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70 Cards in this Set
- Front
- Back
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Agency Formation
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1. Principal agrees that Agent will act on the Principal’s behalf
2. Agent agrees to act for Principal 3. Parties understand that the Principal is in control |
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Agent
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a person who (1) by mutual assent (2) acts on behalf and (3) is under control of the principal.
General Agent: is authorized to do a continuity of services Special Agent: is authorized to conduct a single transaction |
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Principal
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• Disclosed: when a 3rd party knows the Agent is acting on the Principal’s behalf and knows the Principal’s identity.
• Partially Disclosed: when 3rd party knows Agent is acting on Principal’s behalf, but does not know the Principal’s identity. • Undisclosed: when 3rd party believes Agent is acting on its own behalf. |
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Fiduciary Duty
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Agent has a fiduciary duty and has an obligation to put the Principal’s interest ahead of his own.
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Duty of Loyalty
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Agent has a duty to act solely for the Principal’s benefit. Any benefit the Agent receives while performing his duties belongs to the principal (bribe, kick-back).
Policy: the Agent would not be in a position to receive any benefit if it were not for the business relationship with the Principal and the Agent carrying out his duties related to the business. The Principal is entitled to the reimbursement for the loss created by a breach of this duty. |
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Duty of Care and Skill
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Agent has the duty to exercise standard of care and skill of the locality for the kind of the work the Agent is employed to perform, including exercising any special skills the Agent has and has the duty to disclose.
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Duty of Disclosure
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Agent has a duty to disclose all facts, which the Agent knows or should know would reasonably affect the Principal’s judgment, unless Principal has manifested he already knows the facts or does not care about them.
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Principal's Liability to a 3rd Party
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Principal is generally not liable, unless the Agent acted with authority (actual, apparent, or inherent), or the act was ratified, or there was acquiescence with respect to the act.
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Actual Authority (reasonable agent)
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Principal’s words or conduct would lead a reasonable person in the agent’s position to believe the Principal had authorized the Agent’s act.
-express, implied and incidental |
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Express Authority
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Manifested by words or conduct
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Implied Authority
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implied or inferred from the words used from past customs or past conduct or usage.
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Incidental Authority
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acts reasonably necessary to accomplish the authorized acts (a jeep to examine property deep in the mountains of Montana)
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Apparent Authority
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(reasonable 3rd party): a reasonable 3rd party would believe the Agent was authorized to act on the Principal’s behalf (such as ordinary course of business – objective/subjective: firms in general/this particular firm) or the 3rd party reasonably believed the Agent was acting on his own behalf (undisclosed Principal).
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Power of Position
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A position carrying with it generally recognized duties; regardless if there are unknown limits on that particular Agent (Bob the teller sitting at the loan desk)
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Estoppel
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(3rd party changed position and detrimentally relied) Principal becomes liable if:
1. Principal intentionally or recklessly led 3rd party to believe Agent had the authority; or 2. Principal, knowing of the 3rd party’s belief, does not reasonably act to correct the 3rd party’s belief. |
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Inherent Authority
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(reasonable principal): Principal is liable for an act done on his behalf by a general agent, if a reasonable person in the Principal’s position would have foreseen that, despite his instructions, there was significant likelihood that the Agent would act as he did.
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Ratification
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Even if the Agent does not have authority, the principal will be liable to a 3rd party, if the Principal knew of the material facts and affirmed the Agent’s conduct by manifesting an intention to treat the conduct as authorized or accepts benefits of the Agent’s acts knowingly.
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Express Ratification
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Affirming Agent’s conduct by manifesting an intention to treat the Agent’s conduct as authorized.
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Implied Ratification
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Principal accepts the benefits of the Agent’s acts knowing the circumstances.
Note: Ratification does not have to be communicated to the 3rd party. Ratification must occur prior to withdrawal of the 3rd party, prior to termination of K, or if inequitable to hold 3rd party liable. |
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Acquiescense
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Principal does not object to Agent’s performance of similar acts under similar circumstances, allowing Agent to assume principal approves, giving Agent:
• Actual Authority for similar future acts and • Apparent Authority to 3rd party |
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3rd Party's Liability to the Principal
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If contract exists. 3rd party not liable if, Principal is undisclosed OR if Agent knew 3rd Party would not have dealt with Principal knowing the Principal’s identity.
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Agent's Liability to a 3rd Party
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an Agent may be liable to a 3rd party depending on whether the principal was disclosed, partially disclosed, or undisclosed. An Agent is liable to a 3rd party when the Agent did not act with authority (actual, apparent, or inherent), based on Agent’s implied warranty of authority to a 3rd party.
