Table of Contents Business AssociationsI. Agency Law3A. The Agency Relationship / Formation3Gorton v. Doty4A. Gay Jenson Farms Co. v. Cargill, Inc.4B. Consequences of Creating an Agency Relationship: The Agents Authority and Contract Liability4Mill Street Church of Christ v. Hogan5370 Leasing Corp. v. Ampex Corp.5Udall v. T.D. Escrow Services5Watteau v. Fenwick6Botticello v. Stefanovicz6Hoddeson v. Koos Bros.7Atlantic Salmon A/S v. Curran7C. Consequences of Creating an Agency Relationship: Tort Liability7Humble Oil & Refining Co. & Sun Oil Company9Bushey v. United States10Manning v. Grimsley10D. Fiduciary Duties in the Agency Relationship10Reading v. Regem11General Automotive Manufacturing Co. v. Singer11E. Termination of Authority and the Agency Relationship12II. General Partnerships13A. Partnership Formation (Definition and Distinction from Other Relationships; Partnership by Estoppel)13Fenwick v. Unemployment Commn13Martin v. Peyton14Southex Exhibitions v. Rhode Island Builders Association15Young v. Jones16B. Rights of Partners in Management; Partnership Liability16NABISCO v. Stroud19Summers v. Dooley20C. Financial Interests in Partnership (Sharing of Profits and Losses; Partnership Property)20Kovacik v. Reed22D. Fiduciary Duties in Partnership Law23Meinhard v. Salmon24Meehan v. Shaughnessy25E. Partnership Dissociation and Dissolution25Owen v. Cohen27Collins v. Lewis27McCormick v. Brevig28F. Partnership Agreements28G. Other Partnership Forms (e.g., LPs and LLPs)28III. Corporations29A. General Background; Formation; Limited Liability291. Introduction292. Promoter Liability333. Formation of a Corporation344. Defective Formation (De Facto Corporations and Corporation by Estoppel)355. Background Information on Stock and Dividends366. Limited Liability and Piercing the Corporate Veil38B. The Role of Directors and Officers; Fiduciary Duties to Shareholders401. introduction to Director Fiduciary Duties & The BJR402. The Duty of Care and the Business Judgment Rule433. The Duty of Loyalty454. Good Faith (Compensation and Oversight)51C. Role, Duties, and Rights of Shareholders531. Shareholder Derivative Actions542. Shareholder Voting, Proxy Fights, and Proposals593. Shareholder Inspection Rights644. Shareholder Voting Control; Control in Closely Held Corporations65IV. Securities Fraud and Insider Trading66A. Securities Fraud and Rule 10b-566B. Insider Trading691. Rule 10b-5 and Classic Insider Trading702. Tipper/Tippee Liability713. Misappropriation Theory73C. Section 16(b) Liability for Short Swing Trading74Reliance Electric v. Emerson Electric76Foremost-McKesson v. Provident Securities76V. Limited Liability Companies (LLCs)78VI. Social Enterprise (e.g., Benefit Corporations)82

I. Agency Law

A. The Agency Relationship / Formation

Rest. 3d of Agency - 1.01 Agency Defined: Agency is the fiduciary relationship that arises when one person (a principal) manifests assent to another person (an agent) that the agent shall act on the principal's behalf and subject to the principal's control, and the agent manifests assent or otherwise consents so to act.

Rest. 3d of Agency - 1.03 Manifestation: A person manifests assent or intention through written or spoken words or other conduct.

Rest. 3d of Agency - 1.02 Parties' Labeling and Popular Usage Not Controlling: An agency relationship arises only when the elements stated in 1.01 are present. Whether a relationship is characterized as agency in an agreement between parties or in the context of industry or popular usage is not controlling.

Rest. 3d 1.01: Agency is a fiduciary relationship that results from:

The manifestation of assent by P to A that A shall act

on Ps behalf

subject to Ps control

And A manifests assent or otherwise consents so to act

Express Agency:

An agency that occurs when a principal and an agent expressly agree to enter into an agency agreement with each other.

Exclusive agency contract

Power of attorney

Express agency contracts can be either oral or written unless the Statute of Frauds stipulates that they must be written.

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 agents authority is determined from the particular facts and circumstances of the particular situation.

The Question of Control:

Control is a concept that embraces a wide spectrum of meanings, but within any relationship of agency the principal initially states what the agent shall and shall not do, in specific or general terms. Additionally, a principal has the right to give interim instructions or directions to the agent once their relationship is established. Rest. 3d 1.01 (comment f)

A principal need not exercise physical control over the actions of its agent so long as the principal may direct the result or ultimate objectives of the agent relationship. Green v. H & R Block, Inc., 735 A.2d 1039, 1050 (Md. 1999)

when one ... asks a friend to do a slight service for him, such as to return for credit goods recently purchased from a store, an agency relationship exists even though no compensation or other consideration was contemplated. Rest. 2d 1(1) cmt. B

an emancipated child is no longer under its parents control. Nor can it be said that the Cox children were acting for their mother and father by simply living on the disputed property. There were no obligations imposed on the children. The Coxes merely allowed their children to live on land which they claimed. Norris v. Cox, 860 So.2d 319 (Miss. App. 2003)

Gorton v. Doty

Formation of Agency Relationship far reaching example likely influenced by the fact that Doty was the owner and insurance carrier and therefore the best person to be able to account for the losses

The relationship of principal and agent does not necessarily involve some matter of business, but only that where on undertakes to transact some business or manage some affair for another by authority and on account of the latter, the relationship of principal and agent arises.

Doty was directing Garsts efforts, and Garst impliedly consented

A. Gay Jenson Farms Co. v. Cargill, Inc.

Creditor/Debtor v. Principal/Agent & The Question of Control

Cargill managed its risk by:

Implementing a security agreement

Business improvement requirements

Veto rights over borrowing and distribution

Inspection and audit rights

Criticism of finances

Strong paternal guidance statement

Rest. 2d of Agency - 14O Manifestation: A creditor who assumes control of his debtor's business for the mutual benefit of himself and his debtor, may become a principal, with liability for the acts and transactions of the debtor in connection with the business.

Note: This is the Restatement Second, there was a change in the Restatement Third. Now creditor/debtor relationships rarely are considered an agency/principal relationship

Holding - We conclude that Cargill, by its control and influence over Warren, became a principal with liability for the transactions entered into by its agent Warren.

Note: Similar to Doty, Cargill was in the best position to avoid the problem.

B. Consequences of Creating an Agency Relationship: The Agents Authority and Contract Liability

Rest. 2d 144: a principal is subject to liability upon contracts made by an agent acting within his authority if made in proper form and with the understanding that the principal is a party

Actual Authority (Express & Implied)

Rest. 3d - 2.01 Actual Authority: An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal's manifestations to the agent, that the principal wishes the agent so to act.

Rest. 3d - 2.02 Scope of Actual Authority:

(1) An agent has actual authority to take action designated or implied in the principal's manifestations to the agent and acts necessary or incidental to achieving the principal's objectives, as the agent reasonably understands the principal's manifestations and objectives when the agent determines how to act.

(2) An agent's interpretation of the principal's manifestations is reasonable if it reflects any meaning known by the agent to be ascribed by the principal and, in the absence of any meaning known to the agent, as a reasonable person in the agent's position would interpret the manifestations in light of the context, including circumstances of which the agent has notice and the agent's fiduciary duty to the principal.

(3) An agent's understanding of the principal's objectives is reasonable if it accords with the principal's manifestations and the inferences that a reasonable person in the agent's position would draw from the circumstances creating the agency.

Mill Street Church of Christ v. Hogan

Actual Implied Authority This case is mostly about Bills (the hiring brother) belief in whether the church had given him the authority to hire Sam (who fell off the ladder and broke his leg). Sams belief is only tangentially relevant

Analysis: (1) Bill had been allowed to exercise his discretion when hiring workers in the past; (2) Bill needed a helper to complete the job

Past specific conduct is highly relevant

Apparent Authoirty

Rest. 3d - 2.03 Apparent Authority: Apparent authority is the power held by an agent or other actor to affect a principal's legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal's manifestations.

