Agent S Duty to Principle: Owes a Duty of Loyalty to the Principle to Put the Principles

CORPORATIONS CLARKE FALL 2012
AGENCY
Fiduciary Duty from Agent to Principle:

Agent’s duty to principle: owes a duty of loyalty to the principle to put the principles interest over his own, agent cannot solicit business for his own, and has to be open and transparent with his employer.
Competition not ok b/f severance except preparation, ok after with limitations: Employee may compete with employer after severance based on knowledge, experience, skill or memory only restraint is confidential information that would give employee competitive advantage to employee. Before severance employee may make logistical arrangements when still an employee to start his or her own new business with out breaching fiduciary obligation to the employer.(Hamburger).
Employer may limit competition with contract: Employer if wants more protection can negotiate for a non-compete clause however the non compete clause would be invalid if: (1) Skill not unique, and (2) not traceable to employer in some sense.
Also invalid on public policy grounds if: (1) Not for a reasonable duration, (2) reasonable geographic coverage, (3) the nature of employer’s risk from competition, which results in a balancing between employer protecting business and legitimate interest of employee to redeploy human capital.

Fiduciary Duty from Principle to Agent:

Presumption of at will employment: Unless agreement to contrary an employer can discharge employee for any reason as long as not opportunistic or irrational.
Unlawful Reasons for discharge:
Torturous discharge in contravention of public policy: Situations where threat of discharge could be used to coerce the employee into committing crimes, concealing wrongdoing or taking other actions harmful to the public. This does not include: firing someone for fulfilling a duty to disclose information.
Breach of employment contract: A company policy regarding termination may create limitations on the ability to terminate an employee, even if no written or oral contract between the parties.
No implied covenant of good faith and fair dealing in employment relationships: only remedy for a breach of contract, were there would be punitive damages available.

Duty to Creditors(Actual, Apparent, and Inherent Authority):

Actual Authority: Principle manifests consent directly to agent, i.e. principle really wanted to give authority to the agent by manifesting their consent directly to the agent in writing or orally regarding the scope of the agent’s authority. Bound if: principle is bound by agents authorized actions even if the third party did not know that the agent had actual authority.
Apparent Authority: The third party reasonably believes agent is authorized to act on behalf of principle as result of principles manifestation, and this could be either expressed or implied.
Two part test:(1)The third person reasonably believes that the agent has authority, (AND) some type of manifestation makes it reasonable, i.e. have to find someway to blame the principle for something that they did.
Inherent Authority: Agent derives authority from the agency relationship itself, this is designed to protect third parties where the doctrine of apparent authority fails. Designed to protect third parties where the doctrine of apparent authority fails. Because the person is vouched for should not disclaim b/c does not have authority for task.

Liability of Principles for Agents Actions:

Principle puts agent in position enabling agent to commit a fraud on third party: If agent is acting under the apparent authority of the principle then the principle is liable.
Principle would be liable even it did not benefit from the fraud: The principle would be liable even if the principle did not benefit from the transaction b/c liability is based on the fact that the agents position facilities the consummation of the fraud b/c the agent seems to be acting in the ordinary course of business.
Principle benefits from fraud: the principle will bear the loss if benefits off of the fraud. (Blackburn)
Scenarios were partnership will not be vicariously liable: (1) If the principle did not knowingly assist and participate in efforts to defraud (AND) the fraud victim did not rely on the apparent authority of the defrauder. (Sennott)

PARTNERSHIPS
Formation:

Partnership is: An association of two or more persons to carry as co-owners of a business for profit. RUPA 202(a).
Formation can be unintentional: The intent of the parties is arbitrary, all that matters is that the actors intend to carry on a business for profit. So, even if you intend not to be partnership, can get sucked into it unintentionally.
It does not matter what documents say: A paper document cannot alone show intent to form a partnership. The entire agreement and all of the attendant circumstances must be taken into consideration in reaching the determination that a partnership has actually materialized
Unless affirmatively organize as something else: Except when you affirmatively organize as something else like corporation or a limited liability entityfile with the secretary of state.
General Characteristics of partnership: there is equal sharing of ownership and management functions, and so such things as:
(1) Each partner is residual claimant,
(2) Each partner has equal right to participate in management of firm, and
(3) Each is responsible for an equal share of losses or profits.
Default rules alterable as long as no third parties hurt: Rules can be altered by third parties, but rules cannot be augments so that the rules negatively effect third parties.
Contribution to partnership must be money or property unless changed by K:If it is not money or property it is not contribution to the capital account. If do not like the result change it in the partnership agreement.

Profits:

Sharing of profits; RUPA 401(b): (1) Default rules are equal sharing of profits, (2) to be deemed a partner have to have right to profits.
Partner vs. Employee Distinction: (a) if a Partner profits are based on the economic fortunes of the firm, but if a (b) Employee then compensated by salary.

