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

Corporations

Agency
Restatement of Agency §1.01 (supp. p. 6):

“Agency is the fiduciary relationship which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.”
an agent is a person who by mutual assent acts on behalf of another and is subject to the other’s control – a fiduciary with respect to matters within the relationship
the person for whom the agent acts is a principal
Elements of Agency

The manifestation by P that the A should act on his behalf
A’s acceptance of the undertaking
Understanding that the P is in control of the undertaking

Terminology on authority: see book, p. 7-19 (special vs. general agent; disclosed/partially disclosed/undisclosed; vicarious liability of the a master or a principal for the tort of a servant or employee: liability in respondeat superior).
Types of Authority
The liability of the principal to the third party depends on the types of authority the agent was given in striking a deal

Actual Authority (book, p. 9):

Restatement of Agency §2.01 (p. 45): an agent acts with actual authority when, at the time of taking the action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act; that is, if the principal’s words or conduct would lead a reasonable person in the agent’s position to believe that the principal had authorized the agent to so act Þ the issue is the agent’s reasonable belief
this may be express or implied from the words used, from customs, and from the parties’ relationship
express – granted in words TR 2.01 (p. 45)
Scope of Authority – TR 2.02 (p. 48)
Implied – TR 2.02 (1) (pag. 48)
implied authority is actual authority to

do what is necessary, usual, and proper to accomplish the agent’s express responsibilities – OCB; and
act in a manner in which an A believes the P wishes the A to act

Incidental authority – the authority to do incidental acts that are reasonably necessary to accomplish an actually authorized transaction (book, p. 9)
Liability – if A acts with actual authority – P is always bound

Apparent Authority

Third 2.03 (p. 59); where the words or conduct of the principal would lead a reasonable person in the third party’s position to believe that the principal had authorized the agent to so act Þ the issue is the reasonable third party’s belief

its what the T thinks the P has given A the authority to do by the way of P’s actions

power of position (book, p. 11); apparent authority can be created by appointing a person to a position which carries with it generally recognized duties; to those who know of the appointment there is authority to do the things generally entrusted to one in that position

o Liability
§ Disclosed/Partially Disclosed P à P is bound
§ Undisclosed à P not bound; cant have apparent authority

Agency by Estoppel

Third 2.05 (p. 60); a person who is not otherwise liable as a party to a transaction purported to be done on his account is nevertheless subject to liability to persons who have changed their positions because they believed the principal entered into the transaction, and (a) he intentionally or carelessly caused such belief, or (b) knowing of such belief and that others might change their positions because of it, he did not take reasonable steps to notify them of the facts
this is subsumed into apparent authority (book, p. 12)

Inherent Authority

o 2nd Restatement §8A (p. 8)

solely from the relationship and not from agency: it exists for the protection of persons harmed by or dealing with an agent

§161 RST (p. 20); a disclosed/partially disclosed principal is liable for an act done on his behalf by an agent, even if forbidden to act, if

(1) the act usually accompanies or is incidental to the transactions the agent is authorized to conduct, and
(2) the third party reasonably believes the agent is authorized to so act

§194 (p. 21); an undisclosed principal is subjected to liability for acts done on his account if the acts are necessary or usual in such transactions although forbidden by the principal
this derives from the agency relationship and exists for the protection of persons harmed by or dealing with a servant or other agent; for it would be unfair for an enterprise to benefit from the work of its agents without making it responsible for their excesses (book, p. 12-13)
in the 3nd Restatement inherent authority just mentioned on the §2.01 Comment, lett. b (p. 45)
the Third Restatement classifies this as matter of torts – it is listed under respondeat superior

in the 2nd Restatement, inherent authority is well established but we don’t know where it starts and stops (serves as a gap-filler)
the 3rd Restatment drops it altogether and classifies it as a matter of torts and within apparent authority

Ratification(book, p. 15).

Third 4.01 (p. 71); the principal will be bound to third party, even if the agent had no authority, if the agent purported to act on the principal’s behalf and the principal, with knowledge of the material facts, affirmed the agent’s conduct by (1) manifesting an intent to treat the act as authorized – express ratification, or (2) engaging in conduct justifiable only if the principal intends to treat the act as authorized – implied ratification

Morris Oil Co. v. Rainbow Oilfield Trucking (p. 2)
The principal, Dawn, allowed its agent, Rainbow, to use its trucking license

Dawn reserved full control of the oil-related operations; the agreement between them specifically stated that Rainbow was not empowered to incur any debt or liability other than in the ordinary course of business
Rainbow eventually declares bankruptcy, and Morris, a creditor and Π, seeks Dawn’s cash when it finds out about its existence as the backer of Rainbow

the charges were in the name of Rainbow, not Dawn; Dawn had set up a fund to settle claims created by Rainbow’s operations
the trial court found that Dawn was aware that Π was relying on Dawn’s representations that payment would be made from the fund and that ∆ was at all times the agent of Dawn; Dawn on appeal argued there was no agency relationship

this is a case of inherent authority with undisclosed agency; the undisclosed principal is subject to liability to third parties with whom the agent contracted where such transactions are usual in the course of business conducted by the agent, even if the contract is contrary to the express directions of the principal
furthermore, Dawn ratified Rainbow’s actions here

Liability

If there IS AUTHORITY (P is bound, because actual/apparent/estoppel/inherent/ratification)

if P is bound and disclosed/partially disclosed, then P is liable and A is not (ONLY P IS LIABLE) [Third 6.01 (p. 78) and Third 6.02 (p. 79)] if P is bound and undisclosed, then P is liable and A is also liable (BOTH ARE LIABLE) [Third 6.03 (p. 80)]

If there IS NO AUTHORITY

if P is not bound because there is no authority, then A is bound but P is NOT (ONLY A IS LIABLE). In this case, the implied-warranty theory applies [book, p. 18; Third 6.10 (p. 87)]

