Type of organization and problems related:

I. Principal-Agent

A. Who are the agents of the organization?( partners in general partnership, officers in
corporation)

Agency applies to everything (organizations can’t act on their own but they do through agents)

3rd Restatement §1.01 (3 part analysis): ABC

1. (A)The agent manifests assent(written or spoken words or conduct)

2. (B) Manifestation of consent by the principal that the agent act on the principal’s behalf
3. (C) Subject to the principal’s control

Look at:

1.agreement or understanding b/w parties(a contract or compensation not needed)

2.Facts in the situation determine (what parties said, did, how they acted, course of dealing)

Case: Gorton v Doty, Cargill

B. If Agency problem is a tort: Is the principal liable to a third party for the agent’s tort?

 Agent: always liable for own negligence

 Principal liable? Yes, if CONTROL + SCOPE OF EMPLOYMENT
 3rd party can sue?

3rd Restatement §2.04 Respondeat superior (employer-employee):Principal/employers are

vicariously liable for the torts of employees/agents that arise within the scope of the employee’s
employment.

3rd Restatement Factors:

a. The extent of control that the agent and the principal may exercise over the details of the
work
b. Whether the agent is engaged in a distinct occupation or business
c. Whether the type of work done by the agent is customarily done under a principal’s
direction or without supervision
 d. The skill required in the agent’s occupation
e. Whether the agent or the principal supplies the tools or other instrumentalities required for
the work and the place in which to perform it
f. The length of time during which the agent is engaged by a principal
g. Whether the agent is paid by the job or the time worked
h. Whether the principal and agent believe they are creating an employment relationship
i. Whether the principal is or is not in business

Case: Humble Oil: P’s control=liable; Sun Oil: no control on day-to-day operation=not liable

Within the Scope of employment?

 Action within the job description ( Case: Manning)

 Action occurred on the job or detour not frolic (Case:Ira S. Bushey)
 Agent intended to benefit the principal
Frolic: employee leaves work to do something personal=employer not liable
Detour: slight deviation=employer liable

Intentional torts: Employer/principal generally not liable except when intentional tort is “serving
the employer”, it was a characteristic risk related to agency relationship or it is foreseeable

Case: Manning

Independent contractor: principals are not responsible for the torts of their independent
contractors (non-employee agents) unless:

a. the tort arises out of an area over which the principal exercised control
b. inherently dangerous activity
c. non-delegable duty.
d. Negligence(Estoppel)
e. Apparent Agency

Apparent Agency: When the person that commits the tort is not the agent. Involves:

a) A reasonable belief by the 3rd party that the alleged agent is an agent of the principal
(reasonable reliance)
b) Action or inaction by the principal to create (or fail to dispel) that reasonable belief on the part
of the third party
c) Some showing that the party’s injury could have been avoided had the alleged principal
exercised control over the alleged agent.

Case: Mc Donald’s, Holiday Inn

C. If Agency problem involves contracts: Is the principal bound by the agent’s actions?

1. Creation of Actual Authority:

-objective manifestation by the principal

followed by the agent’s reasonable interpretation of the manifestation

which leads the agent to believe that it is authorized to act for the principal

scope of authority: the extent of an agent’s actual authority

 Actual Express Authority: Involves examining the principal’s explicit instructions (negates
implied authority- cannot co-exist with IA)
 Actual Implied authority: Involves examining the principal’s explicit instructions and asking
what else might be reasonably implied in those instructions to accomplish the job

Case: Millstreet church(implied authority)

Apparent Authority:

-the power held by an agent or other actor to affect a principal’s legal relations with 3rd parties when
a 3rd party reasonably believes the actor has authority to act on behalf of the principal and that
belief is traceable to the principal’s manifestations.

