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Business Associations/Corporations
University of Pennsylvania School of Law
Wachter, Michael L.

2014 Fall Corporations – Wachter

1. Introduction

Background: The Elements of a Business Setup

The following elements differentiate partnerships from limited partnerships from corporations:

1) entity status
2) liability to 3rd parties
3) degree of centralized management
4) transferability
5) continuity or rules governing dissolution

2. Agency – Principal

General Definition-agency exists when an agent on mutual assent acts on behalf of a principal to whom he owes fiduciary duties; the agent usually deals with third persons on behalf of the principal and the degree to which a principal will be liable for the acts of an agent with respect to a 3rd party will turn on the kind of authority the agent has in acting on the principal’s behalf

How to Determine an Agency Relationship?

Rst. 3rd of Agency § 1.02-whatever labels parties might attach to their relationship is not dispositive of whether or not an agency relationship exits, rather the behavior of the parties is to be dispositive

Morris Oil Co. v. Rainbow Oilfield Trucking (N.M. 1987)

Facts of Case: Morris sues Rainbow and Dawn for unpaid debts Rainbow incurred claiming that Rainbow acted as an agent on behalf of principal Dawn; Rainbow and Dawn however in their contract expressly disclaimed any kind of agency relationship, Morris dealt exclusively with Rainbow and Dawn never made any manifestations to Morris (Dawn argues that at the most there could have been apparent authority)
Point of Case: Court holds that despite the fact Rainbow and Dawn disclaimed any kind of agency relationship an agency relationship exists by virtue of the parties’ conduct and held Dawn liable for Rainbow’s debts to Morris Oil; Court’s holding is similar to the principle of § 1.02 that a partnership will be found from conduct; Court finds that the matter couldn’t have been apparent authority since the principal was undisclosed and no manifestations could be traced to the principal but rather there was implied actual authority

Types of Authority giving rise to a finding of agency

Actual Authority

Rst. 3rd of Agency § 2.01 – actual authority is found where the agent reasonably believes he is acting on the principal’s wishes on the basis of the principal’s manifestations

Actual authority per comment b of the Rst. 3rd § 2.01 can be express, implied, or incidental

Express actual authority – specific directions given to an agent
Implied actual authority – by words or actions, an individual has the ability to do anything “necessary and proper” he reasonably believes he has authority to do

Generally, an agent is given broad directions but specifics are implied

Incidental actual authority – authority to do incidental acts that are reasonably necessary to accomplish an actually authorized transaction

Rst. 3rd of Agency § 2.02 – determines the scope of actual authority which stretch to “acts designated or implied in the principal’s manifestations and acts necessary or incidental to achieving the principal’s objectives”

Rst. 3rd commented e: lack of actual authority when agent did not believe or could not have reasonably have believed that principal’s grant of actual authority encompassed a particular action

Apparent Authority

Rst. 3rd of Agency § 2.03-apparent authority is the “power held by an agent or other actor to affect a principal’s legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations.”

Key Difference from Actual Authority: Apparent authority turns on the difference in the 3rd party’s perception of the agent-principal relationship.

Authority by Estoppel

Rst. 3rd of Agency § 2.05-a principal may liable as party to a 3rd party for an agent’s action even when the principal didn’t make a manifestation the actor had authority to act as an agent when the third party was justifiably induced to make a detrimental change in position because the transaction was believed to be on the principal’s behalf because

1) the principal intentionally or carelessly causes such a belief OR
2) having notice of such belief the principal didn’t take steps to correct such a belief that might cause detrimental action

Inherent Authority

Rst 2nd of Agency 8A-authority an agent derives not from apparent, actual, or estoppel but solely from the agency relationship which is done so as to protect third parties entering into arrangements with agents

per comment b of Rst. 3rd § 2.01, inherent authority is not used in Rst. 3rd and this is more of a tort issue

Rst. 3rd of Agency § 4.01-ratification is where principal affirms the prior act of an agent giving the act the effect as if the agent had acted with actual authority even if the agent lacked authority in the first place; there are two forms of ratification:

Express Ratification-a principal affirming the agent’s unauthorized past conduct
Implied Ratification-a principal engaging in conduct that seems to approve the agent’s past conduct

Rst. 2nd of Agency § 43-acquiesence similar to ratification is where an agency takes acts of a similar nature to acts where it stepped beyond its authority and the principal fails to object indicating he consents to the performance of the similar acts

Disclosure of Principals and Authority

General Definition-the disclosure of a principal along with the authority of an agent will vary the liability of both the principal and the agent but a general finding of actual authority on the part of the agent will create liability no matter how much the principal was disclosed

Rst. 3rd of Agency § 6.01-liability for a disclosed principal to a 3rd party when an agent acts with apparent or actual authority; the agent is not liable to the 3rd party
Rst. 3rd of Agency § 6.02-liability for an unidentified/partially disclosed principal to a 3rd party when an agent acts with actual or apparent authority on their behalf; the agent is liable to the 3rd party here
Rst. 3rd of Agency § 6.03-liability for an undisclosed principal when an agent acts with actual authority on their behalf; the agent is liable to the 3rd party here

in all of these instances the agent is not a party to the contract unless the agent and 3rd party agree otherwise but where the principal is not bound the agent will be liable

Liability relationships between the Principal and Agent

Rst. 3rd of Agency § 6.09-unless otherwise disclaimed, the principal and the agent are still subject to liability even after judgment has been rendered against one of them
Rst. 3rd of Agency § 8.09-an agent will be liable to a principal if it acts outside the scope of its actual authority where an agent acting with apparent authority makes the principal liable
Rst. 3rd of Agency § 8.14-a principal is under a duty to indemnify to an agent acting within his actual authority for payments made necessary in executing principal’s affairs

