Business Associations
Krumm; Fall 2010
Introduction
· Analyze statute first, then Operating Agreement and then common law (always last)
General Partnership: unlimited personal liability of each partner for the debts and obligations of the partnership
The default business entity
Limited Partnership: only “general partners” have liability for the obligations of the partnership. So long as “limited partners” remain inactive in the business, they are not liable
Limited Liability Partnership: allows limited liability for all partners
Limited Liability Company: affords limited liability to all owners of an unincorporated entity
Corporation: shareholders; officers and investors don’t have liability; double taxation
The Law of Agency (R2d and R3d of Agency)
Defining the Agency Relationship
Restatement 1.01 Definition: agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act
An agent can bind his principal to a contract, subject the principal to tort liability, and in some circumstances, to criminal liability
i. The employment relationship is the most common principal-agent relationship
Thayer v. Pacific Electric Railway (1961)
i. Facts
1. Thayer bought a precision grinding machine for its aircraft business. The unit was shipped via Pacific Railway and in good condition when it was originally shipped. During the shipping process, the unit became severely damaged. Thayer informed an agent of PR, Hileman, who filled out a form for inspection of damages and later wrote on the freight bill that there was “damage on this shipment.” After repairing the machine over nine months later, Thayer asked PR to cover the cost of the damage. PR rejected the claim because the bill of lading required PR to be notified in writing of the damage within nine months of shipment
ii. Issues
1. Did the actions of Hileman make him an agent of the plaintiff for the purposes of notifying PR of the damages?
iii. Decision
1. Yes, Even though Hileman was employed by PR, he became an agent of the Thayer for the purpose of noting on the freight bill that Thayer intended to claim damages because of the condition of his machine
2. Thayer did not need to expressly make Hileman his agent for the purpose of noting his intention to claim damages
a. The existence of an agency relationship is a question of fact, which can be implied from the conduct of the parties
Even though an agency relationship may be limited to a single act, a fiduciary duty of care and loyalty arises
Dual Agency Rule: an agent cannot act on the behalf of the adverse party to a transaction connected with the agency without the permission of the principal
i. Restatement 8.03: If the two principals are unaware of the double employment, the transaction between them is voidable
1. If one principal is aware, the defrauded principal can rescind or chose to affirm the transaction and recover damages
ii. However, an agent can deal with the other party if such dealing is not inconsistent with his duties to the principal
1. Thus, Thayer is not an abnormality
A. Gay Jenson Farms Co v. Cargill, Inc. (1981)
i. Facts
1. Plaintiffs are a group of farmers. Warren operated a grain elevator purchased grain from local farmers. Warren entered into a financing agreement with Cargill. As part of the agreement, Cargill treated Warren with a parental attitude and gave them considerable advice on how to run the grain elevator. Warren was also appointed as Cargill’s agent for buying wheat and other grain. Cargill was named as the contracting party on these grain contracts. Warren developed financial problems and owed $4 million to Cargill and $2 million to the plaintiff farmers by the time it ceased operations
ii. Issues
1. Is Cargill, by its course of dealings with Warren, liable as a principal on contracts made by Warren with the plaintiffs?
iii. Decision
1. An agreement may result in the creation of an agency relationship although the parties did not call it an agency and did not intend the legal consequences of the relation to follow
a. The existence of the agency may be proved by circumstantial evidence which shows a course of dealing between the two parties
2. A creditor who assumes control of his debtor’s business may become liable as principal for the acts of the debtor in connection with the business (Restatement2d 14 (O))
a. de facto control: when the creditor becomes a principal
Courts seem to place the most weight on the control element of agency.
Contractual Powers of an Agent
In General
i. When does an agent have the authority to bind the principal?