370 Leasing Corp. v. Ampex Corp.

Apparent Authority Salesman bound the company to a contract because he had the apparent authority to agree to a sale with a third party.

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

Udall v. T.D. Escrow Services

Apparent Authority Apparent authority may exist in agents who act beyond the scope of their actual authority

Dont focus on whether ABC was right in opening up the bid so low, they werent. Instead, the appropriate analysis focuses on whether Udall believed, based on T.D.s manifestations, that ABC had authority to act for T.D. to sell the property on T.D.s behalf, and whether that belief was objectively reasonable.

Undisclosed Principals

History of inherent agency power or inherent authority in Rest. 2d as a catch-all for the rare cases where the P was bound, but didnt fit into the other categories of cases. E.g., Watteau.

These cases tend to involve undisclosed principals Rest. 3d has gotten rid of inherent agency power and now just retains a vestige of that with undisclosed principals. ( 1.04)

Rest. 3d - 1.04 Terminology: Undisclosed principal. A principal is undisclosed if, when an agent and a third party interact, the third party has no notice that the agent is acting for a principal.

Agent acting with actual authority?

Rest. 3d - 6.03 Agent for Undisclosed Principal: When an A acting with actual authority makes a contract on behalf of an undisclosed P, both P and A are bound.

Agent acting without actual authority?

Rest. 3d - 2.06 Liability of Undisclosed Principal:

An undisclosed principal is liable for its agents actionsacting without actual authority if a third party detrimentally relies on the agent and the principal has notice and does not take reasonable steps to notify the third party of the facts.

An undisclosed principal cant rely on narrowing an agents authority to less than what a third party would reasonably believe the agent to have under the same circumstances if the principal had been disclosed.

Watteau v. Fenwick

Undisclosed Principals There was no actual authority in this case (Fenwick expressly told Humble not to buy anything except ales and water) and there was no apparent authority in this case because Watteau didnt even know there was a principal.

Holding Fenwick was liable for the acts of Humble in purchasing whatever he was purchasing from Watteau

Ratification

Ratification is the affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with actual authority.

A person may ratify an act if the actor acted or purported to act as an agent on the persons behalf.

Ratification can occur by (a) manifesting assent that the act shall affect the persons legal relations; or (b) conduct that justifies a reasonable assumption that the person so consents. (Express / implied)

At the time of ratification, the purported P must have knowledge of all material facts (or not unaware of lack of knowledge), and T must not have already withdrawn from the transaction. Ratification is not effective if there has been a material change in circumstances that would make it inequitable to bind T, unless the T chooses to be bound.

Ratification creates the effects of actual authority. (Both P and T are bound by the contract and the purported A is discharged.)

No partial ratification.

Botticello v. Stefanovicz

Ratification Husband and Wife are 50/50 TIC in their property. Wife said that she would take no less than a certain amount to lease/sell the farm. Husband went and executed the lease and when the lessee tried to exercise his option to buy, Wife refused.

Holding Wife doesnt have to give her interest in the property, but there will be a new trial in order to determine damages as far as Husbands interest is concerned.

Neither marital status nor TIC creates an agency relationship

The Wife had no intent to ratify, she didnt have knowledge of all the material circumstances.

Estoppel

Raised where purported agent didnt have actual or apparent authority, but a court may hold the defendant liable due to some fault. The defendant is estopped from raising the lack of authority defense.

Estoppel is a one-way street. Only the defendant is liable (and it is generally for damages rather than making the defendant a party to the contract). (In other types, subject to some minor exceptions, the contract is binding on and can be enforced by both P and T.)

Rest. 3d of Agency - 2.05 Estoppel to Deny the Existence of Agency Relationship: A person who has not made a manifestation that an actor has authority as an agent and who is not otherwise liable as a party to a transaction purportedly done by the actor on that person's account is subject to liability to a third party who justifiably is induced to make a detrimental change in position because the transaction is believed to be on the person's account, if

(1) the person intentionally or carelessly caused such belief, or

(2) having notice of such belief and that it might induce others to change their positions, the person did not take reasonable steps to notify them of the facts.

Hoddeson v. Koos Bros.

Estoppel The courts rule: Koos cant deny agency when reasonable surveillance and supervision wouldve stopped the imposter on which Hoddeson detrimentally relied.

No Actual Authority

No Apparent Authority Koos Bros. never made any suggestion that the mystery man had any authority

Cant be formed solely by the purported agent

No Undisclosed Principal Koos Bros. and the mystery man had no underlying agency relationship

No Ratification Koos Bros. had no intent or knowledge of the circumstances

On remand, what will Hoddeson have to prove to make out a case of estoppel?

Acts or omissions by the principal, either intentional or negligent, which create an appearance of authority in the purported agent

The third party reasonably and in good faith acts in reliance on such appearance of authority

The third party changed her position in reliance upon the appearance of authority

Agents Liability in Contract

Fully Disclosed Agency Within Scope of Authority

When the P is fully disclosed and A is acting within the scope of authority, P is liable to the T. A is not liable.

Exception: If A intends/agrees to be bound to the contract. (The rules on contract liability are default rules that can be overridden by express or implied agreement between A and T.)

Undisclosed or Unidentified Principal

When the P is undisclosed, both the P and A are liable on the contract (unless excluded/otherwise agreed).

Almost always the same when the P is unidentified.

Agent Exceeding the Scope of Authority

An A who enters into a contract on behalf of another impliedly warrants that he or she has the authority to do so

(unless A gives notice that no warranty of authority is given, or T knows that A acts without actual authority).

If the A acted without authority or exceeded the scope of authority, and P did not ratify, A is liable to T for breaching the implied warranty of authority.

A may also be liable for fraud if intentionally misrepresented his or her authority.

Atlantic Salmon A/S v. Curran

Agents Liability in Contract Partially disclosed or unidentified principal

Agent was liable in this case. If he didnt want to be liable, he should have disclosed his principle.

C. Consequences of Creating an Agency Relationship: Tort Liability

Rest. 3d - 7.01 Agents Liability to Third Party: An agent is subject to liability to a third party harmed by the agents tortious conduct. Unless an applicable statute provides otherwise, an actor remains subject to liability although the actor acts as an agent or an employee, with actual or apparent authority, or within the scope of employment.

Principals Liability to Third Party for Agents Tort (Overview)

Direct liability when:

A acts with actual authority to commit tort or P ratifies As conduct

P is negligent in selecting, supervising, or otherwise controlling A

P delegates performance of a duty to use care to protect persons or property and A fails to perform duty (aka nondelegable duty)

Vicarious liability when:

A is an employee who commits a tort while acting within the scope of employment [ 7.07]

A commits a tort when acting with apparent authority in dealing with T on or purportedly on behalf of P [ 7.08]

Vicarious Liability

Rest. 3d - 7.07 Employee Acting Within Scope of Employment:

(1) An employer is subject to vicarious liability for a tort committed by its employee acting within the scope of employment.

(2) An employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employer's control. An employee's act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer.

(3) For purposes of this section,

(a) an employee is an agent whose principal controls or has the right to control the manner and means of the agent's performance of work, and

(b) the fact that work is performed gratuitously does not relieve a principal of liability.

2 Big Questions:

How do the classifications work (e.g. employee)? 7.07(3)

Agent or Non-Agent

Extent of Control (Employee or not)

What counts as within the scope of employment?

Rest. 3d

Employee

Non-Employee Agent

Non-Agent (Service Provider)

Rest. 2d

Servant

Independent Contractor (agent-type)

Independent Contractor (non-agent)

Description and Consequence

1. A has power to act on Ps behalf

2. P controls results and physical conduct

= P liable if within scope of employment

1. A has power to act on Ps behalf

2. P sets forth desired results but does not control physical conduct

=P not liable except in special cases

1. A does not have power to act on Ps behalf

2. P may have less control over results and does not control physical conduct

= P not liable in agency law

Exceptions:

P is not liable for tort of non-employee agent except in these special cases:

Principal retains control over the aspect of the work in which the tort occurs (e.g., treated as employee with respect to some limited part of work)

Principal hires an incompetent contractor

Nondelegable duty (e.g., a land occupier has a duty to keep land safe for business invitees)

Activity contracted for is inherently dangerous (e.g., demolition, blasting)

Criteria for Determining Employee Status

Rest. 2d - 202 Scope of Actual Authority: Pollmans List:

Extent of control which P may exercise over details of the work

Is A engaged in a distinct occupation/business?

