Close Business Associations Outline

Close Business Associations

Bruner

Fall 2011

Introduction

“Closely Held” Businesses

1. A small number of owners

2. Active involvement of the owners in managing the business

3. Lack of established market for ownership interests in the company

Closely Held Business Forms

•Sole Proprietorship

•General Partnership

•Corporation

•“Hybrid” Entities

–Limited Partnership (LP)

–Limited Liability Partnership (LLP)

–Limited Liability Company (LLC)

gency

Agency Creation

Requirements for Agency

1) mutual agreement

2) agent acting on principal’s behalf

3) agent acting subject to principal’s control

(See Rest. 2d Agency § 1)

“Fiduciary” – Someone who occupies a position of trust and confidence/loyalty and care.

Gorton v. Doty (Idaho 1937)

•Doty told Garst, the coach, that “he might use” her car to transport players “if he drove it.”

•Is this an “agency” relationship?

Doty tried to paint this as a “gratuitous bailment” – just letting the coach borrow the car. Court disagrees. Agency existed; look to what was actually said, not what was intended

Rest. 2d Agency § 1, Comment b

“[I]f the agreement results in the factual relation between them to which are attached the legal consequences of agency, an agency exists although the parties did not call it agency and did not intend the legal consequences of the relation to follow.”

Note: You don’t have to have intent or knowledge to form an agency, which makes agency relationships very fact intensive.

Jensen v. Cargill (Minn. 1981)

Is Warren Cargill’s “agent”?

a. The existence of an agency may be proved by circumstantial evidence showing a course of dealing between two parties

b. Interference with internal affairs (totality of the circumstances analysis) crosses the line of control necessary for an agency relationship

c. When a creditor assumes management and de facto control over the conduct of the debtor, agency exists.

Green v. H&R Block (Md. 1999)

•income tax services

•“Rapid Anticipation Loan” (RAL) program

–customers apply through H&R Block

–H&R Block “benefits financially” (undisclosed)

Is H&R Block the customer’s “agent” with respect to the RAL program?

a. Agency can be created by inference

b. The creation of an agency relationship ultimately turns on the parties’ intentions as manifested by their agreements or actions.

c. Three important characteristics: 1) agent’s power to alter legal relations of the principal, 2) agent’s duty to act primarily for the benefit of the principal, 3) the principal’s right to control the agent – not necessarily physical control, but control of result

Liability in Contract

Principal’s Liability in Contract

•actual authority

–express actual authority

–implied actual authority

•apparent authority

•inherent authority

•ratification

•estoppel

Express Actual Authority:

An agent has express actual authority when a principal has expressly communicated to an agent the power to perform some act on the principal’s behalf. The ultimate test is whether a reasonable person in the agent’s position would interpret the principal’s communication to encompass a particular act.

“[A]uthority to do an act can be created by written or spoken words or other conduct of the principal ….” (Rest. 2d Agency § 26; see also Rest. 3d Agency §§ 2.01, 3.01)

“[T]he term ‘express authority’ often means actual authority that the principal has stated in very specific or detailed language.” (Rest. 3d Agency § 2.01, Comment b)

Williams v. Duggan (Mass. 1914)

Edward Duggan is explicitly authorized “to pay all taxes, and other assessments; and in general to do every act and thing concerning the premises, which [Bessie Duggan] might [herself] do if personally present.”

Does Edward have authority to borrow money on Bessie’s behalf to pay her taxes? No.

i. The power to borrow money or execute and deliver promissory notes must be granted by express terms or flow as a necessary and inevitable consequence from the nature of the agency created. Courts rarely grant the authority to borrow money unless it is explicit.

Implied Actual Authority and Apparent Authority:

Implied actual authority – what the agent reasonably believes she can do based on the principal’s words or other conduct. (Rest. 2d Agency § 26; see also Rest. 3d Agency §§ 2.01, 3.01)

Apparent authority – what the third party reasonably believes the agent can do based on the principal’s words or other conduct. (Rest. 2d Agency § 27; see also Rest. 3d Agency §§ 2.03, 3.03)

Essco Geometric v. Harvard Industries (8th Cir. 1995)

Harvard implements “world class manufacturing plan” requ