busorgs -- chasalow -- outline + flowcharts

8/8/2019 BusOrgs -- Chasalow -- Outline + Flowcharts

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BUSINESS ORGANIZATIONS OUTLINE

I. Introduction1. Sole Proprietorship

a. You cannot be a Sole proprietorship and share

ownership or else you are a proprietorship, ormore often called a partnership.b. Any type of business can have employees,

including a sole proprietorshipc. The sole proprietor is compensated for his labor,

his role as an investor, his ideas and hismanagement.

i. In general the law tends to allocate controlalong with risk

ii. An employee in the context of working forhis employer is his agent.

iii. A bank may loan the employer money butthe employer still controls the companybecause he has the risk, although they mayplace restrictions on the loan, like requiringit to be used for the kind of businessspecified.

1. borrowing money from the bank isdebt, money owed that must be paidback

2. money invested in a business isequity, it does not need to be paid

back, does not have an interest rate,and usually it entitles one toparticipate in the upside

3. The people who are shareholders arealso the owners of the business andresidual claimants, they get profits.

a. Creditors are someone to whomyou owe money.

b. Partnerships are not usuallyused in business anymorebecause they do not protectpeople from liability

c. sometimes the manager doesnot have complete control, thepeople who put in the mostmoney have most of the riskand therefore most of thecontrol

2. The difference between public and private companies.

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a. Public Companiesi. The public can buy and sell stock in it.

b. Private Companyi. It can be very difficult to sell your stock, making the

issue of control so important, the shareholders that

do not have control can find themselves stuck withworthless stock and no control, a minority stake youcannot do anything with or get rid of. There aremany things that can protect someone like a buy sellagreement which can let someone out of ownershipat a latter date.

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AGENCY LAW

Agency is a relationship that results from the manifestation of consent by P to A that A shall act on Ps behalf and subject to Pscontrol, and As consent to so act. Restatement of Agency

(Second) 1When the agent is acting outside the scope of the agencyyou cannot sue the principal.

Was the conduct of the same general nature as, orincident to, that which the servant was employed toperform

See Restatement of Agency 229Was the conduct substantially removed from theauthorized time and space limits of the employment

Frolic and detourWhether the conduct was motivated at least in partby a purpose to serve the masterMost courts now require a total abandonment of the employment to constitute a frolic and detour

Some Exceptions:- Even if A acts outside scope, M may still be liable:

Ms intent, Ms negligence Reliance by 3rd parties on apparent scope. Principal retains control over the aspect of the

work in which the tort occurs Principal engages an incompetent contractor

(Majestic analysis questions 1-2) Activity contracted for is inherently dangerous, a

nuisance per se (An activity that creates apeculiar risk of harm to others unless specialprecautions are taken)

Nondelegable duty (usually statutory like abuilding code, but can be broader) - A duty soimportant to the community that the principalshould not be allowed to farm it out to another.

The third party can also be held liable to the principal

A principal is liable on contracts made by an agent on theprincipals behalf.

Control can be established by a condition precedent . Gorton v.Doty (you dont need compensation)

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You can form an agency relationship without knowing . TheCargill court says there must be an agreement, but notnecessarily a contract between the parties.

Control can be established in more than one way, if you have asituation where you have the option of not following asuggestion, but if the advisor is financing you and theycan stop at anytime it may still be control even if you dontfollow all the suggestions. Gay Jenson Farms v. Cargill

The principal needs to effectuate control but the control doesnot have to be completely effective , and the control doesnot have to be completely related to the wrong.

Marital relationship not enough to make one spouse the agent

of another. Botticello v. Stefanovicz

In order for an agent to avoid liability , he must reveal notonly that he is acting on behalf of a principal, but theidentity of the principal . The 3 rd party has no obligation toask. Atlantic Salmon A/S

A creditor becomes a principal at the point at which it assumesde facto control over the conduct of the debtor. Restatement 14O

Supplier: One who contracts to acquire property from a thirdperson and convey it to another is the agent of the other only if itis agreed that he is to act primarily for the benefit of the otherand not for himself. Restatement 14K

Comment: Factors indicating that one is a supplier, ratherthan an agent, are: (1) That he is to receive a fixed pricefor the property irrespective of price paid by him. This isthe most important. (2) That he acts in his own name andreceives the title to the property which he there after is totransfer. (3) That he has an independent business inbuying and selling similar property.

General Notes:i. The law of agency in Torts is Respondiot

Superior/Vicarious Liabilityii. It is the ability to exercise control that is relevant not

the actual exercise of control, but it doesnt help toactually exercise control.

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iii. Agency law reaches a little farther then your sense of fairness, it is a very far reaching doctrine, partlybecause the principal will probably have moremoney.

5 Distinct Ways to Form an Agency Relationship Actual Express Contractual Duties : Principal & Agentexplicitly agree that A has power to act on Ps behalf and subject to Ps control

Actual Express Authority (AEA) Actual Implied Contractual Duties : Relationshipbetween P & A is such that court can reasonably inferparties intended to delegate A power to act on Psbehalf and subject to Ps controlWe have this category because sometimes we dont tellour agent everything we want the agent to do, but it is

still within the relationship of agent and principle. There is an incentive with implied authority for theprinciples instructions to be clear or else there will bemore implied authority than you wish.Under apparent authority the third party can stillenforce a contract against the principle even if he didnot now that agent was acting as an agent for theprinciple.Implied authority often depends on industry customs.

Actual Implied Authority (AIA)- Apparent: Apparent authority is the power to

affect the legal relations of another person bytransactions with third persons, professedly as an agentfor the other, arising from and in accordance with theothers manifestations to such third persons.Restatement 8Apparent authority depends on communicationsbetween the principle and the third party theprinciple somehow gives appearance that the agent hasauthority, a manifestation of authority, and the actualauthority is not there.

There is a requirement of reasonableness it usuallyturns on what is customary and reasonable in thecommunity .Apparent authority exists only where there is someconnection between the third party and the principal.