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Disclosed
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if the Principal is disclosed and the Agent had actual, apparent, or inherent authority, or the Principal ratified the act, the Agent is not liable to the 3rd party; Principal is solely liable.
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Partially Disclosed
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if the Principal is partially disclosed, then the Principal and Agent are liable to the 3rd party because the 3rd party could not investigate the unknown Principal’s reliability and relied on Agent.
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Undisclosed
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if the Principal is undisclosed, the Agent and Principal may be liable if the 3rd party expected the Agent to be a party due to Agent’s representation. Split.
Majority: after learning the Principal’s identity, if 3rd party gets a judgment against either the Agent or the Principal, the other’s liability is discharged even if judgment is not satisfied. Minority: a judgment against one does not absolve the other, unless the judgment is satisfied. |
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Principal's Liability to an Agent
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Principal is liable to indemnify Agent for payments authorized or made necessary in executing Principal’ affairs, if the Agent acted with actual authority.
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Agent's Liability to a Principal
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if Agent acted without actual authority and Principal is bound by Agent’s apparent authority and the Principal was damaged (including attorney’s fees and expenses).
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Termination of Authority
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Principal may terminate the agency at anytime, even if doing so violates a contract with the Agent (as personal services contracts will not be specifically enforced unless it is an agency coupled with an interest). The Principal is liable for wrongful termination if the contract creates such liability.
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Formation of a Partnership
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A partnership is formed when the following are present:
1. two or more persons make an agreement 2. to share profits and losses of a business 3. to share control and management of that business. |
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Characteristics of a Partnership
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• Agreement can be oral or written – expressed agreement. The subjective intent of the parties and the words used to describe the relationship is not important. How the parties conducted themselves determines whether a partnership exists (fact dependent) – implied agreement.
• Formalities or filings are not required. • Each partner is an agent of the co-partners and is jointly and severally liable for the debts and wrongdoings of the partnership. Absent party agreement to the contrary, partnership is at-will. |
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Duty of Loyalty
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A partner must act on behalf of the partnership and put himself second.
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Fiduciary Duty
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Partners have the duty of the UPMOST loyalty, as they are agents of each other.
Violation: usurping partnership opportunities; using partnership assets for personal benefits; engaging in competing enterprise; bribe, lying, misrepresentation, and concealment. |
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Types of Partnerships
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Term: a partnership for a fixed length of time. Terminating before the specified time is a violation of the contract. Can only be dissolved for cause. If a partner is found to have wrongfully dissolved the partnership, then the other partner gets damages.
Definite Undertaking: partnership for a specific purpose and automatically terminates upon the occurrence of some event or circumstance (repayment of loan). Can be dissolved for cause only. Partner can recover damages for wrongful dissolution. At-Will: May be dissolved at anytime by express or implied intent. Absent agreement, partnership is At-Will. • Court will not stop an at-will partnership from terminating if the co-partner compensates. • Court will stop termination if it violates the Duty of Loyalty |
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Authority of a Partner
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Absent an agreement otherwise, each partner has an equal authority, equal vote, and is an agent of the partnership. Actual authority exists for acts by a partner within the ordinary course of business (UPA) or if the action is customary in the industry (RUPA).
• Exceeding these bounds may be outside actual authority, but within apparent authority making the partnership liable to a 3rd party. • If a partner lacks authority and 3rd party knows that the act is outside the partner’s authorization, there is no liability to other partners. |
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Ongoing Operations of
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Management: Absent an agreement, every partner has the right to participate in management, under laws of the state. All partners have equal rights in management (even if profit sharing is unequal).
• If there is a disagreement, decision must be made by a majority. Control: Absent an agreement, each partner has equal voting rights – usually not based on percentage of ownership. Assignment of Partnership Interest: Does not require a vote, but only gives right to profits and does not give a right to control – manage. • A partner may assign shares (interest), but the assignee will not be allowed to become an operating partner. Changing Rules: Absent an agreement, rules may only be changed by majority of partners. Addition of Partners: All partners must agree to add a partner. |
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Liability of a Partner
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• A partner is personally liable for all the obligations/debts of a partnership (outside).
