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Business Associations/Corporations
University of Pennsylvania School of Law
Rock, Edward B.

Chapter I: Agency
Authority
Actual authority – P tells A “do this” and A does it; actions of agent are binding on the principle
R2A § 7: it is an act done in accordance with manifestations of the principle
R3A § 2.01: it is whether the agent reasonably believes they are in accordance with the manifestations.
                                                              i.      Inherent authority is brought within actual in § 2.01 with the reasonableness language.
Apparent authority – T thinks A is agent because of P’s manifestations to T; when the third party believes the agent has authority based on the principle’s manifestations made to them. The key is that it has to involve manifestations by the principle. 
R2A § 8: T believes there is authority from P’s manifestation to T
R3A § 2.03: T reasonably believes A has authority and is traceable to P’s manifestation
Inherent authority – A has authority based solely on his position and it is to protect persons harmed by dealing with the agent
R2A § 8A – Liability
                                                              i.      Disclosed, Partially Disclosed Principals: R2A §161: Liable, even if P had forbidden A to do the act IF:
1.      Act usually accompanies or is incidental to transactions that A is authorized to conduct AND
2.      T reasonably believes A is authorized to do the act.
                                                            ii.      Undisclosed Principals: R2A §194: Liable, even if P has forbidden A to do the act IF it is “usual or necessary in such transactions”
Does not exist under R3A; subsumed by actual
Ratification
a.       P bound if A purported to act on P’s behalf and principal, w/ knowledge of material facts either: (R2d §82)
                    i.      Express ratification (R2d §83): Affirms A’s conduct by manifesting intention to treat A’s conduct as authority OR
                  ii.      Implied Ratification (R2d §83): Engages in conduct that is justifiable only if he has such an intention.
b.      Ratification must occur before (R2d §§84-90)
                    i.      T has withdrawn
                  ii.      Agreement has otherwise been terminated
                iii.      Situation has materially changed so it is inequitable to bind T and T elects not to be bound.
 
Morris Oil Co. v. Rainbow Oilfield Trucking, Inc. (2)
Dawn controls Rainbow and R can create liabilities in the ordinary course of business. R buys fuel from Morris and then goes bankrupt still owing money.  M doesn’t know about D so no apparent authority. Despite agency clause in contract, liability clause create actual authority since this is OCB. Liability because M didn’t know and this was OCB (R2A § 194) – undisclosed P – but, even if it was unauthorized, D ratified anyway.
Limitations of A’s power can’t bind T if T doesn’t know about limitations.
 
Agent’s Duty of Loyalty
R2A § 387: A can’t profit for himself and can only work for benefit of P
R2A § 388: A has to turn over all profits to P unless otherwise agreed
 
Tarnowski v. Resop (19)
T hires R as agent to inspect machines. R gets kickback from L&M to say business is good. T relies on R. T sues L&M for lying and then tries to recover bribe from R.
A who violate duty of loyalty is liable to P for any secret profits, even if there are no other outstanding damages.
 
Chapter II :Partnership
A. Partnership Formation (UPA v. RUPA)
1.      UPA on Formation
                                         a.      UPA §6(1) Partnership “association of two or more persons to carry on as co-owners business for profit.”
                                        b.      UPA §7(3) – Sharing of Gross Returns not prima facie evidence of partnerships. “The sharing of gross returns DOES NOT of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.
                                         c.      UPA §7(4) – Sharing of Profits is prima facie evidence of partnership. “The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business. EXCEPTION – Loans: but no such inference shall be drawn if such profits were received: (d) = are payments as debt by instrument or “as interest on a loan, though the amount of payment vary with the profits of the business.
2.      RUPA on Formation
                                         a.      RUPA §202(a) – Formation of a Partnership “The association of two or more persons to carry on as co-owners a business for profit forms partnership, whether or not the persons intend to form a partnership.”
                                        b.      RUPA §202(c) – Factors
1.      (2) – “The sharing of gross returns does not by itself establish a partnership, even if persons sharing them have joint or common right or interest in property from which returns are derived.
2.      (3) – “A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment:
i.        (iv) – “of interest or other charge on a loan, EVEN IF the amount of payment varies with the profits of the business, including a direct or indirect present of future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral.”
3.      Formalities of Formation: 4 Element Test (you can fall into partnership by default)
i.        Agreement to share profits and proceed as partners
ii.      Agreement to share losses
iii.    Mutual right of control of management of business
iv.    Community of interest in the venture/commonly held property
 
Martin v. Peyton (32)
Hall is a P at KN&N. KN&N needs money so Hall goes to Peyton, et al. for loan. In exachange Peyton gets: (i) 40% of Π, (ii) option to be partner, (iii) KN&N securities. Agreement (i) protects collateral from commingling, (ii) informed of all transactions, (iii) record inspection, (iv) revenue from collateral, (v) veto right, (vi) consultation, (vii) partnership interest (viii) restrict partner loans (ix) asses value, (x) Hall runs firm, (xi) life insurance. Option lets them (i) become partners, (ii) incorporate as corp, (iii) force resignation of partner. M sues Peyton as liable for KN&N’s debts.
There was not a partnership so no liability. Profit sharing is given weight, but is not decisive. They could not initiate transactions or bind a partnership.
 