You must always look at how the third partylearned of the agents alleged authority and ask whether the principal reasonably can be said tohave been the source of that knowledge.

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When you have a case of apparent authority when theagent goes beyond their actual authority they are liableto the principle for violating their fiduciary duty.If there is apparent authority not only can the thirdparty enforce the contract against the principle, but also

the principle can enforce the contract against the thirdparty even though it is apparent not actual authority.- Ratification : If the principle decides to adopt a contract

negotiated by an unauthorized person. It can be ratifiedto the agent or to the third party.Ratification

A acts without authority (of any kind) andthere is no grounds for estoppel.

P will only be bound if P ratifies thecontract

Ratification requiresA valid affirmation by P

To which the law will give effectWhat types of acts constitute an affirmation by

the principal?Affirmation can be express or implied

Principal must know or have reasonto know all material factsWill be denied legal effect wherenecessary to protect the rights of aninnocent third party

Also includes estoppel. (Note that estoppel is not truly aform of authority. It is a bar to raising defenses to theauthority claim.)

- Inherent: Arises solely from the designation by theprincipal of a kind of agent that ordinarily possessescertain powers. Usually comes up in situations with anundisclosed principle, or where an agent exceeds theirauthority. A catch all. Inherent agency extends theprincipals liability to acts that the principle hasprohibited to the agent but that are within the scope of authority that agents engaged in similar activities

usually possess. (this is similar to the liability of partners even if the partner committing the act hasconcealed his membership in the partnership)

In undisclosed principal cases, what is the scope of the agents authority?

the principal is liable for all the acts . . . whichare within the authority usually confided to anagent of that character Watteau

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Restatement 195 agent enters intotransactions usual in such business and on theprincipal's account

The legal consequences of an agents acts DO NOT dependon the type of authority the agent possessed. To prove agency you must prove (1) that an agencyrelationship existed and then (2) what kind (or kinds) of authority the agent possessed.Usually you can have more than one type of authority.

The reason you bother saying not to do something even if there is a custom is that: most agents will listen, then youhave a claim against the agent, and maybe you take stepsto let people know.Often when there is either apparent or inherent there is the

other, however, note the difference between the two in asituation like Watteau where the third party did not evenknow there was a principal. In that situation there is nomanifestation by the principal to the third party, but therecan still be inherent authority, as in Watteau whereordinarily the goods would be supplied to that type of establishment (such a transaction would be normal in thebusiness).

Authority v. PowerAn agent may bind the principal even when the

agent lacks any form of actual authorityA power is an ability on the part of a

person to produce a change in a given legalrelation by doing or not doing a given act.Restatement 6

An agents power to bind the principal isbroader than an agents authority to bind theprincipal

E.g., estoppel

Gorton v. Doty Facts: parent loaning car to coach if he drivesShe could not have really protected herself with a contract,because it is not binding on a third party, although shecould then go recover from the alleged agent.Doty really should disclaim any control over the use of hercar or if she had rented them the car then she would justbe operating a business and not acting as a principal.

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Gay Jenson Farms v. CargillFacts: Warren grain elevator, Cargill big seed company

finances them with loansFactors:

1. Cargill's constant recommendations to Warren bytelephone;2. Cargill's right of first refusal on grain;3. Warren's inability to enter into mortgages, to

purchase stock or to pay dividends without Cargill'sapproval;

4. Cargill's right of entry onto Warren's premises tocarry on periodic checks and audits;

5. Cargill's correspondence and criticism regardingWarren's finances, officers salaries and inventory;

6. Cargill's determination that Warren needed "strong

paternal guidance";7. Provision of drafts and forms to Warren upon whichCargill's name was imprinted;

8. Financing of all Warren's purchases of grain andoperating expenses; and

9. Cargill's power to discontinue the financing of Warren's operations.

Cargill found to be principal. The difference between banks and companies acting likeCargill is that banks do not tinker with day to dayoperations.

Cargill Situation Planning SolutionsIt may be that there was a loan officer in the company thatdid not want to mess up their loan record.Reduce Cargills control by setting strong standards inadvance, avoid the biggest mistakes lenders make like:veto power, putting a person in control over the company,or providing assurances of payment to the other creditors.

Take on additional control, since you are already theprincipal make sure it is done right. Like McDonalds, oneof the benefits of that is that you can go to any McDonalds

in the world and know what to expect. But even if one of McDonalds restaurants does not do something they arerequired to do McDonalds is still liable because with controlcomes the power to police.It might have been okay to say we are going to have youtalk to an outside consultant instead of coming in yourself.

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Servants and independent contractorsPrinciple and Agent are big categories within that context there is asubcategory of master servant or independent contractor, you canhave an agency relationship that doesnt fall under master servant.

Why does the distinction matter? Vicarious liability depends not only on whether an agencyrelationship existes, but also on the kind of agencyrelationship that is involved.

Master is liable for servants torts. Principal generally not liable for the torts of an

independent contractor What is the distinction?

A servants physical conduct of the task is controlled or issubject to the right of control by the master

Note that the master does not have to actually

exercise control over what the agent does; he or shemerely needs to have the right to control the agent'sphysical performance of the assigned task

An independent contractors performance of the task is notsubject to the principal's control.

Independent Contract Types Nonservant agent (a.k.a. agent-type independent contractor)

Subject to limited control by P with respect to the chosenresult

Has power to act on As behalf Nonagent independent contractor (a.k.a. nonagent serviceprovider)

Perhaps less control on Ps part No power to act on As behalf

ConsequencesP liable if A w/in P not liable except P not liable inScope of employment in special cases agency law

Archaic ServantIndependentContractor

(agent-type)

IndependentContractor

(nonagent)

Modern PC Employee Nonservantagent

Nonagentindependentcontractor

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Restatement3d Employee

Nonemployeeagent

Nonagentserviceprovider

Liability in Tort

A master is subject to liability for the torts of his servantscommitted while acting in the scope of their employment .Restatement (Second) 219(1)

Sequential analysis of tort liabilityIs there an agency relationship between P and A?Is A Ps servant or independent contractor?If servant, was conduct within scope of employment?

