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Unincorporated Business Organizations-Wyrsch-Spring 2012 1 AGENCY I. Agency Relationship a. FOCUS

a.i. Burden is on the one asserting agency relationship to prove it

a.ii. Elements:

a.ii.1. Person (A) acting o/b/o & for benefit of another (P)

a.ii.1.a. Even if retain broad rights of control, A must be carrying out P’s affairs to be an A. Incidental benefit (Clapp v. JMK/Skewer, Inc.)

a.ii.2. A subject to P’s control

a.ii.2.a. Element of subservience

a.ii.3. Mutual consent to enter into relation

a.ii.3.a. Express

a.ii.3.b. Implied - R§1: Ag’y relationship can exist where failed to recognize that it exists

a.iii. Legal Consequences of Relationship:

a.iii.1. Fiduciary relations exist

a.iii.2. Creates rights + duties

a.iii.2.a. Express

a.iii.2.b. Implied

a.iii.3. Confers power/authority to A to act

a.iii.4. Subjects P to potential liability to 3d parties

Carrier v. McLlarky (NH 1997) - M installed replacement water heater in C’s house - M said would try to get a credit believing old water heater to be under warranty - C never rec’d credit b/c M says has not rec’d $ from manufacturer, so C sued M - Trial Ct ruled in favor of C under theory that M breached duty as A - Issue: agency agmt was formed, was there a breach? - Holding: Reverse trial court. Promise to act as an A is “a promise only to make reasonable efforts to accomplish the directed result” o A must conduct affairs of P w/ a “certain level of diligence, skill, & competence” o M did not guarantee that a credit would be obtained - Do not become an agent simply by offering help or making a suggestion (Violette v. Shoup)

b. COMPARISON

b.i. Buyer-Seller

US v. General Electric (SCOTUS 1926) - GE accused on price fixing

1 - GE said that title passed directly from GE to customer, b/c distributors are an A of GE, thus, there is no intermediate sale to distributor - GE’s Apparent Marketing Strategy: o Control sale of products to consumers (Be competitive) o Maintain quality control over products o Place business risks on distributors (expenses, damages) o Avoid application of antitrust laws (price fixing) . Price fixing among competitors: horizontal . Vertical price fixing  debated issue as to whether it should be considered illegal - Lamps remain in GE’s control until sold by A - A is to pay amount equal to total sale for the month less the A’s compensation of all lamps sold by the A - Issue: whether As to be treated as owners of the lamps, thus, fixed pricing violates anti-trust laws? - Holding: nothing in the form of the K saying they are owners thus making them As, and “delivery of stock to each A anything more than a consignment to the A for his custody and sale as such” Three Structure Options: 1. Too large of a work force a. GE  Depts.  Sales Employees  Consumers 2.  Offices  Sales Employees  Consumers 3. Possible Price Fixing Violation – Sell to Wholesaler a. GE  Wholesalers  Retailers  Consumers b. Wholesalers are separately owned businesses 4. GE’s Chosen Method – Give Power/authority to Sell (Consignment) a. GE  Distributors/Cosignees Agents  Consumers b. Distributors work for GE with power to sell its products but the products are never owned by the distributors

TEST: whether the actor is acting primarily for his own benefit or for the benefit of the other party when acting pursuant to the arrangement b/w the parties

b.ii. Debtor-Creditor

A. Gay Jenson Farms v. Cargill (MN 1981) - Farmers (3d Party) sold grain to Warren (A), who was financed by Cargill (P) to ensure that Warren had enough grain for C - W collapses financially - Farmers sue C, saying W bought Grain as C’s agent - C says typical supplier relationship - Issue: Did C become liable through course of dealings for Ks W made? - Holding: Yes. All 3 elements of agency are met—not merely a B-S relationship o C told W to implement its recommends., manifesting consent that W would be its A o W acted o/b/o C when procuring grain for C and C financed W o C exhibited control over W by interfering w/ W’s internal affairs o Servant-IC distinction does not matter here b/c K issue

b.iii. Bailor-Bailee

b.iv. Other—

b.iv.1. Franchisee Unincorporated Business Organizations-Wyrsch-Spring 2012 3 b.iv.1.a. H& R Block v. Lovelace: franchise = license from the owner of a TM or trade name [franchisor] permitting another [franchisee] to sell a product or service under that name

b.iv.1.b. Exercise of considerable amount of control by Franchisor

b.iv.1.c. Parties had different purposes and objects, concluding franchisee did not act for benefit of franchisor or on its behalf

b.iv.2. Marriage - Cannot infer agency, but such a relationship is entitled to great weight, when considered with other circumstances, as tending to establish the fact of agency

b.iv.3. Property

b.iv.3.a. Co-owners: joint ownership of property does not in itself establish agency

b.iv.3.b. LL-T: no unless lessee makes improvements b/c lease requires such, then becomes lessor’s A

b.iv.4. Corporate

b.iv.4.a. Directors are not SHs’ or corp’n’s A

b.iv.4.b. SHs generally cannot control directors

b.iv.4.c. Alter Ego/Mere Instrumentality

b.iv.4.c.i. Corp’ns are separate & distinct unless PCV to show that one is alter ego of the other by showing it is so controlled & affairs conducted that it is a mere instrumentality of another & observing separate existence would sanction fraud or promote injustice

b.iv.4.c.ii. Disregard when:

b.iv.4.c.ii.1. Gross undercapitalization

b.iv.4.c.ii.2. Fraud

b.iv.4.c.ii.3. Failure to observe corp formalities

b.iv.4.c.ii.4. Non-functioning of off’rs & directors

b.iv.4.c.ii.5. Sub mere shadow of parent

b.iv.4.d. General A’gy Principles: Must demonstrate relationship that one corp’n is acting for other

c. RELATIONSHIP

c.i. Informal & Formal

c.ii. Agreement

c.ii.1. Written  matter of interpretation

3 c.ii.2. Oral  evidentiary issues

c.ii.3. No agmt or gaps in agmt  implied rights + duties

c.iii. Types

c.iii.1. Employer-employee

c.iii.2. Principal-professional agent

c.iv. Everything negotiable except employment laws & regs

II. Rights & Duties B/w P&A

a. Principal

a.i. Duties to A

a.i.1. To exonerate & indemnify: so long as conduct w/in scope of authority

a.i.1.a. Express commitment

a.i.1.a.i. Not entitled to reimbursement in defending suit if IC

a.i.1.b. Implied: reasonable expectations of parties

a.i.1.b.i. Nature of relationship

a.i.1.b.i.1. Depends on reasonable inferences drawn from circumstances

a.i.1.b.ii. Nature of expense/customs of business

a.i.1.c. A’s misconduct? No indemnity for own negligence, illegal acts, or other wrongful conduct (R 8.14)

a.i.2. To pay compensation

a.i.2.a. Express k

a.i.2.b. Implied k = conduct + other circumstances

a.i.2.c. Dependent on result

a.i.2.d. Subagent?

a.i.2.d.i. P must know or have reason to know that A will hire someone else to act o/b/o P & consent, express or implied, to such arrangement

a.i.2.d.ii. Otherwise SubA only has claim against A not P

McKnight v. Peoples-Pittsburgh Trust Co. (PA 1948) - Bank owned Theatres, which McKnight then managed on salary & commission basis - M entered military, rec’d no commission on sale when theatres sold - But W.D. George was the bank’s A; M rec’d compensation from George, who had chosen M in the first place Bank  George Bros  McKnight Unincorporated Business Organizations-Wyrsch-Spring 2012 5 - At no time was there any expectation that the bank would pay McKnight - Holding: M was not a subA of Bank, thus, M only has claim against G for compensation, not bank o Important that the P keeps relationship clean with A and not interact directly with the subagent so that you cannot be ultimately seen as a principal of the subagent a.i.3. To exercise due care a.i.3.a. Traditional approach

a.i.3.a.i. “construction, inspection, and maintenance of the premises, selection of fellow employees, & mgmt. of the work”

a.i.3.a.ii. Can discharge duty by warning of risks of unsafe conditions

a.i.3.a.iii. Duty is nondelegable

a.i.3.b. Restrictions on liability

a.i.3.b.i. Fellow-servant rule: “he who engages in the employment of another for performance of specified duties for compensation, takes upon himself natural and ordinary risks & perils incident to the performance of such services, each employee can observe conduct of others, give notice of misconduct and leave, if employer does not take precautions, thus, safety of each more effectually secured than done by indemnity

a.i.3.b.ii. Contributory negligence

a.i.3.b.iii. Assumption of risk

a.i.3.c. Worker’s comp (only for employees)

a.i.3.c.i. Entitled to compensation even if not fault of employer

a.i.3.c.ii. No recovery for P&S

b. Agent

b.i. Fiduciary Duties

b.i.1. Fiduciary (R§13): a person who has a duty, created by his undertaking, to act primarily for the benefit of another in matters connected with his undertaking

b.i.2. Why?

b.i.2.a. Acting o/b/o & for benefit of P

b.i.2.b. Engaging in legally binding conduct

b.i.2.c. Not in physical presence of P, less control

b.i.2.d. In control of & using another person’s property ($)

b.i.2.e. Deterrent effect to exercise caution

b.i.3. Cuts across all relations

b.i.3.a. Corp. off’rs, partners 5 b.i.3.b. Employees (sales persons, blue collar)

b.i.3.c. Professional As (att’y, acct’t)

b.i.3.d. Well-established businesses

b.i.3.e. Gov’t off’ls

b.i.4. Series of judgment calls

b.i.4.a. Reasonable

b.i.4.a.i. Objective

b.i.4.a.ii. Subjective

b.i.4.b. Conflict of interest

b.i.4.b.i. Actual

b.i.4.b.ii. Appearance

b.i.4.c. Material, important v. trivial, irrelevant

b.i.4.d. Degree of disclosure

b.i.4.e. A’s intent

b.i.4.e.i. Entirely innocent

b.i.4.e.ii. Deceptive

b.i.4.f. Damage, if any; if so, Cx-tion?

b.i.5. Differing Ct analyses

b.i.5.a. Conclusionary

b.i.5.b. Detailed

b.i.6. Major sources of:

b.i.6.a. Common law: inherent relationships

b.i.6.b. Agmt of parties (employment or other K)

b.i.6.c. Statute or Regs

b.i.6.d. Stds of Professional Conduct b.ii. A’s Fiduciary Duties

b.ii.1. To perform

b.ii.1.a. Follow instructions (obey reasonable directions)

b.ii.1.b. Exercise reasonable care Unincorporated Business Organizations-Wyrsch-Spring 2012 7 b.ii.1.b.i. Inaction

b.ii.1.b.ii. Action

b.ii.1.b.ii.1. Duty to indemnify P when P pays for damages resulting from A’s negligence while acting w/in scope of employment

b.ii.2. To disclose (Tied into duty of care/duty of loyalty)

b.ii.2.a. Relation to “perform” & “loyalty” duties

b.ii.2.b. Material info

b.ii.2.c. Duty to account: keep accurate record of $ rec’d & pd out o/b/o P

b.ii.2.d. Ltd to actions w/in scope of agency & creation of agency is not itself w/in scope. General rule: no duty prior to relationship but there is the possibility of a factual exception (Martin v. Heinold Commodities, Inc.)

b.ii.2.e. Enhanced duty to disclose for certain As, if relationship involves “peculiar trust & confidence”

Gelfand v. Horizon Corp. (10th Cir. 1982) - G employed by Horizon, a RE Co. - Horizon decides to lower G’s salary & pay commissions + overrides on sales - Horizon fires G, claims benefiting more than Horizon - G sues for unpaid commissions + overrides - H accuses G of breach of fiduciary duty for selling property to corp’n which wife had 1/3 interest in o Using breach of duty of loyalty as a defense - Issue: a breach is undisputed, but how much of an offset is Horizon entitled to for sale, 1/3 or all? - Holding: where an A seeks to recover compensation out of same transaction in which he was guilty of being disloyal to P, Ct is justified in denying compensation for fiduciary, should not profit from own wrongdoing  thus, G should be held responsible for the profit he made and wife made AND the trial court could force G to disgorge the profit the other 2/3s owners of the corp’n made o P does not need to prove any loss was cx-d by misconduct o Enough that Horizon would have objected to sale if it had known about the interest in the transaction o Extenuating circumstances: instances in past where Horizon employees could obtain a 20% discount on purchases of unimproved property o Ct more upset w/ not disclosing rather than actual sale

b.ii.3. Of loyalty

b.ii.3.a. Best interests of P

b.ii.3.b. Self-dealing (financ’l material interest)

b.ii.3.c. Transactions w/ P

b.ii.3.c.i. Middle-man: need not disclose to all parties his acceptance of dual commissions b/c has nothing to do w/ negotiations

7 b.ii.3.d. Competition w/ P

b.ii.3.d.i. During relationship

b.ii.3.d.i.1. Courts split on whether A should forfeit all compensation during period of disloyalty b.ii.3.d.ii. After relationship b.ii.3.d.ii.1. Depends on circumstances in which A left