The kind of occupation and whether the work is usually done in that locality under Ps direction, or by a specialist w/o supervision?

Skill required in the particular occupation

Who supplies the instrumentalities, tools, and place of work for A?

Length of time for which A is employed

Method of payment, whether by the time or by the job

Is the work a part of the regular business of P?

Do the parties believe they are creating an employment relationship?

Whether the P is in business

Humble Oil & Refining Co. & Sun Oil Company

Employee v. Independent Contractor Apply 202 (X not indicative of employee; Indicative of Employee)

Humble (Held Liable)

Sun Oil (Not Held Liable)

Extent of control which P may exercise over details of the work -

Extent of control which P may exercise over details of the work -

Is A engaged in a distinct occupation/business? -

Is A engaged in a distinct occupation/business? -

The kind of occupation and whether the work is usually done in that locality under Ps direction, or by a specialist w/o supervision? -

The kind of occupation and whether the work is usually done in that locality under Ps direction, or by a specialist w/o supervision? -

Skill required in the particular occupation -

Skill required in the particular occupation -

Who supplies the instrumentalities, tools, and place of work for A? -

Who supplies the instrumentalities, tools, and place of work for A? -

Length of time for which A is employed -

Length of time for which A is employed -

Method of payment, whether by the time or by the job - X

Method of payment, whether by the time or by the job - X

Is the work a part of the regular business of P? -

Is the work a part of the regular business of P? -

Do the parties believe they are creating an employment relationship? - X

Do the parties believe they are creating an employment relationship? - X

Whether the P is in business X (only by design)

Whether the P is in business - X

Scope of Employment - 7.07(2)

1. Was the conduct of the same general nature as, or incidental to, the task the agent was employed to perform?

2. Was the conduct substantially removed from the authorized time and space limits of employment? (frolic?)

3. Was the conduct motivated at least in part by a purpose to serve the principal?

Bushey v. United States

Scope of Employment Did the court replace the motive test with the characteristic activities test?

Was Lanes conduct foreseeable enough to hold the government responsible? YES

The risk that seaman going and coming from the Tamaroa might cause damage to the dry-dock is enough to make it fair that the enterprise bear the loss.

Manning v. Grimsley

Scope of Employment Was throwing the ball at the hecklers within Grimselys scope of employment Yes

Again, which enterprise is best suited to insure against the loss and take preventative measures

Apparent Agency

Rest. 3d - 7.08 Agent Acts with Apparent Authority:

A principal is subject to vicarious liability for a tort committed by an agent in dealing or communicating with a third party on or purportedly on behalf of the principal when actions taken by the agent with apparent authority constitute the tort or enable the agent to conceal its commission.

Hypo

P Nusimatics Co. urges its customers to seek investment advice from its retail sales people, including A.

T, who wishes to invest in gold coins, seeks As advice at an office of Nusimatics Co.

A encourages T to buy a particular set of gold coins, falsely representing material facts relevant to their value.

T reasonably relied on As representations and bought the gold coins.

P is subject to liability for As actions.

D. Fiduciary Duties in the Agency Relationship

Agents Duty to the Principal - Rest. 3d 8.01-8.11

Duty of loyalty

Duty not to acquire a material benefit from a T for actions taken on behalf of P or through As use of position

Duty not to act as adverse party to P

Duty to refrain from competing with P during agency relationship

Duty of confidentiality; duty (during and after agency relationship); duty not to use Ps property for As own purposes

Duty to act in accordance with any contract with P

Duty of care, competence, diligence

Duty to act only within scope of actual authority and duty to obey

Duty of good conduct

Duty to notify P of info that A knows or has reason to know P would want to know

Principals Consent

Rest. 3d - 8.06 Principals Consent:

Conduct by A that would otherwise breach the below-listed duties does not constitute a breach if P consents, provided that A acts in good faith and discloses all material facts in obtaining the consent.

Duty of loyalty, duty not to acquire material benefit from a T, duty not to act adverse or compete, duty of confidentiality

Reading v. Regem

Fiduciary Duties Did Readings agency relationship with the RAMC create a fiduciary obligation to forfeit money earned illicitly while serving abroad? YES

Disgorgement Forfeit the profits made through unauthorized acts

Rest. 3d - 8.02 Material Benefit Arising Out of Position: An agent has a duty not to acquire a material benefit from a third party in connection with transactions conducted or other actions taken on behalf of the principal or otherwise through the agent's use of the agent's position.

General Automotive Manufacturing Co. v. Singer

Fiduciary Duties Questions from Slides

Holding? How did the court describe Singers legal duty? How did Singer violate these duties?

Singer violated his fiduciary duty

He had a duty to devote his efforts to the company and keep their confidentiality

He violated this by working on side deals using information he acquired as an agent to broker the deals

How did contract interact with fiduciary duty law here?

Note that they sued under an agency theory, because under a contractual theory they would only get 3% of the deal that Singer made, whereas under agency they get disgorgement (all of Singers ill-gotten earnings)

He had already clearly violated his employment contract

What remedy does GA get from Singer?

Disgorgement

What if it was wholly unrelated to the business?

The more distant the relationship between the principals business and agents side business the less likely it is a court will find a fiduciary relationship exists.

Principals Duties to Agents

Rest. 3d - 8.14 Duty to Indemnify A principal has a duty to indemnify an agent

(1) in accordance with the terms of any contract between them; and

(2) unless otherwise agreed,

(a) when the agent makes a payment

(i) within the scope of the agent's actual authority, or

(ii) that is beneficial to the principal, unless the agent acts officiously in making the payment; or

(b) when the agent suffers a loss that fairly should be borne by the principal in light of their relationship.

Rest. 3d - 8.15 - 8.15 Principals Duty to Deal Fairly and in Good Faith - A principal has a duty to deal with the agent fairly and in good faith, including a duty to provide the agent with information about risks of physical harm or pecuniary loss that the principal knows, has reason to know, or should know are present in the agent's work but unknown to the agent.

E. Termination of Authority and the Agency Relationship

Terminating Actual Authority - Rest. 3d 3.06-3.10, 3.12

Agreement of parties:

The contract between principal and agent states when it will end or upon the happening of a specified event.

By lapse of time:

At end of specified time, or if none, then within a reasonable time period

Any time by either party after notice:

At common law, presumed at will relationship so either party may terminate (terminology is a revocation by P or renunciation by A). Note this power exists even though the party exercising the power may be in breach of the agency contract, if one.

Exception where power given as security

By change of circumstances that should cause A to realize P would want to terminate authority:

E.g., destruction of subject matter of the authority, drastic change in business conditions, change in relevant laws.

Fulfillment of the purpose of the agency relationship:

i.e., completion of task

By operation of law:

Termination occurs automatically; e.g., upon death or loss of capacity of either A or P, such as dissolution of a corporation or insanity of a person.

Terminating Apparent Authority - Rest. 3d 3.11

The termination of actual authority does not by itself end any apparent authority held by an agent.

Apparent authority ends when it is no longer reasonable for the third party with whom an agent deals to believe that the agent continues to act with actual authority.

II. General Partnerships

[A]n association of two or more persons to carry on as co-owners a business for profit

A general partnership can be formed without any filing with the state.

Once such association occurs, general partnership law determines the parties relative rights and duties. Sources of law: model statutes adopted by states = UPA (1914) or RUPA (1997), and case law interpreting the statute.

Most RUPA provisions are default rules the partners can alter by agreement (written, oral, or implied unless SOF requires otherwise). RUPA 103(a) states this; 103(b) tells you which provisions are mandatory and cannot be altered by agreement.

Some notable characteristics: Partnership pays no federal income tax, instead any profits or losses pass through to the partners; Joint and several liability of partners

A. Partnership Formation (Definition and Distinction from Other Relationships; Partnership by Estoppel)

RUPA - 202 Formation of Partnership

(a) Except as otherwise provided in subsection (b), the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.

