16459948 business organizations outline spring 2009

8/7/2019 16459948 Business Organizations Outline Spring 2009

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BUSINESS ORGANIZATIONS OUTLINEHofstra Law, Professor Greenwood, Spring 2009

AGENCY

LAW

AGENCY

I. Who is an Agent?

A. Agency is the fiduciary relation which results from

i. Consent by the principle for the agent to act

ii.Agent acting on behalf of the principle (& both parties intend this)iii. Understanding that the agent is subject to control by the principle.

a. Control only over the goal, not the means of accomplishing it (lawyers).

B. Theres an asymmetrical fiduciary duty (agent has duty to principle, but not vice versa)

C. An agency is inherently hierarchical - The principle controls (Courts will assume this fact)

D. Formation & termination of an agency relationship

i. Unlike a contract (which is negotiated etc.) an agency agreement is created very easily. Once A

agrees to do something for P, and A is acting on Ps behalf & is subject to Ps control theagency relationship is created.

a. Gorton v. Doty, 69 P.2d 136 (1937) woman tells the football coach who needs to transportstudents to a game to use her car (but only he can drive it). She volunteered the use of hercar, no compensation. Accident happens & suit against the woman, as the principle. Agencyrelationship existed here between woman & coach. Woman consented that coach act in herbehalf in driving her car by volunteering her car & her condition that only he drive it showsthe control she had.

1. How you describe it makes the diff on whether or not its agency:(a) Gave permission this is a loan, not agency(b) Directed - telling him what to do this is agency.

2. This is a little extreme b/c it almost looks like it was only a loan. But fact is thatinsurance is covering the woman, and the boy injured has no insurance. So looks likecourt just wanted to cover the boy.

3. Solution: if she had specified she is loaningthe car to him, then that would have settledit.

b.It is not essential that there be a contract between the principle and agent or that the

agent promise to act as such, nor is it essential to the relationship of principle and

agent that they, or either, receive compensation.

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ii.Agency can be terminated at the will of either party (notion that we dont like involuntaryservitude). Different from contract relationship which you cannot just breach & court will

enforce.

E. Creditor-debtor relationship vs. agent-principal relationshipi. 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

ii.Gay Jenson Farms Co. v. Cargill, Inc., 309 N.W.2d 285 (1981) Warren (W) is a local firmoperating as a grain storage facility & as a middle man between the grain farmers & the

worldwide dealer, Cargill (C). W then insolvent; doesnt pay farmers, and farmers sue C. W &C had an agreement where C finances W, C buys grain from W & C has right of first refusal onthe grain.

a. The court found an agency relationship was created here. Existence of an agency may beproved by circumstantial evidence which shows a course of dealing between the two parties.

1. Consent by principle C consented by directing W to implement certain procedures2. Agent acting on behalf of principle W acted on Cs behalf in procuring grain for C, as

part of its normal operation which were totally financed by C.3. Principle exercise control over agent - C had a lot of influence and control over Ws

financial situation.b.An agreement may result in the creation of an agency even though parties didnt call it

an agency and did not intend the legal consequences of the relation to follow.c. Someone who contracts to acquire something from a 3rd person and convey it to

another is an agent only if it is agreed that he is to act primarily for the benefit of the

other.

d. Problem - banks giving out loans being subject to agency1. Difference for a bank is that the lenders reason for financing is for the interest received.

In Cargill, the reason for the financing was to establish a source of market grain for itsbusiness & took control of the operation for this purpose.

2. If youre lending money to a borrower, you would probably take the steps Cargill did tomake sure operating properly. Any of the measures Cargill took would be appropriate,but the problem in Cargillis that there is an extraordinary amount of control too many

of these things put together.II. Agency Power to Bind - Liability of Principle to third parties in contract

A. Actual Authority - principle gave the agent the authority explicitly; completely clear

B. Implied Authority - Implied authority is actual authority circumstantially proven which theprincipal actually intended the agent to possess and includes such powers as are practically

necessary to carry out the duties actually delegated.

i. To determine whether implied authority exists, it must be determined whether the agentreasonably believes because of present or past conduct of the principal that principal wishes himto act in a certain way or have certain authority.

a. Sometimes may be necessary to implement express authorityb.Prior similar conduct

ii.Have authority because its something that normally goes along with the actual authority given.iii. Mill Street Church of Christ v. Hogan, 785 S.W.2d 263 (1990) Church has hired Bill

to paint in the past & has previously told Bill he can hire his brother Sam to help. Bill only usesChurchs tools & if he needs something goes to store & charges it to Churchs account. Churchhires Bill again, needs help & goes to Church to ask for help. Church says to call Petty, butdoesnt tell Bill he must hire Petty, & told Bill that Pettys hard to reach. Bill gets his brother

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Sam to help & Sam falls off a ladder owned by the Church. Church pays Sam for hours worked.Sam wants workers comp, but only employees get it.

a. Bill is an agent of the Church (an employee Church hires Bill & has control over Bill)b. Bill didnt have actual authority to hire Sam, but had implied authority.

1. past conduct - Bill had been allowed to hire Sam for previous work.2. necessary to implement the express authority - in order to finish the work, Bill hadto

hire a helper.3. agent reasonably believed he had the authority - practice in the past; Bill never told

otherwise; Church even paid Sam for hours worked.C. Apparent Authority when a principle acts in such a manner as to give the impression to a

third party that the agent has certain powers which he may or may not actually possess. It is

a matter ofappearances on which third parties come to rely.

i. 3rd parties have the right to believe the agent has the authority it is reasonable to believe theyhave.

ii.Lind v. Schenley Industries, Inc., 278 F.2d 79 (1960) Lind () worked for Park. Parks vice-president, Herrfeldt (Herr) gave job with Kaufman, & told that Kaufman would tell himduties and salary. Kaufman tells he will get a specified commission, and Herr confirms this. Iskind of commission is not common in the industry (very weird to get it). later terminated &sues for the commission. Kaufman didnt have actual authority to give this commission.

a. Park can be held accountable for Kaufmans action on the principle of apparent authority.Kaufman is s direct supervisor; as far as is concerned, Kaufman is spokesperson forPark. reasonable to think Kaufman has authority to offer commission.

iii. Three-Seventy Leasing Corporation v. Ampex Corporation, 528 F.2d 993 (1976) Joyce, the only employee of 370 corp, is in negotiations to buy HW from Ampex & is speakingto Ampexs employee, Kays (salesperson). Kays sends Joyce an offer at the direction of Kayssuperior.

a. An agent has apparent authority sufficient to bind the principal when the principalacts in such a manner as would lead a reasonably prudent person to suppose that the

agent had the authority he purports to exercise.b. Absent knowledge on the part of 3rd 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.

c. Kays was employed by Ampex as a salesman; it is reasonable for 3rd parties to presume thata salesman has the authority to bind the employer to sell.

d. Ampex's actions furthered this belief; Document was given to Joyce at the direction ofMueller, Kay's superior, and also Mueller agreed that all communication with 370 would bethrough Kays. Doesnt matter if, internally, Kays really didnt have this power.

D. Inherent Agency Power authority that comes from the role/status that comes with being anagent. The agent (in the role/status) ordinarily possesses certain powers.

i. A servant acting within the scope of his employment has inherent authority to commit torts -basically same thing as respondeat superior.

ii.Watteau v. Fenwick, Queen's Bench (1892) - Humble sold business to Fenwick, but Humblestill manager, and Humble name on the door. Humble was only supposed to buy bottled alesand mineral water, but he buys cigars and other supplies on credit. , 3rd party, sues to recoverpayment. 3rd party doesnt even know Fenwick exists, and that he actually owns it.

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a. Rest (2nd) Agency 194 - an undisclosed principle is liable for acts of an agent done onhis account, if usual or necessary in such transactions, although forbidden by the

principle.

b. Rest (2nd) Agency 195 - an undisclosed principal who entrusts an agent with themanagement of his business is subject to liability to third person with whom the agent entersinto transactions usual in such business and on the principals account, although contrary tothe directions of the principal.

iii. Kidd v. Thomas A. Edison, Inc. 239 Fed. 405 (1917) - Kidd (3rd party) enters into K

with Fuller ('s agent) believing she was signing up for an unconditional singing tour/recitals. says that agents only authority was to sign her up with specific recitals (be a booking agent),and the dealer would pay for the performance.

a. Custom to hire singers for recitals & reasonable to believe they intend to pay them. Agent inthis industry is typically empowered to do these things in this type of situation.

b. J. Learned Hand - "It makes no difference that the agent may be disregarding hisprincipal's direction, secret or otherwise, so long as he continues in that larger field

measured by the general scope of the business entrusted to his case."iv. Nogales Service Center v. Atlantic Richfield Company, 613 P.2d 293 (1980) - and

have been in business in the past. 's employee-agent made oral contract with to give adiscount on gas. disapproves the discount; sues for breach of K. argues that agent was not

authorized to give this type of discount.a. Rest (2nd) Agency 161 . A general agent for a disclosed or partially disclosed principal

subjects his principal to liability for acts done on [the principles behalf] which usually

accompany or are incidental to transactions which the agent is authorized to conduct

if, although they are forbidden by the principal, the other party reasonably believes that

the agent is authorized to do them and has no notice that he is not so authorized.