Loses:

Sharing of losses: Losses follow profits
One party provides money the other services:
Common law: If one party contributes money, and the other services if the agreement does not specify otherwise and there are not outside creditors let the losses lie where they fall.
Contribution to party that provided money by party that provided services: (1) Majority view is that the party that contributed money cannot recover from the party that contributed services, however, (2) some cases have held the opposite.

Liability; RUPA 306(a):

Unlimited liability: Misconduct of on partner can have consequences for everyone who is in the partnership.
Partner is personally liable for debts of partnership: Partners are personally liable for the debts of the partnership and creditors can go directly after the debts and they are jointly and severally liable.
Internal agreements do not affect the rights of third parties: No internal agreement in the partnership may affect the rights of third parties, who may not even know that the person that they were suing was a member of a partnership.
Steps of suing a partnership: (1) First look to assets of partnership, RUPA 307(d), (2) Partner must be joined as defendant in action against the partnership, RUPA 307(c), (3) then partners must seek contribution from other partners, RUPA 807(b)-(d).

Management:

Management: The ability to engage in policy making, participate in voting power with regard to firm governance and the ability to assign work and direct the action of employees with in the firm. The more of these qualities exist the more that the person would be considered to be a partner.
Partners have an equal right to manage; 401(f): Partners have equal rights to manage and conduct business, however, are constrained by fiduciary duty.
Equal rights to management can be augmented by express agreement: Except where the partners expressly agree to the contrary it is a fundamental principle of the law of partnership that all patterns have equal rights in the management and conduct of the business of partnership. Covalt.
Voting rights: (1) One person, one vote, (2) Routine Matters i.e. hiring and firing, majority vote, (3) Extraordinary matters, unanimous vote RUPA 401(j), (4) If expressly assign management role may not have the right to vote.
If no majority status quo remains: If there is no majority deadlock results and the status quo previals

Fiduciary Duty:

Duty to disclose information; RUPA 403: Requires a partner on demand to furnish the requesting partners with full and complete information about partnership affairs.
Duty of loyalty in partnerships: partners must account to the partnership and hold in trustee any profit or benefit gained form the partner in the conduct of the partnership business or business derived from the used of the partnership assets.
Meinhard v. Salmon:“ Not honesty alone, but the punctilio of honor most sensitive is then the standard of behavior”
Employer/Employee Setting: Employee is obligated to prefer employer’s interest to his own
Cannot restrict adventurer right to compete for something that should be his due to virtue of agency:Cannot restrict an adventurer the chance to compete for any chance to enjoy the opportunities for benefit that had come to him by virtue of his agency. It does not matter if the value vests in the partnership.
Self dealing: A partners is a fiduciary and may not engage in self-dealing, it does not matter if there is injury the rule is prophylactic in nature and is based need not only to compensate but to deter conduct that possess a risk of causing a damage to the partnership.
Burden and self dealing on the defendant:The burden on the defendant is whether the defendant can demonstrate a legitimate business purpose for his action and that his actions did not result in harm to the partnership.
Business judgment rule does not apply if: the business judgment rule does not apply if the plaintiff can demonstrate that self dealing on the part of the allegedly wrong doing partner.
Burden of proof: Clear and convincing evidence that fulfilled your fiduciary obligations.
Conflicts of interest: If conflict of interest can be shown then party with conflict (if a fiduciary) bears burden of proving that he/ she dealt fairly with the other party.
Duty of Care: Partners owe each other a fiduciary duty of the highest degree of good faith and fairdealing. Starr v. Forham.
Burden: The plaintiff has to prove that the defendant was recklessly uninformed or acted outside the bounds of reason. Cincinnati Bell.
Duty of care employer/employee setting: Unless otherwise agreed a paid agent is subject to duty to the principle to act with standard care and with the skill which is standard in the locality for the kind of work which he is employed to perform.
Mere negligence is not a violation; RUPA 404(c): Mere negligence is not violation have to show gross negligence. Fergueson.
Duty of disclosure: (a) partner must tell partners full information about everything that affects the partnership, (b) have an obligation of disclosure as long as involved in a common enterprise.
Converting an asset belonging to partnership for own use: It is only when there is a breach of trust, such as when one partner or joint venture holds property or assets belonging to the partnership or venture and converts such to his own use would this type of action lie.
Not waivable, but can be reduced if not unreasonable:
Duty of loyalty; 403(b):
(a) Not waivable in partnership agreement, but may be defined more specifically to make it more rectifiable,
(b) The partnership agreement may identify specific types or categories of activities that do not violate the duty of loyalty if not manifestly unreasonable.
Duty of Care; 404(C) or 603(b)(3): may not be unreasonable reduced
Sanctions for breach of a duty:
(1) Actual damages: Actual damages from the breach
(2) Ill-gotten gains from the breach: Damages incudes profits made from the breach and the partner has the right to receive compensation form anything improperly received.
(3) Compensation paid: Damages for compensation paid during the period of breach if it caused duties to be performed inadequately
(4) Does not result in automatic forfeiture: Does not cause automatic forfeiture of partnership interest
Other relief: (1) the court may grant a money judgment in favor of a partner if appropriate, and may grant injunctive or other equitable relief.
Fiduciary duty in limited partnerships: General partners owe limited partners duty of loyalty and care in the exercise of management functions.