(b) An association formed under a statute other than this [Act], a predecessor statute, or a comparable statute of another jurisdiction is not a partnership under this [Act].

(c) In determining whether a partnership is formed, the following rules apply:

(1) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property.

(2) The sharing of gross returns does not by itself establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived.

(3) A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment:

(i) of a debt by installments or otherwise;

(ii) for services as an independent contractor or of wages or other compensation to an employee;

(iii) of rent;

(iv) of an annuity or other retirement or health benefit to a beneficiary, representative, or designee of a deceased or retired partner;

(v) of interest or other charge on a loan, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral; or

(vi) for the sale of the goodwill of a business or other property by installments or otherwise.

Path of Analysis: (1) Written Partnership Agreement Sidley Austin; (2) 202(a) for definition of partnership; (2) 202(c) for specific exceptions; (3) Court developed factors

Fenwick v. Unemployment Commn

Partnership Formation No partnership has been established

Courts Factors:

1. Intention of Parties

2. Profit Sharing

3. Sharing of Losses (Risk)

4. Management (Control)

5. Ownership of Property (Control)

6. Rights of Parties on Termination/Dissolution

7. Conduct/Holding Out to Third Parties

Factors

Partnership

Employment

Intention of Parties

Express/Writing

Profit Sharing

Yes (RUPA 202(c)(3))

But might be wages (RUPA 202(c)(3)(ii))

Sharing of Losses

No Fenwick has all the risk; Chesire did not invest $

Management

No Fenwick has all the control/managerial power

Ownership of Property

Only Fenwick had ownership rights

Rights of Parties on Termination/Dissolution

Looked like simple employment termination, 10 days notice

Conduct/Holding Out to Third Parties

With limited exception, not held out as partners

Martin v. Peyton

Partnership Formation Partners v. Lenders Found to be Lenders, not partners

Also Cargill Difference is that Cargill actually exercised control

Factors

Partnership

Lenders

Intention of Parties

Express/Writing

Profit Sharing

Yes (RUPA 202(c)(3))

But might be interest on loan (RUPA 202(c)(3)(v))

Sharing of Losses

No- fixed amount to be returned by deadline

Management

Some evidence of control by PPF

But is it consistent with ordinary caution of a worried lender?

Ownership of Property

No only security for loan

Rights of Parties on Termination/Dissolution

Loan due in full after 2 year term?

Conduct/Holding Out to Third Parties

Not held out as partners

A Note on Control

Typical Lender Protections

Permission re change in ownership/leadership

Inspection rights

Express limit on specific risky actions

Counseling on discrete matters and/or recommend consultants

Danger Zone

Constant advising

Veto power over business decisions

Resignations/designating management

Assurances to other creditors (recall Cargill)

Southex Exhibitions v. Rhode Island Builders Association

Partnership Formation Had Southex acquired SEMs interest in an alleged partnership with RIBA? No PShip

Factors

Partnership

Other

Intention of Parties

Preamble of contract used word partners

SEM initially rejected ownership offer

Profit Sharing

Yes

But is there an exception or not limited to listed ones?

Sharing of Losses

Only SEM had risk

Management

Shared

But SEM had most operational responsibility

Ownership and Control of Property

No tangible property. Intangible?

Rights of Parties on Termination/Dissolution

5 year term; defined by contract

Conduct/Holding Out to Third Parties

No holding out for contract purposes; no mutual name

Partnership by Estoppel - how third parties can sometimes hold non-partners liable as though they were partners

RUPA 308 Liability of a Purported Partner

The third party plaintiff must establish that:

The person sought to be charged as a partner made a representation, either by words or conduct, purporting to be a partner, or consented to being represented by another as a partner; and

The third party relied on this representation in entering into a transaction with the actual or purported partnership (= a change of position with consequent injury in reliance on the representation).

Young v. Jones

Parntership by Estoppel No Partnership by Estoppel Here

Give Credit The statute speaks only to the creation of liability to third persons who, in reliance upon representations as to the existence of a partnership, give credit to that partnership.

Here, there is no evidence that credit was extended on the basis of any representation of a partnership existing between PW-Bahamas and South Carolina members of the PW-US partnership

B. Rights of Partners in Management; Partnership Liability

See Handout: Overview of Rules on Partnership Management Rights and Liabilities (Copied Here)

RUPA 401(f):

Each partner has equal rights in the management and conduct of the partnership business.

This means the default = 1 partner/ 1 vote (a per capita basis).

For example: A contributes 70% of the partnership capital, B contributes 20% of the partnership capital, and C contributes 10%. A, B, and C each have 1 equal vote.

This is a default rule that can be altered by agreement. E.g., the partners could agree that A gets 7 votes, B gets 2 votes, and C gets 1 vote, in accordance with their economic contributions.

RUPA 401(j):

A difference arising as to a matter in the ordinary course of business may be decided by a majority of the partners.

An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all of the partners.

This is a default rule that can be altered by agreement. RUPA 103(a). E.g., in a large partnership setting such as a large national law firm where it may be unworkable for decisions to be made by majority rule or unanimity. Large firms will often have executive committees because of the high costs of communication and negotiation between all partners, collective action problems, and the risk of hold-outs. An executive committee can provide centralized law firm administration.

See Sidley & Austin v. Day (illustrating how partnership agreements may modify the default statutory rules, such as by delegating decisionmaking authority to an executive committee or using majority approval for matters requiring unanimity per statute).

If partners act is not in the ordinary course of the partnership business or a partner desires to amend the partnership agreement or act contrary to its provisions, then a unanimous vote is required. E.g., unless the agreement provides otherwise, no one can become a partner in the partnership without the express or implied consent of all partners.

RUPA 301(1):

Each partner is an agent of the partnership for the purpose of its business. [A partners act] for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership, unless the partner had no authority to act for the partnership in the particular manner and the person with whom the partner was dealing knew or had received a notification that the partner lacked authority.

This provision addresses the partnerships liability in contract.

The effect of 301(1) is to characterize a partner as a general managerial agent having both actual and apparent authority co-extensive in scope with the firms ordinary business, at least in the absence of a contrary partnership agreement. RUPA 301 cmt. 2.

By default, a partner has actual authority to enter into contracts in the ordinary course of the partnership business.

Without a partnership agreement otherwise, any limit on the actual authority of a partner to act in the ordinary course must be decided by a majority of partners. (see RUPA 401(j) above.)

In partnerships with an even number of partners, especially those with just 2 members, deadlock is a potential problem.

In the case of a 2-person partnership, a majority vote to limit one partners actual authority is impossible if the other partner disagrees.

This rule effectively provides each partner in a 2-person partnership with a veto right over the other. Thus, before a change can occur, both parties have to agree. This dynamic may result in deadlock.

See National Biscuit v. Stroud; Summers v. Dooley.

A partner has apparent authority to enter into contracts in the ordinary course of the partnership business or business of the kind carried on by the partnership, unless the partners actual authority was limited in that regard and the third party knew or had received a notification that the partner lacked authority.

(The logic here seems to be that the agency law requirement of a holding out by the principal is effectively satisfied by the mere fact that the person is a partner.)

Example: A, B, and C form a partnership to run a pet hospital. All agree that A shall have the exclusive authority to order supplies, B shall have exclusive authority to handle advertising, and C shall have exclusive authority to hire help. Although A does not have actual authority to handle advertising or to hire help, he does have apparent authority to do these things because, from a third partys perspective these all appear to be acts carried on in the ordinary course of the partnerships business.

Note that apparent authority extends to any transactions that would be apparently for carrying on business of the kind run by the partnership. Thus, in the example above, if most pet hospitals around also provide boarding or kennel services, a good argument could be made that A, B, and C each have apparent authority to enter into transactions for carrying on such activities regardless of whether the partners had agreed to do that as part of their business.

What does it mean that that the third party knew or had received notification? Knowledge here means subjective knowledgewhat the third party actually knew. A notification is effective either when it comes to the persons attention or when it is duly delivered. RUPA 102(d). Thus, if a notification limiting a partners authority is duly delivered to a third party (e.g., at the third partys place of business), the third party cannot rely on apparent authority with regard to the limitation even if the third party has not actually read the notification.