LIABILITYOF PRINCIPALTO THIRD PARTIESIN TORT

I. Servant VS Independent Contractor

A. A master is subject to liability for the torts of his servants committed while acting in the scopeof their employment. As a general rule, a principle is not liable for the torts of his non-servantagents - i.e., independent contractors.

i. Servant-Master Relationship respondeat superior; master liable for torts of his servants

a. Master/servant relationship exists where the servant has agreed to work on behalf of the

master and to be subject to the master's control or right to control the "physical conduct" ofthe servant (the manner in which the job is performed as opposed to the result alone).

ii.Independent contractors

a. Agent-type independent contractor - one who has agreed to act on behalf of another, theprincipal, but not subject to the principal's control over how the result is accomplished (overthe physical conduct of the task).

b. Non-agent independent contractor - one who operates independently and simply enters intoarm's length transactions with others

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B. Whether the relationship between the parties is an agency relationship does not depend onwhat the parties call it, but what it actually is. The parties cannot effectively disclaim it by

formal consent.

i. Humble Oil & Refining Co. v. Martin, 222 S.W.2d 995 (1949) Love gives her car to gasstation owned by Humble for servicing. Negligence by gas station & Martin injured by the car.Humble liable for negligence? Humble says no b/c gas station operated as an independentcontractor, Schneider. Neither Humble nor Schneider considered Humble the employer.

a. Court says its a servant-master relationship, so Humble is liable. Humble had strict

financial control & supervision over the gas station.1. Humble furnished the station location, equipment, advertising, and a substantial part of

the operating cost (they gave a 75% commission on Schneider's payment of utilities, soHumble was effectively paying 75% of the utilities). Hours of operation controlled byHumble. Humble could terminate at will Schneider's occupation of the premises.Schneider had to do whatever Humble told them to do. The only thing Schneider hadthe discretion to do was hiring, firing, payment and supervision of the few employees.So looks more like Schneider is an employee just being paid based on commission.

C. Control is an essential element of an agency relationship, whether a servant or an independentcontractor. To determine whether the relationship is master-servant, the court will look at

whether the principle had control over the day-to-day operations.

i. Hoover v. Sun Oil Company, 212 A.2d 214 (1965) gas station employee negligently caused afire at a service station owned by Barone. s brought suit against Sun Oil, Barone & theemployee. Barone leased the gas station from Sun, & had a dealers agreement that dictated theK between them. Barone not obligated to do what Sun would recommend, & determined theday-to-day operations. Barone could sell whatever he wanted, although there were rules on whathe used Suns products for.

a. Held independent contractor - the close contact between the two show merely that they havea mutual interest in the sale of Sun products and in the success of Barone's business. Sun didnot have control over the day-to-day operations. Control or influence over the results aloneis insufficient.

D. Franchise agreement - the franchisee will agree to operate its business in certain ways, as required

by the franchisor, in exchange for the use of the license. The purpose of this is to createstandardization in all the franchises nationwide (to achieve the "brand"). However, a franchisecould still be a servant-master relationship if there is sufficient control by the franchisor.

i. Murphy v. Holiday Inns, Inc., 219 S.E.2d 874 (1975) - Betsey-Len Motor Hotel Corporationhad a licensing agreement (franchise) with Holiday Inns, to use their name/logo. Architecture ofBetsey must be approved by Holidays Inn, Betsey not allowed to sell stock w/o approval, Betseymust operate under Holidays rules of operation & make quarterly reports & submit to periodicinspections by Holiday. A customer had a slip & fall and sues Holiday Inn for the negligence.

a. Not servant-master, this is a typical franchise agreement. Holiday Inn does not have thecontrol or right to control the methods ordetails of doing the work. The purpose of theprovisions was to "achieve a system-wide standardization of business identity, uniformity of

commercial services . for the benefit of both contracting parties." Betsey still had thecontrol over the day-to-day operations, and most other powers customarily exercised by anowner.

ii.Rationale for allowing a certain level of control in franchising agreements:a. The problem of free-riding: franchisee would take advantage of other peoples investments

(establishment of the brand name) and exploit it. If the franchisee could do whatever theywanted, it would ruin the brand name.

II. Tort Liability and Apparent Agency

A. Advantages of setting up a business as a franchise:

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i. Establish a brand name ppl can walk in any location and know what to expectii.Less liability for the national company than having branches

a. But national wants some control since theyre promising somethingiii. Owners will work harder than managers, even though same money & same job

B. Policy Issue for franchises should we allow businesses to insist that they present themselves asone enterprise for purpose of advertising, but then turn around for tort purposes and say were 2enterprises? On its face it looks like consumer fraud. Although its ok for contract purposes, notclear if its ok for tort purposes.

C.Miller v. McDonald's Corp., 945 P.2d 1107 (1997) - sues McDonalds for injuries b/c she bit intoa stone while eating a burger. McDonalds was a franchise, owned by 3K, & had an operatingagreement that required 3K to operate in a manner consistent with the McDonalds system, anddescribed how it should be operated in a lot of detail. K also explicitly stated 3K not an agent forany purposes.

i. Liability under Actual Agency: The Control TestIf the franchise agreement goes beyondthe stage of setting standards, and gives the franchisor the right to exercise control over

the daily operations of the franchise, an agency relationship exists.a. If McDonalds retained sufficient control over 3K's daily operations, then an actual agency

relationship would exist (jury question). Agreement didnt just set standards - it required 3Kto use the precise methods that McDonalds established. McDonalds enforced the use of

those methods by regular inspections & retained power to cancel the Agreement.ii.Apparent Agency - One who represents that another is his servant or other agent and

thereby causes a third person justifiably to rely upon the care or skill of such apparent

agent is subject to liability to the third person for hard caused by the lack of care or skill

of the one appearing to be a servant or other agent as if he were such.

a. Question for jury whether McDonalds held 3K out to be its agent & whether justifiablyrelied on that representation

1. (Representation) Everything about the appearance of the restaurant identified it withMcDonald's - this image the McDonalds had worked to create - reputation, etc.

2. (Reliance) General public not expected to understand how franchise works. McDonaldscannot ignore its own efforts to lead the public to believe that all McDonald's are the

same.III. Scope of Employment

A. Conduct of a servant is within the scope of employment if it is actuated, at least in part, by apurpose to serve the master.

i. Ira S. Bushey & Sons, Inc. v. United States, 398 F.2d 167 (1968) - Sailor (works for U.S.)arrived back at his ship drunk, and negligently caused damaged to the ship & drydock (ownedby ). U.S. argues its not liable b/c sailor acting outside scope of employment.

a. The sailor's conduct was not so unforeseeable as to make it unfair to hold the governmentliable. The employer should be held to expect risks, to the public also, which arise 'out ofand in the course of' his employment of labor. It is foreseeable that a drunken sailor mightcause damage while crossing a drydock on the way back to his ship.

B. A servant's acts may be within the scope of employment although consciously criminal ortortious (except serious crimes). A servant's use of force against another is within the scope ofemployment if the use of force is may be expected by the master.

i. Ex: the owner of a nightclub probably would be held liable for injuries inflicted by a bouncer inejecting someone from the bar. The owner presumably hired the bouncer for the very purpose ofusing force to eject drunken or otherwise undesirable patrons.

ii.Manning v. Grimsley, 643 F.2d 20 (1981) professional baseball game, pitcher threw a ball at & injured him ( heckling him, and evidence that pitcher did it intentionally). Court foundemployer liable for pitchers action b/c he was acting within the scope of his employment.

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a. To recover damages from an employer for injuries resulting from an employee'sassault, it must be shown that the assault was in response to the 's conduct which was

presently interfering with the employee's ability to perform his duties successfully.

1. The heckling was conduct that had affirmative purpose to interfere with employeesperforming his duties successfully, and the pitcher's assault was not a mere retaliation forpast annoyance, but a response to continuing conduct which was presently interferingwith his ability to pitch in the game.

IV. Statutory Claims

A. Just b/c an employee behaves in an unacceptable manner (i.e. against company policy and/or law)does not mean that the conduct is obviously outside the scope of employment.