Duty of Loyalty

Rst. 3rd of Agency§ 8.01 – an agent has to “act loyally for the principal’s benefit in all matters connected with the agency relationship”
Rst. 3rd of Agency§ 8.02 – an agent has a duty not to acquire material benefit from a third party in connection with any transaction taken on behalf of a principal

Note: a 3rd party can be liable to a principal if it encourages an agent to breach his/her duty of loyalty to a principal
Additional Note: in some circumstances an agent may be free to acquire a material benefit when it’s not in the principal’s line of business

Tarnowski v. Resop (Minn. 1952)

Facts of Case: Plaintiff engaged defendant as his agent to purchase coin machines but then sued defendant after the transaction on the basis that the defendant collected a secret commission on the side from sellers plaintiff purchased the business.
Point of Case: Court holds that the agent breached their duty of loyalty to the principal by collecting payment on the side and acquiring a material benefit in connection with a 3rd party transaction taken on behalf of a principal.

agent is still liable even if Plaintiff recovered fully from seller
agent liable for damages Plaintiff incurred as a result of the conspiracy

Reading v. Attorney General (House of Lords 1951)

Facts of Case: Petitioner was a sergeant in the British Royal Army who sold cases of whisky and brandy while on duty without the sanction of the Royal Army
Point of case: court hold petitioner is not entitled to the profits of his unjust actions as the agent cannot unjustly enrich him or herself without the principal’s sanction. British Royal Army entitled to the profits the officer made.

Similar holding found under Rash v. J.V. Intermediate, Ltd. (10th Cir. 2007)


· General definition-partnerships are legal entities where each of the partners are unlimitedly liable for each other and have managerial control over the partnership

· UPA § 6 – a partnership is an association of 2 or more persons to carry on as co-owners a business for profit

· RUPA § 202(a) – association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership

3. Partnership

Uniform Partnership Act (UPA) & Revised Uniform Partnership Act (RUPA) as default rules

Both UPA & RUPA are default rules in that while they are the law for partnerships in the state of their adoption they can be overridden by a partnership agreement – both provisions indicate such

UPA § 18 – “subject to any agreement between them”
RUPA § 103 (a) – “to the extent the partnership agreement does not otherwise provide, this [Act] governs relations among the partners and between the partners and the partnership”

RUPA § 106 indicates that the default partnership law applied to a partnership is the law found in the partnership’s state of incorporation
Note on Default Rules:

Default rules are rules set unless changed by the party
Mandatory rules are set by law that cannot be modified
Enabling rules tell parties to fill

ess of a partnership may be decided by a majority of the partners. An act outside ordinary course of business or amendment to the partnership agreement needs consent of all partners.
RUPA § 401, Comment 11-essentially same provision as 18(e)
RUPA § 403-same requirement as UPA § 19 that a partnership keep books and give partners the opportunity to inspect books and records.

Comment: a partner has unlimited personal liability and is justified in unqualified right of access to the partnership books and records. Burden is on the partnership/partner that is producing the information to show that the demand is unreasonable and improper.

Summers v. Dooley (Id. 1971)

Facts of Case: Summers sues his trash business partner Dooley after Summers hires additional help and Dooley doesn’t help pay for the cost; Summers then sues to recover the costs even though Dooley didn’t agree
Point of Case: Case affirms that absent any provision to the contrary partners in a partnership have equal voting rights and a majority of these partners must accede to the decision; consequently Summers wasn’t justified in hiring additional help with Dooley’s consent as he didn’t have a majority of partnership votes

Sanchez v. Saylor (N.M. 2000)

Facts of Case: Petitioner and respondent were partners; when Saylor attempted to secure a loan Sanchez refused to give a financial statement necessary to secure the loans.
Point of Case: Court holds Sanchez, absent a contractual duty under an agreement, did not have to produce his financial records as part of his fiduciary duty and that in cases of disagreement a party couldn’t impose their will unless a matter had been agreed upon by a majority of the partnership; where partners had a fundamental disagreement and there was an impasse the appropriate avenue of relief was dissolution and not suits for breach of fiduciary duty.
Covalt Rule: dissolution of partnership is only result to disagreement that cannot resolve

Profit Sharing in a Partnership

General Doctrine-much like with voting, absent anything contrary in the partnership agreement, partners in a partnership receive an equal share in profits no matter how much capital they may have invested in the partnership
UPA § 18 (a)-unless otherwise specified each partner shares equally in the profits after remaining liabilities are satisfied and that each partner must contribute toward losses sustained by the partnership according to his share in the profit

This like the rest of UPA § 18 is a default rule and partners can apportion the share of the profits in an unequal manner

Indemnification and Contribution

-when partners overpay on their share of their partnership obligations to a creditor (ex. when one partner can pay out more than another who otherwise would be in the red) they are entitled to indemnification between their share of the obligation and how much they actually paid
-when a partnership can require monetary contribution from partners to make up a deficit, often to

Capital Accounts and Draws

Capital Accounts-the accounts of each partner on a partnership’s books indicating their contribution
Draw-the cash payment partners are given as a result of the partnership’s affairs (UPA § 18(f)) – this payment is not an entitlement but rather must be voted on by a partnership)
UPA § 18(f): partners aren’t entitled to remuneration. Instead of pay, partners get share of profits—a draw. The amount of the draw is determined by the partners as a majority vote
RUPA § 401 (a): Each partner is deemed to have an account that is: credited with an amount equal to the: money the partner contributes PLUS the value of any other property (net the amount of any liabilities) the partner contributes to the partnership PLUS the partner’s share of the partnership profits; AND charged with an amount equal to the: money distributed by the partnership to the partner PLUS the value of any other property (net the amount of any liabilities) distributed by the partnership to the partner PLUS the partner’s share of the partnership losses
See Farnsworth v. Deaver