Business Associations
Ganor
Fall 2014
Agency
· Agency: Fiduciary relationship where principal manifests asset to agent that the agent can;
o Act on principal’s behalf
o Subject to principal’s control
§ Right to veto evidence but not determinative.
o Both consent to the relationship; however, can be an agent by actions rather than agreement (Jenson)
o Relationship is created whether they intended to form an agency relationship or not.
o Independent contractor: when the agent is a professional bound to provide independent judgment or when the agent is an established business in its own right such as a building contractor.
o Termination: can be terminated at will be either party; potential contract liability, but not liable under agency law.
· Agency owes a fiduciary duty to the principal.
o Duty of loyalty: act in best interests of the principal; not in competition.
§ (Restatement 8.02) Cannot retain secret profits; everything must go to the principal
· Tarnowski: Principal can recover secret profits lost AND damages!
§ (8.06) Cannot be an adverse party unless:
· Consent from Principal AND
· Fair and full disclosure
o Duty of Care: Act in good faith as one believes a reasonable person would act in becoming informed an exercising any power.
§ This requires
· Duty of good faith (honesty, not have a conflict, not condone/approve bad conduct)
· Best Interest: act in the reasonable belief their actions are in the Co.’s best interest.
· Informed Basis: directors must be informed in making decisions.
§ Manager of a trust typically an agent; however, owes no duty to the beneficiary of the trust. Must follow the rules established in the trust.
o Also, duty of obedience: act according to principal’s instructions.
· Principal: person for whom action is to be taken.
o Principal can be any of these three depending on how much the 3rd person knows or has reason to know about the principal.
§ Undisclosed-3rd party has no notice agent is acting for principal.
§ Disclosed-3rd party has notice agent is acting for a principal and knows principal’s identity.
§ Unidentified-3rd party has notice gent is acting for principal but doesn’t know the principal’s identity.
· Notice: defined very generously—knows, has reason to know, received effective notification, or should know the fact.
Contracts Binding the Principal
· Principal is bound by agreements an agent enters into if:
o Prong 1: He acted on behalf of the principal in concluding the contract
o Prong 2: Agent binded the principal to that contract.
· Prong 1: Did Agent Act on behalf of Principal? Consent from both parties to an agency relationship?
o Disclosed or Unidentified Principals: Question of whether the contract was entered into on behalf of the principal is determined from the perspective of the 3rd party. How did the 3rd party reasonably understand the agent’s conduct? Did the agent reasonably understand from the action or speech of the principal that she has the authority to act on her behalf?
§ Agent: For unidentified principal; generally a party to the contract unless agreement specified otherwise.
o Undisclosed Principals: binded when an agent acts on principal’s behalf in making a contract. Agent must have intended to act for the principal.
§ Agent: becomes party to the contract
o Analyze: How much control was there? Could be a non-agent depending on control.
§ Humble Oil; Liable: Humble set the hours of op., sold only humble oil products, could close down the company at any time, humble paid utility, humble had incentive to monitor
§ Sun Oil Co.; Not Liable: Did not set hours of operation, could buy other products, Barone set the hours and had a full year lease, risks of operating on Barone.
· Prong 2: Did the agent have the power to bind the principal?
o Actual Authority: exists when the agent, at the moment he acts on behalf of the principal, reasonably interprets the principal’s conduct to mean that the principal wants the agent to act that way.
§ Look to how the agent reasonably understood the conduct of the principal.
o Apparent Authority: exists where 3rd party reasonably understands the principal’s conduct to mean the agent has the authority to act for the principal.
§ A CEO (agent of corp.) who acts for her benefit still binds the corporation—apparent authority.
§ There MUST be some manifestation attributable to the alleged Principal
§ Can never have apparent authority with undisclosed, almost impossible w/ unidentified
o Inherent Authority: General agent (ex-an insurance salesman) has power to bind a principal within agent’s ordinary scope of authority AND reasonable 3P would infer agent had power to bind Prncpl.
§ 3P must have found the agent’s acts reasonable
o Ratification: occurs where the principal’s conduct justifies the assumption that the principal wants to be bound by the act undertaken by the agent.
§ Act must be ratifiable
§ Principal must have the capacity to ratify
§ Ratification must occur in a timely manor
§ Must ratify act in its entirety
o Estoppel: Even though the person who purported to act on behalf of the principal lack authority to bind the principal and even though the principal failed to ratify the contract, principal may still be held liable via estoppel. Generally, P will only be held bound if reckless
Agency and Torts
· Agent always remains personally liable for torts he/she committed UNLESS principal owed less than a duty of care to the tort victim or the agent was exercising a privilege of the principal.
· Is the Principal liable for Agent’s conduct?
o Direct Liability: Principal is liable for torts he commissioned. Also liable if he delegated a duty to an agent and agent failed to do it
o Vicarious Liability: liable for torts the agent/employee commits “while acting within the scope of their employment.”
§ Scope of employment: defined broadly
§ 707(3)(a): Employee/Employer relationship exists when employer controls manner and means of the agent’s actions. Test turns on the control the employer exercised.
§ Employee? Liable.
§ Independent Contractor? Not liable.
Sole Proprietorship
· Business only has one owner, not formed any special legal entity
· Debts: Face UNLIMITED personal liability for all of your debts.