Agent Tort Liability:Agent basically is always liable for torts she commits

Though the principal may be as well

Humble Oil & Refining Co. v. MartinFacts: Car at gas station rolls away hits somebody, oilcompany sued, operator of the gas station required tofollow ordersHumble found liable for the acts of the operatorsemployeeKey factor: Whether Humble has a legal right to controlSchneiders physical conduct on job. (that is the mannerin which the job is performed rather than the result) SeeRestatement of Agency (Second) 2.

Is there an argument that Humble might have made butdidnt that could have absolved it of liability despite thecourts finding that a M-S relationship existed?

Yes, that it is outside of the scope of the M-S relationship

Hoover v. Sun OilFacts: employee drops cigarette, recommendations notorders, sun oil logos

Bushey & Sons v. United StatesFacts: drunk sailor coming back to boat loosens wheelsUS defends on scope of employment grounds

Was conduct of same nature as that authorized?

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Was Lane on a frolic and detour?Did Lane have a purpose to serve US?

Discards purpose test, not all courts agree.Friendly goes with a fairness not a cheaper cost avoidertheory, and comes up with a broad understanding of

foreseeablity, that it is not foreseeable that he will turn thewheels but it is foreseeable that sailors will go out anddrink and in coming back something might happen.

Three issues:1. If some harm is foreseeable: Liability, even if the

particular type of harm was unforeseeable2. Conduct by the servant which does not create

risks different from those attendant on theactivities of the community in general will not giverise to liability

3. The conduct must relate to the employment

Not all courts accept (see, e.g., Clover v. Snowbird SkiResort ), most courts now require a total abandonment of the employment to constitute a frolic.

Majestic Realty Associates, Inc. v. Toti Contracting Co.Facts: employee of independent contractor goofed indemolishing building

This case is an exception in that the principle is being heldliable for the acts of an independent contractor.

They are liable because it was an inherently dangerous

activity, Negligence per se. The policy behind the decision is to get your contractor toget insurance when doing inherently dangerous activities.

The court signals that hiring an independent contractorwithout enough insurance could be like hiring one that isincompetent.

The court distinguishes inherently dangerous activityfrom ultra-hazardous (serious risk which cannot beeliminated) which is strict liability.

Policy: When to apply vicarious liability?Appearances

Sun Oil should be liable because if creates theappearance of responsibility

Residual interest

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Sun Oil should be liable because it has a relativelylarge interest in the successful operation of thestation

Deep pocketAny supplier with a deep pocket and any connection

to the accident should be held liableRisk spreadingMuch like deep pocket.

Risk preventionLiability should arise from control or right to controlthe harmful activityHolding oil companies liable causes them to instructtheir service stations to get insurance

Economic analysisCheaper cost avoider

Fairness

Compensation for lossesRetribution for morally blameworthy conduct

Principals Liability in Contract

Restatement 144: a principal is subject to liability upon contractsmade by an agent acting within his authority if made in proper formand with the understanding that the principal is a party

Mill Street Church of Christ v. HoganFacts: handyman hires brother to help him as he had done

in the pastSam sues for workers comp from church, has to be anemployee, Bill had to have authority to hire SamSam is a subagent of the church because Bill had actualimplied and apparent authority to hire Sam.Actual Implied Authority

Why?Implied authority includes such powers

as are reasonably necessary to carry out theduties

Did agent believe based on present orpast conduct that he had authority?

Job needed two men and the church hadlet him hire Sam in the past

No clear instructions to thecontrary expressed to agent, even if inprincipals mindSams belief relevant?

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Sams belief is relevant to apparentauthority, but not implied authority

Planning implications? The church should tell Bill he does not

have the authority to hire someone, and let

people know that all hiring has to be done bythe church

Lind v. Schenley Industries, Inc.Fact: Told by president that he would be assistant toKaufman but that he had to talk to Kaufman, Kaufman toldhim about a 1% commission he would get, company saysKaufman never had this authority to give him this salaryCourt said Kaufman had apparent authority, no actualauthorityAnalysis: The court confuses actual implied authority withboth apparent authority and inherent authority, and thecourt opines wrongly that proof of a specific form of authority is not required.Restatement 8 requires a manifestation by the principalto the third party to support apparent authority. What wasPark & Tilfords manifestation to Lind?

Installing Herrfeldt as sales manager andclothing him with authority to makerepresentations re employment on PTs behalf.

Apparent authority is a question of fact and often turns onwhat is customary in the field.

Planning: What should Park & Tilford have done?o You could have a department like human

resources and everyone gets an employeemanual and everyone knows that they cantget a raise or promotion without the humanresources departments consent. An employeemanual is usually used to disclaim liability forthese types of things. You can make a belief inthe authority unreasonable by notice (actual orconstructive through an employee manual orsomething). Train Herrfeldt and Kaufman notto make these sorts of offers. Insist on writtenemployment contracts with managerialemployees.

370 Leasing Corporation v. Ampex CorporationFacts: Joyce signs contract with signing block for Ampexand never sends it back, he also has a letter from Kays at

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Ampex confirming shipping, and an internal memo fromKays boss says we made this big deal and Kays is incharge of all communications with JoyceOn what type of authority is Joyce relying?

Apparent authority, not actual authority, Kays did not

have authority to sign this letter. Nor did his boss. The internal memorandum has significance in provingapparent authority if you assume Joyce new about thememorandum, and it supports the argument that therewas silence and Ampex wasnt denying the contract.

Broad category of implied authority is a kind of authority arising solely from the designation by theprincipal of a kind of agent who ordinarily possessescertain powers ( Lind )

Actual implied authority: act of putting agent insuch a position leads agent to reasonably believe

he has authorityApparent (implied) authority: act of puttingagent in such a position leads third party toreasonably believe agent has authority.

All authority that is not express is implied.Implied Authority is NOT a separate category.What should Ampex have done to protect itself?