• Each partner is liable to each other only for his share of the partnership obligations (inside). • Partners have right to be indemnified by the partnership and the partnership has the right to require contribution from each partner. • A partnership is liable to its employees because of apparent authority. • A partner paying a judgment against the partnership is now a creditor of the partnership and has a right to reimbursement. |
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Power to Dissolve
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Spilt Jurisdiction
Only At-Will partnerships can be dissolved without cause; otherwise dissolving a term or definite undertaking partnership may be a wrongful dissolution. • Generally: a partner has the right to dissolve the partnership, but may not have the right – making the dissolution wrongful • CA: without the actual right to dissolve, the partners have no right to dissolve the partnership |
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Partnership Breakup/Termination
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1. Dissolution
2. Winding Up 3. Termination |
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1. Dissolution
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Spilt Jurisdiction
Only At-Will partnerships can be dissolved without cause; otherwise dissolving a term or definite undertaking partnership may be a wrongful dissolution. • Generally: a partner has the right to dissolve the partnership, but may not have the right – making the dissolution wrongful • CA: without the actual right to dissolve, the partners have no right to dissolve the partnership |
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Wrongful Dissolution
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Judicial Termination – courts can order dissolution if harm is substantial enough to impair the business.
• Due to serious misconduct that is adverse to the partnership business (willful and continuing action that is harmful to the business; OR • Due to conduct making it impracticable to carry on the partnership and conduct adverse to the partnership business (economic harm, but no necessarily serious misconduct) • Due to breach of partnership (duty of care and loyalty) On Test: Here, there was harm to the business because profits decline 50% in the past year. OR Here, there was no harm because the profits had increased last year even with this conduct. |
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Automatic/Not automatic Dissolution
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UPA: under old system, if a partner leaves (death incapacity) the partnership automatically dissolves.
Exception: if there was a continuation agreement, the partnership continues • Under UPA and RUPA, the wrongful partner has to pay damages to the partnership • Under UPA wrongful partner is not entitled to value of goodwill RUPA: under new system, partnership does not automatically dissolve as a result of death or incapacitation of a partner. • Under RUPA, the wrongful partner is entitled to the value of goodwill |
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2. Winding Up
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Unless otherwise agreed, partners who have not wrongfully dissolved the partnership have the right to wind up the partnership, settling the affairs after dissolution: liquidating assets to pay creditors, distribution to partners of their interest and value.
Determining the Partnership’s Value: • In cash rule in contract; • Partners agree on a value but no division yet; OR • Appraisal |
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3. Termination
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When all the affairs of the partnership are wound up.
Order of Distribution of Assets 1. Creditors outside of the partnership 2. Partner-creditor other than capital or profits 3. Partners with respect to capital 4. Partner with respect to profit |
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Former view of Termination
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When a partner terminates or leaves (dies, retires, incapacitated), partnership is dissolved unless the agreement had a continuation clause, but the court had the right to compel liquidation of the assets.
• UPA: partnership will liquidate assets (market determines the value), pay off the liabilities and share the remainder. • Exception: If there is a continuation agreement, then the partnership is not required to liquidate. |
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Modern view of Termination
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When a partner terminates, wrongfully terminates, or leaves (dies, retires, incapacitated), partnership continues and partner is dissociated from the partnership. Court has no automatic right to compel liquidation of the assets, but must make the fairest resolution
(In-kind-distribution, buy-out, etc.) • RUPA: the partnership is free to perform a buyout. Appraiser/court will determine the value of the inventory/goods. • When a partner dissociates, cannot compel liquidation • No need for a continuation agreement – unlike the UPA |
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Dissociation
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Termination of a person’s status as partner
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In-kind-distribution
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When there are no partnership debts, or where the debts can be handled from the cash account, partnership assets may not be sold, but they may be distributed in kind to the partners.
Unless it would be unfair, generally only permitted when: • (1) Agreement permits • (2) Partners agree; and • (3) Creditor’s rights are not an issue, unless unfair Absent an agreement, apply Rinke: • (1) no creditors • (2) no one other than the partners would be interested in the assets; and • (3) fair to all partners |
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Damages for Wrongful Termination
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Formerly: damages + loss of ownership interest when partnership assets are liquidated; as punishment for ill will, loss of good will.
Modernly: damages only for any losses caused by termination. No punishment related to loss of good will, so no loss of ownership interest in liquidation. |
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Formation of a Limited Partnership (LP)
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A Limited Partnership is formed by 2 or more people and having 1 or more general partner(s) (GP) and one or more limited partner(s) (LP).
