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Business Associations
University of Texas Law School
Hu, Henry TC

BUSINESS ASSOCIATIONS OUTLINE with PROFESSOR HENRY HU
FALL 2011
 
I. Introduction
A.      Agency & Fiduciary Obligations
1)       Organization “within the firm”
a)       Absolute control over product & distribution
b)       Advantages: Absolute control over operation and style
c)       Disadvantages:
(i)       Capital expenditures
(ii)     Total risk
(iii)    Less exposure to bigger markets
(iv)   Need for employee training
2)       Organization “across markets”
a)       Advantages: no additional exposure to risk of loss, owner relieved of concern with management (delegation to contractor)
b)       Disadvantages: aligning of interests & negotiating/monitoring the “deal points,” contracting fees, lack of total control, sharing in costs and profits
3)       Determining which way to read a contract for business organizations
a)       Fowler v. Penn Tires: four corners of the contract test
(i)       Advantages: incentivizes clear contract making; keeps courts out of it (less litigation)
(ii)     Disadvantages: intent is not taken into account, nor is parties actions
o    To make other creditors regulate this and follow up on this is a huge burden
4)       Master / Servant (Restatement Second of Agency § 2)
a)       Master: a principal who has the right to control physical conduct of agent
b)       Servant: Agent whose physical conduct is subject to the right to control by the master – master is vicariously liable for torts the servant commits while in the scope of employment (§219)
c)       Independent Contractors (may or may not be agent; is a nonservant)
(i)       Factors to be used: Restatement Second §220: control over physical activity, economic risk, appearance, whether work is part of regular business, skill required, termination options (Hoover v. Sun Oil)
d)       Employer vs. Employee
(i)       § 2.04: Respondeat Superior (employer is subject to liability for torts committed by employee acting within the scope of employment)
o    §7.07(3)(a): employee’s scope
·            Employee can be organization, and not just individual
·            Comment f: factual situations that are relevant to determine (compare with §220(2) – very similar)
o    §228: 4 requirements for “scope” of employment (compare with §7.07(2))
·            it’s the kind/type that you were employed to perform
·            authorized time & space (this reqm’t is not in 3rd restatement)
·            actuated by a purpose to serve the master
·            force not unexpectable by master
(ii)     Humble Oil: Humble was held liable for acts committed by Schneider because even though Schneider owned the gas station, Humble tightly controlled him. Evidence showing master / servant and not independent contractor was: hours of operation were controlled by Humble, Humble paid ¾ of Schneider’s operating expenses, Humble closely supervised Schneider’s actions, and had complete control over advertising
(iii)    Nature of agent’s conduct: if the physical conduct causes harm, then merely being an agent is not enough to trigger respondeat superior
5)       Principal / Agent
a)       Definition (Restatement Second §1): the fiduciary relationship (imposes high standard) which results from the manifestation of consent by one person (principal) to another (agent) that the other shall act on his behalf and subject to his control, and consent by the other so to act
b)       Even if agent appears to be servant, that might be enough to trigger liability (Gizzi v. Texaco)
(i)       The ad campaign created an appearance of servant status & customers relied on that
(ii)     Not a well established general rule, but demonstrates that even as a nonservant there might be liability issues
c)       If the agent’s conduct is solely words, then rarely is liability triggered
6)       Authority
a)       Authority is generally read as ambulatory (at the time the agent acts) and not at the time of contracting
b)       Actual (Restatement 2nd § 7; Restatement 3rd § 2.02): principal’s manifestation to agent that expresses the principal’s assent that the agent take action on principal’s behalf
(i)       Express (actual conduct; express words used)
(ii)     Implied: Incidental authority – authority to do incidental acts that are reasonably necessary to accomplish an actually authorized transaction (unintended conduct)
(iii)    Difference between 3rd & 2nd restatement à no inherent agency power
(iv)   Power to revoke. Principal has power to revoke actual authority even when the principal has contracted not to do so.