B. Factors to consider to determine whether an employee is acting within scope of employment:

i. The time, place and purpose of the act

ii.Its similarity to acts which the servant is authorized to perform

iii. Whether the act is commonly performed by servant

iv. The extent of departure from normal methods

v. Whether the master would reasonably expect such act would be performed

C.Arguello v. Conoco, Inc., 207 F.3d 803 (2000) Several incidents of racial discrimination byemployees working at gas stations with the Conoco name. Conoco not liable b/c stores wereindependently owned. Since Conoco did not control the details of daily operations of those stores,there was no agency relationship.

i. Time & place - Employee acted while on duty as an employeeii.Purpose - Employee acted while carrying out her employment dutiesiii. Although employee departed from normal methods of her duties and the conduct was not

expected, it took place while employee was carrying out her normal duties as a clerk.iv. No evidence that Conoco would have expected the employee to act this way.

Liability for Torts of Independent ContractorsA. Ordinarily when a person engages an independent contractor (who conducts an independent

business by means of his own employees), he is not liable for the negligent acts of the contractor inthe performance of the contract, but there are exceptions:

i. When landownerretains control of the manner & means of the work contracted forii.Where he engages an incompetent contractoriii. Where the activity contracted for constitutes a nuisance per se.

B. Liability imposed upon a landowner who engages an independent contractor to do workwhich is inherently dangerous (a nuisance per se).

i. Inherently dangerous - an activity which can be carried on safely only by the exercise of specialskill and care, and which involves grave risk of danger to persons or property is negligently

done.ii.Ultra-hazardous - an activity which necessarily involves a serious risk of harm to the person,

land or chattels of others which cannot be eliminated by the exercise of the utmost care, and isnot a matter of common usage. Liability is absolute where the work is ultra-hazardous.

C.Majestic Realty Associates, Inc. v. Toti Contracting Co., 153 A.2d 321 (1959) - Authority hiresToti to demolish a building which was adjacent to 's. In the process, there was damage to 'sbuilding. Evidence showed that it was hazardous work. Authority held liable b/c the work wasinherently dangerous.

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FIDUCIARY OBLIGATIONSOF AGENTS

I. Duties during Agency

A.Reading v. Regem, 2 KB 268 (1948) - sergeant in the British army paid a lot of money by escortinga smuggler's trucks through Cairo (so the police wouldnt inspect the trucks). Crown gets themoney.

i. Servant is liable to his master if he takes advantage of his service and violates his duty ofhonesty & good faith to make a profit for himself, and the position he occupies is the cause

of obtaining the money, rather than providing the opportunity for him to get it. Doesntmatter if master hasnt lost any profit or sustained any damage, or that master couldnt havedone the act himself.

ii.Examples:a. Money goes to master - Police officer accepts bribes to direct traffic away from crime scene.

The only reason he had any authority to be able to direct traffic away & the only reason he

got paid, was b/c of his position as a police officer & his uniform.b. Servant keeps the money - Employee during time he's supposed to work, gambles. Employercan sue him for breach of K, but the money he makes from the gambling is his.

B. Agent has the fiduciary duty to act solely for the benefit of the principle. An employeeviolates this duty by failing to disclose all facts relating to his work and by receiving secret

profits from it.

i. General Automotive Manufacturing Co. v. Singer, 120 N.W.2d 659 (1963) Singer workedfor General. Employment K says Singer would devote his entire time, skill, labor and attentionto said employment and not to engage in any other business. Singer doesnt think General canfill some orders & gets them filled somewhere else, making himself a profit.

a. Singer violated his fiduciary duty to act solely for the benefit of General, so he is liable for

the amount of the profits he earned in his side business. He had a good faith duty to disclosethe fact that he didnt think General could fill the orders; then General could decide what todo.

II. Duties during and after termination of AgencyA. Post-termination competition with a former principle is permitted, but the former agent is

barred from disclosure of trade secrets or other confidential information obtained during his

employment.

B. Soliciting former employers clientsi. Town & Country House & Home Service, Inc. v. Newbery, 3 N.Y.2d 554 (1958) - was an

employee of , a house cleaning service. leaves employment, then sets up a competitivebusiness. had breached the confidential relationship (b/c it stole the plan, which was unique)

and also solicited customers (which it had built over the years).a. A former employee may not solicit his former employers customers if those customers

cannot be readily ascertained by means other than knowledge b/c of the employment.

Where the customer list was secured by years of business effort & advertising, and theexpenditure of time & money, constituting a part of the good will of a business.

C. General Rulesi. While an employee you can't compete with employer b/c you have a fiduciary duty.ii.You can terminate the agency at will, however, so once you quit, you no longer owe a fiduciary

duty & you can compete.

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a. Knowledge received by employment, reputation, etc. you can take this with you. What youcan't do is walk away with a client list on paper.

b. Reason: Otherwise, it would be like slavery either you stay with the same companyforever, change careers, or pay royalties to previous employer.

1. Exception information thats confidential like patents. But this is addressed by non-competes (contract), so unnecessary to address in agency law.

PARTNERSHIPS

WHATISA PARTNERSHIP?

I. Elements of a PartnershipA. 5 Elements of a Partnership - UPA 6. Partnership is an association of "two or more persons to

carry on, as co-owners, a business for profit."

i. Association of two or morea. agreement necessary, but no written contract. Agreement is to associate, not to form a partnership.b. no formal partnership agreement requiredc. no governmental registration requiredd. If you fit the elements of a partnership, youre a partnership.

ii. Personsa. Person can be a corporation (or any other business entity) or a natural person. Some "people" are

not "persons" under definition of law - minors, etc.b. can't form a partnership with yourself, but you could with a corporation of which you were the

sole shareholder.iii. As co-owners

a. not employee/employer.iv. In a business

a. Not a church, not a share of stocksb. co-ownership of a rental property as joint tenants is not enough

v. For profit.a. Not-for-profits don't countb. Just b/c no profit made won't mean its not a partnership, as long as they intendedto make profit

B. UPA 7: Rules for determining existence of a partnership

i. Joint tenancy/joint property/part ownership doesnt of itself establish partnershipii. Sharing of gross returns doesnt of itself establish a partnershipiii. UPA 7(4) Receipt of a share of profits of a business is prima facie evidence of partnership, but no

such inference shall be drawn if(exceptions):a. Wages or rent (even if calculated based on profit) - store may pay landlord rent based on profits of

the store w/o landlord becoming its partner.b. Debt repayment - if business owes ex-partners money, this doesnt make them a partner, it makes

them a creditor.c. Annuity to deceased partner - if you want to retire, your payments should not be based on profits;

but they may be if you are dead.d. Interest - If you lend money to the partnership & take as interest a share of profits, you are not a

partner. But if you invest money in the partnership & take a share of the profits, you are.

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1. So what becomes important is the level of control.e. As consideration for sale - the distinction between allowing in a new investor and selling the

business is going to be tough to make if the seller still receives a share of profits.C. Liability Rules of a partnership

i. Profit Sharing Default Rule profits are split per person/partner, w/o regard to money or laborcontribution. But you can change the default rule by agreeing to something else in the partnershipagreement.

ii. Splitting losses default rule - losses follow profits. So if you make agreement on profits, losses also

split that way.a. 3rd party breach of K or torts - Sue the partnership & collect. But if partnership is insolvent?

1. Partners held jointly and severally liable for the obligations of the partnership (UPA 15).Each partner is a guarantor of the partnerships full debts.

b. Partnership agreement can say how losses (debts) will be split. If agreement says Partner A isliable for 90% of debts, B 10% of debts, you can still sue B for full debt and collect. But thenB can sue/collect from A the 90%.1. Reasoning: 3rd parties entitled to rely on the entity, plus that each individual partner puts

their individual credit behind the partnership.iii. UPA 9: Every partner is agent of the partnership for purpose of its business. The act of every

partner for carrying on the usual way of business binds the partnership, unless he has no authority to

act in particular manner and 3rd party knows .iv. UPA 13: Partnership liable for any wrongful act or omission of any partner acting in the ordinary

course of the business or partnership or w/ authority of co-partnersv. UPA 17: Person admitted into existing partnership liable for all obligations of the partnership

arising before his admissionvi. Federal Income tax purposes income and losses of the partnership are attributed to the individual

partner; the partnership itself does not pay taxes.

II. Partners Compared with EmployeesA. UPA 42: The sharing of profits is prima facie evidence of partnership, but no such inference shall

be drawn if such profits were received in payment as wages of an employee.

