CORPORATIONS

SPRING 2002

I. AGENCY

  1. Basic Definitions

1.Agency is the fiduciary relationship that results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control and consent by the other so to act.

  1. One for whom action is taken is the principal (principals necessarily have a stake in the business).
  2. The person who takes the action on behalf of another is the agent (agents may or may not have stake in the business).
  1. Master v. Servant v. Independent Contractor
  2. A master is a principal who employs an agent to perform service and who controls or has a right to control the physical conduct of the other’s service.
  3. A servant is agent employed by master to perform service whose physical conduct while serving is controlled or subject to control of the master.
  4. An independent contractor is one who contracts with another to do something for that person, but who is not controlled or subject to control by the other with respect to performance of the undertaking. An independent contractor may or may not be an agent.
  5. Liability for Acts of Agents
  6. A principal is liable for acts of agents acting within the scope of employment but not for acts of independent contractors.
  7. Actual Authority

Arises from manifestation of principal to agent to deal with others as a representative of the principal, principal is liable for the acts of the agent.

  1. Apparent Authority

Arises from manifestation of a principal to a 3rd party that another person is authorized to act as an agent for the principal. The theory is that the 3rd person relies on the manifestation. Look at the 3rd party’s belief.

  1. Inherent Authority

Arises from the manifestation of the agency relationship itself and without regard to actual or apparent authority.

Example: Owner tells store manager not to mark down prices, but the manager marks down prices. Manager acted with inherent authority because there was no third party and no actual authority.

  1. Implied Authority

Usually based on past dealings. Look at the view of the third party who reasonably believes that the agent can act.

II.PARTNERSHIPS

A.General Partnerships

1.Definition:

An association of two or more people to carry on as co-owners of a business for profit.

2 people can form a partnership even if there is no intent to do so, assume partnership unless specified otherwise (§ 7 of 1914 UPA; § 202(c)(3) of 1997 UPA)

  1. Partnership Agreement
  2. The agreement is the law of the partnership.
  3. The UPA provides default rules that can be modified by agreement
  4. BUT the rights of third parties cannot be affected by partnership agreements.
  5. Partners cannot contract to limit liability to a third party but partners can agree among themselves to whatever deal they like.
  6. UPA background rules apply when there is no writing or nothing specific in the writing.
  7. Can sue an individual partner without suing the partnership.
  8. 1997 UPA
  • Can sue an individual partner but cannot go after personal assets unless and until the partnership assets are exhausted.
  • Partners are jointly and severally liable for all the obligations of the partnership. This means that the P can sue whoever she wants and can collect solely from that partner.
  • This makes the partnership seem more like a separate entity.
  • A partner can waive this requirement.
  1. Sharing of Profits and Losses

Where a person receives $ from p/s as payment of debt, rent, interest on a loan does not imply a p/s. (§ 18 1914 UPA)

Even if not split equally, profit sharing is prima facie evidence of formation of a partnership.

Default Rule

Absent agreement otherwise, profits and losses shared equally.

Note that individual partners may not want to split losses equally because of tax implications.

  1. P/S does not pay taxes, the individuals who make up the p/s pay taxes.
  2. If all losses are allocated to A who has more taxable income than B, there is a bigger tax savings than if losses are split 50/50. So A may not want to split loss 50/50.

Richert v. Handly

Facts: R supplied the money H did the work, deal to share equally in the profits and losses. H is both a partner and a laborer, he also charges for his services.

Holding: Regardless of who contributed what to the venture, each party is responsible for half the losses. The capital contributions matter only when determining who should pay whom.

  1. Partnership Management

Each partner is an agent of the partnership for carrying on the business of the partnership. Cannot K around this.

UPA 1914 - § 9

  1. Every partner is an agent of the p/s for the purpose of its business and the act of every partner, for apparently carrying on in the usual way the business of the p/s of which he is a member binds the p/s, unless the partner so acting has in fact no authority to act for the p/s in the particular manner and the person to whom he is dealing has knowledge of the fact that he has no such authority.
  2. An act of a partner which is not apparently for the carrying on of the business of the p/s in the usual way does not bind the p/s unless authorized by the other partners.
  3. Unless authorized by the other partners or unless they have abandoned the business, all the partners must consent in order to:
  4. Assign the p/s property in trust for creditors or in the assignee’s promise to pay the debts of the p/s.
  5. Dispose of the goodwill of the business.
  6. Do any other act which would make it impossible to carry on the ordinary business of a p/s
  7. Confess a judgment
  8. Submit a p/s claim or liability to arbitration or reference.
  9. No act of a partner in contravention of a restriction on authority shall bind the p/s to persons having knowledge of the restriction.

UPA 1997

§301 - each partner is an agent of the p/s for the purpose if its business. An act of a partner for apparently carrying on in the ordinary course of business binds the p/s unless the partner had no authority to act for the p/s in the particular matter and the person with whom the partner was dealing knew or had received a notification that the partner lacked authority. An act which is not apparently for carrying on in the ordinary course of the business binds the p/s only if the act was authorized by the other partners.

