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Business Associations/Corporations
University of San Diego School of Law
Smith, Thomas A.

I. Agency
A. Who is an Agent?(Chapter 30 – Examples & Explanations)
                           Principal (Corporate Board) —— Agent (Officers/Employees)
       • Whether a corporation is bound by the acts of its officers raises usual agency questions •
• Agency: the relationship when one person acts for another. Under the restatement, agency results when P & A (1) agree that A will act (2) on P’s behalf and (3) subject to P’s control. No agency unless P & A agree. If A is found to be acting as P’s agent, then P is “chargeable with the acts of her agent as fully and to the same extent as though she had been [committed the act herself]” (Gorton v. Doty)
(1)   Have to agree
(2)   That principal (P) have control over agent (A)
(3)   A has to agree to act primarily on P’s behalf/ in P’s interest
• Three results of this relationship:
(1)   P can be liable for contracts A makes
(2)   P can be held accountable for the torts of A if master/servant
(3)   A owes a fiduciary duty to P
• 3 principle forms of agency:
(1)   Principle-agent
(2)   Master-servant (necessary for tort liability)
(3)   Employer/proprietor and independent contractor
• Types of agents:
(1) Servants
(2)   Independent contractor agents
(3)   Independent contractor non-agents
• Agent’s Agent v. Subagent: Subagent is someone authorized by the principal to be hired, as opposed to agent’s agent who is not authorized. Usually no implied authority to hire subagent where job involves discretion.    
1. Requirements for Agency
● GORTON v. DOTY (1937, Pg. 1, Idaho):
    • Facts: Doty (Δ) loaned her car to Russell Garst, a high school football coach to transport members of the team of a game. When Garst had a traffic accident in which Richard Gorton was injured, Richard’s father, as guardian ad litem, sued Doty, arguing that Garst was Doty’s agent while transporting the team in Doty’s car, hence Doty, as principal in the agency relationship was liable for the injuries resulting from the accident. 
     • Issue: Where one undertakes to transact some business or manage some affair for another by author and on account of the latter, does the relationship of principal and agent arise?
    • Holding: Yes. To find Doty liable, the court must find that (1) Garst is Doty’s agent; and (2) Garst is Doty’s servant. Here Doty volunteered the use of her car to Garst, the high school football coach for the purpose of furnishing transportation of the team to and from its game site. She “designated Garst,” and, in so doing, made it a condition precedent that the person designated should drive her car. That she thereby consented to Garst should act for her and in her behalf, in driving her car on that occasion, is clear from the act in volunteering the use of her car upon the express condition that he should drive it and further, that Garst consented to so act for Doty is equally clear by his act in driving the car. This court has not held that the relationship of principal and agent necessarily involve some mater of business. Furthermore, the fact of the car’s ownership alone (conceded here), regardless of the presence or absence of the owner in the car at the time of the accident establishes a prima facie case against the owner for the reason that the presumption arises that the driver is the agent of the owner.
     • Dissent (Budge): There is no agency relationship between Doty and Garst because agency requires more than passive permission; rather, it involves request, instructions or command.
     • Rule: Where one undertakes to transact some business or manage some affair for another by author and on account of the latter, the relationship of principal and agent arises. It is not essential to the existence of authority that there be a contract between principal and agent or that the agent promise to act as such nor is it essential to the relationship of principal and agene that they, or either, receive compensation.
The conclusion of this case is clearly wrong – D is not in any way the master to G’s servant. D has agreed to lend a car to G; they didn’t agree that G would act on D’s behalf or subject to D’s control.
2. Lender Liability
• Cargill is a rare case – usually no lender liability (discourages companies trying to save others).
• Restatement (Second) of Agency §14 O notes that “a security holder who merely exercises a veto power over the business acts of his debtor by preventing purchases or sales above specified amounts does not thereby become a principal. However, if he takes over the management of the debtor’s business either in person or through an agent, and directs what contracts may or may not be made, he becomes a principal…” 
• Restatement (Second) of Agency §14K(Supplier v. Agent) A supplier: 1) Fixed price for sale irrespective of price paid by him (most important); 2) Acts in his own name, takes title to the property which he thereafter is to transfer; 3) Has an independent business in buying and selling similar property.
• Branch Offices: Suppose Warren was branch office. There is liability even if not actually acting on behalf of company because it is just a formal requirement (ie they were supposed to act on behalf) If Warren were a branch office defrauding people then again possible liability to Cargill by Respondeat Superior.
● A. GAY JENSON FARMS v. CARGILL (1981, Pg. 7, Minnesota):Creditor who takes control of debtor’s business may be held liable as a principal. Agency can be implied from circumstantial evidence.
     • Facts: Warren is an independent grain elevator who buys grain from farmers and sells it to Cargill (multi-national corporation). Plaintiffs here are farmers suing Cargill as Warren’s agent, for contracts that Warren defaulted on due to bankruptcy. Cargill was Warren’s creditor, loaning it money for working capital, but also had Warren act on its behalf to buy grain. In 1970, Cargill contracts with Warren to act as its agent to seek growers for a new type of wheat. Cargill also controlled many aspects of Warren’s day-to-day business as a part of this arrangement – the less financially sound Warren became, the more Cargill got involved in order to protect its investment. Cargill keeps Warren’s books; Warren couldn’t make large capitol repairs w/out consent; Warren couldn’t declare dividend or sell or purchase stock w/out consent; Internal memo states “Warren needs strong paternal guidance.”
    • Issue: May a creditor who assumes control of his debtor’s business become liable as principal for the acts of the debtor?
    • Holding: Yes. Agency is a fiduciary relationship that 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 of the other to so act. In order to create an agency relationship, the principal must consent to the agency, the agent must act on behalf of the principal, and the principal must exercise control of the agents. All three of these elements are found in the circumstances of this case – (1) Warren contracted with farmers on Cargill’s behalf, (2) Unlike a regular creditor, Cargill maintained control and influence over Warren – Warren was obligated to implement Cargill’s suggestions, Cargill had the right to buy all of Warren’s grains and look at their books, and to approve any indebtedness or capital purchases; (3) By directing Warren to implement its recommendations, Cargill manifested consent that Warren would be its agent; (4) While some of Warren’s actions (in isolation) are typical of a creditor, you must look at everything combined. Warren is not a supplier under the Restatement test because he does not have an independent business.
     • Rule: A creditor who assumes control of his debtor’s business may be held liable as principal for the acts of the debtor in connection with the business. An agency relationship can be implied from circumstantial evidence showing a course of dealing between the two parties.
B. Liability of Principal to Third Parties in Contract
Kinds of authority that Agent can use to bind Principal:
Actual Express Authority:
                                                              i.      Principal actually tells agent to go do something
                                                            ii.      Board must be (1) acting by the requisite majority (2) at a proper meeting.  
                                          Note: Can be held liable here even if undisclosed principal.
                                                          iii.      Can be found in:
1. The corporate statute (now rare)
   2. Articles of incorporation (but not often)
   3. Bylaws (most common source of descriptions of officer’s responsibilities)
   4. Board resolutions (authorize specific transactions or categories of transactions)
Actual Implied Authority: (based on communication between P&A)
                                                              i.      Actual power the principle intended you to have but did not give it to you directly, it has to be inferred from circumstances. Found in:
1.      Penumbras of the actual express authority – i.e. a corporate president is “authorized to manage day to day business affairs.”
2.       Board’s reaction to other similar actions by corporate agents may indicate an implied approval to the action.
                                                            ii.      Standard Restatement formulations:
1.      incidental to the authorized job
2.      usually accompanies the authorized job
3.      reasonably necessary to accomplish the job
                                                Ex: If CEO booked hotel room in course of negotiations. 
Apparent authority (based on communication between P & 3rd Party)
                                                              i.      A doesn’t actually have this power–it is the power principle holds out to third party that the agent has. This is based upon statements that you made to or in front of a third party. Courts will impose liability if the board created the appearance that an officer was authorized to carry out a transaction.