Partnerships
· Partnerships are formed automatically when
o Two or more persons carry on a business; Ganor: Look to control! Is there control over business?
§ Can be corporations, LLC’s, etc.
§ Does not matter if you have actually started the business
o With profit sharing (must be for profit)
o Intent to engage in the venture together and for that person to be a partner
§ Person who receives a share of the profits is prima facie a partner in the business unless meet conditions of RUPA 202(c)(3) or UPA 7(4)
§ Did the parties share control?
§ Did the parties share the losses?
§ Contribution of money or property
§ Does not matter if you did not contribute money, can still be a partner if you just contribute sweat equity. Vohland v. Sweet
o P. by Estoppel: If you consent to others callings you a P and 3P relies, you may be P. by estoppel.
o Common Defense: I’m just a creditor/investor, not a partner!
§ Also not partners: Just paying rent, independent contractor, payment of debt, compensation to an employee, for the sale of the goodwill of a business.
§ Assignment of Profits: If partner assigns his rights to profits, assignee is NOT a partner.
§ Assignment of management rights: Can’t be done!
· Debts: General rule is that each partner is fully liable for the debts of the partnership, both partnership assets and personal assets. Under RUPA, joint and several liability
· Agency: Each partner is a general agent of the partnership; each partner binds the partnership contracting in the usual course of business.
· Taxes: Partnership is generally not treated as a separate entity-each partner has to pay his share of the partnership’s profits
· Books and Records: Partnership may not unreasonably restrict access to books and records from a partner. RUPA 103(b)(2)
· Business Opportunities: A partner’s duty of loyalty prevents the partner from taking business opportunities from the partnership, unless the other partners consent. RUPA 404(b)(1)
· Competition: Cannot compete with the partnership before the dissolution RUPA 404(b)(3)
Partner’s Rights
· Each Partner entitled to an equal share of the profits and an equal share of losses in proportion to their ownership steak.
· Equal rights in management and conduct of partnership business, unless delegated by partnership agreement
· Voting: Under RUPA 401, unanimous consent required for admission of a partner, amendment of the partnership agreement, and substantial business changes. All others votes require majority consent by default, but may be altered in partnership agreement.
· Management Rights: Each partner has equal rights in the management and conduct of partnership business.
· Books and Records-each partner has fair access to the books and records
Partnerships and Ownership
§ Property held in a partnership gets a special form: Tenancy in Partnership
o Big development: the “firm” owns its own assets. Resolves contracting problems with creditors, who have a right to all partnership assets.
o Also, partners can sell a piece of the partnership—easier to r
d parties in the transfer of real property. (pg 56)
o Statement can be cancelled—even if it has not been canceled by, it is cancelled automatically five years after most recent amendment.
Once you have found Partnership Liability, what assets are exposed?
· Partnership creditor can always get partnership assets
o RUPA-Partnership is separate legal entity
o UPA-Partnership debts are owed by the group of partners.
· Personal Assets of the Partners are generally also available with a few exceptions;
o Agreement with the creditors which limits personal liability of partners
o Creditor cannot get the personal assets of a partner who joined the partnership after the obligation arose.
§ RUPA 306(b)-new partner simply not liable
§ UPA 15-all partners are liable, but a person who joins the partnership after the debt was incurred can only satisfy their liability out of partnership property.
§ Liability of a purported partner or partner via Estoppel; in some cases, we hold person liable regardless of whether they are a partner. UPA 16/RUPA 308.
Duties of the Partnership
§ Duty of Care-partners have a duty to act with due care, but they only violate that duty if they act with at least gross negligence.
o Partnership agreement may modify duty of care, but may not unreasonably reduce it.
o Not mentioned by UPA, but still enforced.
§ Duty of Loyalty-RUPA 404(b)
o To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity.
o Refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest that is adverse to the partnership
o To refrain from competition with the partnership in business or before dissolution.
§ Partnership can ratify things that would be a violation if full disclose is made
§ May not eliminate, but may enumerate things that violate DOL
Dissolution
§ Partnership ends in three steps:
o Partnership’s dissolution
o The winding up of assets
o Partnership’s termination
§ Dissolution occurs when there is a dissolving event (RUPA 801)
§ Partnership at Will: partners have not agreed to remain partners for a specific amount of time or for a particular purpose.
o dissolved by the partnership’s having notice from a partner, other than a partner who is dissociated under RUPA 601(2) of that partner’s express will to withdraw as a partner, now or at a later date.
o 601(2)-partner who has withdrawn
o partner who is expelled
§ Partnership for a Definite Term or Particular Undertaking
o Dissolved by the end of this term or when undertaking is complete
o May also be dissolved by the express will of all partners to wind up
o A partnership formed for a term or undertaking can also be dissolved by “the express will of at least half of the remaining partners to wind up the business” if that will is expressed “within 90 days after a partner’s dissociation by death or otherwise under 601(6)-(10) or wrongful dissociation under 602(b)
§ Law views dissociation of a partner is so important that it gives partners right to resolve without majority decision.
o Partnership is dissolved if partnership agreement specifies that a certain will cause it.
o Purpose of Partnership becomes illegal
§ However, if law is repealed within 90 days, law treats partnership as if it never ended.
o Can be dissolved judicially if “economic purpose is frustrated” or “another partner has engaged in conduct related to the business which makes it not reasonably practicable to carry on business without that partner.”