(v)     Applies even there is an undisclosed principal and agent purporting to act on his own because principal probably set things in motion and stands to gain the benefits
(vi)   Principal’s objectives & interests must also be taken into account. If literal translation would be inconsistent with principal’s objectives, and agent reasonably believes that, then deviation from literal manifestation is fine.
(vii)   Can also deviate if agent reasonably believes that circumstances have changed; if upon reconsideration different instructions would be given; impracticable to communicate with principal for clarification before action needs to be taken
(viii)Agents knowledge at the time the agent acts is controlling
c)       Apparent (Restatement 2nd § 8; Restatement 3rd § 2.03): principal’s manifestation that another has authority to act with legal consequences, when a 3rd party reasonably believes that the actor is authorized and belief is traceable to manifestation
(i)       Power of position example: appointing a person to a position carries generally recognized duties
o    Lind: Kaufman’s apparent authority came from the following: supervisor sent Lind to Kaufman about new salary and duties; it was custom that other’s in K’s position had this type of authority;
o    Practically – how can you know in corporate setting who the principal actually is? Restatements make everything contingent on principal’s conduct, but in reality most corporations don’t rely on restatements for this reason.
d)       Inherent (Restatement 2nd § 8A, 194-5): principal is liable for an act done on his behalf by a general agent even though the principal had forbidden the agent to do the act if, 1) the act is incidental authority or 2) a 3rd person reasonably believes that agent was authorized to do the act
(i)       Watteau: Humble buying goods in violation of agreement with owners of bar but not on principal’s account. (Restatement 2nd § 195 wasn’t in effect)
o    Policy reasons to hold him liable: disincentivizes rogue agents; incentivizes monitoring of agents more; incentivizes to do thorough background checks & get good agents
o    Policy reasons not to hold liable: creditors discourage in giving credit lines to new ventures; fairness/windfall arguments
e)       Ratification (Restatement 2nd §82, Restatement 3rd §4.01): Liable if agent purported to act on principal’s behalf and 1) principal affirmed the agent’s conduct by manifesting an intention to treat the agent’s past conduct as authorized or 2) engaged in conduct that is justifiable only if he has such an intention
(i)       Elements needed for ratification:
o    Act that could be ratified (e.g.: actor purported to act as agent on person’s behalf)
o    Principal had capacity to ratify (e.g.: must be principal at time of act)
o    Ratification is timely stated (must precede intention to withdraw, any material change that makes in inequitable to bind 3rd party, unless 3rd party chooses to be bound)
f)        Agency by Estoppel (Restatement 2nd § 8B; Restatement 3rd § 2.05): Even though no manifestation is made, principal might be liable when 3rd party is induced to make a detrimental change in position because the transaction is believed to be on the person’s account, if: 1) the person intentionally or carelessly caused such belief or 2) having notice of the belief, the person did not take reasonable steps to notify them of the facts
g)       Termination: P has power to terminate A’s authority at any time, even if doing so violates contract, and even if it had been agreed that A’s authority was irrevocable à contracts relating to personal service will not be specifically enforced
h)       Policy Justifications for enforcing liability: Makes BOD more careful in their selection of CEO’s; releases 3rd party from responsibility of conduct of due diligence; Enterprise is in better position to assume risk than agent
7)       Agent’s Liability to 3rd Party:
a)       Turns on first if principal was bound (disclosed, partially disclosed, or undisclosed)
(i)       Disclosed – agent generally not liable
(ii)     Partially disclosed – both agent & principal generally liable
(iii)    Undisclosed – both agent & principal generally liable
o    If 3rd party can get judgment against one, then the other is released (majority view)
b)       Second, turns on agent’s power
(i)       Actual – Agent not liable
(ii)     Apparent – Agent not liable
(iii)    None – Gives implied warranty for liability to 3rd party & subject to liability
8)       Agency costs =
a)       Monitoring expenditures by principal;
b)       Bonding expenditures by principal (payment to agent to expend resources to guarantee that he will not take certain actions to harm the principal or compensate if he does hurt principal); and
c)       Residual loss ($ equivalent of reduction in welfare experienced by principal due to divergence)
9)       Fiduciary Obligations
a)       Unjust enrichment for agent
(i)       Reading v. Attorney General: Reading was sergeant in Army, was wearing uniform, and was assisting in the carry of loaded lorry in exchange for a total of 20,000 pounds. Crown recovered money and Court held that when the servant has unjustly enriched himself by virtue of his service, without his master’s sanction, the servant ought not to keep the $ and master can keep money even if he hasn’t suffered or lost any profit.
(ii)     Fee forfeitures discourages agents from being disloyal to their principals (only in clear & serious violations of duty – Burrow)
b)       Violation of fiduciary duty of loyalty
(i)       Bancroft v. Glen: Glen was president of Bancroft and LCP owns Bancroft. He was courted by another editing company and disclosed salary information, intentionally misled LCP, and discussed knowledge of employees’ capabilities. Acts taken together showed violation.
(ii)     Town & Country v. Newberry: Household cleaning business. Customer base was built by calling and putting in a lot of hours to get a good list of need. Some employees started new business and took customer list with them. Violation because there was a lot of time and energy devoted to building the list. Implied notion of duty of loyalty that was breached.
(iii)

agreement among the partners concerning either the affairs of the partnership or the conduct of its business. May be inferred by the conduct of the parties. If no written document, then explicit and implicit conduct agreements over time form the agreement. Changes in the way the partnership is actually conducted may be amendments for purposes of 401(j) to the agreement and require unanimity.
g.        However, four elements needed to be considered partnership (judicially created): agreement to share profits, share losses, mutual right of control/mgmt. of business, and community of interest in the venture
h.       The state in which the chief executive officer is incorporated is the law that governs (RUPA 106).
3.       Entity (RUPA § 201, §307) vs. Aggregate (UPA) Theories
a.       RUPA envisions partnership as entity distinct from the partners. The partnership may be sued and be sued in the name of the partnership (RUPA § 307). Partnership can own property (RUPA § 501)
                                                                                       i.      Can’t reach individual partner’s assets until judgment of same claim has been rendered against the partnership & writ of execution has been returned unsatisfied (RUPA § 307)
                                                                                      ii.      Under this view, if A & B were equal partners, and A put up $50K, and B did all the services (worth $50K), then B would get half of the partnership value which is $50K.
b.       UPA – partnership can’t be sued because it’s not recognized as entity
                                                                                       i.      Can jointly and severally sue partners, but must join ALL partners on any debts or obligations of the partnership (e.g. breaches of contract). If not, then suit can be dismissed by other partners
                                                                                      ii.      Under this view, if A & B were equal partners, and A put up $50K, and B did all the services (worth $50K), then B would get half of the assets at the end of the day, which is half his service value and half assets. He sold half his services for $25K, and retained half his services, so he would get $25K.
c.        For taxation purposes – federally the partnership is taxed on an aggregate basis, not as individual partners
4.       Agency in Partnership – Every partner is an agent of the partnership (UPA § 9) and acts binds the partnership unless the partner so acting has in fact no authority to act for the partnership in the particular manner and 3rd doesn’t know he doesn’t have power
a.       No act of partner in contravention of restriction of authority shall bind the partnership to persons having knowledge of restriction
b.       A partnership is bound by partner’s wrongful acts (UPA § 13)
c.        UPA: Ambiguous on apparent authority; holds third party knowledge requirement for lack of authority more flexible (knowledge of such other facts that show bad faith) than RUPA (actual knowledge)
                                                                                       i.      Partners are joint & severally liable only in tort actions, not contractual claims. Contracts- jointly liable.
                                                                                      ii.      Incoming partner liable for all existing liabilities in the partnership, but these claims against him can only be satisfied by partnership property
d.       RUPA: Partnership bound by act of partner for apparently carrying on in the usual way the partnership business or business of the kind carried on by the partnership
                                                                                       i.      All partners are jointly and severally liable. In order to be enforced, creditor must exhaust partnership assets first, before reaching partner’s personal assets.
                                                                                      ii.      LLP exception – not personally liable just because they are a partner. Are liable for personal misconduct
                                                                                    iii.      New partners are not liable for anything before they became partner