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Business Associations
University of North Carolina School of Law
Hazen, Thomas Lee

I.                  Agency Definition
a.       Definition: Agency Restatement § 1(1): Agency is a fiduciary relation which results from the manifestation of consent by one person [the principal] to another [the agent] that the agent shall act on the principal’s behalf and subject to the principal’s control, and consent by the agent so to act.
                                                                           i.      Actual consent is NOT required, just the manifestation of consent is required
                                                                          ii.      You can and should make these through contracts, but it doesn’t always happen that way
                                                                        iii.      There must be mutual consent by both the principal and the agent
b.       Gay Jenson Farms Co. v. Cargill, Inc. (Minn. 1981).
                                                                           i.      When does a loan agreement become an agency relationship? – Question of fact
1.       Control
a.       Right of first refusal
b.       Paternal guidance and meddling in decisions
2.       Holding out — it appeared that the agent was the principal w/ regard to debt
3.       Benefit: Cargill was getting 90% of the grain (benefit) from Warren. This was a captive supplier. This is not determinative of an agency, but it’s a huge deal.
c.        Authority is needed to have to have an agency bind principal to third party transactions.
                                                                           i.      Two Types
1.       Actual Authority – the authority that is given through words/contracts/course of conduct/job description, etc.
a.       Two types
                                                                                                                                                   i.      Express (actual) Authority is a specific authorization of agency, whereas
                                                                                                                                                  ii.      Implied (actual) Authority flows from an express grant.
b.       Inherent Authority – give someone a title that gives someone the inherent authority to do something
2.       Apparent Authority – Authority that arises where the principal gives the 3rd party reason to believe that actual authority exists. 
a.       Note: This authority cannot arise where it’s the agent that gives 3rd party reason to believe that actual authority exists.
                                                                                                                                                   i.      Example: Contract says that X has the authority to enter into Ks up to $10K, but have to get authority from higher power to enter into more expensive Ks. For 3 months, X has been entering into $20K Ks. The company fulfills the Ks à apparent authority has been created, and the company cannot back out of the obligation.
b.       Ex. Butler v. McDonald’s Corporation — because McDonald’s has strong control over the procedures and operational standards of their franchisees, a jury could find that apparent authority was created. A sign “independently owned and operated” may have fixed this authority issue.
                                                                          ii.      Ratification – the principal’s after the fact approval of an agent’s unauthorized act. This may be express or implied (through acquiescence). Ratification binds the principal and relates back to the time of the unauthorized acts
d.       An agency relationship gives rise to fiduciary duties — including the duty of loyalty and the duty of care
                                                               i.      Duty of care
1.       In the agency context, an agent has the obligation to use reasonable measures to carry out its functions
                                                              ii.      Duty of Loyalty – with several sub-rules
1.       Duty of Undivided Loyalty – Unless otherwise agreed, an agent is under a duty to act solely for the benefit of the principal
2.       Conflict of Interest – Unless otherwise agreed, an agent may not deal with the principal as an adverse party
3.       Unjust Enrichment – Unless otherwise agreed, an agent who makes a profit while working for the principal must give the profit to the principal
4.       Corollary to this principal is the insider trading laws and use of confidential information – violation of agency law if you use the information to your profit
II.               Corporation Introduction
                                                               i.      Aside: 3 Parts of Ownership (equity):
1.       Profits (profit sharing)
2.       Assets (portion of the assets)
3.       Control
III.           Partnership (General Partnership)
                                                               i.      Type of agency relationship — § 9 UPA
                                                              ii.      Recognized at common law as well as by statute; default method of doing business if there is more than one owner — default rules are UPA
                                                            iii.      Partnership law is a combination of contract law and agency law
                                                            iv.      Definition — (§ 6 of 1914 Act): Partnership is an association of two or more persons to carry on as co-owners a business for profit.