Duty of the principal to indemnify the agent for payments/loss, etc. [book, p. 19; Third 8.14 (p. 109)]

The Agent’s Duty of Loyalty
TR 8.01 (p. 97) – establishes duty of loyalty and 8.02 (p. 99) – no material benefit from position
Tarnowski v. Resop (p. 18)

Π had sought to buy a jukebox business, hiring ∆ as his agent; ∆ proceeded to take a bribe and buy Π a shit business
Π can recover the commission that his agent secretly received from the sellers and further a damage award for costs that were a consequence of the transaction due to TR 8.01 and TR 8.02;
Duty of loyalty is broad
Only way A can profit is through payment from P

No side payments or bribes

Whose corporate opportunity is it

IS it A’s or P’s

Whose resources was it – who’s time was A on

Did A learn about opportunity through her FR

Who did Kim Kay go to

Was the opportunity meant for P or A

A can take BO if specifically given to A

But if there is a chance that BO was open to P, then A must make it available to P before acting on it

TR 8.04 (p. 103): Duty of the agent to refrain from competing with the principal
TR. 8.05 (p. 103): Prohibition to use principal’s property/confidential information

Partnership
Source: UPA (p. 112) then RUPA (p. 131). 2/3 of the States had adopted RUPA, 1/3 not.
General points about partnerships:

partnerships are defined by the Uniform Partnership Act, (UPA) §6 (p. 114);

“a partnership is an association of 2 or more persons to carry on as co-owners a business for profit”

whereas, the Revised UPA §202(a) (p. 148): the “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.”
these associations of two or more people can be formed easily or inadvertently; there is no requirement of filing papers or a certificate
as with corporations, the statutes are largely either enabling or default – not mandatory
equality among partners exists
ease of dissolution exists
partners have unlimited liability, and are either jointly and severally, or severally and jointly liable Þ as per UPA §13 (p. 117) or RUPA 306 (p. 159)

Other Statutory points;

UPA §7 (p. 114) lists the rules for determining the existence of a partnership

§7(3): the sharing of gross returns does not of itself establish a partnership
§7(4) 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, unless it was (a) a payment as a debt by installments, (b) as wages, (c) as an annuity to partner’s widow, (d) as interest on a loan, or as consideration for the sale of a business’s good will

UPA §15 (p. 118); “All partners are liable (a) jointly and severally for everything chargeable to the partner

partners.

Extraordinary decisions; acts outside the ordinary scope of business may require the consent of all parties (see comment at the bottom of p. 166, also for the case under UPA)

this tracks UPA fairly closely, except that under RUPA, a partnership agreement consists of the fragmentary implicit and explicit agreements made as the partnership agreement evolves; therefore, unanimity is required not only to depart from the formal agreement, but also the fragmentary ones. This depends on RUPA §401(j) to be read in conjunction of RUPA §101(5) which provides the definition of “partnership agreement” (book, p. 47)

RUPA §403 (p. 167) and UPA §19/20 (p. 119) indicate that all partners have access to the books at all times and provide full information about the partnership. The right of access/inspection is not conditioned on the partner’s purpose or motive (see comment, pp. 168-1699. It cannot be unreasonably restricted [see RUPA §103(b)(2)] NB: these are default rules that the partners can change if they do so desire

RUPA 103 – everything can be amended by agreement except what is in here

RUPA § 103(b)(3) (p. 139): cannot eliminate the duty of loyalty, but look the 2 exceptions provided by RUPA § 103(b)(3)(i) e (ii) (p. 140) and the comment n. 4 at p. 141 (be specific!)
in UPA, have to go § by § to see what is default and mandatory

A Partner’s Expenses are not Reimbursable Unless Approved by the Majority
Summers v. Dooley (p. 41)
Π sued his partner when ∆ refused to sanction the hiring of an employee, and Π hired him anyways, paying out a salary

UPA §18(h) (p. 119) indicates that when an equal partnership exists, differences in business (ordinary matters) matters must be decided by a majority of partners; in a two person partnership, one partner cannot take action that will bind the partnership over the objection of the other partner
Incentivizes parties to create a PS agreement before entering into PS or amend the PSA

Court will read PS law literally

Not all courts will infer terms from actions of parties

Partners have unlimited liability for aggregation of partners

That’s why one person and one vote

Under the default rules of a partnership, all individuals count equally; just b/c you contribute 90% of the capital and get back 90% of the profit (note that under the default rule the profits are shared equally among partners), it does not mean you have complete control over the business – your vote is still equal to those who contribute 10%:

but recall that these default rules can always be changed

Types of Rules – always check for “subject to any agreement b/w them” language

(1) they can be default
(2) they can be mandatory rules which can NOT be changed by agreement
(3) enabling rules; rules which specifically direct the parties to write in language

Sanchez v. Saylor (p. 44): a third party was willing to lend the partnership money, but only with the condition that he obtains the financial statements of ∆, one of the partners

∆ refused to give them up, and Π, the other partner, sued him
the court finds there was no breach of fiduciary duty; the only remedy for Π would really be to dissolve the partnership
note that partnerships are more of a transitory relationship – partnerships get broken up all the time

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RUPA § 106 (p. 145) – Governing Law of the internal affairs of the partnership: the jurisdiction in which a partnership has its chief executive office.

Capital Accounts and Draw

How is profit split between the partners?
UPA §18(a) [p. 119] and RUPA §401 (a) and (b) [p. 163] indicate that profits will be shared equally (default rule)

UPA §18(f) indicates that there is no guarantee of remuneration from a partnership Þ there is merely a right of a draw (a cash distribution to partners) but all partners, as per §18(h), must agree upon it

“draws” are subtracted from the total amount of capital of