Lupien v. Malsbenden (36)
C owns Mart. M loans C money for operations. C disappears, so M takes daily control. L contracts with M for car. L sues M as partner.
M was partner because he had daily control, loaned money for part rather than lump sum, and was entitled to payment upon sale of cars.
There is a point when creditors can become partners.
 
B. The Legal Status of a Partnership
1.      Entity v. Aggregate Theory
a.       Aggregate Theory (UPA §6(1), Common Law) Partnership is aggregation of individuals and can’t own property.
b.      Entity Theory (RUPA)
                    i.      RUPA §201(a) – “A partnership is an entity distinct from its partners”
                  ii.      BUT, RUPA allows certain areas for aggregate theory (liability for debts, duty of loyalty, etc.)
 
C. The Ongoing Operations of a Partnership
1.       Making Decisions Regarding Ordinary Course of Business
a.       UPA §18 – “Rules Determining the Rights and Duties of Partners” (“Subject to any agreement between them…” Thus, these default rules can be overwritten by the partnership agreement/contract)
                     i.      (e) – “All partners have equal rights in the management and conduct of the partnership business.”
                    ii.      (h) – “Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of partners but  “No act in contravention of any agreement between the partners may be done rightfully without the consent of all partners.”
b.       RUPA §401 – “Partner’s Rights and Duties”
                     i.      (f) – Each partner has equal rights in the management and conduct of the partnership business. Also, rights to be consulted. Unlike, the power of a shareholder, the power of a partner includes the management rights.
                    ii.      (j) A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only w/ the consent of all of the partners.
c.        RUPA §106: issues regarding the questions of management should be governed by law of jurisdiction in which a partnership has its chief executive office
d.       Summers v. Dooley (43) (Differences must be decided by majority of partners / if equally divided, those who forbid change must have their way): Summers and Dooley in partnership. S hires an additional employee over D’s objection and wants reimbursement from D for employee’s salary.
                     i.      Court rules that if the partners are equally divided, those who forbid a change must have their way. There was no ratification because he objected continuously.
e.        Sanchez v. Saylor (44)S and S were partners, a third party was considering lending money to the partnership to finance a restructuring of the partnership’s debt, but it required Sanchez to provide financial statements, he refused. Saylor brought suit against Sanchez on

is entitled to reasonable compensation for his services in winding up the partnership affairs.” Theory = everyone works together and shares profits and/or losses equally, under UPA §18(a). TAXABLE!
                    ii.      RUPA §401(h): “A partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership.”
c.        Indemnification
                     i.      UPA §18(b): “The partnership must indemnify every partner in respect of payments made and personal liabilities reasonably incurred by him in the ordinary and proper conduct of its business, or for the preservation of its business or property.”
                    ii.      RUPA §401(c): “A partnership shall reimburse a partner for payments made and indemnify a partner for liabilities incurred by the partner in the ordinary course of the business of the partnership or for the preservation of its business or property.”
d.       Interest on Capital
                     i.      Original Capital UPA §18(d): “A partner shall receive interest on the capital contributed by him only from the date when repayment should be made.” No RUPA provision
                    ii.      Additional Capital (Contribution above what was agreed upon)
1.       UPA §18(c): “A partner, who in aid of the partnership makes any payment of advance beyond the amount of capital which he agreed to contribute, shall be paid interest from the date of the payment or advance.”
2.       RUPA §401(e): “A payment or advance made by a partner which gives rise to a partnership obligation….constitutes a loan to the partnership which accrues interest from the date of the payment…”
 
 
E. Partner Liability for Partnership Obligations
a.       UPA: Partners are:
               i.      UPA §15(a) – Jointly and Severally liable for (right to indemnification)
1.       §13 – Partner’s wrongful act while acting in ordinary course of business
2.       §14 – Breaches of Trust
              ii.      UPA §15(b) – Jointly liable for (thus has to name all the partners in a suit)
1.       Other debts and obligations of the partnership
2.       This is aggregate theory, so in theory must sue every partner. BUT, many UPA states allow partnership to be sued in the name of the partnership.
* Partners are PERSONALLY liable for any obligation beyond any resources that they provided.
b.       RUPA: All partners jointly and severally liable for ALL obligations of the partnership. For any obligation, may sue one partner alone.
c.        Contracting out the unlimited liability?
                     i.      UPA §15 – CANNOT contract out.
                    ii.      RUPA §306(a) – can K out with lender but not with other partners. You can get waivers from the lender.
                  iii.      RUPA §103(b)(10) – can’t restrict the right of third parties.
d.       Liability of Incoming Partners
                     i.      UPA §17: “…Liable for all the obligations of the partnership arising before…admission…except that this liability shall be satisfied only out of partnership property.” Thus, no personal liability.
                    ii.      RUPA §306(b): “A person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the person’s admission as a partner.”
e.        Judgments In Joint and Several Liability Partnership Action (UPA – No provision)
                           i.      RUPA
1.       RUPA §307(c): Judgment against a partnership cannot be collected against a partner unless the judgment has also been made against that partner.
RUPA §307(d) – Exhaustion Rule: Can’t collect against an individual partner until all of the partnership assets are exhausted.  Individual partner can then