  1. Scope of Authority

An agent’s actual or apparent authority binds the principal.

  1. Actual Authority
  • Manifestation by principal to agent that agent can act on principal’s behalf.
  • Basic rule is that each partner has authority to act for the partnership in the ordinary course of the partnership business. Their actions bind the p/s unless the partner has no authority AND the third party knows and the action was taken anyway.
  • § 18(h) says if there is disagreement about business, the dispute should be resolved through majority vote, difficult to get this in 2-partner relationship.
  • One partner cannot change actual authority but can try to change apparent authority.
  • The tinkering of actual authority does not affect apparent authority.
  • Nabisco v. Stroud

Facts: S and F are partners who buy bread from Nabisco. Both agree to dissolve the p/s but F continued to buy bread from Nabisco who then sued S for outstanding payment. S argues that F was not authorized to buy the bread so S does not owe Nabisco anything.

Holding: Nabisco wins because one partner cannot restrict the power of another partner to buy the bread, F has actual authority. What should S have done? He should have dissolved the p/s and made Nabisco aware of this. If S dissolves the p/s and then F buys bread from Nabisco, then S would no longer be liable. Dissolution eliminates the actual authority of the partners to conduct business; in order to eliminate apparent authority, the partners must give notice to third parties. They should also publish and give notice to the world. (§ 35, 36 of UPA 1914)

  1. Apparent Authority
  • Manifestation of a principal to a 3rd party that another person is authorized to act as an agent for the principal so that the agent appears in the eyes of a 3rd party to bind the partnership.
  • Look at what the third party reasonably believes based on past and usual dealings.
  • Apparent authority cannot be created by manifestations of the agent.
  • Smith v. Dixon

Facts: D sued S for specific performance or damages due to non-performance of a property K. S claims WR, who agreed to a lower sale price, had no authority to make the deal for a lower price.

Holding: D wins because WR had apparent authority to negotiate a lower price. The court looked at what WR did in the past.

  1. Scope of Apparent Authority to Bind Partnership

The broader the partnership’s business the more liability a partner can create in favor of 3rd parties against the partnership.

Rouse v. Pollard

Facts: Attorney gets money from client, squanders it, attorney is judgment proof so client goes after the partnership.

Holding: P loses because the deal was not in the usual course of the law business in NJ.

The court looks at what is usually done to determine the scope of the business.

Roach v. Mead

Facts: Attorney gets money from client, squanders it, attorney is judgment proof so client goes after the partnership. P sued for negligence (professional malpractice) in failing to give advice regarding the loan.

Holding: P wins because giving legal advice is within the scope of a law partnership business so it is hard for the firm to say that the partner did not have the apparent authority to give legal advice even if it is bad legal advice.

  1. Partners’ Duties to Each Other
  1. Fiduciary Relationship
  1. Duties based on fiduciary relationship so partners have a duty of loyalty and a duty of care.
  • Opportunities within the scope of the partnership’s business that come to an individual partner belong to the p/s.
  • Fiduciary duty rules are gap fillers, if not specified otherwise the default rule applies.
  • Partners can vary the scope of the duty by explicit agreement, if they don’t then the law imposes a general fiduciary duty.
  • The question of what is in the scope of the duty can be modified implicitly by the partners as well as explicitly.
  1. UPA 1914

§21 - Every partner must account to the p/s for any benefit and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct or liquidation of the p/s from any use by him of its property.

  • If p/s money is used without authorization, the partners get the profits but not the losses so the individual partner incurs liability for the losses for taking the money in the first place.
  1. UPA 1997

Imposes a more narrow fiduciary duty, there is no duty during formation but there is a duty during dissolution.

§404 - The only fiduciary duties a partner owes to the p/s and the other partners are the duty of loyalty and the duty of care. (these are corps. concepts)

Duty of Loyalty (catches crooks)

  1. Account to p/s and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the p/s business or derived from a use by the partner of p/s property including the appropriation of a p/s opportunity
  2. No dealing with p/s in the conduct or winding up of the p/s business as or on behalf of a party having an interest adverse to the p/s
  3. Refrain from competing with the p/s in the conduct of the p/s business before the dissolution of the p/s.

Duty of Care (catches bumblers)

  1. In the conduct and winding up of the p/s business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct or a knowing violation of the law.
  1. Cases
  1. Meinhard v. Salmon

Facts: M pays S ½ of money to improve, manage and run property. M gets 40% of profit for 5 years then 50% for the rest of the lease. Losses shared equally, S has sole power to manage and operate the business. S enters new lease prior to end is lease with M and does not tell M what he is doing. M wants new lease held in trust as asset of the p/s, S claims there never was a partnership merely a venture that would end when original lease expired. Both leases concern the same property, 2nd lease just contains more properties. Crt considers scope of P/S and scope of new deal.