Again, train its agents and give notice to potentialthird parties.Form contract requiring approval by contract

manager.Watteau v. Fenwick Facts: Beerhouse manager, Humble, owned beerhouse andthen sold it but stayed as the manager. Beerhousemanager only allowed to purchase certain things, he buysother things, managers name is still on the door.Humble didnt have actual authority because he as theagent could not have reasonably believed the scope of hisauthority to include that ability,Apparent authority?

No, the principle did not do anything to manifest to thethird party that the agent had that authority.Inherent authority?

Yes, the principal is liable for all the acts . . . which arewithin the authority usually confided to an agent of thatcharacter

Former Authority

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Sometimes you have to take steps to let people know that they nolonger have authority.

Ratification, Estoppel, Agents Liability

Botticello v. Stefanovicz Facts: Couple each owns undivided half interest in the property,tenants in common. Walter leases with an option to purchasewithout consulting Mary. Plaintiff moves in pays rent and makesimprovements, Mary cashes checks. Plaintiff tries to exercise theoption, Mary says no

Court says that the martial relationship is not enough to make onespouse the agent of the otherA marriage is not the same as a partnership.

The only real question here is did she ratify it by accepting rentCourt said no just being married doesnt imply consent

Planning: Botticello could have shown her the contract, or explained itto her and then if she still accepted the rent the ratification argumentwould work

The agency rules relating to undisclosed principals apply topartnerships.

Distinguish Ratification from Actual Authority Created by Acquiescence(1) Acquiescence by the principal in conduct of an agent whose

previously conferred authorization reasonably might include it,

indicates that the conduct was authorized; if clearly not included in theauthorization, acquiescence in it indicates affirmance.(2) Acquiescence by the principal in a series of acts by the agent

indicates authorization to perform similar acts in the future.Restatement 43

Hoddeson v. Koos Bros.Facts: Fake furniture salesman takes plaintiffs moneyWhy isnt this a case of the apparent authority of an apparent agent?

No holding out by Koos that tall man was its agent.Why doesnt Koos failure to police its sales floor constitute the

requisite manifestation?A manifestation is conduct by a person, observable byothers, that expresses meaning. Restatement (Third) 1.03cmt. b.Although omission can be a manifestation here it is not.

Court holds that if you dont watch your store well enough in somesituations you are estopped from disclaiming responsibility, court calls

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it agency by estoppel, court says new trial so you have the opportunityto argue estoppel.Apparent authority and estoppel are similar, but in estoppel the thirdparty has to alter their position in order to win, and estoppel only bindsthe principal not the third party.

On remand, what will Hoddeson have to prove to make out acase of estoppel?Acts or omissions by the principal, either intentional ornegligent, which create an appearance of authority in thepurported agent

The third party reasonably and in good faith acts inreliance on such appearance of authority

The third party changed her position in reliance upon theappearance of authority

Where agent had authority (of any kind) contract is binding onboth P and T.

Estoppel only binds P

Agent Liability on the Contract Disclosed Principal

None Two exceptions:

Clear intent of all parties that agent be boundAgent made contract but without authority

Party to the contract? Fraud/deceit? Implied warranty of authority (bulk of jurisdictions)(Restatement section 329)

Agent is not a party to the contract, but 3 rdparty is entitled to: the amount by which hewould have benefited had the authorityexisted.

Partially disclosed or undisclosed principalAgent treated as though a party to the contract

Third party must elect who to sue

Fiduciary Obligations: What duties do P and A owe to eachother?

Agents Fiduciary DutiesCare (i.e. duty not to shirk on the job)Loyalty (i.e. Dont Steal from the firm!)

Kickbacks, bribes or gratuities (Restatement 388) Evengratuities given after the factSecret profits

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From transactions with principal (Restatement 389)Use of position ( Reading )

Usurping business opportunities from principal ( Singer )Grabbing and Leaving ( Town & Country )

Most of the stuff gets fixed by disclosure, or else it is not up to theagent to decide whether the amount is too small to report or whether itis wrong or not

Particularof Loyalty

Under 388 of the Restatement of Agency (Second): Unless otherwiseagreed, an agent who makes a profit in connection with transactionsconducted by him on behalf of the principal is under a duty to givesuch profit to the principal.

Atlantic Salmon A/S v. CurranDefendant selling salmon representing himself as a corporation whenin fact he wasnt, at some point had a company called MarketingDesigns, Inc.

Because there was no principal he became the de facto principal.Black Letter Law: If an agent wants to avoid liability, he must revealnot only that he is acting on behalf of a principal, but the identity of the principal. The 3 rd party has no obligation to ask.Planning: What should the plaintiffs have done to protect themselves?A credit check, or they could have checked with the secretary of state.

Reading v. Regem

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Facts: British sergeant while on duty goes on ride on trucks of smugglers to help them get through without being inspected andgets paid for it.

Crown wants money he earnedCourt awards Crown money because the only reason he got the money

was because he was acting as their agent.Court says if his position as an agent more than affords him theopportunity for getting the money, but rather plays a predominant partin his getting the money then he is accountable for it to his master.The Agent has a duty to act solely for the benefit of the principal in allmatters connected with his agency. Restatement 2 section 387Remedy? Constructive trust, meaning you are in reality holding themoney for the principal.Why should we give the Principal a property right in the secret profitsof its Agent if the Principal is not damaged?We want to discourage it, not give any incentive to engage in behavior

we consider wrong.Note that the holding is not dependent on a measurable loss of valueto the Crown.

General Automotive Manufacturing Co. v. Singer Court says he was Automotives agent and owed them the profits hemade on the sideHe argues that he is allowed to do it because they were beyond thecapacity of AutomotiveBut he is the manager of Automotive so he has to work for the solebenefit of the Principal

Court says he should have disclosed, and it would have been inAutomotives discretion to reject the work, and to take any profits fromassigning the work, by failing to disclose he violated his duty to actsolely for the benefit of his principal.What if GA wanted the job, but Singer thought GA would do a bad job,could he warn the customer?No, but he could quit, it is not his right to warn the customerWhy wasnt Singer decided as a breach of contract case?Automotive would only get compensatory damages Automotives lostprofits from not doing the work, not disgorgement of Singers profits.