Can co-exist with Actual Authority

Case: Ampex: agent sold computer core memories

Restatement 3rd §4.01 Ratification: Authority that is granted after the contract has been made.
Involves situations where the agent enters into an agreement on behalf of the principal without any
authority. Two questions to determine ratification:

 Does the principal, through word or deed, manifest his assent to affirm the agreement?
 Given the situation will the law give effect to that assent?
 Limitations to ratification
 The principal must know or have reason to know the material facts
 Partial ratification is not valid
 If 3rd party manifests intention to withdraw then principal may not ratify
 Ratification will be denied to protect a 3rd party

Restatement 3rd §2.06 Undisclosed principal (Inherent agency)

 Principal liable if having knowledge of agent’s conduct, he does not take steps to notify 3rd party
and thus there is a detrimental change in position from 3rd party
 Principal cannot rely on instructions that, if under disclosed circumstances a 3rd party would
believe there’s an agency
 Principal is liable on authorized contracts but agent is not. Agent and principal are both liable if
principal partially disclosed or undisclosed

Case: Watteau: agent bought items not authorized

Restatement 3rd §2.05 Estoppel- Principal is liable if 3rd party justifiably is induced to make a
detrimental change in position because the transaction is believed to be on the principal’s account
(Equitable doctrine to prevent principal from denying agency).
  Involves:
 Acts or Omissions(either intentional or negligent)
 3rd party reasonable reliance of appearance of authority

Case: Koos Brothers

2. Agent’s liability on contracts

 Agent is generally not liable for contracts on behalf of Principal
 If there isn’t a Principal, A is liable but not on the contract

Case: Salmon- A liable equitable breach of warranty b/c he signed a contract on behalf of an non-
existent P

D. Check for fiduciary duties resulting from agency (who has a duty?): duty of care + duty of
loyalty

Fiduciary Obligations of Agents: Restatement 3rd Chapter 8

1. .Duty of Loyalty:

-Not acquire material benefit arising out of position (no self-dealing)(Case: Reading)

-Refrain from competition ( Case: Town and Country)

-No usurping principal’s opportunities ( Case: Rash)

-No secret profits (disclosure needed)

2. Duty of Care: Acting with care to fulfill your obligations

3. Duty to follow instructions(that are lawful and reasonable)

I. General Partnership:

DEF: Partnership: the association of two or more persons to carry on as co-owners a business
for profit ( RUPA §202)

 Elements: ( RUPA §401)

 Intention of parties  Ordinary decisions by majority
 Equal rights in management  Right to share in profits
 Ownership/control of partnership’s  Obligation to share in losses
property  rights of parties in dissolution
 Partner can only get remuneration for
winding up
Case: Fenwick: cashier not a partner b/c didn’t share in losses

 Characteristics:
 Entity distinct from its partners( RUPA §201)
  Doesn’t pay taxes but individual partners do
 Partnership and partners are equally liable
 Property acquired by the partnership is property of the partnership not of the
partners individually
 Partners are all agents of partnership
 Partners are controlled by partnership agreement(court wil not read beyond)

Case: Day: rights that partner wanted not in agreement

Common issues:

1. Creditor v partner:

Was partnership formed? Check Fenwick elements. If so, all partners are generally liable for debts.

2. Partner v Partner:

a)Was partnership dissolved? General rule: partnerships are terminable at will.

 A court will grant dissolution if party can prove:

 Deteriorated relationship
 Disappointing economic returns
 Circumstances no longer satisfying

Case: Owen(Bowling Alley)

Case: EXCEPTION: no dissolution when a partner has not fully performed the obligations required by
agreement. Collins(Cafeteria)

Case: EXCEPTION: when losses in a partnership of 2 partners where 1 provided labor and 1 provided
funds, neither is liable to the other. Kovacik(sharing of losses)

 Winding up- period between dissolution and termination

 Assets should be liquidated in this order:
- Pay creditors(internal +external)
- Repay partners their capital contributions
- Share profits/ losses between partners
 All partners are liable on all transactions while winding up



b)What are the rights of partners?

 Partnership property
 Neither partners nor shareholders own property
 Partners have interest in property

Case: Putnam v Shoaf(partnership property)

  Participate in management
 Ordinary decisions by vote
 Extraordinary decisions unanimously

Case: Nabisco(Ordinary decisions)

Case: Summers(garbage company, no 3rd party affected)

c)Duties and liabilities of partners?