1. Actual Authority: Expressions made to the agent by the principal delineating the agent’s authority (written or oral)
a. Restatement3d 2.01 definition
2. Apparent Authority: Representations made by the principal to the third party about the agent’s authority (Restatement 2.03)
a. The agent appears to have certain authority to bind the principal even though the agent may not have the actual authority to do so
i. Example: A CEO settling a minor debt, even though they have not been given the authority by the company. The third party assumes that the CEO has the authority because most companies give that authority
ii. Other sources of authority: implied, incidental, and inherent
1. Implied authority (part of Actual Auth.) example: a principal authorizes an agent to borrow money; the agent’s authority to execute a promissory note is implied
2. Incidental authority(part of Actual Auth.): if a principal’s manifestations to the agent expresses the principal’s wish that something be done, it is natural to assume that the principal wishes, as an incidental matter, that the agent proceed in the usual and ordinary way if such has been established, unless the principal directs otherwise
a. Inherent authority: inherent agency power is a term used to indicate the power of an agent which is derived not from authority, apparent authority or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent (indistinguishable from apparent authority).
iii. Estoppel
1. Courts have estopped a person to deny the authority of another to act on such person’s behalf
a. Example: a client silently allows her attorney to settle a lawsuit on her behalf; the client might later be estopped to argue that the attorney lacked the authority to do so
2. Restatement3d 2.05
iv. Ratification (Restatement 4.01)
1. Allows a person to ratify the actions of another undertaken on behalf of the person
a. Thus, the principal can ratify an unauthorized act of his agent and thereby be bound by such action
b. Also, a person can ratify the very existence of an agency relationship
An Agent’s Express Authority
i. A principal may expressly authorize an agent to bind the principal contractually and often does so by means of a power of attorney or other document
ii. King v. Bankerd (1985)
1. Facts
a. Bankard owned a home with his wife. The couple became estranged and Bankard moved out west, allowing his wife to live in the home and also executing a power of attorney to King. The POA gave King the ability to convey, grant, bargain and/or sell the property. After several years and several failed attempts to contact Bankard, King conveyed Bankard’s interest in the property to his wife for no consideration, who later sold the property. Bankard sued for breach of fiduciary duty and violating the power of attorney
2. Issues
a. Does a power of attorney authorizing the agent to convey, grant, bargain and/or sell the principal’s property authorize the agent to make a gratuitous transfer of the property?
3. Decision
a. Powers of attorney are strictly construed as a general rule and are held to grant only those powers which are clearly delineated
i. However, the rule of strict construction cannot override the general and cardinal rule that the court determine the intention of the parties
b. Because powers of attorney are ordinarily very carefully drafted and scrutinized, courts give the terms used a technical rather than a popular meaning
c. Almost all courts hold that a general power of attorney authorizing the agent to sell and convey the property, although it authorizes him to sell for such price and on such terms as to him shall seem proper, implies a sale for the principal’s benefit
d. An agent holding a broad power of attorney lacks the power to make a gift of the principal’s property, unless the power:
i. Is expressly conferred
ii. Arises as a necessary implication from the conferred powers, or
iii. Is clearly intended by the parties, as evidenced by the surrounding facts and circumstances
e. The main duty of an agent is loyalty to the interest of his principal
iii. Durable POA’s are not revoked on the incapacity of the principal
An Agent’s Apparent Authority
i. Smith v. Hansen, Hansen, and Johnson, Inc. (1991)
1. Facts
a. Hansen installed a glass wall purchased from a Fentron employee in a new building. Shortly after installation, the glass began to leak. Hansen settled with the owner and sued Fentron for reimbursement. The glass was sold to Hansen by Foster, who was employed by Fentron as a manager of manufacturing services. However, Foster’s duties were limited to the manufacturing department and he was not authorized to sell product. Foster led Hansen to believe that he had the authority to sell even though it was unknown to and contrary to Fentron’s policies
2. Issues
a. Did Foster act under apparent authority and thus make Fentron liable?
3. Decision
a. Actual and apparent authority are depend on objective manifestations
i. With actual authority, the principals objective manifestations are made to the agent
ii. With apparent authority, they are made to a third person
b. Actual authority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal’s account
c. Apparent authority to do an act is created as to a third person by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the third person to believe that the principal consents to have the act done on his behalf by the person purporting to act for him
i. Manifestations to a third person can be made by the principal in person or through anyone else, including the agent, who has the principal’s actually authority to make them (R2d 27: manifestations)
ii. Manifestations will support a finding of apparent authority only if they have two effects
1. They must cause the one claiming apparent authority to actually, i.e. subjectively, believe that the agent has authority to act for the principal
2. They must be such that the claimant’s actual, subjective belief is objectively reasonable
d. Here, there is no evidence to support a reasonable inference that Foster had apparent authority to sell products because he was a manager of manufacturing services
ii. Appointing a person to certain positions such as general manager, president, or partner gives a person apparent authority
1. Absent notice to third parties to the contrary, placing the agent in such a position constitutes a manifestation that the principal assent
impartial advice based upon a carefully informed judgment as to the principal’s interests.