Breach of Contract v. Fiduciary DutyContract:

Remedy: Actual damagesNo moral condemnationNeed to interpret the contract (e.g. work 5 and days)

Breach of fiduciary duty:Remedy: Disgorgement

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Moral condemnationX-ref Meinhard v. Salmon : punctilio of an honor themost sensitive

Full Time and Attention ProvisionsIssues?

Outside activitiesuncompensatedcompensated (such as being a director of anotherfirm)

No provision for board waiverMoonlighting?Writing the Great American Novel?

Town & Country House & Home Service, Inc. v. Newbery Facts: Special quick and assembly line type house keeping, employees

steal client list which was difficult to cultivate for this special type of house cleaning, employees contact only people on the list but aftertheir employment has ended.Court says the client list was a trade secretWas it possible to allege that defendants breached their duty not tocompete?

Yes, because they advertised specifically to her customers, theproblem is not that they left and started their own competing business

You are not allowed to compete when you are still the agent of theprincipalSuppose Alice a 3 rd party competitor spies on the T&C trucks to get the

client list?She would not be liable because she is not an agent so she cancompete with the principal.If you have an independent basis for gathering the information you areokay, even if you are a past agent, you cant compete while you arestill an agent though.If they could have got the list from hiring a private detective but theydecided to just avoid the trouble and use it because they already had itin their minds what is the difference?Because we want to impose that hassle, that barrier, before they canuse the principals information.

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Information valuable both inside and outside firm.Large costs incurred to develop information.Information could not cheaply be duplicated.

Uniform Trade Secrets Act

(Cal. Civ. Code 3426 (1999)) Trade secret = information (including a formula, pattern,

compilation, program, device, method, technique, or process)that:

(1) Derives independent economic value, actual orpotential, from not being generally known to the public orto other persons who can obtain economic value from itsdisclosure or use; and

(2) Is the subject of efforts that are reasonable under thecircumstances to maintain its secrecy.

Consequences of Trade Secret Liability: Injunctive Relief

Actual or threatened. Term: Life of T.S. plus

Damages Actual Damages Unjust Enrichment of Misappropriator Reasonable Royalty (retrospective/prospective) PUNITIVE DAMAGES (up to 2X)

Attorneys Fees for bad-faith litigation (Either party)

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PARTNERSHIP

A partnership is an association of two or more persons to carry on asco-owners a business for profit UPA Section 6(1)

All partners are agents of the partnership. UPA 9 and thus eachpartner owes the same fiduciary obligations that any agent owes aprincipal;

An agreement is necessary to form a partnership.

No formalities are required to form partnership... so long as enterprise walks & talks like one... which includes a number of factors, including:

Intent (express or implied); Risk sharing ( i.e.profit and loss); Elements of sharing of control;

Rights on Dissolution

Partnerships are the only type of entity (a sole proprietorship is notreally an entity) that you dont have to file anything with the state, it isvery cheap to set up a partnership, with a corporation you need anattorney.

No body ever uses a partnership in the real world.

Sources of Partnership Law Statutory Body of Law:

Uniform Partnership Act (1914): Adopted by every state except La.

Revised Uniform Partnership Act (1997); Adopted in about half the states, including CA

(These are called the Default Rules, used to fill in gaps.Even if you want the default rule to govern you should stillput it in the agreement.)

Common Law Cases

Defining Characteristics :1. For-profit, unincorporated business2. Two or more owners(A & B)3. Partners each make contribution to business (capital, labor, land,

etc)4. Partners share profit/loss;5. Partners jointly enjoy rights of control/management;

Caveats :1. P-ships can vary by K many rules

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2. P-ships hire external capital/labor without adding new partners,one of the determining factors to determine if the newemployees or the lenders are partners is control, and sharingprofits and losses

Whats at Stake? Liabilities : All partners are agents of partnership and cantherefore obligate the partnership...

and thus all partners are personally liable on suchobligations

Joint liability for partnership debts Joint & Several liability for wrongful act of a partner

Control Rights : Also shared among the partners; Return : Profits shared equally among the partners;

Shared pro rata on dissolution of partnership Forced Sale rights upon dissolution

Regulatory posture : Tax treatment; regulatory classification, flow throughtaxation means the partnership does not pay taxes onprofits, the individual partners do, with corporations thereis double taxation

Default rule votes based on one vote per person, not pro rata onshares

UPA 18 provides that: The rights and duties of the partners inrelation to the partnership shall be determined, subject to any

agreement between them, by the following rules: (e) All partnershave equal rights in the management and conduct of the partnershipbusiness.

UPA 31 provides that: Dissolution is caused: (!) Without violation of the agreement between the partners, (b) By the express will of anypartners when no definite term of particular undertaking is specified.

That leaves the problem of what happens to the partnership propertyupon dissolution. UPA 18 provides in part, (a) Each partner shall berepaid his contributions and shall share equally in the profits andsurplus.

Fenwicks Caution: Even though P-ship agreements can alter mostrights/duties between partners, bending the default rules too far isrisky: It risks a legal finding that no partnership existed in the firstplace

Lack of formality => Principal Tension: Though fit with default rules helps to determine status...

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once a partnership, no need to follow default rules! The trick for organizations worried about partnershipstatus, but who dislike the UPA default rules:

Either live with more default rules, or take care tocontract around them in fashion that formally resembles

them.Fenwick v. Unemployment Compensation CommissionBeauty store with receptionist, agreement says partnership,receptionist gets 20% of profits if there are any, but no control, did notbear losses, or other elementsProfessor thinks there was a partnershipFactors: Return, Risk, Control, Duties, and Duration(can either sever)UPA 7(4)

In determining whether a partnership exists: (4) The receiptby a person of a share of the profits of a business is prima facie

evidence that he is a partner in the businessBut The Act further provides that sharing of profits is prima facieevidence of partnership but no such inference shall be drawn if such profits were received in payment as wages of anemployee, and it seems that is the legal inference to be drawnfrom the factual situation here.

