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Business Associations/Corporations
University of Toledo School of Law
Barrett, John Q.

Business Association Outline – Professor Barrett, Fall Semester 2011

I. Agency

a. Formed by Mutual Consent

b. Need not be in writing – could be words, writing, or conduct

c. Both sides must agree

d. No need for consideration, it is not a K, therefore can be terminated at any time

i. **Exception when it cannot be terminated – Agency coupled w/ an interest

e. Agent has duties to Principal, and Principal has duties to the Agent

i. P must Compensate A for R costs / expenses – ie, A placing an ad in paper

f. Types of Authority

i. Actual Authority

1. At time of taking action that has legal consequences for the principal

2. This is REAL authority – can sell car, not house

3. 2 types

a. Express AA – When P actually tells you to do something

b. Implied AA – What A reasonably believes has the power to do

i. the A deciding to place an ad in the paper to sell the car

4. Termination of AA – either party can terminate by letting other side know, must have Notice

ii. Most Agency problems arise b/w the P and the third party (newspaper wants money for the ad, or person who bought the car)

iii. If A had AA, then the P is bound by the A’s act (A must act w/in the scope of his authority)

1. When an Agent represents that he has AA, he will be held liable under an implied warranty – Barrett buys a Ferrari for Bill Gates

iv. Apparent Authority – where P interacts w/ a 3rd party and created an impression, and it could R be believed, the P will be bound

1. When Bill Gates calls up and states person like Barrett will pick up car

2. P must create impression A has authority – A cannot create Apparent Authority by telling the 3rd party that they have authority – 3rd party must R believe

a. Look to course of dealing b/w 3rd party and the Principal – his Coke example and me – if A is just lying to the 3rd, no App. Authority

3. Look to the R belief of the 3rd party – liability will go back to the P

4. Must be traceable to P’s actions or words

5. Exception – if in place of authority (prez of Exon & tells someone you are prez) – will create apparent authority – Prez can be an A on behalf of Exon

6. Termination – when 3rd parties belief is no longer R

g. Torts (are special)

i. Agent is liable if commits a tort while acting on behalf of P – A PERSON IS ALWAYS LIABLE FOR THEIR OWN TORTS

1. Q is whether the P is also liable?????

2. Respondeat Superior – only applies in the employer / employee context

a. Emplr has the ability to control the acts of the Empee – what differentiates from an Independent Contractor Relationship

h. Liability of the Principal

i. Contracts

1. All K’s by A w/ Actual Auth

2. All K’s by A w/ App Auth

ii. Torts

1. All torts that occur w/in the scope of the agency (RS)

2. Must be employer / employee relationship

3. Includes Int. Torts if A trying got further the goals of the P, even if P has forbidden the act in question (tells bill collector not to break anymore legs)

4. Frolic v Detour

a. F – Dominoes not liable, way off the paty – ie Detroit Airport

b. D – if delivery boy goes off path slightly – Eee still liable

i. Liability of the Agent

i. To 3rd Party

1. On K

a. If no authority (breaches implied warranty of authority)

b. If P undisclosed (purchasing property in own name for a P) – 3rd party does not know who he is dealing w/

c. Unidentified (3rd party knows you are an agent, but not for whom) – 3rd party does not know who he is dealing w/

d. 3rd Party can sue either the P (on actual authority) or A, BUT NOT BOTH

2. Torts

a. Always liable for own torts

ii. To the Principal

1. For Breaching duty to P, including acting outside actual authority

j. Co-Agents – 2 or more A’s representing 1 P

k. Dual Agents – 1 agent representing 2 or more P’s

l. Sub-agent – Acting on behalf of A, who is acting on behalf of P (secretary working for A)

i. When can be done

1. Only allowed when authorized by P – E or Implied

2. Act is ministerial

3. Customary in the business

4. Necessary or incidental to the acts to be done (need more than 1 person to get job done)

ii. Misconduct – makes A and SA liable to the P,

m. Agents have a duty to report what they know to the P

i. P deemed to know what A knows

1. Exceptions –

a. A acting adversely to the P

II. The Partnership – Is an association of 2 or more people who are co-owners and are in business for a profit – Uniform Partnership Act

a. The Need for a Written Agreement – A writing is not necessary for the formation of a Partnership – It is the default entity

b. Sharing of Profits and Losses –

i. Sharing of Profits – Profits will be shared equally amongst (default), unless the Partners had previously agreed to a different profit ratio

ii. Sharing of Losses – Losses will also be shared equally amongst (default), unless the Partners had previously agreed to a different loss ratio

1. Allocation of loss only works as long as the agreed partner has the $$$, every partner may have to pay

a. Partners are personally (jointly & severally liable) for all other partners’ obligations