Town & Country House & Home Serv. v. Newbery (NY 1958) - Home and cleaning service, N worked there for 3 years - T&C allege it is a “unique, personal & confidential” enterprise - Issue: Was plan to terminate employment & solicit T&C’s customers a breach of duty? - Holding: the only trade secret involved was the customer list. Even if did not operate under banner of former employer, he still may not solicit his customers who are not openly engaged in business in advertised locations or whose availability as patrons cannot readily be ascertained but who through years of trade built such list. - Trade secret (R of Torts § 757): any formula, pattern, device or compilation of info which is used on one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it

b.ii.3.d.iii. Agmt

b.ii.3.d.iii.1. Subject to strict test of reasonableness if restrict a person’s means of procuring a living

b.ii.3.d.iii.2. Covenant not to compete: Robbins v. Falay

b.ii.3.d.iii.2.a. Liquidated damages clause b/c difficult to calculate how much damages should be

b.ii.3.d.iii.2.b. Restriction unenforceable b/c it overreached

b.ii.3.d.iv. No agmt

b.ii.3.e. Corporate opportunity doctrine

b.ii.3.f. Use of inside info

b.ii.3.f.i. Duty not to use or communicate information confidentially given on acct of agency, in competition w/ or to injury of P, although such info does not relate to the transaction in which he is them employed, unless info is a matter of general knowledge

b.ii.3.g. No dual agency

b.iii. Restrictions on Employees Re: Trade Secrets

b.iii.1. Balancing of interests required b.iii.1.a. Employer’s need to protect confidential nature of info

b.iii.1.b. Employee’s right to engage in work of his/her choice & use general knowledge, expertise & experience Unincorporated Business Organizations-Wyrsch-Spring 2012 9 b.iii.2. Situations where raised

b.iii.2.a. During employment

b.iii.2.a.i. Agmt: express commitment

b.iii.2.a.ii. No agmt: implied duties

b.iii.2.b. After employment

b.iii.2.b.i. Agmt: express commitment

b.iii.2.b.ii. No agmt: implied duties

b.iii.3. Types of restrictive agmts

b.iii.3.a. Nondisclosure of protected info/data

b.iii.3.b. Nonuse of protected info/data

b.iii.3.c. Noncompetition w/ employer’s business (territory + time period)

b.iii.4. Source of restrictions: 18 USC 207 + 208

b.iii.5. Professional firms

b.iii.5.a. Main Asset: clients

b.iii.5.b. Law firm

b.iii.5.b.i. Special rules when att’y leaves firm

b.iii.5.b.ii. Need to protect client’s best interests

b.iv. Employer’s Legitimate Property Interest Entitled to Protection (“Trade Secrets”)

b.iv.1. Employers are entitled to protection of a legitimate, valuable property interest: some confidential, nonpublic info/data that gives employer some competitive advantage

b.iv.2. Forms:

b.iv.2.a. Customer/vendor lists

b.iv.2.b. Special info re: customers

b.iv.2.c. Special manufacturing processes

b.iv.2.d. Business & manufacturing strategies

b.iv.2.e. Personnel data

b.iv.2.f. R&D projects

9 b.iv.2.g. PPI

b.iv.2.h. Product formulas

b.iv.2.i. Product design & spec data

b.iv.2.j. Financ’l data re: operations/results

b.iv.2.k. Future development plans

b.iv.2.l. Patent, TM, copyright info

b.iv.2.l.i. Shop rights doctrine: where, during hours of employment, w/ employer’s materials & appliances, conceives & perfects and invention for which he obtains a patent, he must accord his master a non-exclusive right to practice the invention

b.iv.2.m. Professional firms: clients

III. P’s Vicarious Liability (Strict Liability)

a. General Approach:

a.i. P’s no fault/strict liability

a.i.1. Vicarious liability can be imposed even when actual consent over tortfeasor at time of accident is absent

a.ii. Negligent hiring – not conducting a proper background check

a.ii.1. Rebuttable presumption that use due care when hiring

a.iii. Negligent oversight

a.iii.1. Some jurisdictions hold ownership of car as rebuttable presumption of agency

a.iv. Employment relation not necessary

a.v. Relationship: master-servant v IC  Determined by trier of fact

a.v.1. Master: P who employs an A to perform service in his affair & who controls or has the right to control the physical conduct of the other in the performance of the service (R (2d Agency) § 2)

a.v.2. Servant: A employ by a master to perform service in his affairs whose physical conduct in the performance of the service is controlled or is subject to the right of control by the master

a.v.3. IC: person who Ks w/ another to do something for him but who is not controlled by the other nor subject to the other’s right to control wrt his physical conduct in the performance of the undertaking—may or may not be an A

b. Relation (control)

b.i. Employee v. IC Unincorporated Business Organizations-Wyrsch-Spring 2012 11 Kane Furniture Corp. v. Miranda (FL 1988) - K sold carpet installation business to Perrone, K supplies carpet, provides installation services through P - P assigned jobs to Kraus, when he could not perform - Kraus finished jobs, got drunk at bar, drove Carleton to car at warehouse parking lot - On way, struck Miranda’s vehicle, died at hospital - Issue: Were Perrone and Kraus employees of Kane? - Holding: Reverse trial ct, Perrone & Kraus are ICs o Factors to consider whether an employee or IC (R (2d Agency) § 220): . Extent of control which, by agmt, master may exercise over details of the work  Most important factor  Once carpet installer got job, he was on his own . Whether the one employed is engaged in a distinct occupation or business  Carpet installing can be viewed as a unique business . Kind of occupation, w/ reference to whether, in the locality, the work is usually done under the direction of the employer or by the specialist w/o supervision . Skill required in the particular occupation . Whether employer or workman supplies the instrumentalities, tools, & place of work for the person doing the work  Perrone & Kraus supplied own tools & equipment . Length of time for which the person is employed  Employed on an “as needed” basis . Method of payment whether by the time or by the job  Paid per installation rather than by time . Whether the work is part of the regular business of the employer  Only factor favoring e’ee – installation was part of business . Whether the parties believe they are creating relationship of master & servant  All factors indicate they meant an IC relationship . Whether the P is in business  “relevance of this factor is obscure”

b.i.1. Modern Day Factors to determine whether E’ee or IC:

b.i.1.a. Federal & state income tax w/holdings

b.i.1.b. Employer files w-2 form w/ IRS

b.i.1.c. Social security & medicare deductions

b.i.1.d. Other employer deductions taken from paycheck

b.i.1.e. Unemployment compensation

b.i.1.f. Worker’s comp

b.i.1.g. Participate in health or life insurance program

b.i.1.h. Participate in retirement plan

b.i.1.i. Participate in stock-option plan

b.i.1.j. Covered by labor-mgmt agmt

b.i.1.k. Entitled to benefits under family & medical leave act 11 b.i.1.l. Entitled to protection under fair employment (anti- discrimination) provisions in civil rights act Lazo v. Mak’s Trading Co. (NY 1994) - 3 men assist grocer by unloading trailer - Driver of trailer and one of the men got into an altercation - Men came and went, free to hold other employment, no on payroll, no fringe benefits, single payment - Issue: are they employees or ICs? - Holding: No Q of fact, IC - Dissent: Men did not have authority of where & when to perform the unloading  no control over price; no control over results or means used to achieve results; no connection b/w assault & tortfeasor’s duty as a day laborer; regardless of control, not liable for separate assault

b.i.2. Fact that law requires an exam & certain std of skill does not prevent master-servant relationship from arising (i.e., dr, lawyer)

b.i.3. Possible implication that IC: Not protected by certain employee protections

b.i.3.a. One in pursuit of an independent business

b.i.4. Main laws protecting “e’ees” (fed + state):

b.i.4.a. Unemployment comp (salary)

b.i.4.b. Workman’s comp (injury)

b.i.4.c. Anti-discrimination (race, color, religion, sex)

b.i.4.d. Age discrimination

b.i.4.e. Min wage

b.i.4.f. Mgmt-labor relations

b.i.4.g. Employee safety (OSHA)

b.i.4.h. Disabilities

b.i.4.i. Veterans (rehiring)

b.i.4.j. Family & medical leave

b.i.4.k. Retirement benefits (ERISA)

b.ii. Exceptions to IC exception:

b.ii.1. Employer negligence (hiring or oversight)

b.ii.2. Inherently dangerous activity: work which in its nature will create some peculiar risk of injury to others unless special precautions are taken

b.ii.2.a. Inherently dangerous/hazardous activities

b.ii.2.a.i. Use of explosives to take a building down Unincorporated Business Organizations-Wyrsch-Spring 2012 13 b.ii.2.a.ii. Transportation of hazardous waste materials, chemicals

b.ii.2.a.iii. Construction/maintenance of high voltage electric lines

b.ii.2.a.iv. Construction/maintenance of very high office bldgs.

b.ii.2.a.v. Excavations in or near a public hwy or a heavily populated area

b.ii.2.a.vi. Manufacture of lethal weapon systems (bombs, rockets)

b.ii.2.a.vii. Public fireworks exhibition in crowded area

b.ii.2.a.viii. Use of heavy construction equipment

b.ii.2.a.ix. Production, testing, and use of nuclear energy

b.ii.2.a.x. Construction of underground subway system

b.ii.2.a.xi. Flying helicopters in & around large cities

b.ii.2.a.xii. Use of new medical devices, x-ray equipment

b.ii.2.a.xiii. Recovery efforts in a heavily damaged area (hurricane)

b.ii.3. Nondelegable duty

b.ii.3.a. Employer’s duty is so important that law should not allow person to transfer duty/responsibility to another if 3d party injured

b.ii.3.b. Based on statute, K, or common law

b.ii.3.c. Examples:

b.ii.3.c.i. Duty of common carrier to transport passengers safely

b.ii.3.c.ii. Duty of landowner to keep premises reasonably safe

b.ii.3.c.iii. Duty of LL to comply w/ building codes

b.ii.3.c.iv. Duty of employer to keep work areas reasonably safe

b.ii.3.c.v. Duty of law firm to represent clients most effectively

b.ii.3.c.vi. Duty to comply w/ statutory requirements

b.ii.3.c.vii. Duty of hospital to maintain safe bldgs. For patients

b.ii.3.c.viii. Duty of homeowners to ensure home reasonably safe

b.ii.3.c.ix. Duty to ensure hazardous materials discarded properly

b.ii.3.c.x. Duty of gen. k-ors to ensure works areas safe

b.ii.3.c.xi. Duty of car owner to keep car in safe condition

13 b.ii.3.c.xi.1. Maloney v. Ruth: held liable when brakes failed after just having brakes overhauled at a service station

b.ii.3.c.xi.1.a. This is an exceptional case! Not the law!

Kleeman v. Rheinegold (NY 1993) - 5 days before SOL to expire on med mal claim, att’y sent process server to serve dr “immediately” - Papers served to dr’s secretary, not dr, so case dismissed - Trial Ct found process server to be an IC - Issue: whether att’y may be held vicariously liable to client for negligence of a process server hired o/b/o client? - Holding: proper SOP is part of lawyer’s over-all responsibility. Att’y has nondelegable duty to clients to exercise due care in SOP, so att’y can be held liable for negligent SOP even if IC performed SOP o Duty is nondelegable when so important to the community that the employer should not be permitted to transfer it to another o Client’s reasonable expectation & beliefs about who will render a particular service are a significant factor in ID-ing duties deemed to be nondelegable

b.ii.4. Apparent relation b.ii.4.a. Raised where this is some sort of business relation, i.e., franchisor-franchisee relationship b.ii.5. Financial responsibility

b.ii.5.a. Contributory negligence – master is barred from recovery against a 3d person who negligently cx-d a loss to the master if the servant also was negligent in the accident giving rise to the loss

b.iii. Employee’s personal liability – remains personally liable, employer is just also liable

b.iii.1. For affirmative acts of wrongdoing committed while acting o/b/o master

b.iv. Employer’s direct liability

c. Activity (scope of employment)

c.i. SOE Test: whether or not employee’s actions or inactions fell w/in scope of employer’s business

c.i.1. IC – about control

c.i.2. E’ee – needs to be close enough to the business

c.ii. Nexus Test:

c.ii.1. How close are employee’s actions or inactions connected to employer’s business?

c.ii.2. If fairly and reasonably connected, incidental to employer’s business  liable for e’ee’s negligent and int’l acts that injured 3d persons

c.ii.3. If not fairly & reasonably connected, actions outside SOE Unincorporated Business Organizations-Wyrsch-Spring 2012 15 c.ii.4. Matter of Degree, judgment;

c.ii.4.a. If slight deviation = detour (within)

c.ii.4.b. If substantial deviation = frolic (outside)

c.ii.5. Factors: (R§228)

c.ii.5.a. Kind = conduct must be of the same general nature or incident to conduct authorized

c.ii.5.b. Purpose (to serve master)

c.ii.5.b.i. Cardozo: whether it is the employment or something else that has sent the traveler forth upon the journey or brought exposure to its perils

c.ii.5.b.ii. Outside SOE when engaged in an independent course of conduct not intended to further any purpose of employer

c.ii.5.c. Time & Place

c.ii.5.d. If force used, force not unexpectable by master

c.iii. Negligent Torts

c.iii.1. E’ee return to employment: re-entry rule

c.iii.1.a. Reenters after a frolic when employee “breathes a sigh of relief”

c.iii.2. Employer’s work rules: e’ee disobedience

c.iii.3. E’ee’s personal habits, conduct: Horseplay, tricks, games

c.iii.4. Business connected activities (office parties, outings)

c.iii.4.a. Is it on premises?

c.iii.4.b. Does employer pay for food/drinks?

c.iii.4.c. Are e’ees helping with serving the food?

c.iii.5. E’ee commuting: going & coming rule

c.iii.5.a. On commute – outside SOE

c.iii.5.b. BUT what if they pay for gas? Or parking?

c.iii.6. E’ee having a dual purpose

Clover v. Snowbird Ski Resort (Utah 1991) - Two restaurants, one at bottom and one at midpoint of ski mountain - Zulliger & Norman went skiing before reporting to work - Supposed to return to Plaza Restaurant after inspecting Mid-Gad Restaurant - But made 5 runs in b/w returning to restaurant

15 - On 5th run, Z took a jump despite signage saying not to, landing on Clover - Issue: was Z acting w/in SOE to hold Snowbird liable? - Holding: a jury could reasonably find w/in SOE b/c there was a predominant business purpose for trip to Mid-Gad Restaurant o Dual purpose of benefiting employer + serving a personal interest = w/in SOE

c.iii.7. 24 hour on call – working “around the clock” c.iii.8. Business work during personal time (cell phones)

c.iii.9. Work at home

c.iv. Intentional torts

c.iv.1. A&B (police brutality)

c.iv.2. Employee fraud (insurance/cc agent)

c.iv.3. Employee stealing/robbery (purse/laptop)

c.iv.4. Sexual misconduct (rape, harassment)

c.iv.4.a. Mere fact that an e’ee has opportunity to abuse facilities necessary to performance of duties does not render an employer vicariously liable for abuse, nor does fact that occurred during working hours (Alma v. Oakland Unified School Dist.)

c.iv.5. Extreme racial, religious discrimination, abuse (exclusion, refusal to serve)

c.iv.6. Criminal violation of fed or state statute (price fixing/bribery/overbilling)

c.iv.7. Outrageous misconduct (violence in workplace)

c.iv.8. Substantial property damage (arson, explosives)

Ira S. Bushey v. US (2d Cir. 1968) - Drunk coast guard, Lane, turns 3 wheels that open water intake valves of ship being serviced

- Ship begins to list, slips off blocks & falls against dry dock wall

- Dry dock owner sues US

- Issue: were Lane’s acts while drunk w/in SOE after he turned valves upon returning to duty? - Holding: Lane’s conduct was not so unforeseeable as to make it unfair to charge the gov’t w/ responsibility. Employer should be held to expect risks which arise out of and in the course of his employment of labor. o Risk that seamen might cause in coming and going is enough to make it fair that gov’t bear loss o Rejected motive test but find fact that  is better able to afford damages not alone sufficient to justify legal responsibility either

c.v. Theories of Intentional tort liability

c.v.1. Motive – looked at motive of employee at time of tort Unincorporated Business Organizations-Wyrsch-Spring 2012 17 c.v.1.a. No longer followed, tended to favor no liability for employer

c.v.2. Foreseeability

c.v.2.a. Incident must be a foreseeable consequence of employment

c.v.3. Characteristic of business

c.v.3.a. Must be engendered by or arise from the work

c.v.3.b. Incident must be outgrowth of employment

c.v.4. Outgrowth of the work environment

c.v.4.a. Injury must be inherent in working env’mt

c.v.5. Enterprise liability

c.v.5.a. Injury typical or broadly incidental to enterprise

c.v.6. Policy analysis (application of vicarious liability justifications)

c.v.6.a. Abuse of power/authority exception

c.v.7. Work precipitating cause

c.v.7.a. General duty of care (security)

c.v.8. SL

c.v.9. Implied K

c.v.9.a. General duty of care (security)

c.v.10. Agency relation aided person in accomplishing tort

c.vi. Lisa M. Case- Basic Test: Employee’s intentional conduct must have a causal nexus to employee’s work

IV. P’s K Liability

a. Relation (Representative)

a.i. Person w/ power of attorney: financial/medical decisions

a.ii. Corporate president’s authority to sell all corp. assets

a.iii. Former employee’s power to bind employer (new order)

a.iv. Lawyer’s power to bind client (settle litigated dispute)

a.v. University president’s authority to hire professors

a.vi. Agent’s authority to appoint/hire subagents

a.vii. Employer’s liability for agent’s defrauding customer ($)

17 a.viii. Telephone operator’s power to bind employer (insurance)

a.ix. Partner/member’s power to bind business (order supplies) b. Activity (Scope of Authority)

b.i. Actual Authority

b.i.1. Express

b.i.1.a. Oral v. Written

b.i.1.b. Power of Att’y

b.i.2. Implied

b.i.2.a. R(3d): actual authority to

b.i.2.a.i. (1) do what is necessary, usual, and proper to accomplish or perform an A’s express responsibility

OR

b.i.2.a.ii. (2) act in a manner in which an A believes the P wishes the A to act based on A’s reasonable interpretation of P’s manifestation in light of P’s objectives and other facts known to the A

b.i.2.b. Necessary

b.i.2.c. Position

b.i.2.d. Past conduct

b.i.2.e. Custom

b.i.2.f. Delegation of authority

b.i.2.f.i. General rule: A’s powers cannot be delegated in absence of authority to do so

b.i.2.g. Incidental authority: R(2d) § 35 “unless otherwise agreed, authority to conduct a transaction includes authority to do acts which are incidental to it, usually accompany it , or are reasonably necessary to accomplish it”

b.ii. Apparent Authority (estoppels)

b.ii.1. R(2d) § 27: act is created as to a 3d person by written or spoken words or any other conduct of P which reasonably interpreted, cxs the 3d person to believe that the P consents to have the act done o/b/o P by person purporting to act for him

b.ii.2. 3d Party’s reasonable belief

b.ii.2.a. Manifestation Unincorporated Business Organizations-Wyrsch-Spring 2012 19 b.ii.2.b. Position

b.ii.2.b.i. R(3d) § 1.03: placing A in a position customarily having authority of a specific scope, absent notice to 3d parties, constitutes a manifestation that P assents to be bound by actions of A

b.ii.2.c. Past dealings

b.ii.2.c.i. Dealings must be similar to one at issue and there must be a degree of repetitiveness

b.ii.2.d. Custom

b.ii.3. Duty of inquiry by 3d parties triggered when A employed power in a manifestly suspicious way so that there had to arise a reasonable doubt as to whether A was not violating a fiduciary duty

b.ii.3.a. Court looks from a subjective and objective view

Smith v. Hansen, Hansen & Johnson, Inc. (WA 1991) - Owner of bldg. hires HHJ to renovate it, including an exterior glass wall - Glass wall began to leak 1 yr later, HHJ settled w/ owner, sought reimbursement from glass installer- Fentron - Foster, worked for Fentron, told HHJ about glass Fentron had, but his job was to solicit sales for Fentron products and services - HHJ requested salvage glass, which Foster sold, when in fact, Fentron had rejected glass itself for manufacturing deficiencies, Foster sold on his own - Wrote checks for payment of glass to Foster - Trial Ct found apparent authority, holding Fentron liable when Foster absconded to CA - Issue: Did Foster have apparent authority? - Holding: No, Foster was mgr of manufacturing services, no manifestation that this gave him authority to sell materials and designs o/b/o Fentron. Made check paid personally to him and glass was not in control of Fentron but at a salvage yard. o Manifestations to 3d party must: . 1. Cx the one claiming apparent authority to actually believe that the A has authority to act for the P . 2. Be such that the claimant’s actual subjective belief is objectively reasonable o Foster did not have actual authority to enter into this transaction, moreover it is a fraudulent transaction b/c Foster absconded w/ the $

b.iii. Inherent

b.iii.1. General A – incidental to P’s business

b.iv. Ratification

b.iv.1. Express – P’s specific affirmation

b.iv.2. Implied

b.iv.2.a. Conduct (use/payment)

b.iv.2.b. Failure to object

19 c. Att’y’s Authority- Litigation decision-making

c.i. Unless otherwise agreed, client controls substantive matters & att’y controls procedural

c.ii. An att’y has no implied actual or apparent authority for substantive matters but has such authority over procedural and administrative matters

c.ii.1. But in general legal practice context (not litigation!) att’y has broad implied actual authority & apparent authority (Bucher)

c.ii.2. Client may be estopped to deny his/her att’y’s apparent authority to 3d person (Szymkowski)

Substantive Procedural File Suit Determine overall strategy Settle case Present evidence (select witnesses) Appeal case Raise & argue issues Stipulate essential facts Hire specialists (blood samples, detectives)

V. Undisclosed Ps

a. R(3d) § 6.03: when an A acting w/ actual authority makes a K o/b/o an undisclosed P, (1) unless excluded by the K, the P is a party to the K; (2) the A and 3d party are parties to the K; and (3) P, if a party to K, and 3d party have the same rights, liabilities, and defenses against each other as if the P made K personally

b. Undisclosed Ps v. Partially Disclosed

b.i. Nature

b.ii. Use & benefits

b.iii. Intentional v. unintentional

b.iv. Inherent problems:

b.iv.1. Conceptual

b.iv.2. Practical

b.v. Relation to law of Ks (3d party rights)

c. Rights – can enforce unless there is need to protect 3d party’s legitimate interests: LIMITATIONS

c.i. Express limitation against

c.ii. Personal services

c.iii. False denial

c.iv. Known 3d party refusal if ID disclosed c.v. Mere suspicion? Unincorporated Business Organizations-Wyrsch-Spring 2012 21 Kelly Asphalt Block v. Barber Asphalt Paving Co. (NY 1914) - Kelly sues as undisclosed P, Barber made K w/ Kelly’s A, Booth - Kelly and Barber were competitors - Booth asked Barber for a price on asphalt blocks, which were furnished and pd by Booth, o/b/o Kelly - Barber believes rule should be changed where ID of P concealed b/c belief that, if disclosed, K would not be made - Issue: is K enforceable? - Holding: yes, there was a meeting of minds. If Booth had made K and assigned right later to Kelly, it would have been enforceable all the same. o There was no fraud b/c never questioned about agency, and Booth never misrepresented who he was representing o The blocks were sold at FMV

d. Liabilities (3d Parties’ Rights)

d.i. Authorized transactions: 3d party can enforce – but Election Doctrine

d.i.1. English rule (traditional common law)

d.i.1.a. 3d Party has only one COA

d.i.1.b. If 3d Party obtains judgment against A, 3d Party cannot bring suit against P

d.i.1.c. Regardless whether or not 3d Party aware of P’s existence

d.i.2. American rule (Election Rule)

d.i.2.a. 3d Party can make a valid election only if aware of P’s existence at time

d.i.2.a.i. If unaware and obtains judgment against A, an still sue P

d.i.2.a.ii. If aware and obtains judgment against A, cannot sue P

d.i.3. Restatement view (probably majority) R(3d) § 6.09

d.i.3.a. No restrictions are placed on 3d Party in terms of suing A v. P

d.i.3.b. Can obtain judgment against both and seek satisfaction against both until fully recovers

d.ii. Unauthorized transactions

d.ii.1. Still liable if w/in scope of agency and 3d party could have reasonably believed

e. Unintentionally undisclosed P

e.i. Business owners fail to disclose to 3d parties that business is incorporated (or LLC)

e.ii. Could occur where a sole proprietorship has done business for many years but later incorporates (or converts to a LLC), failing to disclose changed status

f. Ways to put 3d parties on notice of agency relation:

21 f.i. Specific notice via ltr

f.ii. Business ltrhead

f.iii. K-ual docs

f.iv. Representative signatures

f.v. POs, invoices

f.vi. Business cards

f.vii. Business checks/CCs (avoid paying bills w/ personal checks)

f.viii. Website

f.ix. Faxed copies of docs, other materials

f.x. Emails

f.xi. Promotional materials

f.xii. Yellow pages

f.xiii. Meetings

f.xiv. Orally

VI. A’s Liability to 3d Parties

a. Authorized Transactions

a.i. Disclosed P: A of disclosed P will not be held liable unless there is clear and explicit evidence of A’s intention to substitute or superadd his own personal liability

a.i.1. Exceptions:

a.i.1.a. Express assumption

a.i.1.b. Implied promise

a.i.1.c. Custom, profession

Copp v. Breskin (WA 1989) - Breksin & Robbins, a law firm, hired an expert witness - B&R informed Copp that client would pay his fees - Client pd some but not all, B&R informed Copp that client was willing to only pay 30% of the fees billed by Copp - B&R commenced litigation o/b/o Copp to get expenses - Issue: is the law firm liable even though it disclosed the P? - Holding: when a litigation service provider Ks w/ an att’y based on the att’ys credit, and the attorney is ware or should be aware of this, it should not matter that the client’s ID is known. The SP reasonably expects that the att’y will be responsible, as surety or guarantor of the client’s performance o Owe an express disclaimer of responsibility if att’y intends not to be bound by a K for litigation services Unincorporated Business Organizations-Wyrsch-Spring 2012 23 o The primary responsibility of making it clear that the att’y acts in an agency capacity w/ no personal liability rests upon the att’y o Custom is for expert to look to att’y to be pd

a.ii. Undisclosed P: A is liable when P is undisclosed when party to a K

Jensen v. Alaska Valuation Service (Alaska 1984) - 1970-1979: AVS conducted appraisals for Jensen - Pre-1972: Sole proprietorship business: “Jensen Builders” o AVS’ Acct record has “Art Jensen, Jensen Builders” - 1972: “Arthur Jensen, Inc.” is incorporated  housing construction business Jensen is President & owned 50% of stock AVS not specifically notified of status change But 4 corporate checks used before July 1979 - July 1979: Jensen ordered 5 appraisals by phone - Late 1979: AVS informed of corporate status - 1980: Corporate insolvent - 1982: AVS filed suit against Jensen personally to recover for $831 unpaid - Jensen says AVS notified of corporate status b/c: o Corporates checks used pre-July 1979 o Corporate signs on property o K-or plans submitted to AVS ID-ing corp’n - Issue: is Jensen personally liable b/c he failed to notify AVS of his corporate status? - Holding: AVS accepted appraisals before seeing plans or receiving checks, an A is liable for a K entered unless P is disclosed at time K is formed o A has burden of proving that agency relationship and ID of P disclosed o Std is that 3d party knew, should have known, had reason to know, or was given notification

a.iii. Partially disclosed P

a.iii.1. When an A acting w/ actual or apparent authority makes a K o/b/o an unidentified P:

a.iii.1.a. (1) the P and 3d party are parties to the K and

a.iii.1.b. (2) the A is a party to the K unless the A and 3d party agree otherwise

b. Unauthorized Transactions

b.i. Disclosed P: implied warranty concept

Husky Industries v. Craig Industries (Missouri 1981) - Craig in business of manufacturing coal w/ two plants, incorporated under one name - Craig k-d w/ Kingsford Co. to seel 1500 tons of coal/month for 2 years, which was more than output of both plants - Craig called to see if Gideon would be interested in buying Mountain View plant - Craig signed sales offer o/b/o corporation as “Craig, Pres.” - Craig then rejected formal offer to buy as Bd (consisting of Craig’s family) rejected it - Issue: did Craig, as A, have authority and should be held liable for sale? - Holding: when purporting to act as A for a P, reasonable to assume that A has power to bind P, and if it is found otherwise, an A who makes such an assertion should be personally liable for consequences

23 o Unless agmt expressly binds an A personally, who discloses a P, the liability of the A is not predicated upon the K itself but rather upon the A’s breach of the express or implied covenant of warranty of authority

b.i.1. Limitations:

b.i.1.a. Express disclaimer

b.i.1.b. Later approval needed

b.i.1.c. A’s authority uncertain (duty to inquire?)

b.i.1.d. 3d Party knowledge

b.ii. Undisclosed P: A party of K

b.ii.1. But can still sue P

c. Nonexistent P

c.i. Defectively organized corp’n or LLC

c.ii. Preincorporation transactions

c.iii. Unincorporated nonprofit ass’n

d. The manner in which an A signs a K (promissory note) may affect his/her liability:

d.i. *usually arises in the case of small corp’n or LLC

d.ii. Basic Rules:

d.ii.1. If clearly signs as A, no liability  Mary Jones, as Agent for Smith

d.ii.2. If clearly does not sign as A, liable  Mary Jones

d.ii.2.a. No parol evidence can be introduced to show otherwise

d.ii.3. If unclear, ambiguous, need to determine parties’ intent  Mary Jones, Agent or Mary Jones, President

d.ii.3.a. Parol evidence admissible to show parties’ understanding

d.ii.3.b. Should avoid this as it may trigger the doctrine of description personae, meaning that it merely characterizes the description of the person rather than the person’s intention to be bound

VII. P’s Ratification of A’s Actions

a. P’s Conduct

a.i. Express

a.ii. Implied

b. P’s Knowledge

b.i. Actual Unincorporated Business Organizations-Wyrsch-Spring 2012 25 b.ii. Imputed

VIII. Termination of A’s Authority or Relationship

a. By Acts of Parties

b. By Acts of Law

UNINCORPORATED BUSINESS ORGANIZATIONS

I. Major Forms and Comparison

a. Possible Situations and Approaches:

a.i. Set Up New Business

a.ii. Purchase Existing Business

a.iii. Join Existing Business

a.iv. Obtain Franchise

a.v. Major Pts

a.v.1. State statutes allow major “customizing” (via default provisions) in all business org’l forms for most of above features EXCEPT taxation & liability

a.v.2. Most features are considered “washouts” in deciding which type of business form to select

b. Financing

b.i. Outside (Creditors) – Debt Financing

b.ii. Inside (Investors) – Equity Financing

c. Operation

c.i. External (3d Party Relations):

c.i.1. K Liability (Scope of authority)

c.i.2. Tort liability (SOE)

c.ii. Internal (Owner-Mgmt-E’ee Relations)

c.ii.1. Rights

c.ii.1.a. Compensation

c.ii.1.b. Profits/losses

c.ii.1.c. Transfer of ownership

c.ii.1.d. Mgmt (decision-making authority)

c.ii.1.e. Other ownership rights (records-information) 25 c.ii.2. Duties

c.ii.2.a. To perform (reasonable care)

c.ii.2.b. Loyalty (act in best interests)

c.ii.2.c. Disclose (important info)

d. Termination

d.i. By acts of parties

d.ii. By operation of law

II. Drafting Agmts

a. Major Parts:

a.i. Description, purpose, term of business

a.ii. Capital contributions (money or property)

a.iii. Returns to owners (salary, sharing of profits, other distributions)

a.iv. Acct’g (responsibility, methods, types of records and access to)

a.v. Mgmt (equal voice or delegation, approval of actions)

a.vi. Restrictions/limitations of actions

a.vii. Settling of disputes (majority, unanimous, or other means)

a.viii. Death, disability, removal, bankruptcy, or withdrawal of owner

a.ix. Insurance (life, liability, property)

a.x. Admission of new owners (majority or unanimous approval)

a.xi. Termination of business (situations triggering, procedure, distribution)

a.xii. Valuation of business, ownership interest (method of calculation)

b. Possible implications of one’s ownership interest: not protected by certain e’ee protections

c. Main laws protecting “employees” (fed & state):

c.i. Unemployment compensation (salary)

c.ii. Workman’s compensation (injury)

c.iii. Anti-discrimination (race, color, religion, sex)

c.iv. Age discrimination

c.v. Minimum wage

c.vi. Mgmt.-labor relations Unincorporated Business Organizations-Wyrsch-Spring 2012 27 c.vii. Employee safety (OSHA)

c.viii. Disabilities

c.ix. Veterans (rehiring)

c.x. Family and medical leave

c.xi. Retirement benefits (ERISA)

GENERAL PARTNERSHIPS

I. Nature and Creation RUPA Articles 1 & 2

a. Creation (Express v. Implied Creation)

a.i. UPA § 6(1): partnership

a.i.1. Association

a.i.1.a. Voluntary agmt, express or implied

a.i.2. Persons

a.i.2.a. Can be a corp’n

a.i.2.b. Just need capacity to K

a.i.3. To carry on as co-owners of a business

a.i.3.a. Ownership = power to ultimate control

a.i.4. For profit

a.ii. Manner: no magic moment but when person consent to carry-on as co-owners a business for profit

a.ii.1. Agmt v. No agmt

a.ii.2. Marriage and partnership have common elements, must show evidence that spouses held themselves out as partners

a.iii. When raised:

a.iii.1. 3d Party

a.iii.2. Gov’t (IRS)

a.iii.3. Parties

a.iv. Major Factors: (no one is a controlling factor)

a.iv.1. Sharing of profits (general v. net) + losses

a.iv.1.a. Sharing of profits(losses) is substantial evidence of partner status b/c individual has assumed owners’ risk of operating the business 27 a.iv.1.b. Non-equity partner: are not required to make a capital contribution to partnership nor own an equity interest in partnership

a.iv.2. Participation in substantive mgmt., decision-making

a.iv.3. Right & duty to act as an agent-partner in a partnership business (TPs)

a.iv.4. Fiduciary relation w/ other partners

a.iv.5. Unlimited liability for partnership debts/losses

a.iv.6. Made true capital contribution to partnership

a.iv.7. Comparable ownership interest in partnership

a.iv.8. Co-owner of partnership property

a.iv.9. Right to examine partnership books + records

Lupien v. Malsbenden (ME 1984) -  entered into K w / Craigin for construction of a Bradley automobile -  checked on status of car once or twice a week, dealing w/ Malsbenden as C was seldom present - M told  to sign over ownership of his pickup truck to pay for balance for Bradley vehicle -  never rec’d the Bradley he had k-d to purchase - M asserted that his interest in Bradley operation was solely as a banker, who loaned $ (w/o interest) - C had disappeared and M had physical control of Motor Mart - Issue: were M and C partners? - Holding: whatever the intent of these two means as to their irrespective involvements in the business, joint control over the business and intent to share the fruits of the enterprise amounted to a partnership

b. Nature b.i. Aggregate theory- collection of individuals

b.i.1. Partners own in common the partnership property and they are all joint principals in partnership transactions

b.ii. Entity theory- partnership has separate legal existence

b.ii.1. RUPA § 201

b.iii. Importance:

b.iii.1. Creditor’s rights

b.iii.2. Individual’s status w/in partnership

b.iii.3. State/federal regulation

b.iv. Today- trend towards entity approach although traits of both still exist b/c entity approach facilitates business transactions

b.iv.1. Examples:

b.iv.1.a. Taxation Unincorporated Business Organizations-Wyrsch-Spring 2012 29 b.iv.1.a.i. IRC § 701: each partner taxed directly on share of partnership income and losses (aggregate theory)

b.iv.1.a.ii. But entity files its own tax return for informational purposes under § 6031

b.iv.1.b. Liability

b.iv.1.c. Dissolution

b.iv.1.d. Enforce Ks

b.iv.1.e. Title of property

b.iv.1.f. Filing lawsuits

b.v. Creditor’s rights? (partnership + individual)

c. Applicable Acts

c.i. Uniform Partnership Act

c.ii. Revised Uniform Partnership Act

II. Financial Structure & Partners’ Contributions

a. Financial Structure

a.i. Partnership Acct’g

a.i.1. Income stmt: sets forth revenues and expenses during an acct’g period

a.i.2. Balance sheet: stmt of assets, liabilities and owners’ equities

a.i.3. Capital acct: shows equity of each partner

b. Contributions

b.i. UPA & RUPA contain no restrictions, limitations or requirements on the nature & amount of partners’ contributions to the partnership  fully negotiable

b.ii. Kinds:

b.ii.1. Cash

b.ii.2. Property (real + personal)

b.ii.3. Securities

b.ii.4. Services (present + future)

b.ii.5. Promissory notes

b.ii.6. Ks (“rainmaker”)

b.ii.7. Person’s name, reputation

29 b.ii.8. Experience

b.ii.9. Expertise

b.ii.10. Anything else considered of value to the partnership

III. Partners’ Property Rights

a. Individual v. Partnership Property [UPA § 8; RUPA § 203, 204]

a.i. Key: Intention of Partners – Partners are free to determine

a.ii. Partners’ Property rights: partnership

a.ii.1. To specific partnership property

a.ii.2. Interest in the partnership

a.iii. Partnership creditors’ rights

a.iii.1. Partnership property

a.iii.2. Individual partners’ property

a.iv. Individual partners’ creditors’ rights

a.iv.1. Partnership property

a.iv.2. Individual partners’ property

a.v. Why is distinction important?

a.v.1. Creditors: individual & partnership

a.v.2. Partners: departing & joining

a.v.3. Partners: distribution – termination & liquidation

a.v.4. Heirs: settlement of partnership affairs & estate

a.v.5. Gov’t: taxation

a.vi. Factors to determine intent:

a.vi.1. Purchase money

a.vi.2. Use/possession

a.vi.3. Record title

a.vi.4. Payment of taxes, improvements, repairs

a.vi.5. Recorded as a partnership asset

a.vi.6. Payment of underlying loan

a.vi.7. Other factors/circumstances Unincorporated Business Organizations-Wyrsch-Spring 2012 31 b. Partners’ Rights re: Partnership Property

b.i. When the intention of the partners to convert individually owned property into firm property is inferred from circumstances, the circumstances must be such as do not admit of any other equally reasonable and satisfactory explanation (UPA)

b.ii. RUPA has two presumptions:

b.ii.1. Property purchased w/ partnership funds is partnership property

b.ii.2. Property acquired in the name of one of more of the partners w/o indication of their status as partners & w/o the use of partnership funds is presumed to be the partners’ separate property, even if used for partnership purposes

c. Partner’s Interest in the Partnership UPA RUPA Specific Partnership Property § 25 Specific Partnership Property § 501 - Co-owners (undivided) - Partnership property owned by partnership - Possessory (partnership purposes) - Not by individual partners - Not assignable - Not co-owners - Not subject to attachment - No interest to transfer Interest in Partnership § 26 Interest in Partnership § 502 - Economic right - Same as UPA - Profits + surplus - Assignable 9§ 502 + 503) - Assignable (§ 27) - Subject to changing order (§ 504) - Subject to changing order (§ 28)

Putnam v. Shoaf (Tenn. 1981) - Mrs. Putnam has 50% interest in cotton gin partnership, Frog Jump - She wants out of partnership & pays $21K to Shoafs to take over her debt o Partnership has $90K debt o Charlestons own other 50% - Shoafs fire old bookkeeper & discover bookkeeper was embezzling

- S recovers $68K, ½ goes to the Cs and Mrs. P wants her share

- Issue: Can a partner recover in a judgment after transferring interest?