Holding: M wins. Partners owe duty of loyalty to each other. Profit sharing implies partnership. What should S have done? S should have told M about the deal and then they could have competed for the deal.

  1. UPA fiduciary duties apply in dissolution.

Johnson v. Peckham

Similar facts as Meinhard, same result.

P required to share profits of other deal with J b/c the deal was made before the p/s ended so there is a fiduciary duty owed.

  1. Partnership Property
  2. UPA 1997

§501 - Individual partners have no co-ownership interest in the p/s’s property (assets). There is no ability to transfer p/s partner for an individual partner’s own personal benefit.

§502 - Partners can transfer interest in profits and surplus for their own personal benefit. This is the transferable interest because this is personal property not p/s property.

§503

  1. If a partner transfers her transferable interest this does not by itself cause the partner’s dissociation or a dissolution and winding up of the business.
  2. A partner cannot transfer a liability without consent of the other partner. Consent needed to assign liabilities and duties, though no consent needed to transfer economic rights (profits, surplus).
  3. Does not entitle the transferee to participate in the management or conduct of the p/s business, to require access to information concerning p/s transactions or to inspect or copy books and records.
  4. Transferee gets management rights only if the other partners accept him as a partner.
  5. Upon transfer the transferor retains the rights and duties of a partner other than the interest in distributions transferred.
  6. Transferring rights and liabilities does not affect the rights of creditors to come after transferor unless creditor signed a release.
  7. The transferee is not liable for future liabilities because she is not a partner unless there is a K between transferee and transferor.
  1. Creditors
  2. Individual creditors can get a partner’s personal assets and transferable interest.
  3. Partnership creditors can get the p/s’s assets as well as the assets of the individual partners but the creditor must exhaust p/s assets first before going after personal assets.
  4. Policy
  • If individual creditors go after p/s assets then this can disrupt the business.
  • P/S is more credit worthy because the creditors can go after other assets if necessary.
  1. Partnership Accounting
  2. Basic Financial Statements
  1. Balance Sheet

Snapshot of the financial condition of the company at one point in time, the right side must equal the left side.

  1. Assets (left side) = liabilities + equity (right side)
  2. Equity = Assets - Liabilities Equity is the difference between what you have and what you owe.
  3. Double Entry Bookkeeping - there must be two entries for every transaction so that the sides balance
  4. Numbers are kept at historical cost not fair market value.
  • This is not the most accurate way of bookkeeping because it does not tell you what the assets are worth.
  • But historical cost is easy to find whereas fair market value is not practical.
  • Bank loans are not kept at historical cost because that is a bad way to reflect the value of the assets because historical cost does not reflect the value of the assets and if assets are overvalued then equity is overvalued.
  • Cannot tell from the balance sheet what each partner gets upon dissolution.
  • Assets are book values so they won’t tell you what they are worth during liquidation.
  • AR involve collection risks b/c if the company goes out of business debtors have no incentive to pay b/c there is no one at the company to do the collections.
  • Depreciation of fixtures and other property.
  • Creditors may take a cash payment less than what they are owed which will affect the right side of the balance sheet.
  • Can get an idea of the assets and liabilities even though they are not completely accurate.
  • Look at the profits when seeking to value the business so the income statement is a better way to value the business. Higher profits mean higher price.
  1. Income Statement

Captures the performance of the company over a period of time.

  1. The net profit is reflected in the partner’s capital, this ties the balance sheet to the income statement.
  2. Profits = Revenue - Expenses
  3. Profits do not equal cash position of the business.
  4. Distribution after Dissolution

UPA 1917 §40

The liabilities of the p/s shall rank in order of payment:

  1. Outside creditors
  2. Inside creditors (loans from partners)
  3. Partner’s initial capital contribution
  4. Partner’s profits
  1. Partnership Dissolution

Partnership for a Term

  • Partnership that exists for a fixed period of time
  • A partnership for a term becomes a p/s at will upon the end of the term.

Partnership at Will

  • Any partner can leave at any time with no liability.
  • UPA 1914
  1. Partners may by agreement vary the UPA dissolution rules
  2. Distinguishes dissolution from termination or winding up.
  • Dissolution is any change in the relationship between the partners. This cannot be modified thru agreement. (§29)
  • Dissolution does not terminate the p/s. (§30)
  1. Distinguish legal right to terminate the business from the economic/actual termination.
  1. Any partner who did not wrongfully dissolve can force the liquidation of the business. (§38)
  2. If a partner has this legal right that does not mean that the business will be liquidated.
  1. No liquidation if the business is still viable because someone will always be interested in continuing the business and will be willing to buy off the partner who can cause the liquidation.
  2. Liquidation reduces the value of the business more than buying off does.
  1. Unless otherwise agreed the partners who have not wrongfully dissolved the p/s have the right to wind up the p/s affairs provided that any partner with cause may obtain winding up from the court. (§37)
  2. Causes of Dissolution

§31 - Dissolution is caused: