Corporations

Fall 2002, Gabaldon

  1. Professional Responsibility
  2. Conflict of Interest – MR 1.7
  3. reasonableness AND
  4. clients’ informed consent
  5. written? – old rule no, new rule in some jurisdictions req. written consent
  6. Conflict of Interest exists if:
  7. rep of one client will be directly adverse to another cleint OR
  8. significant risk that representation of one or more clients will be materially limited by lawyer’s responsibilities to another client, a former cleint, a 3p, or the personal interest of the lawyer
  9. Can represent anyway if:
  10. REASONABLY belief the lawyer will be able to provide competent and diligent representation
  11. not prohibited by law
  12. DOES NOT involve the assertion of a claim by one client against another in the same litigation
  13. informed consent
  1. Transactions with Clients – MR 1.8
  2. fair terms AND
  3. Lawyer CANNOT enter an unfair / unreasonable transaction w/ client EVEN IF the terms are fully disclosed and client consents
  4. reasonable opportunity to seek independent cousel (you need to tell them they should) AND
  5. client’s informed consent
  6. Presumptively UNFAIR / voidable by client – burden is on lawyer to prove that transaction was fair
  7. Malpractice? – not necessarily malpractice if trans is not in compliance w/ 1.8 (indicative but not dispositive w/r/t standard of care)
  1. Representation of the Partnership – who is the client?
  2. ABA – the entity is the client
  3. some states – you represent the individual partners if you represent the partnership
  4. Lawyer can represent both an individual and his organization IF there is no problem under MR 1.7
  1. Duty to the organization when a constituent threatens harm – MR 1.13
  2. if lawyer knows a member / partner / officer / director / employee is engaged or plans to engage in an act that is
  3. related to the representation AND
  4. violation of a legal obligation of the organization or of the law AND
  5. is likely to result in substantial injury to the organization
  6. lawyer should proceed as is reasonably necessary in the best interests of the organization
  7. probably means working your way up the hierarchy…
  1. Unauthorized Practice
  2. distinguishable from competence to advise on laws of another jurisdiction
  3. can be competent to advise on the laws of a jurisdiction in which you are not admitted
  4. CANNOT go to that jurisdiction to advise UNLESS you are admitted there
  5. crossing state boundaries w/ client to negotiate – most states usually tolerate occasional intrusions

  1. Intro to Primary Business Forms
  2. 7 Types / 4 Factors Chart

Ltd Liability / Control / Name & Filing / Taxation
Sole Proprietorship (w/ ee or Lender) / Unltd. for proprietor / Proprietor / ------/ Pass-through
General Partnership / Unltd. for partners / General partners / ------/ Pass-through
Limited Partnership / Unltd. for general partners; Ltd. for limited partners / General partners / YES / Pass-through
Corporation / Ltd. for shareholders / Board of Directors / YES / 2-Tier
(but Sub. S)
Limited Liability Company (LLC) / Ltd. for members / Members / YES / Pass-through
Limited Liability Partnership (LLP) / Ltd. for partners / General partners / YES / Pass-through
Limited Liability Limited Partnership (LLLP) / Ltd. for general partners; Ltd. for limited partners / General partners / YES / Pass-through
  1. Classifications
  2. Corporations vs Unincorporated Associations (the traditional classification scheme)
  3. Unincorp’d Assn’s – suitable for firms W/O publicly traded securities, have become more popular as limited liability options become available
  4. many older laws assume that all businesses are either general partnerships or corporations – newer forms are analogized to one or the other
  5. Closely Held vs. Publicly Held
  6. problematic b/c businesses exist on a continuum, sometimes aren’t clearly one or the other
  1. 7 Types
  2. Sole Proprietorship (w/ or w/o ee’s)
  3. owned by a single person
  4. UNLIMITED PERSONAL LIABILITY
  5. no legal distinction b/t the owner and business
  6. pass-through taxation
  7. no filing requirement to create
  8. *** Profit-sharing TENDS to say “co-owners” – where profits are shared, probably NOT a sole proprietorship (1914 § 7)
  1. General Partnership
  2. 1914 UPA § 6 – Association of One or More Persons to carry on as Co-owners a business for profit
  3. UNLIMITED PERSONAL LIABILITY
  4. “Default” Business form
  5. can be created by oral agreement, conduct (no filing req)
  6. usually results when business starts w/ no planning
  7. Dissolution
  8. 1914 § 31 - dissolved AT ANY TIME by the express will of ANY ONE partner (or by death of any partner)
  9. 1997 § 601-807 – dissociation and dissolution distinguished, any partner can still dissociate at any time
  10. pass-through taxation
  1. Limited Partnership
  2. composed of one or more General Partners and one or more Limited Partners
  3. gp’s
  4. Unltd personal liability
  5. control
  6. lp’s
  7. Limited Liability BUT
  8. Conditional on them NOT exercising control of the company
  9. if they do exercise control, unlimited personal liability to ANY 3P who relied on it
  10. Filing req – failure to file = GP
  11. Pass through taxation
  1. Corporation
  2. Limited Liability for all investors and participants
  3. filing requirement
  4. Two-Tiered taxation
  5. income is taxed once at the corporate level and again on a personal level
  6. Closely Held vs Publicly Held – key differences
  7. composed of Shareholders, Directors, Officers (one person can be all three)
  1. Limited Liability Company (LLC)
  2. Like a Corporation BUT easier to operate
  3. “Members” can control directly
  4. no separation b/t directors and shareholders
  5. none of the formality req’s of a corp
  6. Filing req
  7. pass through taxation
  8. the newest business form
  9. Limited Liability Partnership (LLP)
  10. Limited Personal Liability
  11. like a GP, but partners have NO PERSONAL LIABILITY for firm obligations exceeding the assets of the partnership
  1. Limited Liability Limited Partnership (LLLP)
  2. variation on the LP, not very popular
  3. No personal liability for the General Partners, still no personal liability for the Limited Partners
  4. passthrough taxation
  5. filing req

  1. Intro to Agency Law
  2. Definitions
  3. Agency
  4. Rest 1.01 – fiduciary relationship
  5. Principal manifests consent to Agent that A shall act on P’s behalf and subject to P’s control, and A consents to so act
  6. Rest 1.02 – parties’ labelling of the relationship irrelevant
  7. Rest 1.03 – manifestation of consent to Agency relationship through written, oral, conduct