iii. Duty of Loyalty (Restatement 8.02)
1. Gelfand v. Horizon Corp. (1982)
a. Facts
i. Gelfand worked for Horizon as a real estate salesman and sales manager. He was paid a salary plus commission. Horizon fired Gelfand, but did not pay him outstanding commissions. The trial court awarded Gelfand commissions on eleven of the twelve disputed sales. On appeal, Horizon claims that Gelfand breached his fiduciary duties. The Barranca Estates property that Gelfand sold was to a corporation in which his wife had an interest. Gelfand did not appraise Horizon of this detail.
b. Issues
i. Is an agent who breaches his fiduciary duty to a principal liable for profits made by third parties on the transaction?
c. Decision
i. Yes, a fiduciary who has, by violating his obligation of loyalty, made it possible for others to make profits, can himself be held accountable for that profit regardless of whether he has realized it
1. The theory is that the trustee is not to be free to authorize others to do what he is forbidden
ii. However, the court is not obligated to compel a fiduciary to reimburse the beneficiary for third party profits
1. The authorization for such a remedy is not mandatory and should be made on the circumstances of each case based on equity
2. Here, Horizon did not have a policy which forbade land purchases by employees or required disclosure in such situations
a. Thus, the trial court was not compelled to make Gelfand reimburse Horizon for third party profits
2. Some courts force the disloyal agent to forfeit all compensation paid during the period of disloyalty
3. The liability of an agent is subject to the economic loss rule, where a party suffering only economic loss from the breach of contractual duty may assert a tort claim for such breach only if tort law provides an independent duty of care
a. Thus, the principal could sue under contract, but not fiduciary breach if there was not an independent duty that was not governed by the contract
4. Contracting around fiduciary duties is covered in Restatement 8.06(1)
iv. Vicarious Liability for Negligent Act
1. Terminology
a. One of the most important consequences of finding that a person is an agent of a principal is the imposition of vicarious liability on the principal for the tortious conduct of the agent (Restatement 2.04 and 7.03)
b. Two conditions for vicarious liability
i. Control
1. The principal must exercise, or at least have the right to exercise, a certain degree of control over the agent
ii. Scope of employment
1. The agent must be acting within the scope of employment at the time of the tortious conduct
2. The Control Test
a. Kane Furniture v. Miranda (1988)
i. Facts
1. Kane is a furniture store that also sells carpeting. Kane uses Perrone to install the carpet after it is sold. Perrone hires independent carpet installers, such as Kraus, to work the jobs. After an installation, Kraus went to a bar, drank for four hours, and ran a stop sign resulting in a crash that killed Miranda’s wife
ii. Issues
1. Was Kraus an employee of Kane, resulting in vicarious liability, or an independent contractor resulting in no liability for Kane?
iii. Decision
1. An independent contractor, Restatement 220 defines the test of employee/independent contractor
2. The extent of control is the most important factor in determining whether a person is an independent contactor or an employee
a. If a person is subject to the control or direction of another as to his results only, he is an independent contractor
b. If a person is subject to control as to the means used to achieve the results, he is an employee
i. Here, Kane only controlled as to the final result
b. Restatement 7.07 factors
i. The extent of control that the agent and the principal have agreed the principal may exercise over details of the work
ii. Whether the agent is engaged in a distinct occupation or business
iii. Whether the type of work done by the agent is customarily done under a principal’s direction or without supervision
iv. The skill required in the agent’s occupation
v. Whether the agent or the principal supplies the tools and other instrumentalities required for the work and the place in which to perform it
vi. The length of time during which the agent is engaged by a principal
vii. Whether the agent is paid by the job or by the time worked
viii. Whether the agent’s work is part of the principal’s regular business
ix. Whether the principal and the agent believe that they are creating an employment relationship
x. Whether the principal is or is not in business