• General partners assume management responsibilities and full personal liability for the debts of the partnership. • Limited partners are generally treated as passive investors. They exchange their right of control for limited liability. They are only liable up to their investment. Limited partners cannot participate in management, if he does, he loses limited liability. • Certificate of Partnership must be filed with the state, naming each limited partner, general partner |
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Liabilities of General Partner
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Personally and unlimitedly liable for the partnership
Corporation as sole general partner: Board of director is effectively the general partner as they control the general partner. • Duty of Loyalty from corp’s board of directors to limited partners, allowing limited partners to sue both the corp and board of directors. • Corporation’s directors are not generally liable UNLESS (FUC): • Fails to maintain corporate identity in affairs (forgot which hat he was wearing when doing business); OR • Undercapitalized at formation; OR • Co-mingling of assets |
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Liabilities of Limited Partner
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traded control for lack of personal liability regarding the partnership, but may become personally and unlimitedly liable IF:
Split Jurisdiction Formerly: LP acts substantially as a General Partner (evidence that LP attended partnership meetings and participated in decisions) – liable to all creditors. LP deals with a 3rd party, making the 3rd party believe that LP is a general partner – liable only to those the LP dealt with. Modernly: LP deals with a 3rd party, making the 3rd party believe that LP is a general partner – liable only to those the LP dealt with. |
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Limited Liability Partnership (LLP)
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In an LLP, each partner may participate fully in the business affair without becoming liable for the entity’s obligations. LLPs are general partnerships, but here, the general partner is not liable for all of the partnership’s obligations. However, a general partner is liable for his own conduct and those under his control (some states for contracts, some for torts, some for both).
• LLP must be registered • Individual partners will not be liable for acts of malpractice committed by other partners, but will for those under him (like in a law firm). • LLP duties owed to Partners: general partner owes a fiduciary duty to the limited partners, but the limited partners do not owe a duty to the general partner. |
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Limited Liability Company (LLC)
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• Members are not liable for LLC obligations, but are permitted equal control in management or may hire professional managers who may be partners or shareholders.
• Biggest advantage of LLC is that an LLC member is only liable for the amount of capital contribution, even if the member actively participates in the business • May be pierced like a corporation (inadequate capitalization, but can’t be pierced for failure to follow formalities) • Members owe a duty of loyalty to LLC, unless competition is allowed in the agreement. • Taxes are passed through where the shareholders pay the taxes, not the LLC (like corps). |
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Corporation
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A legal entity with limited liability. A corporation does not exist until the state returns the filing documents as approved (article of incorporation or corporate charter). This can create questions of liability during the transition time of formed, but not yet legal.
• Publicly Held Corporation • Closely Held Corporation |
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Mechanics of Incorporating
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Articles of Incorporation: to form a corporation, the incorporators must file a document with the Secretary of State (articles of incorporation or charter).
By-laws: after the corporation has been formed, it adopts by-laws. By-laws are the rules governing the corporation’s internal affairs (date, time, and place of annual meeting, number for directors, listing of officers, quorum number, meetings, etc.). |
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Characteristics of a Corporations
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• Limited liability of his investment (shareholders are not personally liable for the corporation’s obligations)
• Free transferability of ownership interests (shareholder can sell shares to whomever he wishes) • Continuity of existence (existence is indefinite) • Centralized management (normally managed by or under control of the board of directors and shareholders have no right to participate in management). • Entity status: corporation has status of a legal entity. |
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Board of Directors
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the directors manage the corporation’s business
• The Board of Directors formulates policy and appoints directors to carry out that policy. • Must act with formalities: meetings, notice of meetings, quorum, voting by majority of directors • Decisions my majority vote • Election of directors: either directors or shareholder may fill vacancies on the board • Removal of Director by Director: • CL: directors cannot remove other directors even for cause • Statute: statutes can allow for removal by a board for cause if there is a provision in by-laws • By court order – split jurisdiction |
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Officers
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the corporation’s officers administer the day-to-day affairs of the corp, under the supervision of the board. The board appoints the officers. An officer is an agent of the corporation and his authority is therefore analyzed under agency principles (authorization: actual/apparent/inherent/ratification, outside scope of authority).
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Shareholders
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have a limited role
• Shareholders elect directors at the annual meeting • Shareholders have inherent authority to change the by-laws even if the charter give power to the board • Special meeting can be held at the request of a shareholder • Shareholder can cancel board action if: • (1) There is entrenchment or • (2) Interference with shareholder democracy • Shareholder formalities: meeting and notice-annual meetings required; quorum: a majority of shareholder entitles to vote is necessary • Removal of director by shareholder: • CL: shareholders have inherent authority to remove director for cause (fraud, breach of duty of loyalty, gross incompetence) • Statute: in most jurisdictions, majority of the shareholders can remove a director even without cause • Procedurally, removal requires notice and opportunity to be heard |
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Ultra VIres
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Defense raised to prevent enforcement of a contract. Ultra Vires is any act that is beyond the purpose and powers (express or implied) of a corporation is an ultra vires act. These acts arise when the corporation acts outside the powers granted in its articles of incorporation or beyond the powers granted by state corporation law.