RUPA 303:

This provision allows a partnership to centrally file, such as with the secretary of state, a statement of partnership authority that states the authority or limitations of authority, of some or all of the partners to enter into transactions on behalf of the partnership. Subsections 303(e) and (f) restrict the effectiveness of those limitations to real estate transactions. That is, a third party is not deemed to know of a limitation of a partner merely because the limitation is contained in a filed statement, unless it concerns the limitation of a partner to transfer real property.

RUPA 305(a):

A partnership is liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course of business of the partnership or with authority of the partnership.

This provision addresses the partnerships liability in tort.

Note that you do not have to engage in the vicarious liability (aka respondeat superior) analysis from agency law of analyzing whether the actor is an employee. It suffices that the actor is a partner of the firm.

To determine the partnership liability you look to whether the partner was acting in the ordinary course of business of the partnership or with the authority of the partnership. The ordinary course of business of the partnership is not defined, but seems to roughly mean that the partners overall course of conduct was within the scope of the partnership business or of the type broadly authorized for that type of business (e.g., would take into account evidence of customary practice in the community or relevant industry).

If it is outside the ordinary course of business of the partnership and was not authorized by the partnership, then the partnership is not liable (but the individual partner may be personally liable).

Note that subsection (b) provides that a partnership is liable in certain circumstances if a partner misapplies money or property of a third person.

RUPA 306:

(a) Except as otherwise provided in subsections (b) and (c), all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law.

(b) A person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the persons admission as a partner.

(c) An obligation of a partnership incurred while the partnership is a limited liability partnership (LLP), whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. . .

Joint and several liability means that a claimant/creditor may sue the partners jointly as a group or separately as individuals for the full amount of the relevant obligation.

This rule means that partners have personal, unlimited liability for the liabilities of the partnership. This is one of the major consequences of operating as a general partnership, and one of the key reasons for choosing to operate instead as a limited liability entity such as an LLP, LLC, or corporation (which, unlike general partnerships, requires filing organizational documents with a state agency). Well discuss these other forms of business associations later in this course.

Note that as between partners and outside creditors, an individual partner has unlimited personal liability for the obligations of the partnership, but that between the partners, each partner is only responsible for his share of the partnership obligation. If one partner pays off a partnership obligation, he is entitled to indemnification from the partnership. If the partnership lacks the funds to indemnify the partner, the partners are required to contribute according to their loss shares. (RUPA 401(b), 401(c), 807(b), 807(c)).

Regarding subsection (b), a partner is not personally liable for transactions or partnership conduct that predates the partners arrival, but any investment theyve made in the partnership is at risk, since partnership assets are the first source to satisfy outstanding obligations. After a partner leaves, she is liable only for obligations incurred by the partnership while she was part of it.

RUPA 307:

This provision concerns actions and judgments against the partnership vs. an individual partner. RUPA 307(d)(1) is an exhaustion rule requiring a judgment creditor to seek to recover from partnership assets before proceeding against an individual partners assets.

RUPA 308:

This is the partnership by estoppel provision. See our class discussion of this topic.

NABISCO v. Stroud

Partnership liability compare with Summers (similar facts, opposite outcome)

1. Explain the basis for deciding in favor of National Biscuit.

a. Freeman as a general partner with Stroud, with no restrictions on his authority to act within the scope of the partnership business so far as the agreed statement of facts shows, had equal rights in the management and conduct of the partnership business.

b. Stroud could not restrict the power and authority of Freeman to buy bread for the partnership as a going concern, for such a purchase was an ordinary matter connected with the partnership business, for the purpose of its business and within its scope.

2. Why wasnt Strouds notification to National Biscuit enough for him to restrict Freemans ability to bind the partnership?

a. Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners

1. It was in the ordinary course of business

2. Cant have a majority in a two person partnership

Summers v. Dooley

Partnership liability compare with Nabisco (similar facts, opposite outcome)

In the case at bar one of the partners continually voiced objection to the hiring of the third man. He did not sit idly by and acquiesce in the actions of his partner. Under these circumstances it is manifestly unjust to permit recovery of an expense, which was incurred individually, and not for the benefit of the partnership but rather for the benefit of one partner.

The only reasonable interpretation of the pertinent statute is that business differences must be decided by a majority of the partners provided no other agreement between the partners speaks to the issues.

Nabisco

Summers

Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners

business differences must be decided by a majority of the partners provided no other agreement between the partners speaks to the issues

Contract binding on partnership: Stroud was not, and could not be, a majority of the partners

Contract not binding on partnership: a majority of the partners did not consent to the hiring of the third man

Suit was brought by a third party seeking to hold liable the partnership for the acts of one of the partners.

Suit was brought by one partner against the other for contribution towards an alleged partnership expense.

All partners are agents of the partnership with power to bind the partnership. As a partner, Freeman had actual authority to conduct affairs in the ordinary course of business. The partnership could have restricted that authority, but not without a majority vote and Stroud did not control a majority.

All partners have equal rights to participate in the management of the partnership, and it takes a majority to change the status quo if partners disagree as to a matter in the ordinary course of business. If Summers wants to be reimbursed for an act changing the status quo, he needs a majority vote, even if the act would have bound the partnership to a third party under the apparent authority principle.

In a deadlock, the partner proposing the change loses.

C. Financial Interests in Partnership (Sharing of Profits and Losses; Partnership Property)

RUPA 401(a) Partners Rights and Duties

Each partner has an account that is a running balance reflecting:

their contributions (money plus the value of any other property),

their share of profits,

any distributions (taking a draw), and

their share of losses.

Capital Contributions

As a matter of default, initial capital contributions are not required from partners.

Some or all partners may contribute only services.

Vocab: a service partnership or K-and-L partnership = where one partner provides all the capital and another provides all the labor.

The basic default rule is that each partner is credited with an amount equal to the money plus the value of any other property contributed. The contributed capital itself belongs to the partnership and can be any property (real, intangible, etc.). RUPA 401(a).

Profits and Losses

Unless otherwise agreed (and a limited exception during winding up), a partner is not entitled to compensation for services. RUPA 401(h).

By default, a partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partners share of the profits. RUPA 401(b).

So the default = equal share of profits and losses in proportion. Does it make any difference if the partners contributed unequal amounts of capital or labor?

If A and B agree to split profits 60/40 but say nothing about losses, how would losses be split?

Statute is silent on when profits are distributed. A well-drafted partnership agreement will address this. If not, the default is to take draws by consensus on ad hoc basis.

Partnership Account Examples

Profit Allocated Example

Alice

Bob

Initial Contribution

$10,000

$1,000

Year 1 Profit

$1,000

$1,000

Year 1 Account Balance

$11,000

$2,000

Loss Allocated Example

Alice

Bob

Year 1 Account Balance

$11,000

$2,000

Year 2 Loss

($2,000)

($2,000)

Year 2 Account Balance

$9,000

$0

Profit Allocated and Draw Taken Example

Alice

Bob

Year 1 Account Balance

$11,000

$2,000

Year 2 Loss

($2,000)

($2,000)

Year 2 Account Balance

$9,000

$0

Negative Account Example

Alice

Bob

Year 3 Account Balance

$10,000

$1,000

Year 4 Loss

($2,000)

($2,000)

Year 4 Account Balance

$8,000

($1,000)

Settlement of Accounts and Contributions in Winding Up

RUPA 401(a), 807

A partnership must apply its assets to discharge the obligations of creditors (including partners who are creditors).

If there is any surplus, that is divided among the partners in accordance with their right to distributions. Partner accounts make no distinction between capital contributions and profits.

Questions

Amos contributed $100,000 in capital and agreed to lend the partnership $25,000. He therefore has a status of both partner and creditor. What are his rights as against other general creditors with respect to his loan if the partnership goes under?

Amos gets 25k at the same time as the other creditors, unless they agree otherwise

Can a general partnership be formed if there is no agreement about how losses will be shared?