2. Example – 3 partners agree to a loss payment ratio of 20%, 20%, & 60%. If the 1st party becomes insolvent, the last two partners will maintain the 3:1 ratio when allocating partner 1’s payment ratio – would now be 25% & 75%.

iii. All Partners Have a Capital Account – This will be 1 Final Question

1. CA = Contributions – Distributions + Share of Profits – Share of Losses

2. Each Partner has a Capital Account – Partners’ CA’s will net everybody out

3. Example 1 – Adam Contributes $100K, Brian puts in $0, the venture loses $100K

a. Adam’s CA = $100K – 0 – 0 – $50K = +$50K (Adam receives this from Brian)

b. Brian’s CA = $0 – 0 – 0 – $50K = (–$50K) – must pay Adam $50K

4. Example 2 – Adam Contributes $100K, Brian puts in $0, the venture loses $50K of its assets

a. Adam’s CA = $100 – 0 + 0 – $25K = +$75K (will receive the 50K in the bank + 25K from Brian)

b. Brian’s CA = $0 – 0 – 0 – $25K = –$25K

c. There is 50K still in the bank (only 50K of furniture was destroyed)

c. Management –

i. All Partners have actual authority which means they can bind w/in the scope of the Partnership Business

ii. If Actual Authority is taken away, this would lead to an Apparent Authority Analysis

1. Apparent Authority = Did a Reasonable 3rd Person believe that the partner had to authority to make the deal?

a. Is gained through Course of Dealing and Conduct

b. A partner cannot create Apparent Authority by telling a lie

iii. Authority of partners is tied to the SCOPE of the partnership

1. If a partner acts w/in the scope of the partnership – then the partnership is bound – must be R to the 3rd party

2. If a partner acts outside the scope of the partnership – then the partnership is not liable

iv. Agency and Voting lessons – Voting is perceived by majority vote / head count (weight of ownership is not considered) –> 2(20% + 20%) : 1(60%) vote would beat a 60% (1) : 40%(2)

d. Duties of Partners to Each Other

1. Each Partner owes a Duty of Loyalty to the Partnership

a. Partners are not supposed to compete w/ the partnership

b. Should act in furtherance of the partnership’s goals / interests

c. Not supposed to profit at your partner’s expense

d. Partners ha

cking Partners out of a Partnership

1. General Rule – Can expel a partner w/out cause –

a. The only limitation on this is expelling a partner in bad faith

i. Example – kicking a partner out for personal gain, less partners = bigger slice of the attorney fee for the remaining partners

ii. The burden is on the kicked out partner to show bad faith

2. Non-competition Covenants – The are enforceable if deemed reasonable

a. Courts will consider time (length of), area (space of), and how burdensome on the departing partner

h. Inadvertent Partnerships – Where 2 people have a relationship, one has a relationship w/ a third party, 3rd party wants to sue and wants to find a partnership so can sue the other person

i. Sharing profits alone is not enough to form a partnership, can be indicative, but it is not exhaustive – (RUPA states that sharing profits presumes a partnership)

ii. Partnerships by Estoppel – asserting partner need have Clean Hands – even if held out to the public by the partnership as a Partner – will not be considered a true partner if he knew himself that he was in fact not a partner (need to have reliance)

III. The Limited Partnership

a. Introduction– Limited partners have limited powers (voting, control, liability), General Partners have non-limited powers

i. Limited Partnerships

1. Are composed of General Partners (at least one) and Limited Partners (at least one)

a. General Partners – have unlimited powers & unlimited liability

i. Will be Jointly and Severally Liable

b. Limited Partners – have limited powers & limited liability

i. Have a limited voice to bind

ii. Cannot act on behalf of the partnership

iii. Great for Passive Investors – let the General Partner do all work

iv. Have limited liability

1. Will only be liable up to their investment in the partnership

2. Allows for 1 level of tax – profit and loss are allocated to the partners

3. Limited Partnerships Exist by Statute – To be a limited partnership – you must file with the state

a. Annual Franchise Tax – corporations must pay, limited partnerships will not pay

ii. Limited Liability Partnerships (LLP) – An LLP is a GP in all respects (everybody has equal voice, can bind the entity), then papers are filed – statute provides that Partners do not remain personally liable for the torts of their partners, but will remain liable for breach of K

1. The partnership is still liable for torts, but partners will only lose their investment, not their shirt

2. Partners in an LLP have full personal liability for claims arising from their own misconduct

iii. Limited Liability Limited Partnerships (LLLP)

1. The same as a Limited Partnership, but also get liability for torts (limited partners already had a shield – up to their investment, it is the GP who gets liability for Torts)

a. Doesn’t add a lot b/c more than likely it will be the GP who commits the tort (always liable for your own torts – up to the shirt off your back)