B. Fenwick v. Unemployment Compensation Commission, 44 A.2d 172 (1945) - Chesire works forFenwick & asks for a raise. Fenwick agrees only if hes making enough money, so he gets a lawyer towrite an agreement, which said Chesire is a partner (so Chesire gets share of profits). Chesire leavesemployment, & Fenwick refuses to pay into the unemployment fund b/c she wasnt an employee withinthe meaning of the statute. said the agreement was not a partnership agreement, but just an agreementfixing the compensation of the employee. Court held that no partnership created, the K was nothingmore than a method to provide for compensation. Just b/c the agreement says they are a partnership,doesnt make it so.i. Court looks at the characteristics of a partnership:

a. The intention of the parties just b/c K said partnership, doesnt make it so. The real reason forthe K was to provide calculation for an increase in compensation, but to protect Fenwick in case

he couldnt afford it.b. The right to share profits not every agreement that gives a right to shares profits is a

partnership, so not conclusive.c. The obligation to share losses only Fenwick liable for debts of partnership.d. The ownership and control of the partnership property & business - Fenwick contributed all

the capital & Chesire had no right to share capital upon dissolution. Fenwick also retained allcontrol.

e. Community of power in administration - Fenwick had exclusive control of mgmt of thebusiness.

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f. Language in the agreement K called it a partnership, but also excluded Chesire from most ofthe ordinary rights of a partner.

g. Conduct of the parties towards third persons didnt hold themselves out as partners, she wasstill working as the receptionist.

h. The rights of the parties on dissolution- No diff for Chesire than if she quiti. Co-ownership agreement only to share profits, Fenwick had ownership.

III. Partners compared with LendersA. The determination of whether a business organization constitutes a partnership is done on a case-by-

case analysis of all factors to determine whether they reveal the intent to do business as co-owners;no single factor is dispositive. Thus, an explicit partnership agreement may be deemed not to create apartnership, and an agreement specifically denying a partnership exists may be found void.

B. The sharing of profits is not conclusive evidence of a partnership.

i. ***Martin v. Peyton, 246 N.Y. 213 (1927) - KNK, a partnership, was in financial difficulty, and Hall,a partner there, arranged for the s (Peyton + others) to loan them some securities, to be used ascollateral for a bank loan to KNK. KNK creditors sued to get their money, and argued that the loanto KNK by s was actually a partnership agreement, so s would also be liable for KNK's debts b/cthey were partners. Although the agreement said no partnership, the rule is to look at what actually isthe case. Court looked at circumstantial evidence, & decided no partnership formed.a. Although profit sharing (which happened here) is considered an element of a partnership, not all

profit-sharing arrangements indicate the existence of a partnership relationship. All of thefeatures of the agreement are consistent with a loan agreement, so no partnership has beenformed.

b. Note : If KNK had been organized as a corporation, LLC, or LLP, s here would have avoided anyrisk of liability. Under those forms of business organization, as equity investors, s could nothave been held personally liable for the firm's debts.

ii.Southex Exhibitions, Inc. v. Rhode Island Builders Association, Inc., 279 F.3d 94 (2002) hadentered into an agreement with SEM, s predecessor, in the production of shows. The agreementprovided for profit-sharing and was said wished to participate in the shows as sponsors andpartners. SEM said he didnt want ownership of the show, and described himself as a producer.Then takes over SEM, and dissatisfied with performance, so enters into K with another

producer. sues, arguing that it was a partnership, and liable for breach of fiduciary duty bywrongful dissolution.a. Court looks at the totality of the circumstances, and decides not a partnership. Evidence is:

1. The agreement was titled Agreement, not Partnership Agreement2. Agreement was for a fixed term, not indefinite.3. SEM had to advance all money for the shows and indemnify for all show-related losses.

(a) Partnership usually sharing of operating costs(b) Generally, presumption that partners share equally in partnership losses.(c) SEM responsible for the majority of mgmt decisions in the relationship(d) conducted business with 3rd parties in its own name, rather than that of the putative

partnership. In fact, the partnership never had a name and never filed a partnership tax

return.(e) The joint endeavor simply involved a periodic event, which neither generated nor

necessitated ownership interests in tangible properties(f) SEMs pres said he merely regarded as a producer of the shows.

b. While evidence of profit sharing is prima facie evidence of the existence of a partnership, itis not dispositve, and other factors may indicate no partnership was intended.

IV. Partnership by EstoppelA. General Rule : Persons who are not actual partners as to each other are not partners as to third

persons.

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i. Exception : A person who represents, or who expressly or impliedly consents to such arepresentation, that she is a partner, is liable to any third person who extends creditin good-

faith reliance on such representations. (UPA 16)B. Young v. Jones, 816 F.Supp 1070 (1992) Price Waterhouse Bahamas (PW-Bahamas) is Bahamian

partnership, and price Waterhouse United States (PW-US) is a NY partnership. invests money in acompany, based on an audit letter from PW-Bahamas, and later the money disappears. sues PW-Bahamas for negligence, and saying that b/c the 2 are partners by estoppel, PW-US is also liable. sayb/c PW-Bahamas letterhead only identified it as Price Waterhouse & used that logo, and also b/c Price

Waterhouse advertised that it had offices all over the world.i. Since the 2 firms are organized separately, there is no partnership in fact.ii. Also, there is no partnership by estoppel. doesnt contend that he relied on the advertising or

letterhead in investing. Plus, the exception in UPA 16 only applies to reps made to 3rd person whogive credit to the partnership. No credit was extended here, this is a case of liability for negligence.Also, didnt show that they relied on any conduct by PW-US that they had a partnership with PW-Bahamas.

THE FIDUCIARY OBLIGATIONSOF PARTNERS

I. The Fiduciary Obligations of PartnersA. Each partner has a fiduciary duty to all other partners.

i. The only fiduciary duties a partner owes to the partnership & the other partners are the dutyof loyalty & the duty of care. (UPA 404).a. A partners duty of loyalty is limited to the following:

1. every partner must account to the partnership for ANY benefit and hold in trust all profitsderived by or for the partnership

2. refrain from dealing with the partnership in conduct or winding up as or on behalf of an partywith adverse interest to the partnership

3. refrain from competing with the partnership before dissolutionb. A partners duty of care is limited to refraining from engaging in grossly negligent or reckless

conduct, intentional misconduct, or a knowing violation of the law.c. Partner required to act in good faith and fair dealing with regard to the partnership & other

partnersd. A partner does not violate a duty or obligation merely because the partners conduct furthers the

partners own interest (partner CAN further his own interests).e. A partner may lend money to and transact other business with the partnership & with regard to

these transactions, the rights and obligations of the partner is the same as if he was not a partner.ii. Unless otherwise agreed (default), books of the partnership shall be placed at the principal place of

partnership's business & all partners shall have access to the books at any time (UPA 19).iii. All partners shall render information affecting the partnership to other partners (UPA 20)

B. Partners in a business have a fiduciary duty to inform each other of business opportunities that

arise. Joint venture partners owe each other the highest obligation of loyalty as long as theirventure continues.

i. ***Meinhard v. Salmon, 249 N.Y. 458 (1928) Salmon leased a hotel from Gerry for a term of 20yrs; Salmon needs financing, & enters into a joint venture (partnership, but never actually calledthat) with Meinhard who would pay the money needed for this, and would receive 40% of theprofits for 5 yrs, and 50% after. Salmon had the sole power to manage the property & no interest inthe lease ever assigned to Meinhard. Towards the end of the lease, Gerry approaches Salmon with anew, bigger opportunity, and Salmon enters this other lease w/o telling Meinhard. Meinhard findsout and demands he be let in on the new deal b/c the opportunity to renew the lease belonged to thejoint venture.

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a. Holding : Meinhard gets % of the shares of the new deal.1. Salmon (managing partner) owed Meinhard (investing partner) a fiduciary duty, and that this

included a duty to inform Meinhard of the new leasing opportunity. Joint venturers owe eachother the highest duty of loyalty, and the duty is even higher for a managing co-adventurerb/c Meinhard relied on him to manage the partnership.

2. There was a close nexus between the original joint venture and the new opportunity, since iwas essentially an extension & enlargement of the subject matter of the old one. This wouldbe diff if the new opportunity didnt involve the same thing.

3. Salmon was also an agent of the joint venture, and this new opportunity was only madeavailable because he held that position in the joint venture. Salmon would never have hadthis opportunity were it not for Meinhards initial investment.

4. This case extended the duties of partnership far beyond duties under contract.b. Dissent : This isn't a partnership (where the majority would be correct), its a joint venture, which

is a partnership for a very limited purpose & contemplated that it would end at a certain time.Where the parties engage in a joint enterprise each owes to the other the duty of good faith in allthat relates to their common venture. Their fiduciary relationship only exists within that scope.

II. After DissolutionA. A partner who retires ceases to be a partner, and his former partners no longer owe him a

fiduciary duty.

i. Bane v. Ferguson, 890 F.2d 117 (1989) Bane was a partner in a law firm which entitled partnersto a retirement pension, but the benefits would end if/when the firm dissolved w/o a successor. Baneretires, and a few months later the firm merges with a bigger firm. Then, that firm dissolves &retirement benefits cease. Bane sues old partners, alleging that they acted unreasonably in decidingto merge, & that their negligent mismanagement led to the firms dissolution.a. Partners can't do anything that makes it impossible to carry on the ordinary business of

the partnership, unless authorized by all the partners (UPA 9(3)(c)). Also, a partner is afiduciary of his partners, & owes this duty against negligence. But neither apply here, b/c Banewas no longer a partner once he retired. The only complaint he could have had was if there wasfraud or deliberate misconduct (where no fiduciary relationship is necessary).1. The business judgment rule protects the firm from liability for mere negligent operation.

III. Withdrawing Partners Removing Clients from FirmA. Fiduciaries may plan to compete with entity to which they owe allegiance, provided that in the

course of these arrangements they dont otherwise act in violation of fiduciary duties.

i. Partners owe each other fiduciary duty of "utmost good faith and loyalty," must considerother partners' welfare & refrain from acting for purely private gain.

ii. A partner has an obligation to render on demand true and full information of all thingsaffecting the partnership to any partner

iii. Meehan v. Shaughnessy, 535 N.E.2d 1255 (1989) 2 partners in a law firm were planning to leave& set up their own firm. They asked another partner & some associates to leave with them. They hada list of cases they were going to take with them & sent out letters to the clients to consent toremoval of their files from the firm. As they were preparing to leave, they denied that they were

leaving when asked by the partners.a. The fiduciary duty of a partner does not prevent that partner from secretly preparing to start his

own law firm. But they breached their duty of loyalty by acting in secret and obtaining an unfairadvantage over the firm by (1) denying (lying) they were leaving, (2) preparing notices to go outimmediately (before firm could compete) to the clients, and (3) delaying to provide the firm witha list of clients they intended to solicit until they had already obtained authorization from most ofthem. Also, the letters to the clients were unfairly prejudicial it did not indicate to the clientsthat they had a choice on whether to remain with the firm, but only that they were leaving andneeded permission to remove the files from the firm.

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IV. Expulsion of a PartnerA. Dissolution is caused: (1) without violation of the agreement between the partners, (d) by the

expulsion of any partner from the business bona fide in accordance with such power conferred by

the agreement between the partners. [UPA 31]. When a partner is involuntarily expelled from abusiness, his expulsion must be bona fide or in good faith, for a dissolution to occur without

violation of the partnership agreement.

B. Lawlis v. Kightlinger & Gray, 562 N.E.2d 435 (1990) Lawlis was a senior partner in a law firm andbegan using alcohol, so he didnt practice for several months b/c of this, & b/c he was seeking treatment.

He later informed his partners of his problems, and they set forth some conditions with no 2nd chance.When he relapsed, they did give him a 2nd chance, where if he met certain conditions, they would returnhim to full partnership status. He didnt consume alcohol after that. However, Lawlis was then toldthey would recommend his expulsion & a few days later the firms files were removed from his office.Lawliss expulsion was voted on by a majority vote of the senior partners, as per the partnershipagreement.i. Lawlis claims that the notification of the impending recommendation of expulsion & removal of

files was a dissolution of the partnership, and this was wrongful b/c it wasnt authorized by themajority vote.a. Court disagrees. Everyone still considered him a partner even after this, and Lawlis still acted

like a partner. The notification was merely to say what they planned to do. The dissolution

occurred when they voted by majority for his expulsion, in accordance with the partnershipagreement.

ii. Lawlis also claims that his expulsion was a breach of the fiduciary duty between partners, whichrequires each to exercise the duty of good faith and fair dealing b/c he was expelled for thepredatory purpose of increasing the firms lawyer-to-partner ratio.a. Court disagrees. When the firm found out about the alcoholism problem, it sought to help him,

even though he was taking substantial time off work. Even after he violated the conditions setforth at first, the firm still gave him a 2nd chance. And instead of recommending immediateexpulsion, the firm proposed to allow him to stay for a while so he could find other employment& retain insurance coverage.

PARTNERSHIP PROPERTY, RAISING CAPITAL & RIGHTSOF PARTNERSIN MANAGEMENT

I. Partnership PropertyA. What constitutes partnership property? Issue is whether property is partnership property or the

individual property of the partner. All property originally brought into the partnership or subsequentlyacquired, by purchase or otherwise, for the partnership, is partnership property. [UPA 8(1)]i. Where there is no clear intention expressed as to whether property is partnership property, then

courts consider all the facts related to the acquisition and ownership of the asset. Some of the factorsconsidered are:

a. How title to the property is heldb. Whether partnership funds were used in the purchase of the propertyc. Whether partnership funds have been used to improve the propertyd. How central the property is to the partnerships purposese. How frequent and extensive the partnerships use is of the propertyf. Whether the property is accounted for on the financial records of the partnership.

B. Rights and Interests

i. The property rights of an individual partner in the partnership property are (i) her rights inspecific partnership property, (ii) her interest in the partnership, and (iii) her right to

participate in the management of the partnership. [UPA 24]

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a. Each partner is a tenant-in-partnership with her co-partners as to each asset of the partnership[UPA 25(1)] (Each partner, collectively, owns the whole partnership).1. Each partner has an equal right to possession for partnership purposes (but no right to

partnership property for any other purpose w/o consent of all other partners).2. The right to possession is not assignable, except when done by all the partners individually or

by the partnership as an entity3. The right is not subject to attachment or execution except on a claim against the partnership4. The right is not community property

5. On the death of a partner, the right vests in the surviving partners.b. A partners interest in the partnership is her share of the profits and surplus, which is

personalproperty. [UPA 26]1. A partner may assign her interest in the partnership and such assignment will not dissolve the

partnership (unless partnership agreement says otherwise). [UPA 27(1)](a) The assignee has no right to participate in the management of the partnership. But the

assignee is liable for all partnership obligations.(b)

C. Co-partners do not own any assets of the partnership; the partnership owns the assets and thepartners own interest in the partnership. The interest is an undivided interest.

i. Putnam v. Shoaf, 620 S.W.2d 510 (1981) Putnam sold her partnership interest to Shoaf; the

business had a negative financial position of $90k. Shoaf agreed to assume all personal liability forpartnership debts, and Putnam was relieved of any partnership liability. The partnership thenrecovered a lot of money from a lawsuit (which was not known to any partners before theconveyance). Putnam sues to get a share of the money.a. It is evident that Putnam intended to convey her entire interest in the partnership to Shoaf. Had

she intended to convey less, she would have remained a partner unknown to herself or the otherpartners. She would not have been liable for the partnerships debts either.

b. Entity vs Aggregate1. Aggregate what she sold belonged to Putnam, but she couldnt have sold the right to the

money from the lawsuit if it didnt exist at that time (no meeting of the minds). So the rulewould be that it remains with her.

2. But partnership is viewed as an entity, not an aggregate . So, the partnership actually owns allassets and when a partner coveys her interest in the partnership, she does not convey propertyheld by the partnership, but only her interest in the partnership. She just sold whatever thatinterest was even if she didnt know it was worth a lot more than she thought.

II. Raising Additional CapitalA. Partnerships sometimes need to raise additional capital to finance their activities. Sometimes the issue is

addressed in the partnership agreement itself. Examples:i. Pro rata dilution provision permits a call to each partner for a certain sum and provides for a

reduction in partnership shares of any partner who does not contribute the requested sum.ii. Provision might allow partners to invest in the firm at a reduced price or require partners to make

loans that will bear interest at a higher rate.

iii. May provide for the sale of new partnership assets to people outside the partnership, similar to acorporations placing new shares on the stock market.

III. The Rights of Partners in ManagementA. UPA 18 sets out basic rights and duties, but these are default rules which can be changed by agreeing

otherwise (in partnership agreement).i. 18(a) Equal shares of profits per person. Losses follow profits.ii. 18(b) if a partner advances money on behalf of partnership, the partnership needs to indemnify

(b/c its the partnerships expense, and partnerships liability).iii. 18 (c, d):

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a. The distinction between contributions and loans.b. No interest on capital contributions.

iv. 18(e): All partners have equal rights in management equal votes (even if sharing of profits isunequal). Meaning a voice, a right to information, and a right to vote.

v. 18 (f): No partner entitled to salary for acting in partnership businessvi. 18(g): black ball rule need unanimous vote of all existing partners to become a partner.vii. 18(h): Any difference arising as to ordinary matters connected with the partnership business may

be decided by a majority of the partners.

viii. 18(i): Distinction between legislative and constitutional mattersa. Constitutional matters - things that require change in partnership agreement requires unanimous

consent (this rule can't be changed)b. Legislative matters (ordinary matters) - decided by majority vote (this is a default rule, it can

be changed in the partnership agreement).B. The acts of a partner within the scope of the partnership business bind all partners; all

partners are severally and jointly liable for the acts and obligations of the partnership (unlessno authority to act & 3rd party knows the restriction). A majority of partners can make a decisionand inform creditors and will thereafter not be bound by acts of minority partners in

contravention of the majority decision.

i. National Biscuit Company v. Stroud, 106 S.E.2d 692 (1959) Stroud and Freeman enter into a

partnership to sell groceries. There were no restrictions in the partnership agreement on themanagement functions or authority of either partner. Stroud notifies Biscuit () that he wouldnot be responsible for additional bread delivered. But Freeman orders bread, Biscuit delivers it.Partnership is dissolved, Stroud responsible for winding up partnerships affairs, and refuses topay Biscuit.a. Court holds that Freemans purchases of bread bound the partnership. The purchase was an

ordinary matter connected with the partnership business within the scope of the businessand Stroud could not be a majority (b/c only 2) of the partners to make a decision otherwise.

C. Where equal partners exists, differences on business matters must be decided by a majority of

the partners.

i. Summers v. Dooley, 481 P.2d 318 (1971) Summers & Dooley form partnership to operate

trash collection business. Summers wants to hire a 3rd

person to help, but Dooley says no.Summers hires someone anyway & paid him from his own funds. Dooley finds out & objects.Summers then sues Dooley for reimbursement from partnership funds for money paid to the 3rd

person.a. Dooley refused consent to hire the 3rd person & objected when he found out Summers still

did. A partner who has actively opposed expense incurred individually and for the benefit ofone partner rather than partnership as a whole is not liable for the cost

D. Partnerships are distinct entities from their partners. A partnership must indemnify a partner for

injuries that occurred in the ordinary course of the partnership business. There is no

corresponding right of indemnity for the partnership against the partner.

i. Moren ex rel. Moren v. JAX Restaurant, 679 N.W.2d 165 (2004) Moren, a partner in JAX

(restaurant) brought her son to work on a busy day. Son gets injured when his hand goes into thedough press. Son (father actually) sued JAX, and JAX responded with a 3rd party negligence claimagainst Moren.a. Morens conduct was in the ordinary course of business, and so her negligence rests with the

partnership (even if her conduct partly served her personal interests). She was acting for thebenefit of the partnership at the time of the injury even though she was simultaneously acting inher role as a mother.

E. The essence of a breach of fiduciary duty between partners is that one partner has advantagedhimself at the expense of the firm .

i. The basic fiduciary duties are:

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a. a partner must account for any profit acquired in a manner injurious to the interests of thepartnership, such as commissions or purchases on the sale of partnership property;

b. a partner cannot without the consent of the other partners, acquire for himself a partnership asset,nor may he divert to his own use a partnership opportunity; and

c. he must not compete with the partnership within the scope of the businessii. Day v. Sidley & Austin, 548 F.2d 1018 (1976) Day was a senior partner & chairman at Sidley, and

signed an agreement for the firm to merge with another firm. Then they set up a new location,despite Days objection. Day then resigned, saying the relocation & appointment of a new co-

chairman made his continued service with the firm intolerable.a. Day alleges misrepresentation by Sidley that no partner would be worse off because of the

merger, & he was worse off b/c no longer sole chairman. But Day had no legal right for Day toremain chairman of the DC office. Also, even if he did know this to begin with, & he changedhis vote, it would have no effect, b/c all that was needed was majority vote (not unanimous).

b. Day also alleges breach of Sidleys fiduciary duty b/c they began the merger negotiations w/oinforming all partners & didnt reveal changes that might occur b/c of the merger. But the onlybreach would be if one partner has advantaged himself at the expense of the firm, and this wasntthe case here. Concealing merger plans didnt produce profit for the other partners or financialloss for partnership as a whole.

PARTNERSHIP DISSOLUTION

I. DissolutionA. Dissolution of a partnership does not immediately terminate the partnership. The partnership

continues until all of its affairs are wound up. [UPA 30]B. Causes of Dissolution: Unless otherwise provided in the partnership agreement, the following may

result in dissolution:i. Expiration of the partnership term

a. Even if partnership is for a fixed term, partners can still terminate at will. But since this will bebreach the other partners can sue for damages.

ii. Any partner can terminate the partnership at will (b/c a partnership is a personal relationshipwhich no one can be forced to maintain). Where the partnership is for a term or where it is apartnership at will but the dissolution is motivated by bad faith, it may be a breach of the agreement.

iii. Assignment. Although an assignment of a partners interest is not an automatic dissolution, anassignee can get a dissolution decree upon expiration of the partnership term or at any time in apartnership at will [UPA 30-32].

iv. Death of a partner. On the death of a partner, the surviving partners are entitled to possession of thepartnership assets and are charged with winding up the partnership affairs without delay [UPA 37].The surviving partners are also charged with a fiduciary duty in liquidating the partnership and mustaccount to the decedents estate for the value of the decedents interest.

v. Withdrawal or admission of a partner. Partnerships only exist if same partners.a. This only works if very few partners, where one person makes a difference. But in a large

partnership, it doesnt work every time one partner leaves the partnership changes. This is adefault rule, which you can change.

b. Most partnership agreements provide that losing or admitting a new partner will notresult indissolution. New partners may become parties to the preexisting agreement by signing it at thetime of admission to the partnership [UPA 13(7)]. When an old partner leaves, there areusually provisions for continuing the partnership and buying out the partner who is leaving.

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vi. Illegality. Dissolution results from any event making it unlawful for the partnership to continue inbusiness.

vii. Death or Bankruptcy. (Default rule) The partnership is dissolved on the death or bankruptcy of anypartner [UPA 31(4), (5)]

viii. Dissolution by court decree. Court may do this in its discretion. Some circumstances may beinsanity of a partner, incapacity, improper conduct, inevitable loss, or whenever it is equitable [32].

II. The Right to DissolveA. Dissolution by court decree Significant disagreement between partners that undermines the

business of the partnership.i. On application by or for a partner the court shall decree a dissolution whenever (c) A partner

has been guilty of such conduct as tends to affect prejudicially the carrying on of business, or (d) Apartner willfully or persistently commits a breach of the partnership agreement or otherwise soconducts himself in matters relating to the partnership business that it is not reasonably practicable tocarry on the business in partnership with him. [UPA 32].a. Owen v. Cohen, 119 P.2d 713 (1941) and were partners in a bowling alley, with no

duration time set. loans the partnership $6,986 to be paid back to him from prospective profits.Bowling alley running at a profit, but then the partners started having disagreement over how thebusiness should be run, and these conflicts affected the profitability. sues for dissolution.1. Court found that s actions severely undermined the success of the partnership. There were

bitter, antagonistic feelings between the parties while the arrangement required cooperation,coordination & harmony. The partners were no longer able to carry on the business of theirmutual partnership.

B. There is no such thing as an indissoluble partnership only in the sense that there always exists thepower, as oppose to the right, of dissolution. But without a legal right to dissolution, there will be

damages because it is a breach of the partnership agreement.

i. Collins v. Lewis, 283 S.W.2d 258 (1955) and entered into partnership to operate a cafeteria. was to finance the project & was to supervise development & manage it. would be paid backfrom the profits, and the rest of the profits would be split equally. When they opened, they were notmaking a profit. said it was because refused to pay additional development costs, so that moneywas coming out of the revenue. sued for dissolution.

a. has the power to dissolve the partnership, but not the right to do so without damages since hisconduct is the source of the partnership problems and amounts to a breach of the partnershipagreement.

C. A partner at will is not bound to remain in a partnership, regardless of whether the business isprofitable or unprofitable. Exercising the power to dissolve, however, must be exercised pursuant

to the fiduciary duty of good faith.

i. Page v. Page, 55 Cal.2d 192 (1961) and partners in a linen supply business; no writtenagreement. was also a creditor of the partnership. Business losing money for 8 years, but thenstarted to make profits. sued to dissolve the partnership.a. Court found no evidence that the partnership was for a term. Since it is at will, a partner can

terminate the partnership at any time, whether profitable or not. However, partners are still

bound to the fiduciary duty of good faith. A partner may not dissolve a partnership to gainbenefits of the business for himself, unless he fully compensates his co-partner for his share ofthe prospective business opportunity (this would be a separate action, but here the issue iswhether its at will).