- Holding: No, the partnership recovered the $, which is now owned by S, not Mrs. P

o Mrs. P clearly intend to dissolve the partnership by transferring her interest, she transfers everything that partner has—present, future and assets of mutual ignorance

. Conveyed her interest which was her share of the profits and surplus

o Partnership property is owned by the partnership not individual partners

o Default rules:

. Can only sell partnership property w/ unanimous consent

. Can only add partners w/ unanimous consent

31 d. Partnership property rights:

d.i. Rights in specific partnership property

d.ii. Interest in the partnership

d.iii. Right to participate in mgmt

IV. Operation

a. Decision-making & Contractual Powers of Partners

a.i. Transactions/matters covered include:

a.i.1. Ordinary v. extraordinary decisions

a.i.1.a. Sale of a partnership’s only asset is beyond the scope of usual partnership business and thus cannot be effected by a single partner

a.i.2. Amending partnership agmt

a.i.3. Fundamental changes in structure (merger)

a.i.4. Significant changes in line of business/mkt

a.i.5. Allocation of workload/clients/cases

a.i.6. Allocation of profits + compensation + bonuses

a.i.7. Other personnel decisions (hiring-firing-promotions)

a.i.8. Purchasing/selling products, services

a.i.9. Acquisition/selling of facilities or other property

a.i.10. Maintenance of buildings, plants + equipment

a.i.11. Fin’l decisions (loans, investments)

a.i.12. Mkt’g/advertising decisions

a.i.13. Resolving disputes/deadlocks

a.ii. Possibilities

a.ii.1. Single partner

a.ii.2. Group or committee

a.ii.3. Majority of all partners

a.ii.4. Supermajority of all partners (3/4 or 2/3)

a.ii.5. Unanimous approval of all partners

a.iii. Partnership’s Act’s default rules- Mgmt Rights

a.iii.1. In general: [UPA § 18(2); RUPA § 401(f)] Unincorporated Business Organizations-Wyrsch-Spring 2012 33 a.iii.1.a. Subject to agmt of partners

a.iii.1.b. In absence of agmt UPA default rules apply

a.iii.1.c. Total equally among partners, one vote per partner, regardless of contributions /services

a.iii.2. Levels of Decision-making: Partnership provisions Id some specific decisions but otherwise does not define what constitutes fundamental v. ordinary decisions

a.iii.2.a. Level I Decisions [UPA § 18(g), (h); RUPA § 401(i), (j)]

a.iii.2.a.i. Fundamental decisions

a.iii.2.a.i.1. Altering partnership business

a.iii.2.a.i.2. Changing terms of partnership agmt

a.iii.2.a.i.3. Admission of a new partner

a.iii.2.a.ii. Unanimous approval

a.iii.2.b. Level II Decisions [UPA § 18(h); RUPA § 401(j)]

a.iii.2.b.i. Ordinary course of business decisions

a.iii.2.b.i.1. New supplier

a.iii.2.b.i.2. K commitment

a.iii.2.b.i.3. Product pricing

a.iii.2.b.ii. Majority vote

a.iv. Partnership agmt controls

a.iv.1. Key: how to allocate mgmt functions? Need to balance interests of –

a.iv.1.a. Facilitating conduct of business (lower costs)

a.iv.1.b. Risks of partner acting contrary to the interests of other partners (+ liability to 3d parties)

a.v. Actual authority UPA § 18; RUPA § 401

Elle v. Babbitt (Oregon 1971) - 3 Partners of The Pipe Machinery sue for an acct’g from Beall Pipe & Tank from the leasing of two pipe mills by the partnership to Beall - Beall formed the partnership when it decided to switch to the tooling method for creating steel pipes - Beall did not have enough capital to buy a tube mill so partnership would buy it and lease it back to Beall - Beall eventually terminated its lease offering to buy both mills from the partnership, which was refused by some of the partners

33 - Lowered royalties for Cascade job to be competitive, but royalties lowered by partners who were accused of acting for Beall and there was no meeting of all the partners about cut in royalty - Issue: was this allowed by the partnership? - Holding: it is clear that the mgmt of the partnership had been handled by mgmt-level employees and officers of Beall over the years and none of the partners ever objected to conducting the partnership this way. Decision to cut royalties was part of this exercise of mgmt, and those partners had the authority to make that decision and bind the partnership.

Summers v. Dooley (Idaho 1971) - S & D form partnership in trash collection business - Agmt allows them to hire someone to replace them when they can’t work - S hires a 3d employee despite D’s objections - S pays for 3d employee at own expense & argues D owes him $ b/c D benefited from the profits - Issue: Is D liable for expenses arising out of S’s choice despite objections? - Holding: there was no majority vote, each partner has equal rights contrary a differ agmt, so no partner is responsible for expenses incurred w/o the majority’s approval o D did not ratify S’s decision—manifestly unjust to hold D responsible for expense from S’s sole decision

o Not in ordinary course of business to have a 3d person

a.vi. Apparent authority

a.vi.1. Partner binds the partnership when his act is in the usual way (UPA) or in the ordinary course of business of the kind carried on by the partnership (RUPA)

RNR Investments Limited Partnership v. Peoples First Community Bank (FL 2002) - RNR’s affirmative defense that Bank was negligent in lending $960K to RNR w/o consent of the LPs when RNR’s GP was ltd to obtaining financing up to $650K in their partnership agmt - RNR defaulted of the note and mortgage for construction of a house for resale - RNR LPs did not know about total loan until 2 years after loan secured - No evidence to show that partnership agmt was ever given to Bank - Issue: Did the Bank have actual knowledge or notice of GP’s restricted authority or did RNR rely upon GP’s apparent authority to bind RNR? - Holding: each partner is an A of the partnership for the purpose of its business, an act of a partner in ordinary course of business binds the partnership unless partner has no authority to act for the partnership AND the person whom partner was dealing with know or had received notification of the partner’s lack of authority o Absent actual knowledge, 3d parties have no duty to inspect the partnership agmt or inquire otherwise to ascertain the extent of a partner’s actual authority

a.vi.2. Partners’ Vicarious Liability: Agency law- SOE

a.vi.2.a. Joint and Several Liability

a.vi.2.b. UPA § 13 – differ terms than RUPA

a.vi.2.c. RUPA § 305. Partnership Liable for Partner’s Actionable Conduct

a.vi.2.c.i. (a) A partnership is liable for loss or injury cx-d to a person, as a result of a wrongful act or omission ,or other actionable Unincorporated Business Organizations-Wyrsch-Spring 2012 35 conduct, of a partner acting in the ordinary course of business of the partnership or w/ authority of the partnership

a.vi.2.c.ii. (b) If, in the course of the partnership’s business or while acting w/ authority of the partnership, a partner receives or causes the partnership to receive money or property of a person not a partner, and the money or property is misapplied by a partner, the partnership is liable for the loss

a.vi.2.d. LLC Act § 302 contains similar terms

a.vi.3. Partners’ K Liability- Agency law- Scope of Authority

a.vi.3.a. Joint Liability (under UPA; RUPA is joint and several)

a.vi.3.b. RUPA § 303: Stmt of Authority – provides a partnership the option of filing a stmt of authority concerning transfers of real property held in the name of partnership and other transactions

a.vi.3.c. UPA § 9 usual kind

a.vi.3.d. RUPA § 306 – ordinary course of business

a.vi.3.d.i. Nature of business

a.vi.3.d.i.1. Must be doing something in furtherance of purpose for which relationship was created

a.vi.3.d.ii. Type of transaction

a.vi.3.e. LLC Act § 301 contains similar terms

a.vi.4. Professional Ass’n

a.vi.4.a. In the context of a law practice, more closely resembles the conduct of a partnership than that of a corp’n

b. Tort Liability and the Fraudulent Partner (fraud is part tort and part K)

b.i. SOE v. Scope of Authority (narrow v. broad application)

b.i.1. Prevailing view that the partnership is liable for punitive damages assessed against a partner for her wrongful or actionable conduct

b.ii. Motive (person v. business)

b.iii. Foreseeability

b.iv. Apparent authority

b.v. Position to deceive

b.vi. Indicia authority

b.vii. Basic fairness

35 b.viii. Estoppel

b.ix. Direct responsibility

b.ix.1. Principal’s knowledge, implicated

b.ix.2. Negligent hiring, oversight

c. Lawsuits by and against partnerships & partners

c.i. Partner’s liability RUPA § 306: except as otherwise provided, all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law

c.i.1. Therefore partners are subject to liability for all tort & K claims against the partnerships but:

c.i.1.a. The partnership may have sufficient assets or insurance to coverthe claims and

c.i.1.b. RUPA § 307 requires 3d persons to follow certain steps to hold partners liable -- judgment against the partner plus exhaustion of partnership assets

c.ii. Suits by & against the partnership (3d parties)

c.ii.1. Joint debtors: proceed against fewer than all the debtors if all the debtors are named as  s, w/ the judgment enforceable against the jt property of all and the separate property of the debtors actually served w/ process

c.ii.2. Suits to enforce partnership rights must be brought in the name of all partners, unless provided otherwise by statute

Adams v. Land Services, Inc. (CO 2008) - Brighton Farms’ LLP status was revoked years earlier and is a GP - BF hired LSI to manage and find a purchaser for its Adams Cty property - LSI had a broker’s commission of 40% in order to increase the value of the property - Plot of land sold, proceeds distributed, partnership dissolved - Minority partners who disapproved of sale sued LSI and Barnes Family who bought land saying failed to perform the services that entitled LSI to the compensation he rec’d - Issue: Can GPs sue o/b/o Brighton Farms? Do they have standing? - Holding: partners cannot bring a derivative action o/b/o the partnership property (like SHs in a corp’n can); cannot sue to enforce a partnership claim unless majority of partners agree to do so - There is precedent out there that a minority partner would be able to bring a derivative action—but only in exceptional circumstances where partnership declined to sue on a valid, valuable, partnership COA

d. Partners v. Partners

d.i. Partners’ rights – subject to agmt (expressed/implied) by the partners: UPA & RUPA contain very similar rules

d.i.1. To participate in mgmt. (see above)

d.i.2. To share in profits/distributions (EQUALLY – UPA § 18(a) & RUPA § 401(b)) v. Compensation (Not equally – UPA § 18(f) & RUPA § 401(h)) Unincorporated Business Organizations-Wyrsch-Spring 2012 37 d.i.2.a. Share in profits equally w/o regard to contributions

d.i.2.b. Not entitled to separate compensation over and above other partners

d.i.3. To a formal acct/information (UPA § 22 & RUPA § 403(c))

d.i.3.a. Whenever circumstances “render it just and reasonable”

d.i.3.b. Two parts:

d.i.3.b.i. (1) acct’g is required

d.i.3.b.ii. (2) sum certain is determined to be due to the 

d.i.4. To access records (UPA § 19 & RUPA § 403(b))

d.i.5. To reimburse/indemnify (UPA § 18(b) & RUPA § 401

d.i.6. To transfer ownership interests

d.i.6.a. RULE: unless partnership agmt otherwise provides –

d.i.6.a.i. Partners cannot transfer ownership (mgmt.) position

d.i.6.a.i.1. Requires unanimous consent of partners

d.i.6.a.ii. But partners can assign economic ownership (fin’l interest) in the partnership w/o other partners’ approval (UPA § 27 & RUPA § 503)

d.i.6.b. Partnership agmt CAN ALTER –

d.i.6.b.i. Can allow transfer of ownership (mgmt.) position OR

d.i.6.b.ii. Can restrict transfer of economic ownership

d.i.6.c. Common types of restrictions:

d.i.6.c.i. Right of first refusal (price as per 3d party offer)

d.i.6.c.ii. First option to purchase (price set by partnership)

d.i.6.c.iii. Partners’ consent or approval (e.g., unanimous, majority)

d.i.6.c.iv. Buy-sell requirement (mandatory)

d.i.6.c.v. Other restrictions (e.g., w/in specific profession, area)

d.i.7. To participate in winding up process (if termination) (UPA § 37 & § RUPA 803)

d.i.8. To maintain an action against partnership and/or partners (RUPA § 405)

d.ii. Partners’ duties (to partnership + partners)