This case is saying that if you are too successful as a transactionalattorney in giving your client all of the control then there is not apartnership

Partners vs. Owner/Employee Type of Claim on Firm:

Employees: Usu. no capital contribution; fixed salary (+bonus)

Owner: Initial contribution; residual claim of firm value Control

Owner usually has significant control; Ee: Little/none Duration: Limited or for the life of the business

Owner: usually entitled to stay in business indefinitely Ee: fixed term employment contract or at will

Liability to Third Parties Owner yes; Ee: none

Contributions/Rights on Dissolution Ee: cant force dissolution, and only gets wages due Owner: can force dissolution and gets residual surplus

But is it so simple?Implications of the UPA as a default, form contract

Risks (Upside and Downside)

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PAs often allow for partner w/o capital contribution Usu. when partner has already contributed

labor/expertise Control

Partnership Agreements (PAs) frequently designate one

person to have managerial power; Rights on Dissolution In such partnerships, the partner contributing capital would

have a right to her capital

Partnership Fiduciary Duties

All partners are agents of the partnership. UPA 9 and thus eachpartner owes the same fiduciary obligations that any agent owes aprincipal;

RUPA 404 General Standards of Partners Conduct(a)The only fiduciary duties a partner owes to the partnershipand the other partners are the duty of loyalty and the duty of care set forth in subsections (b) and (c).

(b)A partners duty of loyalty to the partnership and the otherpartners is limited to the following:

(1) to account to the partnership and hold astrustee for it any property, profit, or benefitderived by the partner in the conduct andwinding up of the partnership business orderived from a use by the partner of

partnership property, including theappropriation of a partnership opportunity;(2)to refrain form dealing with the partnership

in the conduct or winding up of thepartnership business as or on behalf of aparty having an interest adverse to thepartnership; and

(3)to refrain from competing with thepartnership in the conduct of thepartnership business before the dissolutionof the partnership.

(c) A partners duty of care to the partnership and the otherpartners in the conducting and winding up of the partnershipbusiness is limited to refraining from engaging in grosslynegligent or reckless conduct, intentional misconduct, or aknowing violation of the law.

(d)A partner shall discharge the duties to the partnership and theother partners under this [Act] or under the partnership

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agreement and exercise any rights consistently with theobligation of good faith and fair dealing.

(e)A partner does not violate a duty or obligation under this [Act]or under the partnership agreement merely because thepartners conduct furthers the partners own interest.

(f) A partner may lend money to and transact other business withthe partnership, and as to each loan or transaction, the rightsand obligations of the partners are the same as those of aperson who is not a partner, subject to other applicable law.

Young v. JonesPartnership by estoppelInvestors relied on audit done by PW Bahamas, try to sue PW-US underpartnership by estoppelHeld:

No evidence of actual partnership

Plaintiffs did not show that they relied on any holding out by PW-USReliance is an element of estoppel

Under what theory could Plaintiffs have proceeded against PW-Worldwide?

Apparent Agency, which has the added advantage of norequirement of a showing of reliance.But, remember the Holiday Inn case.

D

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Some Examples... UPA 20:

Obligation to render true and full information on all thingsaffecting P-ship

UPA 21: Partners must account for profits from any transactionconnected with formation/conduct/business of P-ship

UPA 22: Each partner has a right to a formal accounting of her

rights/interests.

A Caveat within Partnerships Many cases hold that partners owe fiduciary duties not only to

the partnership as an enterprise, but also to each other asindividuals

Not at issue with agency law (where the principal is onlyone person). Generally not so in corporations law (where SHs usually

dont owe fiduciary duties to each other)

Partnership Opportunities A Partner must disclose the partnership opportunity Then the managing partner(s) must decide whether to act on

that opportunity BUT, that decision must be made in good faith.

Doctrine of Organizational Opportunities

To what extent do business opportunities of which a fiduciarylearns belong to the firm rather than the individual?

Agency Restatement 387: Unless otherwise agreed, anagent is subject to a duty to his principal to act solely forthe benefit of the principal in all matters connected withhis agency.Corporate opportunities doctrine

Boundaries of the standard; or there are distinctions of degree Joint enterprise/venture v. general partners

Andrews v. Cardozo

During the partnership v. at its endUPA (1997) 404(b)(1)Geographic?

No liability if a location far removedStatus of partner (Managing v. silent)Cardozo is ambiguous both as to the standard and its boundaries

Meinhard v. Salmon

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Facts: One partner goes behind the back of the other partner andnegotiates to develop a new building after the partnership is to end.

Why did Cardozo side with Meinhard? In particular, where did Salmon go wrong?

The trouble about his conduct is that he excluded his

coadventurer from any chance to compete, from anychance to enjoy the opportunity for benefit that had cometo him alone by virtue of his agency.

What should Salmon have done? DISCLOSE!

Would disclosure alone suffice? The punctilio of an honor most sensitive The thought of self was to be renounced

Cardozo seems to suggest that more might be required DoesSalmon have to give Meinhard the opportunity to be a partner inthe new venture???

Policy: Is Meinhard the right default?Hypothetical bargainIf partners can withhold new informationsuch as thediscovery of a new business opportunityfrom each other,then each has an incentive to drive the other out so as totake full advantage of the informationAs each incurs costs to exclude the other, or to takeprecautions against being excluded, the value of the firmdeclinesA legal rule vesting the firm with a property right to theinformation and requiring disclosure is more efficient

Suppose Meinhard and Salmon want a different rule. Maybe thatneither partner owes fiduciary duties to the other. Is that valid?