 Fiduciary Obligations( RUPA §404)

 Duty of Loyalty
- Refrain from Competing
- Refrain from conduct adverse to partnership
- Account for partnership’s property

Case: Meinhard v Salmon- co-adventurers

Case: Ferguson: No FIDUCIARY duty to former partners

Case: Meehan: No compete

 Duty of care

- Refrain from negligence - Refrain from recklessness

- Refrain from intentional - Deal in good faith
misconduct

Case: Lawlis: Alcoholic partner

d)When can a partner be expelled?

3.Limited partnerships:

 At least one general partner with unlimited liability

 Offer limited liability to some partners if they are passive. If they become involved they can
become generally liable

4.Corporation (more lenient duty of care)

Structure:

Shareholders are passive owners who elect a board of directors to oversee management of the
corporation. Directors in turn appoint officers to run the corporation on a day-today basis
 Corporation(De Jure Corporation) - most entity-like, has its own capital, its own name, some rights as a
citizen (free speech, etc), its own property, its own tax liability

 Corporations have a statutory basis, generally subject to state corporate law of

state of incorporation
 Articles- public documents of incorporation
 De Facto Corporation when the people running the business need to avoid
liability and corporation was not ratified
- Attempted to incorporate and thought attempt was successful
 By Estoppel: 3rd party reliance
 Bylaws
- Not public
- Invalid if inconsistent with articles
- Failure to adopt doesn’t affect

Case: Boilermakers

Common Issues:

Creditors v the corporation: likely to present authority issues

Creditor v shareholders: whole point of corporation is to limit shareholder liability

Do the facts warrant piercing the corporate veil?

Shareholders v directors and officers

Derivative=injury to corporation

Must shareholder post bonds for costs?

Must shareholder make demand first?

a) Excused if:
 Delaware:
- Majority of the board has a material financial or familial interest
- There is reasonable doubt that majority of the board is capable of acting
independently/objectively because of domination or control
- Reasonable doubt that underlying transaction is the product of a valid exercise of business
judgment
 New York:
- Majority of directors are interested in transaction
- Directors fail to inform themselves to a reasonable degree about transaction
 - Directors failed to exercise business judgment in approving transaction(transaction is egregious
on its face)

 If demand refused by board, can suit go forward?

a) Probably not if BJR. Questions to answer:
 Is the board so structured that they are capable of exercising business judgment?
 Are the procedures that the board undertook to examine the desirability of the suit, on their
face, sufficient to justify deference to the board?

Case: Shlensky: Cubs owner, night games. Court will not intervene BJR.

Can the corporation kill the suit by appointing an independent committee?

Direct= inury to shareholder(Doesn’t have the procedural hurdles of derivative action)

Is there a breach of fiduciary duty? If no, then BJR applies. Corporation generally wins.

If yes, then BJR doesn’t apply- this is clearly the case with duty of loyalty

Duty of care not so much- check cases

Duty of care is not traditional negligence, focus is in neglect of duties. E.g did directors fully inform
themselves of the relevant facts before making a decision? Can the directors rely on what the officers
tell them? On what experts tell them?

Can be limited by statute.

Duty of loyalty:

Corporation-director contracts

Conflicts of interest

Does ratification fix the problem?

Disclosure claims:

Security laws come up most often in corporations but they can come up with other organizations when
definition of security is met

Howey test

Securities fraud in an initial prospectus: ’33 Act section 11

Due diligence defense?

Securities fraud in the secondary market: ’34 act section 10(b) SEC Rule 10b-5

Elements:
Scienter

Causation

Materiality

Reliance

Distinguish between failure to disclose.fraudulent disclosure and insider trading

Short swing profits: ’34 Act Section 16(b)

Officer or director v corporation

Indemnification and insurance

When are corporations obligated by statute to indemnify their officers and directors?

What are the statutory limits on ability of corporation to indemnify?

Shareholder v shareholder

Closely held corporations are unique in this context

Under what circumstances and a minority shareholder force a buyout by the majority?

b) LLC

Limited liability of a corporation and ta treatment and flexibility of partnership