1.       Corporation can be a “person” under the Section
2.       Distinction between lender vs. owner: Lender is a creditor, owner maintains equity in the business.
3.       Cannot be an unincorporated association like homeowner’s association
4.       “For Profit” means that the purpose is for profit
                                                             v.      Key Attributes:
1.       No limited liability
2.       Other defective business associations automatically become partnerships
3.       Partnership can be terminated at will by any party
4.       A partner can bind the partnership. This can be removed through K; however, apparent authority might still be an issue if still allow them to bind
5.       At common law, the partnership was considered an aggregate and not an entity; however, RUPA has changed this to entity view
6.       Both voting control and profit distribution is per capita unless contracted otherwise
                                                            vi.      Martin v. Peyton  – loan transaction similar to Cargill. Court didn’t find existence of partnership.
1.       Factors The Court looks to
a.       Control — veto power, management, informational rights
                                                                                                                                       i.      Here, their control was more reasonable in that limited to major corporate decisions vs. day-to-day
                                                                                                                                      ii.      Also, speculative nature of securities made it more reasonable
b.       Profit sharing (benefit)– prima facie evidence of partnership
                                                                                                                                       i.      Here, This is more of a timing provision / mechanism for repayment of the loan
c.        The borrower had the option at any time to become a partner — could go either way
                                                          vii.      Peed v. Peed – husband and wife can form partnership
                                                         viii.      Meinhard v. Salmon – partnership (actually a joint venture) originally lost money but then became profitable. The Defendant was the managing partner of the operation. As the lease was ending, D negotiated for a lease extension on his own past partnership term without informing M of this opportunity.
1.       Court first analogized a joint venture to a partnernship
2.       Court found breach of fiduciary duty of loyalty in that partner must communicate and give opportunity to go forward with business opportunity
3.       The key facts: S was the managing partner and thus, the courts suggests had a

e-out, and thus breach of fiduciary duty of good faith.
a.       Note: Bad faith is always a breach of fiduciary duty; fiduciary duty is more than just good faith
b.       How could Page2 protect himself: Contract for unanimous consent for dissolution, or do it for a term.
IV.           Other Unincorporated Business Associations
                                                               i.      General
1.       Fiduciary Duties
a.       Fiduciary duties are part of LLCs unless there’s something statutory that waive them, or in the definitions of the fiduciary duties they define certain things may/may not be permissible.
b.       Harbison v. Strickland (Alabama 2004).
                                                                                                                                       i.      Even with a Limited Liability Company (LLC), you cannot contract out of all fiduciary duties across the board
                                                                                                                                      ii.      Since in the absence of statutory provision we look to the common law. Sure you can define things by contract (what acts are loyal/disloyal) but you cannot just say no fiduciary duties. 
1.       The LLC has certain innate fiduciary duties.
2.       Resolving issues not addressed by statute
a.       Liberman v. LLC (Wyo. 2000).
                                                                                                                                       i.      Although there’s a statute, it’s called an LLC. What happens if the statute doesn’t answer a question in terms of ownership interest when there’s a withdrawal? They look to the partnership law (the common law) since it’s the closest analogy to fill in the gaps.
                                                              ii.      Limited Partnerships
1.       Formation/Characteristics
a.       Every limited partnership must have at least one general partner
                                                                                                                                       i.      all general partners have JSL for any activities of the partnership.
b.       To be a limited partner, you cannot be involved in the day-to-day activities of the business. If you do exert such control, you lose your limited liability (See Gateway Potato Sales)
                                                                                                                                       i.      The limited partner is not an agent of the LP, and they are a passive investor
c.        When a limited partner dies, it doesn’t dissolve the partnership
                                                                                                                                       i.      But General Partner’s death does dissolve partnership
d.       If your general partner is a corporation, you cannot have all shareholders being limited partners
e.        Formulation of LP or other entities does not eliminate liability previously accrued
2.       Benefits
a.       The limited partnership allows for centralized management
b.       These are set up generally for tax purposes, because corporations are taxed as separate entities, while limited partnerships allow for tax pass-throughs