Agency/ Ability to Bind Partnership:

Partner Agent of Partnership; RUPA 301: Depending on a statement of authority under 303:
(1)Can bind partnership if in ordinary course of business, third-party has no notification that the partner lacked authority: Each partner is an agent of the partnership for purpose of business. An act of a partner including the execution of an instrument in the partnership name, for apparently carrying on in the ordinarycourse of business or business of the kind carried on by the partnership bind the partnership unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partners was dealing knew or had received a notification that the partner lacked authority.
(2) If not in the ordinary course of business only binds partnership if other consent: An act of a partner which is not apparently for carrying on in the ordinary course of the partnership business binds the partnership only if the act was authorized by the other partners.
Each partner is the agent of partnership: Each partner is an agent of the partnership for the purpose of the partnership and so if they may bind the partnership
Each Partnership has apparent authority to bind partnership: In the absence of contrary evidence to the contrary a partner’s actual, apparent, or inherent authority is equivalent in scope to the authority that can be implied from the position of a general agent as distinguished form one who merely engages in ministerial acts or acts only related to a particular phase of business.
Partner can band the partnership even without the right to do so, but will bear the loss: Partners can have power to commit partnership even if the other partners do not grant them the right to do so, however, the erring partner may have to pay his co-partners. Hamond.
Can bind partnership after it dissolves: A partnership may be sued for claims arising after dissolution b/c the conduct at issue was appropriate for winding up the partnership.
Partnership by Estoppel: A person who represents himself or is represented by others as a partner in an existing partnership can bind the partnership to such representations the same as if he were a partners in fact. Apparent authority will be presumed from the persons conduct. Dow v. Jones.
This is also mirrored in RUPA; 702: Partners power to bind partnership: For two years after the partner dissociates w/o causing dissolution and winding up of the partnership business, the partnership including a surviving partnership is bound by the acts of a dissociated partners that would have bound the other partners under 301 if at the time of entering the transaction the other party:
(1) reasonably believed that the dissociated partner was then a partner.
(2) did not have notice of that partners dissociation, and
(3) is not deem dot have knowledge or notice that not a partner
Dissociate if do not want to be liable for others in partnership: If do not want to be liable for others in the partnership then dissociate.
Dissociation does not discharge liability for incurred debt unless creditor consents; RUPA 703: A partner’s dissociation does not itself discharge a partners obligation incurred before dissolution; however a dissociated partner may be released fromliability for a partnership obligation by consent of the partnership and the partnership’s creditors.

Dissociation:

At will partnership will continue as long as members assent: A partnership is formed with out agreement that the partnership shall continue for a specified term or undertaking and the at-will partnership may continue as long as members assent.
Partner can always leave even if non wrongful or wrongful: A partner can always leave regardless if the is wrongful or non-wrongful.
Non-wrongful Dissociation; 601:
Non wrongful if:
(1) Dissociation through expression of will or manifestation,
(2) Agreed event,
(3) Expulsion due to partnership agreement,
(4) Expulsion by vote of partners,
(5) Judicial determination, OR
(6) Death or incompetency
If non-wrongful then:
Wrongful Dissociation; 602:
Wrongful only if:
(1) It is a breach of an express provision of the partnership agreement, or
(2) For a partnership for a term or undertaking leaves before the expiration of the term or undertaking
Exception: Can leave if all of the other partners agree to let the partner agree.
(i) However, can dissociate and not be wrongful if partner dissociates w/ in 90 days of another partners death or dissociation.
Liability: A partners who wrongfully dissociates is liable to the partnership and to the other partners for damage’s caused by the dissociation.
Still entitled to partnership interest: The partner who wrongfully dissociated is entitled to their partnership interest.
No market value test for interest: There is most likely no market value test to determine the partnership interst
May also be entitled to good will: If violate partnership agreement may also be entitled to the future earning capacity of the business.
Wrongful Dissociation by Expulsion by judicial decree on application of partner; RUPA 601(5):
(1) Partner’s wrongful conduct actually hurt’s partnership business
(2) Partner willfully breached the partnership agreement or a duty owed to the partnership
(3) Partner engaged in conduct relating to the partnership business that made it not reasonably practical to carry on business of the partnership with that partner. See Drashner.
If wrongful other partners may continue: As long as the remaining partners pay the dissociating partners what they owe him minus damages that they have incurred.
The consequences of a wrongful dissociation: If the dissociation is wrongful then the other parties may keep going and do not have to dissolve the partnership
Non wrongful dissociation will lead to dissolution:A non wrongful dissociation will lead to dissolution unless the parties agree otherwise
Effects of a partner’s Dissociation; RUPA 603:
(1) If a partner’s dissociation results in dissolution and winding up: Go to article 8
(2) If it does not lead to dissolution: Go to Article 7