If all the indicators of a partnership exist

Kovacik v. Reed

Service Partner Exception (Minority Rule California Rule)

Kovacik Financier

Reed Superintendent and Estimator

Facts Kovcik approached Reed to be a superintendent and estimator and that Kovacik would finance the projects and the two would share the profits 50/50. Kovacik did not ask Reed to share any losses that might result and Reed did not offer.

General Rule absence of an agreement to the contrary the law presumes that partners and joint adventurers intended to participate equally in the profits and losses of the common enterprise, irrespective of any inequality in the amounts each contributed to the capital employed in the venture, with the losses being shared by them in the same proportions as they share the profits. (Reinforced by RUPA)

Minority Rule Service Partner Where one party contributes money and the other contributes services, then in the event of a loss each would lose his own capital the one his money and the other his labor.

RUPAs Response to Kovacik:

Comments to UPA (1997) 401:

The UPA 18(a) rules that profits are shared equally and that losses, whether capital or operating, are shared in proportion to each partners share of the profits are continued. The default rules apply, as does UPA 18(a), where one or more of the partners contribute no capital, although there is case law to the contrary. [Citing, inter alia, Kovacik]

Partnership Property

RUPA 204:

Property purchased with partnership funds is presumed to be partnership property.

Partnership property also includes property that is either:

Acquired in the name of the partnership.

Acquired by one or more partners with a document transferring title that indicates the partner was acting in his capacity as a partner.

RUPA 401(g): A partner may use or possess partnership property only on behalf of the partnership.

RUPA 501: A partner is not a coowner of partnership property and has no interest in partnership property which can be transferred, either voluntarily or involuntarily.

RUPA 502: The only transferable interest of a partner in the partnership is the partners share of the profits and losses. . . and the partners right to receive distributions. The interest is personal property.

RUPA 503: Transfer of partners transferable interest.

RUPA 504: Partners transferable interest subject to charging order.

Partnership Property Hypo

Lawyer Jean-Paul wants to sell his share in a law firm partnership to Maria.

If he enters into an agreement in which he purports to sell membership in the firm to Maria, does Maria thereby become a member in the firm? No, 202

If he enters into an agreement by which he purports to sell his share of the partnership assets to Maria, does Maria take title to those assets? No, 501

Does Jean-Paul have any right he can assign to Maria? Yes, 502

New scenario: What if a personal creditor of Jean-Pauls wants to go after his interest? Yes, 504

D. Fiduciary Duties in Partnership Law

Fiduciary Duties in Partnerships:

RUPA 404(a): The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections (b) and (c).

RUPA 404(b): Duty of Loyalty

(b) A partners duty of loyalty to the partnership and the other partners is limited to the following:

(1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity;

(2) to refrain from dealing with the partnership . . . as or on behalf of a party having an interest adverse to the partnership; and

(3) to refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.

RUPA 404(c): Duty of Care

(c) A partners duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

RUPA 404(d): Good Faith

(d) A partner shall discharge the duties to the partnership and the other partners under this [Act] or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing.

RUPA 404(e)-(g):

(e) A partner does not violate a duty or obligation under this [Act] or under the partnership agreement merely because the partners conduct furthers the partners own interest.

(f) A partner may lend money to and transact other business with the partnership, and as to each loan or transaction the rights and obligations of the partner are the same as those of a person who is not a partner, subject to other applicable law.

(g) This section applies to a person winding up the partnership business as the personal or legal representative of the last surviving partner as if the person were a partner.

Information Disclosure in Partnership

RUPA 403(c):Each partner and the partnership shall furnish to a partner:

(1) without demand, any information concerning the partnerships business and affairs reasonably required for the proper exercise of the partners rights and duties under the partnership agreement or this [Act]; and

(2) on demand, any other information concerning the partnerships business and affairs, except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances.

Nonwaivable Provisions

RUPA 103: (b) The partnership agreement may not:

(2) unreasonably restrict the right of access to books and records under 403(b);

(3) eliminate the duty of loyalty, but:

(i) the partnership agreement may identify specific types of categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; or

(ii) all of the partners or a number or percentage specified in the partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty;

(4) unreasonably reduce the duty of care;

(5) eliminate the obligation of good faith and fair dealing, but the partnership agreement may prescribe the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable;.

Meinhard v. Salmon

Did Salmon breach his fiduciary duty by not informing Meinhard of the opportunity for the 2nd lease Yes

Cardozos Take:

Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of finest loyalty. Many forms of conduct permissible in a workday world are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor most sensitive, is then the standard of behavior.

Because Salmon undertook the 2nd leases negotiations while the partnership was in effect, he violated his fiduciary duty.

Andrews Take:

Partnership was taken up for a fixed period and ended at the end of the first lease. The dissent felt that deals involving events to occur after the expiration of that term were no matter to the partnership.

Common Law It is unclear whether disclosing the opportunity to Meinhard would have been sufficient to eliminate Salmons breach of fiduciary duty

Meehan v. Shaughnessy

Facts

Meehan and Boyle were partners at PC and eventually grew displeased with the partnership. They basically hatched a 6 month scheme to leave the firm and take some partners and associates with them.

They ended up removing approximately 142 cases to MBC

PCs Three Different Claims for breach of fiduciary duty:

By improperly handling cases for their own, and not the partnerships benefit - X

Its a factual questions and just because certain conversations occurred, that doesnt mean improper actions took place

By secretly competing with the partnership X

The logistical arrangements that MBC made (leasing office space, preparing client lists, and obtaining financing) were permissible given the situation

By unfairly acquiring from clients and referring attorney consent to withdraw cases to MBC -

MB continued to use their position of trust and confidence at PC to the disadvantage of PC, and the contents of the letter MB sent to the clients was unfair (THEY LIED and THEY CONTACTED CLIENTS IN AN INAPPROPRIATE WAY)

E. Partnership Dissociation and Dissolution

Dissociation is a change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business.

Dissociation does not necessarily cause a dissolution and winding up of the partnership business.

NOTE:

At Will Default

Term By Specific Election

A partner is dissociated from the partnership upon RUPA 601 Events Causing Partners Dissociation

1) the partnership's having notice of the partner's express will to withdraw as a partner or on a later date specified by the partner;

2) an event agreed to in the partnership agreement as causing the partner's dissociation;

3) the partner's expulsion pursuant to the partnership agreement;

4) the partner's expulsion by the unanimous vote of the other partners if:

a. (i) it is unlawful to carry on the partnership business with that partner;

b. (ii) there has been a transfer of all or substantially all of that partner's transferable interest in the partnership, other than a transfer for security purposes, or a court order charging the partner's interest, which has not been foreclosed;

c. (iii) within 90 days after the partnership notifies a corporate partner that it will be expelled because it has filed a certificate of dissolution or the equivalent, its charter has been revoked, or its right to conduct business has been suspended by the jurisdiction of its incorporation, there is no revocation of the certificate of dissolution or no reinstatement of its charter or its right to conduct business; or

d. (iv) a partnership that is a partner has been dissolved and its business is being wound up;

5) on application by the partnership or another partner, the partner's expulsion by judicial determination because:

a. (i) the partner engaged in wrongful conduct that adversely and materially affected the partnership business;

b. (ii) the partner willfully or persistently committed a material breach of the partnership agreement or of a duty owed to the partnership or the other partners under Section 404; or

c. (iii) the partner engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with the partner;

6) the partner's:

a. (i) becoming a debtor in bankruptcy;

b. (ii) executing an assignment for the benefit of creditors;

c. (iii) seeking, consenting to, or acquiescing in the appointment of a trustee, receiver, or liquidator of that partner or of all or substantially all of that partner's property; or

d. (iv) failing, within 90 days after the appointment, to have vacated or stayed the appointment of a trustee, receiver, or liquidator of the partner or of all or substantially all of the partner's property obtained without the partner's consent or acquiescence, or failing within 90 days after the expiration of a stay to have the appointment vacated;

7) in the case of a partner who is an individual:

a. (i) the partner's death;

b. (ii) the appointment of a guardian or general conservator for the partner; or

c. (iii) a judicial determination that the partner has otherwise become incapable of performing the partner's duties under the partnership agreement;

8) in the case of a partner that is a trust or is acting as a partner by virtue of being a trustee of a trust, distribution of the trust's entire transferable interest in the partnership, but not merely by reason of the substitution of a successor trustee;

9) in the case of a partner that is an estate or is acting as a partner by virtue of being a personal representative of an estate, distribution of the estate's entire transferable interest in the partnership, but not merely by reason of the substitution of a successor personal representative; or

10) termination of a partner who is not an individual, partnership, corporation, trust, or estate.