1.      President – president or CEO can bind the corporation as to matters in the general course of business, but not to extraordinary matters, such as bringing or settling litigation, offering lifetime employment contracts, etc.
2.      Vice-President – can only bind the corporation as to matters in his/her area
3.      Secretary – The secretary normally does not bind the corporation but merely keeps and certifies corporate records.
4.      Treasurer – Normally does not bind the corporation but keeps the corporate books, receives payments and makes other authorized payments.

. Kaufman, told Lind that he would be receiving a 1% commission on the sales of the people under him. In fact, Kaufman had not been authorized by P&T to offer this form of compensation, which would have the effect of nearly quadrupling Lind’s salary. Lind continued to work for P&T for several more years, and was never paid the commissions. After he terminated with P&T, he sued Schenly Industries, which had purchased P&T, seeking his commissions. Schenley denied that Kaufman had been authorized to offer the commission package.
    • Issue: Can an agent bind a principal despite a lack of authority to do so if it would seem to a reasonable person that the agent possessed such authority?
    • Holding: Yes. Authority comes in several forms. The manner most common is actual authority wherein an agent has express authority to bind the principal. However, this is not the only type of authority. Other types include apparent authority, where authority can be inferred from the conduct of the principal and agent as to the third party, and inherent authority, where such authority would tend to arise as a natural incident of the capacity of the agent. The first two types look to the conduct of the agent and principal; the later looks more to status. Here, the position of Kaufman, as Lind’s direct supervisor, was such that Lind could reasonably have believed that Kaufman had the ability to speak for the company when he offered the compensation package he did (Herrfeldt told Lind that Kaufman had authority to set terms of contract, including payment). P&T was therefore bound by Kaufman’s assertions. Reversed and remanded.
    • Rule: An agent can bind a principal despite a lack of authority to do so if it would seem to a reasonable person that the agent possessed such authority. Because this is a reasonableness standard, it should be that the agent can only bind the principle on terms that would appear reasonable to the 3rd party
● THREE-SEVENTY LEASING v. AMPEX CORP.  (1976, Pg. 22, 5th Circuit):Apparent Authority
   • Facts: Joyce formed 370 to purchase and lease computers. Joyce agreed to lease six mainframe memory units to EDS Corp. He began negotiations with Kays, a salesperson for computer manufacturer Ampex Corp. After negotiations, Kays sent a letter to Joyce confirming the sale of six units. Ampex later reneged on the sale because 370 did not meet its credit requirements. 370 was unable to find other units to lease to EDS and lost the deal. Joyce and 370 sued for breach, contending that a valid sales contract had been formed.
    • Issue: Does a salesperson bind his employer to a sale if he agrees to that sale in a manner that would lead the vendee to believe that a sale had been consummated?
    • Holding: Yes. An agent has apparent authority sufficient to bind the principal when the principal acts in such a manner as would lead a reasonably prudent person to suppose that the agent had the authority he purports to exercise. Further, absent knowledge to the contrary on the part of the buyer, an agent has the apparent authority to do those things which are usually incidental to his capacity. Here, Ampex allowed Kays, a salesperson, to deal with a prospective purchaser. In such a situation the purchaser has the right to believe that when the salesperson says that the transaction is completed, he had the ability to close the deal. The contract at most constituted an offer by Joyce to purchase, and so some acceptance by Ampex was needed. Internal memo to office was enough to give authority to Kays, who then sent letter confirming delivery dates which was enough to count as apparent authority and qualify as acceptance to offer. Because the corporation told the 3rd party that all communication would come through the agent, it seems that they held him out with the power to make a contract. Joyce therefore was entitled to his bargain when Kays purported to agree to it, and Ampex was bound.
    • Rule: A salesperson binds his employer to a sale if he agrees to that sale in a manner that would lead the buyer to believe that a sale had been consummated. Absent knowledge by the 3rd that the agent has been limited, he has the apparent authority to do those things that are usual and proper for him to do
• Note: Secretary can usually bind a company by apparent authority since (s)he is an