  8. Consensual arrangement – can be terminated by either party at ANY TIME by giving notice to the other party (regardless of any agreement b/t them) (Rest 3.09)
  9. Apparent Authority does not automatically terminate thereby
  10. Agent
  11. one who acts on behalf of the principal
  12. Principal
  13. he who exercises control over the agent, on whose behalf the agent acts
  14. Servant / EE
  15. Agent subject to PHYSICAL CONTROL by the master
  16. how much control – “central to the job”
  17. ex – Gabaldon is an employee, even though GWLaw doesn’t tell her what to teach or how to teach it (only where and when)
  18. Independent Contractor
  19. may or may not be an agent
  20. contracts w/ another to do something, but IS NOT subject to Physical Control in performance of the undertaking
  1. Types of Authority
  2. Actual
  3. exists if A REASONABLY BELIEVES that P wished A to so act (Rest 2.01)
  4. Scope (Rest 2.02)
  5. acts or types of acts designated by the P, as the A reasonably understands them
  6. includes acts necessary and incidental to achieving P’s objectives
  7. created
  8. by Manifestations of the P to the A (oral, written, conduct if P is on notice that conduct will be so interpreted)
  9. Termination (Rest 3.09)
  10. P revokes A’s authority by giving A notice
  11. notwithstanding any agreement b/t them – CAN ALWAYS revoke authority
  12. doesn’t automatically terminate apparent authority
  1. Apparent
  2. power of A to impact P’s legal relations w/ 3p based on 3p’s REASONABLE BELIEF that A has actual authority to act for P (Rest 2.03)
  3. created (Rest 2.03)
  4. by Manifestations from P to 3P
  5. NOT from A’s manifestations to 3P
  6. Agents cannot create their own apparent authority!!!!
  7. by the position of A in a company / organization and 3p’s reasonable beliefs about what that position entails
  8. terminated (Rest 3.10)
  9. when it is no longer reasonable for 3p to believe A has authority
  10. ex – P calls 3p and tells him “we fired A”
  1. Inherent
  2. arises by implication from other Actual or Apparent authority, including by the position A holds
  3. ex – manager of a store has inherent authority to set price of goods. So, Boss is bound to Customer by Mgr’s markdown EVEN IF Mgr was expressly told by Boss “don’t mark anything down” (no actual authority) and Boss said nothing to Customer (no apparent authority)
  1. Incidental
  2. authority to do incidental acts relating to the transaction authorized
  1. Implied Authority
  2. ALL authority may be created express or implied
  3. can be created by implication from prior course of conduct by the P
  4. can be implied by the A, creating Actual Auth OR implied by 3p, creating Apparent Auth
  1. Types of Principals (Rest 1.04)
  2. Disclosed
  3. when A and 3p interact, 3p has NOTICE that the Agent is acting on behalf of P, AND has NOTICE of P’s identity
  4. Notice = knew, had reason to know, should’ve known
  1. Partially Disclosed
  2. 3p had NOTICE that A was acting on behalf of a P, but no notice of P’s identity
  1. Undisclosed
  2. 3p had NO NOTICE that A was acting on behalf of a P when 3p and A interacted
  3. ie – A appeared to be acting on his own behalf
  1. Ramifications of Agency Law – Creation of Liability
  2. When is the Principal liable to 3p?
  3. K liability
  4. when the K was authorized (A had ANY form of authority – actual, apparent, inherent, incidental, implied)
  5. Tort
  6. P intends the Agent’s actions or consequences thereof – P is therefor an independent tortfeasor
  7. ex – “Louie, break his legs”
  8. IC or EE is irrelevant
  9. P is negligent in hiring, instructing etc.
  10. IC or EE is irrelevant
  11. authorized but unintended (but instructions not negligently given)
  12. ex – P is giving instructions to A, phone cuts out at crucial time w/o P’s knowledge, A follows instructions (minus the crucial part) and causes harm
  13. P is liable, regardless of EE or IC
  14. respondiat superieur (Rest 2.04)
  15. Employer is responsible for torts of their EMPLOYEES while acting IN THE SCOPE of their employment

n/a to Independent Contractors – generally, P is not responsible for torts of an IC

  1. When is the Agent liable for acts taken on behalf of P?
  2. K
  3. disclosed principal – no, A not liable
  4. ex – you can’t sue the clerk at Barnes & Noble personally b/c you know they’re acting on behalf of the company (P)
  5. Reasonable person standard applies to determination of whether someone is acting as an agent, who the principal is, etc
  6. partially disclosed – yes, A is liable
  7. ex – securities brokers may line up a seller or sell the house’s own shares, Buyer thus knows that there’s a P involved but doesn’t know who
  8. undisclosed – yes, A is liable
  9. ex – Disney trying to assemble vast tracts in NoVa to build American Heritage park, don’t want to reveal who’s buying. If they back out of the K, is A liable? YES (P is liable as well)
  10. Tort
  11. agents are always responsible for their own torts
  1. When is 3p liable to P?
  2. K
  3. YES - 3p is liableunless
  4. undisclosed principal and
  5. K is of a type that would be non-assignable
  6. Tort
  7. YES, if 3p commits a tort and damage to P was forseeable, 3p is liable (no special agency rules apply)

  1. Partnerships
  2. Usefulness / Utility of a Writing
  3. could be necessary for Statute of Frauds
  4. avoid future disagreements, helpful in court, identifying trouble spots, plans for death or retirement
  5. NOT MANDATORY
  1. Allocation of proficts or losses (distinguish liability to 3ps)
  2. Subject to Agreement
  3. Default Rules (1914 § 18, 1997 § 401)
  4. profits shared equally
  5. all partners share equally in profits after expenses are paid (including those due to partners) (18(a))
  6. losses follow profits
  7. all partners must contribute to losses according to share of the profits (18(a))
  8. no remuneration for services to p’ship (18(f))
  9. p’s are entitled to indemnification (18(b))
  10. partnership must indemnify partners w/r/t payments made and personal liabilities incurred by him in the ordinary course of business for the preservation of the business and its property
  11. includes overpayment (more than share owed) paid by any partner on a loss, capital loss, etc.
  12. contribute to losses including those of the contributed capital (18(a))
  13. according to share of the profits
  14. proportionate sharing if one or more partners is insolvent (40(d))
  15. partners will contribute in relative proportion to their profit shares the additional amount owed by an insolvent partner
  16. ex – A 60%, B 20%, C 20%, $8,000 loss, C is insolvent
  17. A&B are j&s liable in tort, j in K, C would have to indemnify if he ever got $ again
  18. A = 6 / 8 = 75%
  19. B = 2 / 8 = 25%
  20. C’s share of the loss is 20% of 8000 = 1,600
  21. A pays his $4800 share + 75% of C’s 1,600 share (additional $1,200)
  22. B pays his $1600 share + 25% of C’s $1600 share (additional $400)
  23. rule is for dissolution only, applied before dissolution b/c no other practicable way to do it
  24. ranking distributions on liabilities of the partnership (40(b))
  25. owed to creditors OTHER than partners
  26. owed to partners OTHER than for capital or profits
  27. owed to partners for capital
  28. owed to partners for profits
  29. Richert v. Handley – losses include losses of capital contributed by partners, are liabilities to be repaid BEFORE dividing profits – Generally, you figure out how much $ the company is short and then divide it equally (case involved failed timber venture); no renumeration unless agreed on by parties
  1. Liability of partners to 3ps for acts of the Partnership
  2. UPA 1914
  3. tort – joint and several (15(a))
  4. IF act is w/in regular course of business OR w/ the authority of co-partners
  5. INDEMNIFICATION under 18(b) + interest under 18(c) if one partner pays entire jment in a tort suit (gets proportional share from others)
  6. K – joint (15(b))
  7. revised UPA and most states make this j&s as well
  8. UPA 1997
  9. tort & K – both joint and several liability (306)
  10. all partners are J&S liable for obligations of the p’ship
  11. Effect of filing an LLP election (*see IV E 3)
  1. Law Firm Partnerships
  2. Types of partners, effect on liability and obligations to contribute
  3. 2 Level P’ship – Income Partners and Equity Partners (they put in cash)
  4. Staff Atty / Of Counsel – more like ee, not partners
  5. points worth generalizing
  6. fiduciary duties terminate w/ the p’ship
  7. Business Judgment Rule (BJR) (*see also Corporate BJR)
  8. applies in case of negligence or alleged negligence, NOT self-dealing/loyalty issues
  9. duty to beneficiary may affect conclusions about possibility of duties to others (*see corporate similarities)
  1. LLPs
  2. History
  3. grows out of Texas problems w/ malpractice and negligence claims against law firms following S&L failures
  4. invented by law firms to protect their partners
  1. Narrow v. Broad approaches
  2. Texas – narrow (limited liability only for tort claims)
  3. limits liability only for negligence or malpractice
  4. personal liability for K liabilities, etc.
  5. didn’t cover obligations of partners to indemnify other partners or to contribute to assets on winding up
  6. personal liability on those who supervised those who committed the negligence or malpractice
  7. 1997 UPA – broad (limited liability for both tort and K claims)
  8. no personal liability of partners for K or tort or other obligations of the p’ship, by contribution or otherwise (306(c))
  9. partners will still be personally liable for THEIR OWN TORTS (their own malpractice, fraud, or negligence in representation)
  1. Effect of LLP election
  2. Liability to 3p’s
  3. Partners are not personally responsible for any obligation of the p’ship incurred while it is an LLP (306(c))
  4. contribution / indemnification
  5. no personal liability for contribution to capital losses or other losses either (in the broad shield statutes)
  6. right to contribution for payments made on behalf of the p’ship (401)