37 d.ii.1. Subject to partnership agmt, but RUPA places limitation d.ii.2. In absence of agmt: UPA/RUPA statutory provisions apply AND traditional common law concepts apply d.ii.3. Queries:

d.ii.3.a. When do partners’ fiduciary duties begin/end?

d.ii.3.b. To what extent can a part act in own interests?

d.ii.3.c. To what extent can the partners vary traditional duties? d.ii.4. Loyalty – Act w/in best interests [UPA § 21 (marginal); RUPA § 404(b) & 103]

d.ii.4.a. Businesses having potential conflicts of interest:

d.ii.4.a.i. Oil & gas

d.ii.4.a.ii. Real estate (residential & commercial)

d.ii.4.a.iii. Professional sports

d.ii.4.a.iv. Car & boating dealerships

d.ii.4.a.v. Shopping malls

d.ii.4.a.vi. Golf courses

d.ii.4.a.vii. Clothing, retail stores

d.ii.4.a.viii. Restaurants

d.ii.4.a.ix. Telecommunications

d.ii.4.a.x. Hotels & vacation resorts

d.ii.4.a.xi. Investment advisors

d.ii.4.a.xii. Professional consulting (taxing, acct’g, law) d.ii.5. Care – exercise reasonable care [RUPA § 404(c) & 103] d.ii.6. Disclose [UPA § 20 & RUPA § 403] d.ii.7. *Good Faith and Fair Dealing* (id-d as an obligation) [RUPA § 404(d)]

d.ii.7.a. Terms are not found in UPA but appears in RUPA, not as a partner’s separate duty but instead an obligation – applies to partners’ exercising his/her powers & rights w/in partnership & w/ other partners

d.ii.7.b. Not specifically defined in RUPA b/c really not susceptible to precise meaning – boundaries of terms are amorphous, vague and indefinite – therefore, left for case-by-case development by the cts Unincorporated Business Organizations-Wyrsch-Spring 2012 39 d.ii.7.c. Similar problems exist in the corp arena when determining extent of fiduciary duties of officers, directors, & majority SHs

d.ii.7.d. Generally:

d.ii.7.d.i. Good Faith = partners’ subjective intentions as to particular actions/decisions – honesty-in-fact, sincere, genuine, bona fide

d.ii.7.d.ii. Fair Dealing:

d.ii.7.d.ii.1. Process: How partner carried out action – fairly, properly, above board, full disclosure

d.ii.7.d.ii.2. Substance: overall fairness to partnership or other partner(s) – secret benefits, profits

d.iii. Suits by & against the partnership

e. Creditor’s Claims: individual v. partnership’s creditors (RUPA Art. 5)

e.i. Individual

e.i.1. UPA

e.i.1.a. Partner’s individual property, not partnership property

e.i.1.b. But can seek assignment of partnership interest (§ 27) or charging order (§ 28)

e.i.2. RUPA

e.i.2.a. Partner’s individual property, but not partnership property which is insulated because the partners are not owners (§ 501)

e.i.2.b. But can seek assignment of partnership interest (§ 502 & 503) and charging order (§ 504)

e.ii. Partnership creditors

e.ii.1. UPA - § 40(h)+(i): double priorities rule

e.ii.1.a. Partner’s individual property for majority (§ 15), but minority say partnership property first

e.ii.1.b. No specific provision, but partnership property can be used

e.ii.2. RUPA – pro rata sharing b/w assets of partner’s estates wrt individual creditors

e.ii.2.a. Partnership Property first, then property of individual partners (§ 307)

Bauer v. Blomfield Co./Holden Joint Venture (Alaska 1993) - Bauer, assignee of a partnership interest, sued saying partnership interests wrongfully withheld from him - B loaned $800K to the Holdens who assigned their rights in the partnership Blomfield/Holden 39 - Defaulted, soon after, stopped making payments as assigned from the partnership - B not entitled to interfere in mgmt of administration of partnership business affairs, so could not stop the $877K commission paid to partner, Blomfield - Only entitled to profits & surplus that Holdens would have been entitled to - Issue: did the commission violate the assignment? - Holding: No b/c the commission was agrd to by all partners and the Holdens would have not been entitled to receive it - Dissent: thinks ct needs to address first whether depleting profits through commission was done in good faith

V. Dissociation/Dissolution and Termination a. Dissociation (Partner) and Dissolution (Partnership)

a.i. Dissolution occurs anytime a change in relation of partners—applied to both continuation & termination of business – partnership continues until “winding-up” process ends

a.ii. Causes of Dissolution(UPA § 31 + 32)

a.ii.1. § 31: Specified Events (Proper grounds, i.e., w/o violating agmt of partners)

a.ii.1.a. Termination of definite term or particular undertaking

a.ii.1.b. Express will of any partner

a.ii.1.b.i. Power to dissolve, even if don’t have the right to dissolve at any time

Page v. Page (CA 1961) - Two brothers, π (HB) and Δ (George) partner in linen services - Brothers has done other business together in past - HB owns entity that extended loan to partnership - Interested transaction okay so long as all partners know - HB wants declaratory judgment that partnership terminable at will - Judicial dissolution only in extreme cases - Business is picking up  not extreme circumstance - G says there is a term based on profitability - But business is profiting right now - Issue: Can HB dissolve partnership at will? - Holding: G failed to prove any facts to imply term to continue partnership & can dissolve absent bad faith or breach of fiduciary duty w/ express notice to partner o Can be dissolved by express will of any partner if partnership agmt specifies no definite term or particular undertaking o Wrongful if trying to take profits for himself & freeze brother out o Hope that partnership will be profitable, not enough to make a partnership for term

a.ii.1.c. Express will of all partners (mutual agmt)

a.ii.1.d. Expulsion of any partner bona fide IAW partnership agmt

a.ii.1.e. Any event making partnership business illegal

a.ii.1.f. Death of any partner Unincorporated Business Organizations-Wyrsch-Spring 2012 41 a.ii.1.f.i. Partner is required to buy the estate’s interest

a.ii.1.g. Bankruptcy of any partner

a.ii.1.h. Court decree under § 32

a.ii.2. § 32: Court Decree

a.ii.2.a. Partnership declared a lunatic by a court or of unsound mind

a.ii.2.b. Partner incapable of performing his role in partnership

a.ii.2.c. Partner guilty of such conduct as to prejudicially affect carrying on business

a.ii.2.d. Partner willfully of persistently commits breach of partnership business so that not reasonably practical to carrying on business

a.ii.2.e. Partnership business can only be carried on at a loss

a.ii.2.f. Other circumstances render a dissolution equitable

a.iii. RUPA continues 2 concepts:

a.iii.1. It continues the UPA rule that any member of an at-will partnership has the right to force a liquidation

a.iii.2. By negative implication, it continues the rule that the partners who wish to continue the business of a term partnership cannot be forced to liquidate the business by a partner who withdraws prematurely in violation of the partnership agmt

a.iv. Effect

a.iv.1. Operational

a.iv.2. Liability

a.iv.3. Valuation

b. Continuation of Business – Consequences:

b.i. Partner v. Partners

b.i.1. Need for continuation clause

b.i.2. “Winding-up” partner’s interests

b.i.3. Partner’s role and rights in process

b.i.4. Valuation of partner’s interest (incoming/outgoing)

Seattle First National Bank v. Marshall (WA 1982) Buy-sell agmts - Purpose of partnership was to acquire land and lease it for billboard advertising- Roy Marshall, Burt Marshall & Olsen - Roy died, agmt amended to give Burt 80% of partnership and Olsen 20%

41 - Then Olsen died, buy-sell provision in agmt saying surviving partner can buy out deceased partner - Partnership agmt provided for the determination of the reasonable mkt value of a deceased partner’s share, but agmt did not mention discounts for sales costs and minority interest - To compute reasonable mkt value of the partnership interest, the partnership assets must be valued to determine the net worth of the partnership - Issue: was the partnership meant to be valued w/o usual discounts for sales costs, minority interests & capital gain taxes? - Holding: not unreasonable to interpret agmt as indicated, w/o discounts o When planning buy-sell provisions—dual role: as continuing partner want a conservative valuation of partnership; as retired or decease partner, want a liberal valuation o In determining net worth of the partnership, the entire inventory of land tather than merely partnership interest is to be priced at current mkt value

b.i.5. Business valuation methods – partner is entitled to Fair Value of partnership (absent agmt)

b.i.5.a. Situations needed:

b.i.5.a.i. Purchasing a business

b.i.5.a.ii. Investing in a business

b.i.5.a.iii. Deciding ownership interests (incoming/departing)

b.i.5.b. Methods:

b.i.5.b.i. Liquidation (salvage)

b.i.5.b.ii. Book value (equity: assets – liabilities)

b.i.5.b.ii.1. Net worth

b.i.5.b.iii. FMV (criteria stipulated)

b.i.5.b.iv. Appraised Value (independent opinion)

b.i.5.b.v. Mutual agmt (periodic v. time of event)

b.i.5.b.vi. Capitalized earnings (past/future earnings)

b.i.5.b.vi.1. Cash flow

b.i.5.b.vi.2. Amount set by estimated avg. earnings for set period of time + partner’s % share of those earnings

b.i.5.b.vi.3. Earning power of the business

b.i.6. Partner’s authority

b.i.7. Partners’ rights and fiduciary duties

b.i.8. Application of uniform partnership acts

b.ii. 3d Parties v. Partnership/Partner - *Partners cannot unilaterally alter 3d Party rights

b.ii.1. Continuing Ks and business (unfinished business) Unincorporated Business Organizations-Wyrsch-Spring 2012 43 b.ii.2. “old” debts/claims & “new” debts/claims

b.ii.3. Partnership’s liability: lingering apparent authority

b.ii.3.a. Actual authority

b.ii.3.a.i. UPA § 33: DISSOLUTION (both continuation and/or termination scenario) – terminates all authority of partner(s), except as necessary to wind up partnership affairs or complete transactions

b.ii.3.a.ii. RUPA

b.ii.3.a.ii.1. § 603 DISSOCIATION – terminates partner’s right to participate in mgmt. and conduct of partnership business  no actual authority

b.ii.3.a.ii.2. § 804 DISSOLUTION – partners’ actual authority continues only to extent necessary to wind up partnership business  terminates partners’ actual authority to begin new business

b.ii.3.b. Apparent authority (“Lingering”)

b.ii.3.b.i. UPA § 35: DISSOLUTION (both continuation and/or termination scenario) – partnership by any partner transaction which would bind partnership if dissolution had not occurred, as to:

b.ii.3.b.i.1. Prior customer (3d party) if no knowledge or notice of dissolution (requires actual notice) AND

b.ii.3.b.i.2. Any other 3d party if (1) had no actual knowledge or notice of dissolution AND (2) if partnership has not provided general notice to the public (ad)

b.ii.3.b.ii. RUPA

b.ii.3.b.ii.1. § 702: DISSOCIATION – for 2 yrs, the partnership is bound by any departing partner’s transaction which would have bound the partnership under § 301 (partner’s apparent authority) BUT only if at the time of the transaction the 3d party:

b.ii.3.b.ii.1.a. Reasonably believed the dissociated partner was a partner;

b.ii.3.b.ii.1.b. Did not have notice of the partner’s dissociation;

b.ii.3.b.ii.1.c. Is not deemed otherwise to have knowledge or notice.