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Ultra Vires Rule
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(1) Did the corporation act beyond its powers?
(2) Did the corporation exercise power not specified by its by-laws? • General rule: traditionally, it was unlawful for a corporation to act outside its authorized powers. • Modernly: Corporation powers are so inclusive, almost nothing is outside – essentially abolishing the ultra vires doctrine except for: • (1) Partnership suing to void a corporate action provide that the P is not an agent of the corporation • (2) Corporation is suing its directors/officers for the action • (3) Government is suing corporation to prevent the corporation from profiting from the action • Only shareholders can raise the Ultra Vires defense, not the corporation. However, a shareholder may be solicited by the corporation to bring the action. • It is an Ultra Vires act for a corporation to guarantee a personal loan for one of its directors/officers |
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Eleemosynary Acts
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Charitable donations by the corporation. Even if the article of incorporation is silent on the subject, corporations are generally held to have an implied power to make reasonable charitable contributions. Simply have to show that there is a benefit to the corporation.
Public Policy: encourages donations to a legitimate charitable organization – corporations have most of the wealth and the community is looking to it to be a good citizen. The donation must be (these are considerations not factors): • (1) In reasonable amounts • (2) A reasonable nexus to corporate objectives (not too remote - 1- to 100 relatedness) • (3) Not so remote and fanciful to excite the opposition of shareholders (must not harm them) |
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Interference with Shareholder Democracy
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Intermediate Rule:
• (1) Plaintiff must prove that • (2) the D acted with the primary purpose of interfering with shareholder democracy (ex: shareholder not given the full and fair opportunity to vote – advanced the voting date) • (3) if the P wins, then the act is unlawful • (3b) Defense: D can argue that there was a compelling business justification • D will argue that the only way to avoid the risk was to interfere with shareholder democracy – burden of proof shifts to the D. • Counter to the defense: P will argue that there was a less harmful alternative (literature to the shareholders, info so that the shareholders could make an informed vote) – burden of proof shifts to the P. Per Se Rule: if P shows that the act was for the sole purpose of interfering with shareholder democracy, then P wins. |
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Disregarding the Corporate Entity
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1. Parent/Subsidiary Liability
2. Direct Liability 3. Piercing of the Corporate Veil (shareholder no longer protected from personal liability) |
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Parent/Subsidiary Liability
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General principal that a parent corporation is NOT liable for the acts of its subsidiaries, UNLESS parent (1) exercises complete domination over the subsidiary or (2) uses control to commit fraud or a wrongful, inequitable act to violate a statute or legal duty, or (3) is dishonest and does an injust act against the Plaintiff.
• Subsidiary is a mere instrument of the parent. • Wearing wrong hat – was wearing parent hat while they made a sub decision, acted at board meeting, etc. |
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Direct Liability
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May find liability without piercing the corporate veil - if the parent’s activities in operating the subsidiary injures a 3rd party, then parent is directly liable (BestFoods case where parent agent on site directly controlling the activities of the subsidiary, as opposed to directing the activities as an agent for the subsidiary.
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Piercing the Corporate Veil
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Shareholders have limited liability up to their investment; however, courts will pierce the corporate veil and hold shareholders personally liable for the corporation’s debts if:
1. P can prove 2. Abuse of Corporate Form 3. Inequitable not to hold shareholders personally liable (4) used for major financial institutions that have the resources to investigate prior to see financial vitality/stability |
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Abuse of Corporate Form
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• Alter ego: unity of interest and ownership so that separate personalities of corporation and individuals do not exist (look at level of control that exceed appropriate control (excess control)
• Failing to use corporate formalities • Under capitalized –unable to meet reasonably expected obligations (can use liability insurance) • Co-mingling of Funds |
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Inequitable
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• Inequitable: fraud; undercapitalization (satisfies both prongs: 2 &3) because it would not be fair to let shareholder use limited liability when he did not put in enough $ to meet reasonable obligations to begin with or did not keep enough $ in to properly carry on its business; defaulting on creditors.
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Equitable Subordination
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• (1) Equitable subordination is only applicable when a corporation is in bankruptcy
• (2) Shareholder creditor is controller (names members of the board/CEO) • (3) Shareholder creditor used control to work an inequity • Uses corporation to allow himself to get paid first (pay yourself, then get in line for loss with everyone else) • Controlled to buy material higher than market cost In general: shareholder creditor has the same status as a third party creditor unless the criteria above are met. A partner creditor gets nothing until all other creditors are fully satisfied. |