Compare UPA (1997) 404(b)(1) and 103(b)(3)Partnership agreement may not . . . (3) eliminate the dutyof loyalty under Section 404(b) . . . but: (i) the partnershipagreement may identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable Note the difference between a prospective waiver and aratification after the fact RUPA 103(b)(3) (ii)

Bane v. FergusonFacts: Bane retired from Isham, Lincoln & Beale and became entitled to

a pension that would end if the firm dissolved. Later ILB mergedwith Rueben & Proctor. The merger turned out to be a disasterand the merged firm dissolved. Bane sues, claimingmismanagement in arranging the merger.

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Held: Nor can Bane obtain legal relief on the theory that thedefendants violated a fiduciary duty to him; they had none.At the time of the alleged violation, was Bane a partner in ILB?

No, he had a contractual relationship with the firm.Although some might argue Bane continued to have

partner-like status, at least with regard to the firmsviability and profit. The Court says ILB had no duty to Bane and even if there is aduty the defendants are protected by the business judgment rule(or something like it).

Harming the partnership would normally be thought of as aviolation of the duty of care, but maybe such conduct canalso be thought to be disloyal at least if egregiousenough.

Grabbing and Leaving:Meehan v. Shaughnessy Facts: Partners want to leave firm,

1. Approached Cohen, another partner, and asked her to jointhem in the new firm of Meehan Boyle & Cohen (MBC). Sheagreed.

2. They asked three associates to follow them to MBC. Theyagreed.

3. Two of the departing lawyers met with one of the clients toconvince it to route its business to MBC. It agreed.

4. After notifying the firm on November 30, 1984, that theywould form MBC January 1, 1985, they wrote letters to theirclients inviting them to move their business to MBC.

The partnership agreement varied from usual fiduciary duties,with regard to taking work with you.PC alleged:

1. Boyle told one of the other lawyers who was leaving(Schafer) to manage his cases in a way that woulddefer payment to 1985.

2. When a PC partner left (in an unrelated affair), Boylereassigned most of his cases to Schafer and himself.

The PC partnership agreement required that departingpartners give the firm 3-months notice. For reasons notexplained, PC waived this requirement.

The agreement also provided that partners could take withthem pending cases, so long as they paid the firm anappropriate fee.

Held:MBC breached their duties to the partnership, but how?

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1. They contacted their clients in December in a way that did notfairly give the clients a choice to stay with PC, they gained anunfair advantage over PC(their former partners) in breach of their fiduciary duties.

2. Until December, they lied to their partners about their plans

to leave.A partner has an obligation to render on demand true and fullinformation of all things affecting the partnership to anypartner. UPA 20

Fiduciaries may plan to compete with the entity to which they oweallegiance, provided that in the course of such arrangements theydo not otherwise act in violation of their fiduciary duties. (1) Does the holding imply that M & B have an affirmative duty

to inform the other partners of their plans to leave? No

(2) Suppose that the defendants had never lied about their

intentions, and had made an announcement on privateletterhead, the morning after they leave the firm; making clear that clients could stay with firm;

OkayMeehan is not the last word on client contact.Context (i.e., motivations, actors, and partnership

agreement) is critical.

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Many firms explicitly ban such behavior in partnership agreements,thus altering the fiduciary duties.

ABA Standards: Guidelines for Notice to Clients

Notice is mailed Notice is mailed

Sent to clients with whomlawyer had an active attorney-

client relationship

Sent to clients with whomlawyer had an active attorney-

client relationship

Related to open and pendingmatters for which lawyer had

direct personal responsibilityto the client immediatelybefore the change.

Related to open and pendingmatters for which lawyer had

direct personal responsibilityto the client immediately

before the change.

Sent promptly after change Sent promptly after change

Does not urge client to severher relationship with former

firm and does not recommendhiring the lawyers (though it

can say lawyer willing tocontinue her responsibilities)

Does not urge client to severher relationship with former

firm and does not recommendhiring the lawyers (though it

can say lawyer willing tocontinue her responsibilities)

Makes clear client can decidewhether to stay

Makes clear client can decidewhether to stay

Is brief, dignified, and notdisparaging of former firm Is brief, dignified, and notdisparaging of former firm

31

Grabbing and Leaving: Permissible v. Impermissible

Take desk files Take clientfiles

Deny planswhen asked

Keep plansconfidential

Not informclients of rightto havecounsel of ownchoice

Remind clientsof right tohave counselof own choice

Contact clientsbefore leavingfirm

Contact clientsbeforeannouncedeparture(probably cant saycome with me, butcan relay plans)

Negotiate withassociates (cant steal

associates, but canmake plans known)

Negotiate withfellow partners

Negotiatemerger with

another firm

Locate officespace


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Lawlis v. Kightlinger & Gray Facts: partner becomes an alcoholic, other partners outline a series of

steps for him to take, they sign agreement that specifically saysno second chances, starts drinking again, partners outline a

series of steps for him again and this time he recovers, demandshis full partnership position back, Wampler notifies him that theyare going to recommend his severance, and they remove all filesfrom his office, then they vote to fire him.

Held:Wrongful dissolution claim

Rejected by court; Wampler simply announced whatthe other partners intended to do he did not dissolvethe partnership without the vote called for in theagreement.

Breach of fiduciary duty claiming they violated theimplied duty of good faith and fair dealing firing him for thepredatory purpose of increasing the partner to associateratio

Partners had right to do as they did by contract(guillotine clause(no cause expulsion)) andbreached no fiduciary duty

Self interest alone does not make for a breach of fiduciary duty, it istrue they will make more money by kicking him out, but that does notmean they are kicking him out for that purpose

How do we square the courts approval of the guillotine provision withCardozos famous proclamation in Meinhard that partners should beselfless?

They can be selfless with regard to themselves, but that doesnt meanthey have to be selfless with regard to the other partners interest, butany way any selflessness is trumped by the contract

Assume no expulsion provision in partnership agreement.May firm expel Lawlis or otherwise disassociate itself fromhim?