RUPA 602 Wrongful Dissociation

A partnership is either at will or term.

A partner will be deemed to have wrongfully dissociated if:

the dissociation is in breach of an express term of the partnership agreement; or

the partnership is for a definite term or particular undertaking and the partner withdraws, is expelled, or becomes bankrupt before the end of the term or completion of the undertaking (with limited exception).

A partner who wrongfully dissociates is liable to the partnership for any damages caused by the dissociation.

RUPA 603 Effect of Dissociation

Depending on the act of dissociation, 1 of 2 consequences will occur:

If the event is listed in RUPA 801, then dissolution and winding up will occur.

If the event is not listed in RUPA 801, then a buyout will occur pursuant to RUPA 701.

Consequences of Dissociation

Right to management ceases; duties of care and loyalty generally also terminated, except for matters arising before dissociation. RUPA 603(b).

Purchase of dissociated partners interest. RUPA 701(a)-(c).

Deferred payment if wrongful dissociation. RUPA 701(h).

Indemnification of dissociated partner. RUPA 701(d).

Dissociated partners power to bind partnership. RUPA 702, 704.

Dissociated partners liability to other parties. RUPA 703.

Dissolution, Winding up, Termination

A partnership is dissolved and its business must be wound up when any of the following occurs RUPA 801.

A partners power to bind the partnership after dissolution. RUPA 804.

Dissolution causes the partnership to wind up, absent agreement to continue (e.g., buy-out and continuation agreements), or by unanimous vote (including any dissociating partner other than a wrongfully dissolving partner). RUPA 802(b).

Winding up = Shutting down the business by selling off the assets (either as separate assets or of the business as a going concern), paying the partnership liabilities, settling partner accounts. Actual authority of partners to act on behalf of partnership terminated except in connection with winding up of partnership business.

Once winding up is finished then the partnership is terminated; no filing or magic words required. RUPA 802(a).

1 Person Partnerships

A one person partnership is not possible in CA, so if one partner leaves a 2 person partnership, it go into dissolution

Owen v. Cohen

Allowed Dissolution

Not an at will partnership they signed a 30 year lease with the intention of carrying on the bowling alley business for the duration

Collins v. Lewis

Didnt Allow Dissolution

Not an at will partnership had signed a lease for the operation of a cafeteria that went way over budget

Whats the Difference between Owen and Collins? The partner seeking judicial resolution cant be the bad actor (also look at the nature of the relationship is it actually impractical to continue?)

McCormick v. Brevig

Brother and Sisters Partnership in their family Farm

Issue Should the brother have been able to buyout the sister, or should the property have been liquidated?

Holding the property should have been liquidated under RUPA Art. VII.

F. Partnership Agreements

Partnership Agreements

Can:

Change governance rules (voting rights; duties; limits)

Define scope of fiduciary duties, so long as not manifestly unreasonable

Establish financial rights between partners (during, at dissolution, or upon termination)

Often forget to address:

Buy-out

Valuation

Continuation

Cannot:

Completely eliminate fiduciary duties/right to accounting

Alter third parties rights

G. Other Partnership Forms (e.g., LPs and LLPs)

Limited Partnerships

A type of partnership with 2 types of partners:

General partners: General partners manage the business and have the power to bind the partnership. They are personally liable for the partnership debts.

Limited partners: Silent/passive partners without management rights. Not personally liable except in extraordinary circumstances.

The partnership must have at least one general partner and one limited partner. The name must have a signifier i.e., LP

Default rule is that partners in a LP share profits and losses in proportion to their respective capital contributions.

Requires a formal filing (a certificate of limited partnership) to create a LP; each state has a LP statute.

Most states either have some version of RULPA or ULPA (2001). California has enacted ULPA (2001).

Typically only used in venture capital organizational structure the LPs invest into a GP and then the GP invests the money in portfolio start-up companies

LLPs and LLLPs

LLP = the limited liability form of the general partnership (check out Article 10 of RUPA)

LLLP = the limited liability form of the limited partnership (the GPs get limited liability)

These require filing a form with the secretary of state.

The effect is to shield partners from personal liability for some or all partnership debts (varies by state).

III. CorporationsA. General Background; Formation; Limited Liability 1. Introduction

Introduction to Corporations

The founders of a corporation create the corporation (they incorporate) by filing certain documents with the appropriate state agency and may choose to do so in any of the states.

The corporation - A legal person typically possessing the following attributes:

Separate entity

Limited liability

Indefinite duration

Separation of share ownership and control

Divisible ownership (shares of stock)

Transferable shares and debt obligations (unless limitations imposed)

Corporate law primarily focuses on the relationship between:

the stockholders (aka shareholders)

Are entitled to the residual value of the corporation after it has paid its creditors. Do not participate in the management of the corporation; they merely elect the board of directors, vote on certain fundamental issues (amendments of articles, acquisitions and mergers, etc.)

the board of directors, and

Authority to act for (and to bind) the corporation originates in the board.

Directors have fiduciary duties to the corporation and the body of shareholders.

Elected by the shareholders and serve for a set term

Run the corporation make the major decisions

Appoint the officers

the officers (aka managers or executives)

They handle the day-to-day affairs of the corporations

The officers are appointed by the board.

They are agents of the corporation.

E.g., CEO, CFO, etc.

Critiques of Limited Liability & Unlimited Liability

Critiques of Limited Liability

Tort Creditors Limited liability is particularly troublesome in the context of tort victims, who never had a chance to decide whether to assume the risk entailed in extending credit to a corporation.

The poor are more likely to be affected by corporate bad actors in the tort context (hazardous waste disposal, etc.), so some view it as the rich versus the poor.

Making corporations liable would cause them to pass the costs on, therefore affecting the poorest at a disproportionately higher rate so there is no winning

Contract Creditors Contract creditors might effectively contract for either liability regime, by negotiating a shareholder guarantee or by agreeing to limit claims to corporate funds.

Because a contract creditor willingly enters into an agreement with a corporation, critics have been less critical of their relationship and fairness arguments

Critiques of Unlimited Liability There are two main arguments against unlimited liability: (1) Efficiency and (2) Logistical/procedural

The efficiency argument stems from the notion that unlimited liability would be socially costly because it would impede investment of capital in businesses to such an extent that its costs outweigh its benefits.

Exposure of ones last dollar

Problems with diversification

Weaker shareholder monitoring of corporate management

Need for inter-shareholder monitoring

Reduction in clarity of stock prices

Share transfer restrictions would be needed

The procedural argument is that even if the costs of unlimited liability were worth bearing in order to eliminate the costs associate with limited liability, unlimited liability is unworkable as a practical matter.

Sources of Law

Each state has its own corporation code (statutes), which sets out how to incorporate and the laws governing corporations; courts interpret and apply the state corporation code through case law.

While there is no federal law of corporations per se, federal statues add a significant layer of corporate regulation (e.g., securities laws, Sarbanes-Oxley, Dodd-Frank).

Choice of Law

Choice of law: Once a firm is incorporated in a particular state, it is the law of that state that controls as to the matters covered in the corporations code (this is known as the internal affairs doctrine).

The Ultra Vires Doctrine

At common law, a corporation was limited to the powers enumerated in the purpose clause of its charter.

The purpose clause is a statement describing the business the corporation is to conduct.

The term corporate powers refers to methods the corporation may use to achieve its purpose (e.g., power to contract and power to borrow money).

Historically, if a corporation engaged in conduct that was not authorized by its express or implied powers, the conduct was deemed ultra vires and void. Whenever a transaction was beyond the corporations limited purposes or powers, either party to the contract could disaffirm it. That is what is known as the ultra vires doctrine.