III. The Sharing of LossesA. In the absence of an agreement to the contrary, it is presumed that partners and joint venturers

intended to share equally in profits and losses. However, where one partner or joint venturer

contributes the capital while the other contributes skill and labor, neither party is liable to the

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other for losses. (The reason behind this rule is that in the event of loss, each party loses the value of hisown capital or contribution).i. Kovacik v. Reed, 49 Cal.2d 166 (1957) partnership in a business to remodel kitchens, where

invested $10k and would be the job superintendent & estimator. They would share 50-50 inprofits, but the matter of sharing losses was not discussed. After a year, tells the venture had lostmoney & demanded that contribute to the losses. said he never agreed to share losses & refusedto pay.a. Neither party is liable for any loss. The party who contributed $ isnt entitled to recovery from

the party who contributed only services. Where one party contributing $ and the othercontributes service then in the event of a loss each would lose his own capital one his $ theother his labor.

B. RUPA (1997) 401(b) expressly cites and rejectsKovacik: Each partner is entitled to an equalshare of the partnerships profits and is chargeable with a share of partnership losses in

proportion to the partners share of the profits. [losses follow profits]

IV. Buyout AgreementsA. G& S Investments v. Belman, 145 Ariz. 258 (1984) limited partnership to receive ownership of an

apt complex. One of the partners (Nordale) starts using cocaine & caused a lot of problems thataffected the business. Other partner, G&S files a complaint, seeking dissolution. Before it went tocourt, Nordale dies. Nordales estate says the complaint was a dissolution of the partnership, so

partnership needs to be liquidated & net proceeds go to partners.i. Court says filing of the complaint was not a dissolution; only a court decree could do that. But

Nordale dies before such decree could be entered, so partners have the option of a buyout, as perthe partnership agreement.

ii. Because partnerships result from contract, the partners rights and liabilities are subject tothe agreement made among them. The agreement here provided for a buyout if one of the

partners died. Although the exact provision in the agreement calculated the value of the

interest as less than the fair market value, court says that parties must be bound by the

contracts into which they enter, absent a showing of fraud or duress in the inducement.

a. Buyout provision here if the remaining partners choose to continue the business, it mustpurchase the interest of the departed partner (interest that belongs to the estate). Here, the

buyout formula is the capital account of the deceased partner plus the average of the prior 3yrs earnings. (Capital acct = partners capital contribution to partnership minus losses andreduced by any distributions already made).

B. Other ways to create a system for determining the price of the buyouti. If both parties solvent, set it up where one party names the price, and the other decides whether

to buyer. This is the most fair outcome. (think about 2 little children sharing a piece of cake one cuts it in half, the other gets to choose which half. This way the one cutting will try to be asfair as possible cutting it equally).

ii. Appraisal - but must determine what kind of appraisala. Each side picks an appraiser, and the 2 appraiser pick a 3rd appraiser (that's if they have

money)

iii. Base the amount on gross revenuesa. Small business, less money - most common formula is book value

1. Book value - something you need to generate anyway. But problem is that the bookvalue can easily be manipulated - must trust the accountant.

iv. Buy life insurance on the dead partner to ensure the dead partner is solvent

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CORPORATIONS

LIMITED LIABILITY

I. The Corporate Entity and Limited LiabilityA. Characteristics of the Corporation

i. Separate Legal Entity. A corporation is a separate legal entity (created by the law of a specificstate), apart from the individuals that may own it (shareholders) or manage it (directors, officers,etc.). Thus, the corporation has legal rights and duties as a separate legal entity.

ii. Limited Liability. The owners (shareholders) have limited liability; debts and liabilities incurred bythe corporation belong to the corporation and not to the shareholders, since they are separate legalentities. (Also vice versa, corporation not responsible for debts of shareholders.)

iii. Continuity of existence. The death of the owners (shareholders) does not terminate the entity, sinceshares can be transferred.

iv. Management and control. Management is centralized with the officers and directors. Each is

charged by law with specific duties to the corporation and its shareholders.v. Corporate powers. As a legal entity, a corporation can sue or be sued, contract, own property, etc.B. Exceptions to the Limited Liability Rule In some circumstances, the court may pierce the corporate

veil and dissolve the distinction between the corporate entity and its shareholders so that theshareholders may be held liable as individuals despite the existence of the corporation.i. Fraud or Injustice. Where the maintenance of the corporation as a separate entity results in fraud

or injustice to outside parties (i.e. creditors).ii. Disregard of corporate requirements. Where the shareholders do not maintain the corporation as

a separate entity but use it for personal purposes. The rationale is that if the shareholders havedisregarded the corporate form, then the entity is really the alter ego of the individuals and decisionsmade are for their benefit and not the entitys. This is most likely to occur with close corporations

iii. Undercapitalization . Where the corporation is undercapitalized given the liabilities, debts, and riskit reasonably could be expected to incur.iv. Fairness. The veil may also be pierced in any other situation where it is only fair that the corporate

form be disregarded.

II. Piercing the Corporate VeilA. Piercing the corporate veil is allowed whenever necessary to prevent fraud or to achieve equity.

Whenever anyone uses control of the corporation to further his own, rather than the corporations

business, he will be liable for the corporations acts.

i. Walkovsky v. Carlton, 18 N.Y.2d 414 (1966) was severely injured in a taxicab accident, andsues the cab driver, the corporation owning the cab, and the . owned that corporation and 9others, each corporation had 2 cabs each with the min $10k liability insurance coverage required by

state law. alleged that the corporations operated as a single entity & constituted a fraud to thepublic.a. Court says no reason to pierce the corporate veil.

1. (1) Nothing wrong with one corporation being part of a larger corporate enterprise (i.e.subsidiary). The only issue would be whether there was a disregard of the corporate form, but did not allege this. (2) (Undercapitalization) The state has set minimum insurancerequirements & all other cab corporations have taken out the min insurance. If insuranceprotection is inadequate, the remedy is the legislature.

b. Dissent : Corps were intentionally undercapitalized to avoid responsibility for accidents, whichwere likely to happen. All income was continuously drained for this purpose.

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B. Alter Ego theoryTwo requirements must be met before the corporate veil can be pierced: (1)such a unity of interest and ownership that the corporation and the individual are not separate

personalities, and (2) circumstances are such that not piercing the veil would sanction a fraud or

promote injustice.

i. To determine whether a corporation is so controlled by an individual or another corporationthat the court would be justified in disregarding their separate identities, courts looks to four

factors:

a. The failure to comply with corporate formalities or to keep sufficient business records

b. A commingling of corporate assetsc. Undercapitalization ; andd. One corporations treatment of another corporations assets as its own.

ii. Sea-Land Services, Inc. v. Pepper Source, 941 F.2d 519 received a judgment from Sea-Landfor breach of contract, but when attempted to collect, Sea-Land was dissolved. sues Sea-Landssole shareholder () and s other business entities. wanted to pierce Sea-Lands corporate veil sothat could be held personally liable, then reverse pierce s other corporations (to get the moneythe other corporations have). Court held that the corporate veil could be pierced.a. Unity of interest and ownership - There was no differentiation/separation between the

corporation and the owner. used same office, same phone line, & expense acct to run most ofthe corporations. None of the corporations ever held a meeting. borrowed funds from

corporation for personal expenses, and the corporations would borrow money from each other. didnt even have a personal bank acct.

b. Separate corporate existences would sanction a fraud or promote injustice - must be somethingmore than just a creditor not being able to recover.

1. Comment: On remand, court found in s favor, b/c by receiving countless benefits at theexpense of and other creditors, insured that his corporations had insufficient funds withwhich to pay their debts.

iii. When a parent corporation controls several subsidiaries, a subsidiary is not liable for theactions of the other subsidiaries.

a. Roman Catholic Archbishop of San Francisco v. Sheffield, 15 Cal.App.3d 405 (1971) goesto Switzerland and contracts to buy a dog for $175 from a Catholic monastery, to be paid in $20

installments. makes 2 payments. Monastery refuses to ship the dog until all payments made,plus additional fees, and refuses to refund the money. sues the Roman Catholic Church(parent), the Roman Catholic Archbishop of San Francisco (subsidiary) & others.1. Unity of interest and ownership - was a distinct legal entity from the monastery had no

knowledge of the contract, and no dealings with the monastery. did not allege that wasinvolved in the transaction. Although the monastery may have been an alter ego of theCatholic Church, thats not the case here. There is no respondeat superior between subagents.

