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Business Associations/Corporations
University of Pennsylvania School of Law
Booth, Richard A.

Corporations

WEEK 1
Chapter 1: Introduction to the Law of Enterprise Organization
-firm-a form of business relation that has a temporal dimension, a social identity, and a separate pool of dedicated business assets
-the modern law of organizational forms is premised on the idea that facilitating individuals’ efforts to create wealth is wise public policy
-corporation law addresses such important issues as how corp. enterprises are created and capitalized, how power over their internal affairs is distributed, how their econ. performance is monitored, and what mechanisms exist to improve their performance
-Pareto efficiency-distribution of resources is efficient when resources are distributed in such a way that no reallocation of resources can make at least one person better off w/o making at least one person worse off
-Kaldor-Hicks efficiency-an act is efficient if at least one party would gain from it after all those who suffered a loss as a result of the transaction or policy were fully compensated
-when traditional corporation law addresses fairness, it generally refers to fairness to shareholders
-Coase hypothesized that costs associated w/ transactions b/w market participants were substantial
-Jensen and Meckling assert that the firm could best be understood as a complex of contracts b/w owners of the various factors of production of the firm

Chapter 2: Acting Through Others: The Law of Agency
-the paradigm of the principal-agent relationship occurs when one person extends the range of her own activity by engaging another to act for her and be subject to her control
-the three problems that arise from agency relations: (1) problem of formation and termination, (2) problem of the principal’s relationship to third parties, (3) nature of the duties that the agent owes to the principal

Notes:
-in contract, the agent typically does not become liable for negotiating a contract with the principal; but if you have an undisclosed principal (has no idea you are doing a deal) then you bind yourself
-authority-authority to do what is necessary to carry out what you are actually authorized to do
-apparent authority 3rd parties reasonably believe you have authority
-ratification-when you authorize agent to buy land, and agent buys car (but principal actually realizes he wants car)
-estoppel-some type of change in status where 3rd party acts in reliance to their detriment on the actions of the agent; principal permits 3rd party to cause detriment; estoppel depends on what 3rd party does and ind. facts after the fact as opposed to apparent authority
-realm of agent to principal studies-an agent is a fiduciary

Jenson Farms Co. v. Cargill, Inc. (1981)
F: Warren Seed operated a grain elevator and was involved in the purchase of grain from local farmers; Warren was financed by D, who became its grain agent, and as Warren started doing worse, D took more active paternal role; Warren ceased operations, and was sued by Ps to seek recovery of sum of $2 million
I: Whether D, by its course of dealing w/ Warren, became liable as a principal on contracts made by Warren w/ plaintiffs? Yes
R: In light of all the circumstances surrounding Cargill’s aggressive financing of Warren (constant recommendations by telephone, right of refuseal on grain, Cargill’s right of entry, etc.) there was sufficient evidence from which jury could find Cargill was the principal of Warren w/in the definitions of agency
Notes:
-grain elevators are kind of like banks; Warren was involved in cash grain, store grain for farmers, sell seed; there were 86 farmers who eventually sued when Warren went broke and they owed $2 million to these farmers; about 75% of this cash grain was bought by Cargill (the biggest private corp. in the US) and also financing Warren’s operation
-Cargill was owed $3.6 million by Warren to permit Warren to buy the grain
-the court said Cargill owed the farmers this money as a principal, and that the deals Warren made were on behalf of Cargill
-supposing Cargill was just a bank, they would not have been liable
-maybe the problem is that Cargill is afraid that if they have to bid for grain, they will bid up price on grain market
-the court seems to hang its hat on the fact that one man said Cargill financed them b/c they wanted the grain; one corp. is being held liable for debts of another corp.; if you could hold Cargill for excess debts, why can’t you hold shareholders liable (piercing corp. veil b/w two otherwise unrelated corpations)
-if Cargill had been a bank would it have lent money to this outfit?
-there is no doubt Cargill is involved w/ business of Warren, and everybody knows this (not undisclosed principal), then perhaps Warren is not even liable
-Booth: this case works a lot better if you focus on fact that we have creditor that is not acting here as a creditor
-court held Cargill liable for debts of Warren to these farmers, but what if Cargill had been a bank that had recklessly propped up Warren? Did court get remedy right here? The court could have subordinated the claim Cargill had, but strained to use a theory they should not have used