duty to contribute to partners losses, incuding capital losses

  1. notice to 3p NOT req’d except for the name inclusion requirement
  2. ex – Hamner, Vaughan, and Franker, LLP
  3. Miscellany
  4. *see various corporate law doctrines, including piercing the corporate veil
  5. p61 N9 – many believe the LLP “shield” is more porous than the corp veil b/c of problems w/ multi-state practice, is new p’ship created whenever anyone enters or leaves the firm, etc.
  6. Recognition state-to-state
  7. Art 11 (1997 UPA)
  8. need “Statement of Foreign Qualification”
  9. LLP is governed by the law of the state in which it is formed – governs relations b/t partners and liability of the partners for obligations of the p’ship
  10. unclear / not universally accepted – see p 62 N9
  1. Management / Ability to Bind the Partnership
  2. §§ 9, 18 of 1914 UPA
  3. § 9 Partner Agent of P’ship as to P’ship Business
  4. (1) Every Partner is an Agent of the P’ship
  5. acts apparently in the ordinary course of the p’ship business bind the p’ship UNLESS the Partner has NO AUTHORITY and the 3p knows that
  6. (2) P’ship NOT BOUND if act is not apparently for the carrying on of the business of the p’ship in the usual way
  7. § 18 Rules Determining Rights and duties of Partners
  8. SUBJECT TO AGREEMENT
  9. (e) All partners have EQUAL RIGHTS in the mgmt and conduct of the p’ship business
  10. (h) differences in ordinary course of business – Majority of Partners
  11. unanimous consent to do any act in contravention of agmt b/t the Partners
  1. actual / inherent authority
  2. by agreement
  3. can be agreed to by the parties amongst themselves
  4. IS RELEVANT to liability to 3ps BUT ONLY if the 3p knows about the restriction in the agreement
  5. default rules
  6. equal rights
  7. majority rule
  8. in absence of “voting shares” agreement, count noses (not profit percentages)
  9. differences decided by the majority
  10. if p has specifically agreed not to do something, can’t act in contravention of that – not binding to a 3p that knows of the restriction on authority (9(4))
  11. w/in usual course of p’ship business
  12. burden on  to show Agent’s authority in order to enforce against the Principal
  13. Nabisco v. Strand– one member may not unilaterally restrict the actual authority of another partner absent an express written provision in the p’ship agmt – Freeman and Stroud have a GP food store, Stroud tells Nabisco he “will not be responsible for any bread ordered” (no apparent authority), Freeman orders bread anyway, Stroud is liable for his share of the costs. Freeman has Actual Authority b/c it’s in the ordinary course of business, Stroud is not a “majority” so he can’t take away Freeman’s power.
  1. apparent / inherent (remember effect of past practice in creating apparent authority)
  2. Smith v. Dixon – need only Apparent Auth OR Actual Auth, not both - Managing Smith is instructed by Family of Smiths (they have a GP farm business) not to sell below $225K, he sells for $200K. Smiths are bound – he had no Actual Authority (he’s not a majority of the family), but he does have Apparent Authority (Dixon had no way of knowing what the bottom line was).
  3. Terminating Apparent Auth (Cf 9(1))
  4. P’ship must give notice to the Partner of termination of the authority AND
  5. 3p must have notice that authority no longer exists
  6. Look to:
  7. Scope of P’ship Business
  8. Prior Practice of the Partnership
  9. remember – P’ship creates the authority (by acquiescing, etc), NOT the individual partner
  1. effect of statement of p’ship authority under 1997 UPA
  2. 1997 § 303
  3. P’ship may file a statement of p’ship authority that can place limits on authoriy of some / all the partners to bind the pship
  4. P’ship is bound by the Grant of Auth in a filing in favor of a person who gives value w/o knowledge to the contrary
  5. NO CONSTRUCTIVE NOTICE - person not a partner is NOT DEEMED TO KNOW of the limitation merely b/c it is on file in the statement
  6. Different rules for real property
  7. if filing precludes the transfer, constructive knowledge (even if the 3p doesn’t check the filing)
  8. How it plays out
  9. If 3p checks the filing
  10. No Filing – back to 1914 version search for Apparent authority / Actual Authority (look at scope of p’ship business, past practices of the p’ship, inherent authority)
  11. Filing Permits – P’ship will be bound by the grant of authority in the filing
  12. Filing Precludes – 3p is now on notice of a potential problem

*** this helps 3p avoid litigation in the future (no real reason to look if you expect litigation or don’t care)