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Business Organizations
West Virginia University School of Law
Cowan, Barton Z.

BUSINESS ORGANIZATIONS OUTLINE – FALL 2009
INTRODUCTION
·         Types of business organizations
o   sole proprietorships
o   partnerships
§ general partnerships
§ limited partnerships
§ limited liability partnerships
§ limited liability companies
o   corporations
·         Two things to focus on when reading cases
o   Does the rule that comes out of the case announce a default rule (off the rack, no contract in place) or an immutable rule (a rule that cannot be contracted around, i.e. shareholders elect the board of directors)?
o   If it is a default rule, how could the parties have contracted around the problem presented?
 
CHAPTER 1 – AGENCY
 
·         Agency exists where:
o   one person (the principal) consents that another (the agent) shall act on the principal’s behalf and subject to the principal’s control, and
o   the agent consents to so act.
·         What is an Agent?
o   Gorton v. Doty
§ Teacher told football coach that he could take her car to transport players to a game so long as the coach drove the car. The car was involved in an accident returning from the game.
§ Held: coach was the agent of teacher
§ Teacher (principal) consented that coach(the agent) should act on her behalf (he drove her car instead of her) and subject to the teacher’s control (she mandated that he drive)
§ There is a presumption that a driver is the agent of a car’s owner
o   Just because someone is an agent by an industry’s standards does not make them an agent for legal purposes. The test must be met.
o   A.Gay Jenson Farms Co. v. Cargill, Inc.
§ Warren had a grain operation financed by Cargill with a line of credit. Warren sold most of its market grain to Cargill and Cargill had the right of first refusal. Warren went bankrupt with unpaid debts
§ Held: Cargill liable for debts as principal
§ Agency may be shown by circumstantial evidence that shows course of dealing
§ There must be agreement, but a contract is not required
§ 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
 
·         Types of Agency
o   Express
§ An agency that occurs when a principal and an agent expressly agree to enter into an agency agreement with each other
·         exclusive agency or contract
·         power of attorney
§ Express agency contract can be either oral or written unless the Statute of Frauds stipulates they must be written
o   Implied Agency
§ An agency that occurs when a principal and an agent do not expressly create an agency
§ The agency is implied from the conduct of the parties
§ The extent of the agent’s authority is determined from the particular facts and circumstances of the particular situation
o   Apparent Agency
§ Agency that arises when a principal creates the appearance of an agency that in actuality does not exist
§ When an apparent agency is established the principal is estopped from denying the agency relationship
§ It is the principal’s actions that create an apparent agency
·         Liability of Principal to Third Parties in Contract
o   The Agent’s Authority
§ Mill Street Church of Christ v. Hogan
·         Per course of dealing, Bill Hogan hired his brother to help him with church handy work. The brother was injured and sought worker’s comp through the church’s insurer
·         Held: Bill had implied authority to hire his brother, church insurer liable
·         Implied authority is actual authority circumstantially proven which the principal actually intended the agent to possess and includes such powers as are practically necessary to carry out the duties actually delegated
·         The person alleging agency has the burden of proof
§ Dweck v. Nasser
·         Nasser told his attorney of record that he would blindly sign anything he recommended. Nasser later sought to invalidate a settlement agreement signed by attorney.
·         Held: Nasser responsible for agreement; actual, implied, and likely apparent authority existed
·         An attorney of record in a pending action who agrees to settlement of a case is presumed to have lawful authority to make such agreement
§ Three-Seventy Leasing Corporation v. Ampex Corporation
·         The plaintiff signed a document for sale that was never executed by the defendant. However, an employee for the defendant later confirmed delivery date for the units.
·         Held: employee had authority to create a contract
·         The principal is liable when he acts in such a way as would lead a reasonably prudent person to suppose that the agent had the authority he purports to exercise
·         Absent knowledge on the part of third parties to the contrary, an agent has the apparent authority to do those things which are usual and proper to the conduct of the business which he is employed to conduct
§ Watteau v. Fenwick
·         H sold hotel but remained manager, and bought items on credit. Owners had prohibited this. Seller, upon learning that manager was not the principal, brought suit against owners for price of items.
·         Held: owners liable
·         In undisclosed principal cases, the principal is liable for all the acts of the agent which are within the authority usually confided to an agent of that character
·         Where a third party interacts with an agent assuming that he has authority to carry out the interaction so that the third party assumes he is the principal, the third party is entitled to rely on the agent’s apparent authority
o   Ratification
§ After the transaction the purported principal ratifies the agency relationship
§ Key things to know:
·         Ratified transactions will be treated as if authorized in the first instance
·         Will not be effective where it would be unfair to bind innocent third party to the contract
·         All or nothing proposition, whole transaction or not at al

Modern
Employee
Nonservant Agent
Nonagent independent contractor
Restatement 3rd
Employee
Nonemployee agent
Nonagent service provider
-First Column: P is liable if A w/in scope of employment
-Second Column: P not liable except in special cases
-Third Column: P not liable in agency law
-Exceptions to 2nd Colum:
            (1) P retains control over aspects of work in which tort occurs
            (2) P engages an incompetent contractor
            (3) Nondelegable duty
            (4) Activity contracted for is a “nuisance per se”
§ The Service Station Cases – Service Station Independent Contractor?
·         Humble – no
o   Woman’s car left at service station, rolls down hill before being touched by an employee and hits respondent.
o   Held: Humble responsible
o   There was a strict system of financial control and supervision by Humble with little or no business discretion put in the station owner.
·         Hoover – yes
o   Negligence of employee caused car to catch fire
o   Held: Sun not liable
o   Sun had no control over day to day operations
·         Restatement §220: Factors for determining master/servant relationship:
o   tax status of agent
o   amount of risk bourne by each
o   term of relationship
o   whether A is paid by job or unit wage
o   A’s work part of P’s regular business
o   P and A’s beliefs
o   Who buys supplies
o   Location
o   Whether P in business himself
o   Extent of P’s control over details
o   Whether A has distinct business
o   Trade practice in locality
o   Skill required of A
§ Murphy v. Holiday Inns, Inc.
·         Woman falls on sidewalk outside hotel, sues Holiday Inns, Inc.
·         Held: dismissed as to Holiday Inns, Inc., no day to day control
·         It is the element of continuous subjection to the will of the principal which distinguishes the agent from other fiduciaries
·         If a franchise contract so “regulates the activities of the franchise” as to vest the franchisor with control within the definition of agency, the agency relationship arises even though the parties expressly deny it
o   Tort Liability and Apparent Agency
§ Miller v. McDonald’s Corp.
·         Plaintiff suffered injuries when biting into a stone in a Big Mac
·         Held: McDonald’s liable as principal
If the franchisee agreement allocates