43 b.ii.3.b.ii.1.d. DISSOCIATED Partner’s liability § 703

b.ii.3.b.ii.2. § 704: DISSOLUTION – partnership is bound for any and all partners’ transactions which would have bound partnership under § 301 BUT only if at the time of the transaction the 3d party did not have notice or knowledge of dissolution

b.ii.4. NOTICE: Stmt of dissociation § 704/stmt of dissolution § 805: public filing by either partnership or departing partner providing notice of the dissociation/dissolution – after 90 days of filing, puts 3d parties on constructive notice – limits apparent authority of departing partner & protects partner from potential liability of partnership transactions

b.ii.5. Liability: outgoing v. incoming partners

b.ii.5.a. Incoming

b.ii.5.a.i. UPA § 17 – liable for all obligation arising before admission to partnership but only out of partnership property

b.ii.5.a.ii. RUPA § 306 – not personally liable for any obligation incurred prior to admission but all partners are jointly and severally liable

b.ii.5.b. Outgoing

b.ii.5.b.i. UPA § 36 – dissolution does not discharge existing liability of any partner; discharged from liability by agmt b/w partner and partnership creditor

b.ii.5.b.ii. RUPA § 703 – not liable for obligations after disassociation, only those prior to but may be released from those by agmt

Redman - 1969: Redman employed Firm – MacDonald, Brunsell & Walters

- Redman pd $1000, firm files his suit

- 1970: W leaves firm = dissolution  New firm: M&B

- W never participated in Redman’s suit

- Redman not notified of change in law firm

- 1974: Redman lawsuit dismissed

- 1975: Redman sues law firm + Walters

- Issue: Is W liable, despite no longer being a partner?

- Holding: upon dissolution, affairs are to be wound up which including Redman’s lawsuit and did not discharge the liability of W to Redman

o Even if the firm was A of Redman, the Principal – not w/in Agency relationship/authority for partnership to dissolve, meaning cannot impute knowledge of dissolution to Redman Unincorporated Business Organizations-Wyrsch-Spring 2012 45

b.ii.6. Application of uniform partnership acts

c. Termination- consequences:

c.i. Partner v. Partners

c.i.1. Meaning of winding up process (cash v. in-kind)

c.i.2. Partner’s roles and rights in process

c.i.3. Partners’ authority (actual)

c.i.4. Partners’ rights and fiduciary duties

c.i.5. Priority rules: loans v. contributions v. profits

c.i.6. Application of uniform partnership agreements

c.ii. 3d parties v. Partnerships/Partners*Partners cannot unilaterally alter 3d party rights

c.ii.1. Partnership’s liability: partner’s lingering apparent authority

c.ii.2. Stmt of dissolution

c.ii.3. Partner’s liability for unfinished business

Resnick v. Kaplan (MD 1981) - Four partners of Kaplan Group (law firm), Resnick left - Partnership agmt did not provide for rights upon dissolution - R participated in winding up the partnership affairs of the 150 cases upon which he worked - Aggregate of fees collected and distributed according to % share in partnership - Issue: was the allocation of fees rec’d by the parties upon dissolution based on their respective interests in partnership, not on actual time spent on cases correct? - Holding: yes, based on interest in partnership o Risk to law firm is that law firm will be liable for how R handles the case, even if R is negligent or mishandles the case in some way

c.ii.4. Partnership’s liability during winding up process

Marr v. Langhoff (MD 1991) - Langhoff, Marr & Bennett had a law firm together - Conflicts b/w M & L, dissolved firm as of 1/1/1982 - Agmt b/w M & L that “whatever is yours is yours, and what is ours is ours” - L left M & B practice, taking file for Cook with him saying client wanted to retain him not M & B - M & B want their share of the $800K recovered from the Cook case - Issue: did L breach a fiduciary duty to old firm, does M have right to acct’g after oral agmt w/ L? - Holding: agmt b/w M & L on Dec. 31, 1981 extinguished any duty of loyalty of L to M & B; mutual fiduciary duties cease when the winding up is completed – agmt cut through winding up and directly to termination allowing each to take their cases as if “new business”

c.ii.5. Priority rules: distributing partnership’s assets 45 c.ii.6. Application of uniform partnership acts

c.iii. Termination

c.iii.1. In kind liquidation

c.iii.1.a. Liquidation rules for distribution of partnership assets & losses:

(subject to agmt of partners but w/o prejudice to creditors)

c.iii.1.a.i. UPA § 40

c.iii.1.a.i.1. Payment to creditors other than partners

c.iii.1.a.i.2. Payment to partners other than for capital and profits (i.e., partner loans to partnership)

c.iii.1.a.i.3. Payment to partners for capital contributions

c.iii.1.a.ii. RUPA § 807

c.iii.1.a.ii.1. Eliminates subordination of inside debt, i.e. of partners who are creditors, to outside debt

Dreifuerst v. Dreifuerst (Wisconsin 1979) -  and  , brothers, formed partnership – no written articles governing partnership - Dissolution and wind-up, but unable to agree to winding-up -  wanted partnership sold,  could then continue to run but  ’s interest be satisfied in cash - Trial ct denied sale request, dividing assets in kind according to valuation presented by  - Issue: can a partner, absence agmt, upon dissolution and wind-up force a sale of the partnership? - Holding: a sale is the best way to determine the true mkt value of the assets; o In-kind distribution when by agmt and other ltd circumstances: . 1. There are no creditors to be pd from the proceeds; . 2. Ordering a sale would be senseless since no one other than the partners would be interested in assets; and . 3. In-kind distribution was fair to all partners . BUT Ct cannot permit an in-kind distribution under § 38 of UPA unless all partners agree o In-kind distributions may affect a creditor’s right to collect debt owned since the assets of the partnership as a whole may be worth more than when divided up

c.iii.2. Judicial sale of assets

Prentiss v. Sheffel (AZ 1973) - 3 person partnership for operating Shopping Center - S failed to contribute his share of operating losses - Other 2 want to continue partnership w/o S o They have 42.5% interest each, S has 15% interest - Trial ct found that partners had frozen S out of partnership, so ct dissolved it, ordering liquidation & sale of partnership - 2 partners use paper dollars to bid on business (bidding the asset being bid upon—not actual cash) - They get high bid & get business from S - Issue: Can partners bid on partnership asset at a judicial sale upon dissolution? Unincorporated Business Organizations-Wyrsch-Spring 2012 47 - Holding: Yes, partners are not precluded & does not matter that they had advantage of using partnership equity to bid & S had same right as other partners to bid on business

c.iii.3. Possible Scenarios: c.iii.3.a. A & B agreed to end partnership business but will do so when all unfinished business is complete, still in winding up process until work completed

c.iii.3.a.i. EFFECT: each partner is not entitled to addit’l compensation for each addit’l work unless otherwise agrd – still must divide profits according to existing partnership agmt

c.iii.3.b. A & B agree to end partnership business, also agree to divide up unfinished business & complete addit’l work separately, still in winding up process until work completed

c.iii.3.b.i. EFFECT: Same as (a) above.

c.iii.3.c. A & B agree to end partnership business, also agree to divide up unfinished business & complete addit’l work separately – clear intention/agmt that this is an in-kind liquidation, winding up process ended & immediate termination

c.iii.3.c.i. EFFECT: each former partner is entitled to keep any profits derived from addit’l work to complete business projects kept

c.iii.4. Service Partners

c.iii.4.a. Where one party contributes money & the other services, in the event of a loss each would lose his own capital—the one his money & the other his labor

c.iii.4.b. Do not apply where:

c.iii.4.b.i. Service partner was compensated for his work

c.iii.4.b.ii. Service partner made a capital contribution, even if contribution was nominal

LIMITED LIABILITY PARTNERSHIPS

I. Nature and Creation

a. Special Advantages in LLP status

a.i. Maintain tax advantages (one tax) of general partnership

a.ii. Better protect partners from personal liability

a.iii. Easy to convert from general partnership to LLP (register)

a.iv. Major restructuring and redrafting not necessary

a.v. Maintains existing general partnership norm (partners!)

a.vi. Incorporates existing body of general partnership law/decisions 47 b. Problems w/ LLPs:

b.i. Special requirements to establish and annually report

Apcar Investment Partners v. Gaus (TX 2005) - Smith & West were an LLP - Didn’t renew and ceased to be registered as an LLP as of 1996 - Signed commercial lease w/ 24 month personal guaranty for 60 mos w/ MF partners in Aug. 1999 - Stopped paying rent in Oct. 2002 - Issue: are they personally liable since personal guaranty ltd personal liability to 24 mos? - Holding: yes, a partnership must be in compliance w/ registration requirements for its partners to receive protection from individual liability

b.ii. Application of partnership act default provisions

b.iii. Changes to partnership agmt (e.g., profit-sharing)

b.iv. Requirements of professional organizations

b.v. If conversion, effect on existing Ks/liabilities

II. Effect on Partner’s Liability

a. Scope of Liability

a.i. “full shield” v. “partial shield” statutes

a.i.1. Partial Shield Protection - protects only against a partner’s vicarious liability for misconduct of other partners such as:

a.i.1.a. Debts and obligations of the partnership arising from errors, omissions, negligence, incompetence, or malfeasance committed in the course of the partnership business by another partner or a representative of the partnership not working under the supervision or direction of the first partner at the time the errors, omissions, negligence, incompetence, or malfeasance occurred

a.i.1.b. Still remain liable for general obligations of the partnership (Ks, debts)

a.i.2. Full Shield Protection – RUPA § 306

a.i.2.a. (a) all partners are liable jointly and severally unless otherwise agrd

a.i.2.b. (b) person admitted into an existing partnership is not personally liable for any partnership debts incurred before admission as partner

a.i.2.c. (c) obligation arising in an LLP is solely an obligation of the partnership, partners are not personally liable, directly or indirectly solely by reason of being a partner

a.i.2.d. ULLPA provides full shield protection

a.i.2.e. Today: Most jurisdictions are full shield statutes Unincorporated Business Organizations-Wyrsch-Spring 2012 49 Ederer v. Gursky (NY 2007) - G & E LLP registered as an LLP in 2001 - G withdrew from LLP, agreeing to remain a partner for one case’s trial in 2003 - G continued to operate LLP until 2005 - E sued in 2003 against LLP seeking an acct’g & breach of withdrawal agmt by not paying him for 2 weeks of trial - Issue: does LLP elimination of liability for “any debts” include those owing to partners? - Holding: No, it is part of UPA § 26, which only pertained to 3d party debts not those to partners – thus the individual partners (G) is liable to other partners (E) - Dissent: nothing in language suggesting that any debts did not pertain to former partners, who are essentially 3d parties - Partner withdrawing from an LLP can hold former partners personally liable—SHs and members of an LLC withdrawing can only look towards firm’s assets for satisfaction of amounts owed

Megadyne Information Systems v. Rosner, Owens & Nunziato, LLP - Megadyne hired Irell & Manella in 1995 to represent them in settlement w/ OTCA - I & M never filed a formal complaint, one year SOL expired against OTCA in Nov. 1996 - I & M referred Megadyne to R, O & N in 1997 as a more cost efficient way of resolving problem w/ OTCA - Megadyne fired R, O & N in 1998, hired another firm but ultimately case won in favor of OTCA b/c SOL had run - Megadyne sued R,O & N for failure to take action by failing to notify client of first rejection ltr from OTCA, failure to bring suit against I & M for inaction allowing SL to expire - Only Owens actually handled the case - Issue: was there a breach of fiduciary duty by R, O & N by making client think they still had a viable claim against OTCA? - Holding: triable issues as to whether other partners were involved and that Megadyne relied to its detriment on R, O & N’s representations that there was still a viable claim against OTCA

a.ii. Personal misconduct (partnership’s liability-reimbursement)

a.iii. Supervisory responsibility (general v. close) – extent of liability for supervisory or other involved partners in LLPs:

a.iii.1. Most state statutes impose liability on those partners who are in the best position to prevent the harm vis-à-vis the wrongdoer (partner or associate) – but problems for partners who:

a.iii.1.a. Have overall responsibility for a client

a.iii.1.b. Serve on a committee that reviews work prepared by other lawyers in the firm

a.iii.1.c. Provide specific expert advice on a matter that is generally handled by other lawyers in the firm

a.iii.1.d. Serve on a mgmt. or compensation committee that violates some employment lawyers in the firm

a.iii.1.e. Participate in a case in which an associate negligently mishandles the case

49 a.iii.1.f. Have no role in the misconduct other than finding out about it and not doing anything about

a.iv. “innocent” partner (no knowledge v. some involvement)

Kus v. Irving (CT 1999) - Law firm – I, D & C, was an LLP - K hired I to collect on husband’s life insurance policy, inducing her to sign a fee agmt to pay him 25% of what he collects before suit and 33% after suit - K sued I, D and C individually - D & C filed affidavits saying no personal knowledge and did not know about transaction until it was concluded - Issue: should D & C be held personally liable? - Holding: shared no benefit, did not have direct supervision or control over I and did not know about the matter until 9 days after funds distributed, means they are protected from liability

LIMITED PARTNERSHIPS

I. Nature and Organization

a. Partnership consisting of at least one GP & one LP

b. GPs can usually be either an individual or another business org’n

c. Still widely used for major investment, development, exploration, production & asset sharing purposes

d. Popular b/c of the long history of case law & provides for clear distinction b/w partners’ status (GP v. LP)

e. Trade off b/w LP’s liability and mgmt

f. Many distinctions made in statute & case law re: rights & duties of GPs & LPs

g. More formality required to set up

h. If public offering, may constitute a security w/in meaning of Fed. Securities Test of 1933 – Williamson Test

h.i. 1933 Act: applies to initial issuance of securities – designed to protect investors through disclosure

h.ii. Covers:

h.ii.1. Selling/purchasing securities (stocks, bonds & investments ks)

h.ii.2. Public, broad-scale offerings for investment

h.ii.3. If covered, must file registration stmt w/ sec + investor disclosure, unless exempted

h.ii.4. If a violation, stiff remedies for investors

h.iii. Test for security as an investment K (Howey test):

h.iii.1. Investment of $ Unincorporated Business Organizations-Wyrsch-Spring 2012 51 h.iii.2. Common enterprise

h.iii.3. Expectation of profits derived solely (substantially) from efforts of others

h.iv. Key: degree that owners participate in mgmt. (active v. passive)

h.v. Normally presumed GP interests more likely to be considered securities

h.vi. LLCs, depends on members’ role in mgmt. of org’n

Briargate Condominium Ass’n v. Carpenter (4th Cir. 1992) - Briargate was a GP; this is a collection action - Carpenter thought she was an LP although Briargate operated as a general partnership at all times - She withdrew from any equity participation once she found out she was really a GP - Issue: should Carpenter be held liable as a GP even though she thought she was an LP? - Holding: if belief was reasonable, not liable except to 3d parties who believed she was a GP o Need to determine whether she held a good faith belief that she was a LP when she joined o If she demonstrates good faith, then her notice of withdrawal effectively cuts off liability for any fees accrued after such notice o To hold her liable for prior fees, must show that 3d parties believed in good faith she was a GP II. Limited Partner

a. Rights & Duties

a.i. Rights of LP

a.i.1. Inspect books and records § 305(1)

a.i.2. Formal acct’g § 305(2)

a.i.3. CANNOT participate in mgmt. unless in partnership agmt § 302

a.i.3.a. Cannot Q GPs decisions unless actual fraud/bad faith

a.i.4. Can participate in profits/other distributions if allowed in partnership agmt

a.i.4.a. If not in agmt, on basis of value of partnership’s contributions – so not equally

a.i.5. Transfer of ownership position NOT allowed unless in agmt

a.i.5.a. If not in agmt, need unanimous approval of all partners § 301

a.i.6. Can transfer interest in partnership unless restricted by agmt § 701

Temple v. White Lakes Plaza Assocs., Ltd. (KS 1991) - John was LP of White Lakes, agmt signed by his wife Marianna - LP Agmt may sell, assign, or transfer interest – but must designate that they plan to substitute another as LP and the Partnership must agree to this substitution - Agmt gave LPs no authority to act to bind partnership - John and Mariana divorce, granting Marianna 100% of John’s interest in the partnership - White Lakes argues that they can deny Marianna admission to the partnership 51 - Issue: are they forced to admit Marianna as a partner? - Holding: Marianna is an assignee of John’s interest, but she cannot be substituted as a LP outside of the agmt

a.i.7. Can bring a derivative action o/b/o partnership (Art. 10) Direct Suit Derivative Suit § 1002 of Re-RULPA Action to enforce own claim or injury LP’s action o/b/o ltd partnership Any recovery to LP Any recovery to ltd partnership Must bear own expenses Expenses may be reimbursed if successful result No procedural steps required Procedural steps required: - Existing LP - Owner at time of wrong - Mgmt. inaction (BJR applies) To compel distribution To recover damages for other partner’s violation of fiduciary duty (care or loyalty) To recover reimbursement To enjoin improper or unauthorized ltd partnership action To inspect partnership records To recover ltd partnership damages from 3d party To enforce mgmt. right To enforce ltd partnership agmt To compel dissolution of ltd partnership To protect other interest

a.ii. Liability

a.ii.1. ULPA § 7: LP not liable to creditors or other 3d person for partnership transactions and/or debts unless takes part in the control of the business

a.ii.1.a. Control is not defined in ULPA but Cts examined degree and manner of LP’s participation in partnership business, plus creditors’ reliance

a.ii.2. Situations:

a.ii.2.a. LP’s personal, active participate (v. mere advice, consultation)

a.ii.2.a.i. Ignorance, inadvertent

a.ii.2.a.ii. Intentional abuse of LP status

a.ii.2.a.iii. Dissatisfied w/ GP

a.ii.2.a.iv. Financial crisis

a.ii.2.b. LP’s participation as an employee

a.ii.2.c. LP is silent (no participation) but is powerful, in full control (veto power, substantial investment)

a.ii.2.d. LP participates indirectly as an officer in a corp’n (GP)

a.ii.2.e. Creditor fully relies on LP’s role (believes a GP) v. totally unaware (windfall!)

b. Individual Creditors Unincorporated Business Organizations-Wyrsch-Spring 2012 53 b.i. Does control depend on creditor reliance requirement? It depends! ULPA § 7

b.i.1. If to protect creditors: reliance required

b.i.2. If to punish LP: no reliance required – windfall

b.ii. RULPA § 303(a) – depends on degree of participation

b.ii.1. If fully participates on same level as GP – reliance is not required

b.ii.1.a. Full liability BUT will Q this if acts in capacity of an employee, officer

b.ii.2. If substantial participation in “control” – reasonable reliance is required

b.ii.2.a. Liability only if 3d person reasonably believes the LP is a GP but Q re: impact of safe harbor provision

Holzman v. DeEscamilla (CA 1948) - De Escamilla is GP, Russell & Andrews are LPs

- But R & A could control what crops were planted & could withdraw funds from business acct w/o knowledge or consent of GP

- Issue: did R & A take control of the business in such a way to make them liable as GPs?

- Holding: LP shall not become liable as general partner, unless, in addition to the exercise of his rights & powers as LP, he takes part in control of business

o RULPA § 303(b)

. LPs can be liable only to those who “reasonably believe, based upon ltd partner’s conduct, that ltd partner is general partner”

. Create “safe harbors” of activity that is not deemed as participation in control— consulting w/ & advising a GP is not enough

- b.iii. Re-RULPA (2003) – LP not liable in any case regardless of amount of participation

Zeiger v. Wilf (NJ 2000) - Wilf led various entities; being held liable for consultant payments owed by general partnership owned by him and family members - Trenton, Inc. was GP of partnership and CPA, owned by Wilf, was the LP, in a project for renovations - Project failed and partnership filed for bankruptcy - Issue: Should Wilf be held liable as a principal of the LP of the limited partnership? - Holding: there is nothing in the record to show that  was misled or relied on some impression that Wilf was a GP to allow the finding of personal liability b.iv. Level of Participation - § 303: b.iv.1. Limited participation – mere advice = no liability

53 b.iv.2. No participation = no liability

b.iv.3. LP may be actively involved in day to day operation of partnership’s affairs provided that he does not have ultimate decision making responsibility

III. General Partner

Obert v. Envtl. Research & Development Co. (WA 1989) - Campus Park LP was controlled by ERADCO, its GP, and a number of LPs - ERADCO breached various fiduciary duties so LPs voted to replaced ERADCO with Pace as GP - The LP Agmt allowed a majority of LPs to remove a GP, but COA held this effected a dissolution and held the partnership dissolved - Agmt made in 1970, ULPA not adopted until 1981 - Issue: Can the LPs vote out the GP or does that dissolve the partnership? - Holding: ULPA cannot have retroactive effect, meaning the LPs successfully voted to replace the GP as there was nothing in the Agmt that required a meeting be held when a vote is taken by the LPs

a. Rights and Duties

Brickell Partners v. Wise (DE 2001) - Brickell, LP of El Paso, challenges its acquisition of Crystal Gas Storage - Acquisition approved by a Conflicts and Audit Committee comprised of management members of El Paso’s GP, DeepTech - Issue: did the agmt call for neutral parties to serve on Committee? - Holding: no, just that they were non-management directors of DeepTech, which they were

IV. Special Topics a. Finance

b. Distributions

Brooke v. Mt. Hood Meadows Oreg., Ltd. (OR 1986) - BOD voted to distribute only 50% of the LPs taxable profits, reinvesting the rest into the business - Under the agmt, all mgmt decisions are the responsibility of the GP - Issue: whether LPs have right to compel GP to distribute to them all the profits? - Holding: the agmt contains no provision expressly directing GP to distribute profits to LP but is subject to a good faith judgment of GP – but availability of cash for distribution depends strictly on mgmt’s operation of the business and the future cash needs of the business

c. Dissolution

THE LIMITED LIABILITY COMPANY

I. Nature, Formation and Organization

a. Separate legal entity

Abrahim & Sons Enterprise v. Equilon Enterprises LLC (9th Cir. 2002) - Shell and Texaco made an LLC, transferred ownership of gas stations to LLC - Franchisee says right of first refusal to buy gas station was violated b/c no opportunity to buy station before it was transferred to LLC - Neither company retained complete control after transfer as that was transferred to Equilon - Issue: was this a sale, triggering right to offer to franchisees? - Holding: Yes, needed to give right to first refusal to franchisees Unincorporated Business Organizations-Wyrsch-Spring 2012 55 o LLCs like Corp’ns are distinct legal entities b. Owners protected from liability

Weber v. US Sterling Securities Inc. (CT 2007) - Class action o/b/o all who rec’d fax ads seeking injunctive relief - Issue: are the members liable personally on the judgment? - Holding: not liable for obligations of LLC but this claim sounded in tort and officials may be held personally liable for their tortuous conduct o LLCs provide that members are not liable for obligations

c. Taxed only once

c.i. Under old Kinter regulations, looked at four characteristics to determine if a corp’n or should be taxed as a partnership:

c.i.1. Continuity of life

c.i.2. Centralized mgmt

c.i.3. Free transferability of interests

c.i.4. Ltd liability

d. Special Issues and Problems

d.i. Close relation to revised UPA

d.i.1. Overall statutory framework

d.i.2. Application of LLC Act default provisions

d.i.3. Application of operating agmt provisions

d.i.4. Members’ rights: sharing of mgmt. and profits

d.i.5. Members’ fiduciary duties

d.i.6. Members’ ownership interests & transfer thereof

d.i.7. LLC’s liability for members’/managers’ actions

d.ii. But some use of corp. statutes/concepts

d.ii.1. “broad powers” provision

d.ii.2. Ltd liability of members

d.ii.3. Member mng’d v. mngr mng’d

d.ii.4. PCV doctrine

Litchfield Asset Mgmt Corp. v. Howell (CT 2002) - Two LLCs formed by Howell and family members – Mary Ann Interiors and Architectural Design LLC and Antiquities Assocs. LLC - Howell had 97% ownership in Design and Design had a 99% ownership in Antiquities

55 -  says formed Design to prevent  from collecting previous debt owed by Howell - Two companies deposited payments into Design’s account even if maintained separate accounts and records segregated for tax purposes - Issue: Can he pierce LLC veil to hold Howell liable? - Holding: evidence shows that Howell conducted the businesses no differently than she treated her own personal affairs and can pierce veil o PCV: . Control . Used to commit fraud or wrong . Control and breach caused the injury

d.ii.5. Limitations on distributions d.ii.6. Conversions & mergers

C&J Builders and Remodelers LLC v. Geisenheimer (CT 1999) - G entered construction K w/ Pageau d/b/a C&J, a sole proprietorship at the time - C&J sued for payment upon which G objected stating that C&J, which has been converted to an LLC, was not a member to the K - Issue: is the LLC a member to the K? - Holding: no reason to disallow LLC being a member to K b/c converted from a sole proprietorship which is allowed when converted from a general partnership

d.ii.6.a. De facto LLC d.ii.6.a.i. A law under which LLC might be organized d.ii.6.a.ii. Attempt to organize it d.ii.6.a.iii. An exercise of company powers thereafter d.ii.7. Foreign LLCs d.ii.8. Derivative actions

e. “Laws”

e.i. If an inconsistency exists b/w any provision in the AOO and operating agmt, the operating agmt controls wrt mngrs and members AND the AOO control as to 3d parties who reasonably rely on the AOOs

Elf Atochem North America, Inc. v. Jaffari (DE 1999) - LLC had provisions in place to arbitrate exclusively in CA w/in a 38 page single space agmt - Issue: did failure of LLC to actually sign the agmt in capacity as LLC make the agmt not binding? - Holding: Agmt binding on LLC as well as members AND nothing prohibits members of an LLC from vesting exclusive SMJ in arbitration to a specific state o it is the members who are the real parties to the agmt o no reason that members can’t K away where they are allowed to file suit o Maximum effect to parties’ freedom to K

f. Members’ Liability

f.i. When can creditors hold members liable? Generally cannot unless it is Fair, Equitable and Just to do so

f.i.1. Judge made, not statutorily based

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