1. Increased by profits and contributions
                2. Decreased by losses and distributions
    b) Profits and Losses [§401(b)]                 1. Profits: shared equally
                2. Losses: shared in accordance with profits
    c) §401(c-e): Interest accrues on loans by partners
    d) §401(h): No payment for services performed for the partnership
 
 2) Settlement of Accounts among partners at end of day [§807(b)]     a) Profit or loss is calculated and is allocated according to the agreement to the partners capital accounts
    b) If it is a positive amount, that amount is paid to the partner
    c) If it is a negative amount, that amount is due the partnership from the partner
    d) Kovacik v. Reed (Slides from September 4 illustrating interaction of §401 and §807): The court is holding the exact opposite of what the default rules say under §§401 and 807(b) because deemed that labor was a contribution of capital with value that which was not agreed upon. Court was using their equitable powers because they thought it was not fair.
 
Kovacik
Reed
Contributions
$10,000
$0 (just services)
½ Losses
Due/
$5,660