2. Non-piercing would sanction fraud or promote injustice Not enough that won't be able tocollect if not permitted to sue .

iv. A parent corporation is expected to exert some control over its subsidiary. When, however, acorporation is controlled to such an extent that it is merely the alter ego or instrumentality of

its shareholder, the corporate veil should be pierced in the interest of justice.a. In Re Silicone Gel Breast Implants Products Liability Litigation, 887 F.Supp. 1447 (1995)

is the sole shareholder of MEC (they have a parent-subsidiary relationship). highly involvedin MECs daily operations. MEC sued in tort & s want to pierce the veil & hold parent liable.1. There is sufficient evidence here that MEC is s alter ego.2. To determine if a subsidiary is merely the alter ego of the parent, the court must

evaluate the totality of the circumstances, considering factors like (1) same directors orofficers, (2) they file consolidated taxes, (3) the subsidiary is undercapitalized, (4) thesubsidiary gets all its business from the parent, (5) the parent uses the subsidiarys property

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for its own, (6) the parent pays expenses or wages for the subsidiary, (7) their dailyoperations are commingled.

b. To determine whether to pierce the veil in a parent-subsidiary situation, no showing of fraud isrequired under DE law. Most states that require fraud only do so in contracts cases, not torts.1. Even in fraud required MECs funds may be insufficient to satisfy s claims. Also, may

have induced ppl to believe it was vouching for MEC, so allowing to escape liability wouldbe unjust.

C. Limited partners do not incur general liability for the limited partnerships obligations simply

because they are officers, directors, or shareholders of the corporate general partner.Undercapitalization is no reason to open liability to limited partners who control the general

partner, but theres the remedy of piercing the corporations veil.

i. Frigidaire Sales Corporation v. Union Properties, Inc., 88 Wash.2d 400 (1977) Commercial is alimited partnership. s were limited partners of Commercial, and the only general partner wasUnion, a corporation. s were also Unions officers, directors, and shareholders. Commercialbreached contract with ; and wants to pierce Unions veil to make s liable.a. Just b/c undercapitalized, can't go after the partners in Commercial. Need to pierce the

corporations veil. But here, no reason to pierce Unions veil. entered into K with Commercialand s signed the contract only through their capacities as officers of Union (Commercialsgeneral partner). Court refused to pierce veil, and found that s scrupulously separated their

actions on behalf of Union from their personal actions, and never had cause to believe s weregeneral partners in Commercial.

ii. Contract vs Tort Courts are more willing to pierce the veil b/c of undercapitalization in tort casesthan in contract cases. This is b/c in K cases, the had an opportunity to investigate the financialresources of the corporation & had chosen to do business with it. Almost like assumption of the risk.

THE INTERNAL AFFAIRS DOCTRINEANDTHE RACETOTHE TOP/BOTTOM.

I. Internal Affairs DoctrineA. The Internal Affairs Doctrine is a choice of law rule. It provides that the internal affairs of

a corporation will be governed by the corporate statutes and case law of the state in which the

corporation is incorporated.

i. Internal vs External Affairsa. Internal shareholder voting rights, distribution of dividends, corporate property, fiduciary

obligations of mgmt, etc.b. External labor & employment issues, tax liability

1. External affairs governed by the law of the state in which the corporation is doingbusiness.

B.McDermott Inc. v Lewis, 531 A.2d 206 (1987) DE corporation is a subsidiary of a Panama

corporation (all DE corporation stock owned by the Panama corporation). But Panama corporationhas shares owned by the De corporation, so whats happening is that the Bd is electing themselves its a self-perpetuating corporation. In DE, cant have this circular way of electing the Bd.

i. Nonetheless, it is a fundamental principle of our law that corporate laws can be evaded byincorporating somewhere else (Panama).

CORPORATE ROLE & PROFIT MAXIMIZATION

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I. The Role and Purpose of the CorporationA. Corporate Purpose and Power

i. Corporations must have a purpose or goal. So the question is What purposes are within thebounds set by the articles of incorporation and statutory law under which the corporation wasformed?

ii. State law often sets forth the acts that a corporation may legally perform. These acts should be inthe aid of a proper corporate purpose.

iii. If the corporation engages in an improper purpose or uses an improper power, that purpose or act

is said to be ultra vires (beyond the corporations powers) .iv. Powers of a Corporation

a. A corporation has express power to perform any act authorized by the general corporationlaws of the state & those acts authorized by the articles of incorporation.

b. In most states, corporations also have implied power to do whatever is reasonablynecessary for the purpose of promoting their express purposes and in aid of their

express powers, unless such acts are expressly prohibited by common or statutory law.B. Corporate Social Responsibility

i. Debate about the responsibility of corporations:a. A corporations objective should be to produce the best possible goods and services, that no

other legal standard is enforceable, and that any other standard allows an unhealthy divorce

between management (making decisions) and ownership; VSb. Corporations have a social responsibility and that they must balance the interests of

stockholders, employees, customers, and the public at large.C. Charitable Contributions

i. Charitable contributions tend reasonably to promote corporative objectives, and is a lawfulexercise of implied corporate power.

a. ***A.P. Smith Mfg. Co. v. Barlow, 346 U.S. 861 (1953) Corporation gave a gift of $1500to Princeton University; the gift was challenged by a shareholder. Corporations president &other execs say the gift was an investment (qualified graduates would work for them), that itcreated a favorable environment for the company, and that the public had a reasonableexpectation of such socially oriented contributions by the corporation. Its more like

advertising; theyre furthering their corporate image.1. A corporation may participate in the creation and maintenance of community, charitable,

and philanthropic funds as the directors deem appropriate and will, in their judgment,contribute to the protection of corporate interests.

2. Del C. 122 : Ever corp created under this chapter shall have the power to...(9) Makedonation for public welfare or for charitable, scientific or educational purposes

D. Business Judgment Rule

i. A corporation is organized primarily for profit of the stockholders, and the powers of thedirectors are to be used for that end. However, d irectors have reasonable discretion, to be

exercised in good faith, to act for this end. Directors also have the power to declare

dividends and their amounts. Their discretion will not be interfered with unless they are

guilty of fraud, misappropriation or bad faith (when there are sufficient funds to do so w/odetriment to the business).

a. ***Dodge v. Ford Motor Co., 204 Mich. 459 (1919) - Shareholders of Ford brought suit toprevent expansion of a new plant and to compel the director to pay addl special dividends.Corporation had surplus and Ford wanted to use it to increase production and cut prices ofcars to benefit the public (reinvestment).1. Here, Fords discretion to expand the business and cut car prices is upheld. Past

experience shows Ford mgmt has been capable & acted for the benefit of its shareholders& it doesnt look like any detriment to shareholders interests. Fords expansion plans can

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still be carried out & there would still be surplus available for dividends. So court saysthe surplus dividends after that should be distributed.

ii. It is not the function of the courts to resolve a corporations questions of policy andmanagement, and the judgment of directors will be accepted by the courts unless those

decisions are shown to be tainted by fraud, illegality or a conflict of interest.

a. Shlensky v. Wrigley, 95 Ill.App.2d 173 (1968) minority shareholder of corporation thatowns Wrigley field & the Chicago Cubs brought a derivative suits against directors forrefusing to install light on the field & to schedule night games for the Cubs as other teams

had done to increase revenues. Motivation in refusing to do this was the view of the majorityshareholders that it wanted to preserve the surrounding neighborhood & believed baseballwas a daytime sport.1. Business judgment rule presumption of good faith. No evidence that installing lights

and scheduling night games will bring extra revenue, and theres a detrimental effect onthe neighborhood (if it brings neighborhood down, fans may not want to see games inpoor areas; property value might go down). No evidence that the motives of directors arecontrary to the best interests of the corporation and stockholders.

2. Corporations are not obliged to follow the direction taken by other, similarcorporations. Directors are elected for their own business capabilities and not for

their abilities to follow others.

SHAREHOLDER DERIVATIVE ACTION

I. Shareholder Derivative & Direct ActionA. Derivative Suits . A shareholder may sue to enforce mgmts duties. If the claim is that mgmts

breach reduced the residual value of the business, the shareholder must due derivatively in the nameof the corporation.i. Problem - A person with a relatively small stake in the residual value of a business might want to

bring derivative suit just to be bought off. Requiring the s to make payment to the corporationreduces this temptation for the complaining shareholder. The real party in interest here though, isthe shareholders attorney, b/c he may legitimately demand payment from the corporation inconnection with a settlement.

B. Limiting Derivative Strike Suits

i. In order to limit strike suits and otherwise protect against over-deterrence, most statutes limitshareholders who may bring derivative suits, and many states have enacted statutes requiring the-shareholder in a derivative suit, under certain circumstances, to post a bond or other securityto indemnify the corporation against certain litigation expenses if loses the suit .a. When security must be posted. Depends on the statute; some say when owns less than a

specified % of stock; others say it is at the courts discretion (& demanded only when there is

no reasonable possibility that the action could benefit the corporation).b. Who is entitled to security. In most states, only the corporation may demand security &

only its expenses may be paid. Some states allow directors/officers to demand it & receivereimbursement.

c. Covered Expenses. Usually all expenses, including attorneys fees. Also expenses ofofficers/directors that the corporation has obligated to pay b/c it has indemnified them maybe covered (indemnification doesnt usually apply for fraudulent actions, only for

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