Over time, courts began to interpret corporate powers more broadly. State legislatures began to allow corporations to specify in their charter that they were formed to engage in any lawful purpose. Corporations need not specify a single purpose, nor do they need to list their specific powers.

Today, most modern corporation statutes expressly grant incidental/implied powers. In the absence of express restrictions, the board and corporate managers to whom they delegate, have discretionary authority to enter into contracts and transactions reasonably incidental to its business purpose, which may be broadly defined. (DGCL 121, 122)

The modern ultra vires doctrine is narrow; it applies only where the certificate of incorporation states a limitation and there are 3 exclusive means of enforcement (DGCL 124):

in a proceeding by a stockholder against the corporation to enjoin a proposed ultra vires act;

in a corporate suit against directors and officers for taking unauthorized action (the directors and officers can be enjoined or held personally liable for damages);

the state attorney general can seek involuntary judicial dissolution if the corporation has engaged in unauthorized transactions.

An ultra vires act will be enjoined only if equitable to do so; generally means that an act involving an innocent third party (e.g., one who didnt know the action was ultra vires) will not be enjoined.

Use of the ultra vires doctrine is very rare; many legal commentators view it as a historical relic.

The Internal Affairs Doctrine

As a general matter, the internal affairs of the corporation are governed by the law of the state of incorporation.

Courts apply the law of the state of incorporation when adjudicating governance and fiduciary duties that arise within the corporation, including the rights of and relations among stockholders, the duties and obligations of the officers and directors, issuance of shares, acquisition procedures, etc.

Hence, the act of incorporation also selects the law that will apply to the corporations internal affairs. (E.g., a Delaware corporation, a California corporation)

A notable departure from the internal affairs doctrine is Californias long-arm statute, Corporation Code 2115.

It makes foreign corporations with half of their taxable income, property, payroll, and outstanding voting shares within California subject to certain provisions of the California Corporations Code.

This is controversial and has been the subject of recent debate (Delaware courts have ruled it unconstitutional and there has been a California legislative attempt to get rid of it).

Qualification of Foreign Corporations to Do Business

A business incorporated in one state may conduct business in another if qualified to do business in that state.

To qualify the corporation usually has to file a certified copy of its certificate, pay a filing fee, and appoint a local agent to receive service of process in that state.

Why do we Study Delaware Law?

The largest body of precedent interpreting its corporation code meaning it has the most comprehensive body of corporate law in the U.S.

Relatively stable and modern corporate law. Radical reform of its corporation code is unlikely as Delawares constitution mandates a 2/3 vote of both state legislative houses to change the corporation code. Delaware courts frequently issue unanimous opinions.

A special court for business matters (the Chancery Court), which has a reputation for excellence and experience in corporate law (as well as the Delaware Supreme Court, which is similarly respected).

Procedures that facilitate timely decisions (which can be especially important for some corporate issues like takeovers).

Many lawyers across the country are trained in Delaware corporate law, especially business savvy lawyers.

Public v. Private Corporations

Public corporations are large firms with stock traded on public stock markets

The shareholders typically do not expect to participate actively in the operation of the business; they are passive investors. (Many Americans also invest indirectly through mutual funds, etc.)

There is a large amount of federal law that applies to public corporations (securities laws, etc.).

Private corporations

Not subject to public reporting requirements under federal securities laws (Take the Securities Regulation course to learn more!)

Typically, private corporations have a small number of shareholders who hold stock that is not publicly traded. The stock is generally less liquid and may be subject to shareholder agreements that limit its transferability.

Generally (though not always) private corporations are of relatively modest economic scope, and the people in the top managerial positions may also own a substantial amount of the corporations stock.

Partnerships v. Corporations

General Partnership

Corporation

Formation

Informal; UPA, RUPA.

Formalities required; Certificate of incorporation, bylaws, board of directors, minutes, filings, etc.

Limited Liability

No. Unlimited personal liability.

But partnership agmt can have indemnity provisions, can buy insurance, and other partnership forms offer limited liability to various extents (LP, LLP, LLLP)

Yes. Limited liability for shareholders.

But creditors may seek personal guarantees and there is the veil piercing doctrine.

Free transferability (of interest/share)

No (default rule).

Just the transferable interest is personal property that can be transferred; but partners can negotiate and dissociate.

Yes, generally.

Can sometimes be restricted.

Partnership

Corporation

Continuity

Default is at will.

Can agree to continuation agreements.

Death of partner dissociation.

Default is indefinite/perpetual.

But can limit.

Not tied to human life.

Management

Decentralized (default).

Each partner an agent and equal participation in mgmt is default; but can use exec comm. and limit authority by agreement and notice to third parties.

Centralized (default).

Directors and officers manage the corporation; not shareholders. Separate and specialized functions.

Cost

Zero.

But often good idea to hire a lawyer.

Filing fees, typically lawyer fees, franchise fees, etc.

Default Rules

Extensive.

More extensive.

Flexibility

Very malleable form for carrying on business; most rules are default.

Not quite as flexible.

Tax

Pass-through (single).

Losses can be passed through for use by partners.

Taxed as entity, so shareholders have double taxation on distributed earnings; losses usable only by corporation.

[Exception: S Corporations]

2. Promoter Liability

A promoter is a person, who acting alone or [with others], directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer.

E.g., identify and solicit investors, arrange for space/facilities, hire employees for the entity, enter into contracts.

Often referred to as the founder or organizer.

Contrast with an incorporator who has the limited, mechanical task of preparing the incorporation documents and filing them with the state. Incorporators are often lawyers, paralegals, etc. In contrast to the rules of promoter liability, incorporators are typically not liable for their pre-incorporation acts.

Promoter Liability

Pre-incorporation

Promoters are liable for contracts entered into on behalf of a future corporation, absent a contrary intent.

Contrary intent generally requires showing more than just signing for a corporation to be formed.

Evidence of the parties intentions must be found in the contract or in the surrounding circumstancesfor example, a provision in the contract stating that the parties intend the promoter to be a non-recourse agent.

Post-Incorporation

Corporation is liable on the contract only if the corporation adopted/ratified it.

Can be express (e.g., formal board resolution) or implied (e.g. if directors or officers knew of and acquiesced in the contract).

Promoter remains liable unless:

Corporation is formed;

Corporation adopted the pre-incorporation contract; and

The parties agreed to release the promoter from liability (either in the initial contract or through subsequent novation).

Its possible for the corporation and the promoter to both be liable on the contract.

Moneywatch v. Wilbers

Promoter Liability

- Jeff Wilbers Promoter of a corporation formed for a golf business

Moneywatch Landlord that leased property to Wilbers

Facts

Wilbers intended to create a corporation, but the LL advised him that he would have to remain personally liable on the lease even if a corporation was eventually created.

Wilbers incorporated and submitted a request to change the name of the lease from Wilbers to the corporate identity.

2 Arguments:

Novation (Contracts Argument) -X

A novation occurs where a previous valid obligation is extinguished by a new valid contract, accomplished by substitution of parties or of the undertaking, with consent of all the parties, and based on valid consideration.

In order to effect a valid novation, all parties to the original contract must clearly and definitely intend the second agreement to be a novation and intend to completely disregard the original contract obligation.

Promoter (Corporate Argument) - X

argued that he is not liable because he executed the lease as a corporate promoter on behalf of a future corporation

A promoter is not personally liable on a contract made prior to incorporation which is made in the name and solely on the credit of the future corporation.

The promoters of a corporation who execute a contract on its behalf are personally liable for the breach thereof irrespective of the later adoption of the contract by the corporation unless the contract provides that performance thereunder is solely the responsibility of the corporation.

Promoter Fiduciary Duties

Promoters of a yet-to-be-formed corporation have some fiduciary duties to the entity, the other promoters, and investors:

Promoters must deal with the entity in good faith. This requires promoters to act fairly in transactions they enter into with the corporation.

Promoters must disclose relevant information, like opportunities and conflicts vis-a-vis the entity, to other relevant parties. (e.g., no secret profits)

3. Formation of a Corporation

The Incorporation Process

Select state of incorporation.

Reserve the desired corporate name by application to the secretary of state or other designated state office.