White v. Thomas (1991)
F: Appellant White had employed Simpson on part-time basis for nearly two years and instructed her to bid on his behalf up to 250K on a piece of property; she ended up spending 327K, and realizing that she went over agreed to sell to Thomas part of the property; White did not want her to do this, never gave permission, and immediately repudiated the offer
I: Whether White was legally bound to the terms of the contract as her principal and employer? No
R: While the declarations of an alleged agent may be used to corroborate other evidence of the scope of agency, neither agency nor the extent of the agent’s authority can be shown solely by his own declarations or actions in the absence of the party to be affected

There is no evidence that White knowingly permitted Simpson to enter into a contract to sell or that he ever held her out as having such authority

Notes:
-how did Simpson get authority to overspend? Why no authority to sell?
-White will not ratify sales transaction; Simpson said she had power of attorney, but this was not enough
-what if White had tried to get out of purchase contract; the check constitutes a manifestation by the principal, we have something more than mere assertion by agent that she has authority to do something

Gallant Ins. Co. v. Isaac (2000)
F: Isaac got a new car and new insurance for that car from Thompson-Harris, an independent insurance agent that includes the power to bind Gallant on new insurance policies; Thompson told Isaac he was insured on a Friday, but he had not paid his deductible (Thompson told him to pay on Monday), and got in accident on Saturday, but Gallant said it was not liable for any losses incurred b/c policy wasn’t in force
I: Whether Gallant is liable for any losses incurred? Yes
R: Thompson was authorized to bind Gallant on new insurance policies as well as interim policy endorsements, and Isaac would have reasonably believed that the agent had authority

In re Gleeson
F: Gleeson, who died, nominated Colbrook as trustee of her estate, but he became co-tenant of trust real estate and failed to account for his share of profits
I: Whether the trustee can deal in his ind. capacity with the trust property? There are some exceptions, but not in this case
R: The petitioner’s decision was to act as trustee and as such he could deal with himself

The petitioner should have been required to recast his first semi-annual report and to account therein for all monies received by him personally as a profit by virtue of his being a co-tenant of trust property during the 1952 crop year, and to pay amount of any such profit to the trust

Notes:
-trustee/tenant Colbrook has already sewn wheat and w/ only two weeks to go before new season, he decides to renew lease on land, and even increases prices of land
-court says he must account for profits he has made-more than just report his profits, he also must cough it up to the common pot; not just question of disclosure, but also paying it out
-would this rule apply to corporations as well?
-Booth thinks Colbrook is damned if you do, damned if you don’t; if he farms it, he has to hand over products, but if he does not farm it, he gets sued for shirking
-in corporate law w/ respect to loyalty of duty claims, burden is on fiduciary to prove terms are fair, but if you get ratification, then the burden flips

Booth: Jerry Maguire Paradox-there is an agent but with one principal, but in general agency law, if an agent has more than one principal w/ similar competing concerns, you would be worried that agent is not giving you 100%
-with real estate agent, it is the same thing where most real estate agents have multiple clients
-why is it not a breach of fiduciary duty for sports or real estate agents to have more than one principal? The real estate agent w/ more listings has more traffic, and nobody would be able to afford an agent if you were the only principal; it makes the deals people want easier to enter into
-presumably, these agents get waivers from their principals, which says agents have rights to represent other principals and even steer them to these other principals
-agents come with baggage and some have extra rules that are a result that certain kinds of contracts are in interests of parties that are involved with them

WEEK 2
Chapter 3: The Problem of Joint Ownership: The Law of Partnership
Notes:
-partnership is default form of organization; you can have partnership even if you haven’t entered into an agreement as long as you and someone else have decided to go into business as co-owners for profits
-if your venture is not seeking profits, then you do not have a partnership
-you can end up in a partnership even though you do not sign anything or you do not mean to end up in a partnership