Consider:UPA (1914) 32(1)(b) or (d) incapable of

performing his part of partnership contract, orwillfully or persistently commits a breach of thepartnership agreement, or otherwise soconducts himself in matters relating to thepartnership business that it is not reasonablypracticable to carry on the business inpartnership with himRUPA 601

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Disassociation when a partner leaves a law firm, instead of havingthe partnership dissolved and then reformed without the partner wholeftUnder the RUPA 601 there are three instances when a partner can be

disassociatedEffect of Assigning Partnership InterestPutnam v. Shoaf Facts:

The Shoafs are actually being paid to take over Mrs. Putnamsinterest in the partnership

They discover that the bookkeeper has been embezzling fromthe firm. They sue and recover 68k.Mrs. Putnam claims she was entitled to this recovery.

Held:

Putnam losesShe had no specific interest in the unknown damages toseparately convey or retain, and she conveyed herpartnership interest to the Putnams.Is the court treating the partnership as an entity or anaggregate?

An entityUPA (1997) 201(a): a partnership is an entitydistinct from its partnersUPA (1997) 203: Property acquired by apartnership is property of the partnership and not of the partners individually.

The point is when you buy an interest in a partnership you are buyingthe whole thing

Creditors Access to Firm and Personal AssetsA partnership is a separate entity UPA 201, 203

You dont own a third of everything the partnership owns, but you owna third of the partnership

Creditor of firm seeks to attach personal assets of a partner tocollect debt. Allowed?

Yes, but many states require that the creditor firstproceed against the partnership

Hint: UPA (1997) 306(a) Except as otherwise provided in subsections (b) and (c),

all partners are liable jointly and severally for allobligations of the partnership unless otherwise agreed bythe claimant or provided by law.

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(b)A person admitted as a partner into an existing partnershipis not personally liable for any partnership obligationincurred before the persons admission as a partner.

(c) An obligation of a partnership incurred while thepartnership is a limited liability partnership, whether

arising in contract, tort, or otherwise, is solely theobligation of the partnership. A partner is not personallyliable, directly or indirectly, by way of contribution orotherwise, for such an obligation solely by reason of beingor so acting as a partner. This subsection appliesnotwithstanding anything inconsistent in the partnershipagreement that existed immediately before the voterequired to become a limited liability partnership underSection 1001(b).

Personal creditor seeks to attach firm assets. Can the creditorseize partnership property to satisfy the debt?

No, because the partner cant touch partnershipproperty and the creditor cant touch more than thepartner, the creditor can get in front of moneycoming out of the partnership in proportion to theownership interest of the partner in the partnership

Hint: UPA (1997) 501 and 504(e) 501A partner is not a co-owner of partnership property and hasno interest in partnership property which can betransmitted, either voluntarily or involuntarily. 504(e)

This section provides the exclusive remedy by which a judgment creditor of a partner or partners transferee maysatisfy a judgment out of the judgment debtorstransferable interest in the partnership.

Is the creditor out of luck?No they can get in between some of the moneycoming out of the partnership.

Hint: UPA (1997) 504(a)-(b)(a)On application by a judgment creditor of a partner or

of a partners transferee, a court having jurisdictionmay charge the transferable interest of the judgmentdebtor to satisfy the judgment. The court mayappoint a receiver of the share of the distributionsdue or to become due to the judgment debtor inrespect of the partnership and make all other orders,directors, accounts, and inquiries the judgmentdebtor might have made or which the circumstancesof the case may require.

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(b)A charging order constitutes a lien on the judgmentdebtors transferable interest in the partnership. Thecourt may order a foreclosure of the interest subjectto the charging order at any time. The purchaser atthe foreclosure sale has the rights of a transferee.

Partnership CapitalInitial capital contribution

A partner may contribute labor.Capital Account:

The way you keep track of what you have put intothe partnership is the capital account.

A running balance reflecting each partners ownershipequity

UPA (1997) 401(a)Each partner is deemed to have an account that is:

(1)credited with an amount equal to the moneyplus the value of any other property, net of theamount of any liabilities, the partnercontributes to the partnership and thepartners share of the partnership profits; and(2)charged with an amount equal to the moneyplus the value of any other property, net of theamount of any liabilities, distributed by thepartnership to the partner and the partnersshare of the partnership losses.

Allocation of profits increases capital accountAllocation of losses decreases capital account

Taking a draw (distribution) decreases capital account

35$1,000$1,000 Year 3 Draw

$1,000$10,000 Year 3 CapitalAccountBalance

$2,000$2,000 Year 3 Profit

$0$9,000 Year 2 CapitalAccountBalance

BobAlice


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Partnership ProfitsProfits divided equally per capita(person) not pro rata. UPA(1914) 18(a); UPA (1997) 401(b)Partnership agreement provides for profits to be divided: 90% toAlice; 10% to Bob. Agreement silent on losses. How are lossesallocated?

Losses follow profits, absent contrary agreement. UPA(1914) 18(a); UPA (1997) 401(b)

Raising Additional Capital The Free Rider Problem

Solutions:Agreement can state that the managing partner can issue a call foradditional funds and provides that if any partner does not provide thefunds called for, his share is reduced, according to the existingformula. This is sometimes referred to as pro rata dilution. Another approach is called penalty dilution, where the partnershipagreement might provide that if the managing partner determines thatadditional funds are needed, new points will be offered to the partnersat a price of $250 each. (This would be called 4 to 1 dilution, since theoriginal points were sold for $1,000)

Another approach requires partners to make loans to the partnership,pro rata, when called upon by the managing partner to do so. Theloans might for example bear interest at three percent above theprime rate, with no distributions to be made to the partners until thefull amounts of the loan and interest are paid. The tough problem is tospecify the consequences of a failure of a partner to comply with arequest for loan money. One possibility is to allow the non-defaultingpartners to make the loan and compensate them for doing so byproviding for repayment of, say, 110 percent of the amount loaned,plus interest.

The right to buy new shares in a company are called pro rata rightsyour right to participate in any new investment at the samepercentage of your interest in the business, you want that to preventdilution (other people buying more of the company or you selling morepieces of the company your share of the company decreases), and

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punishes those who dont reinvest, and it increases your returns theright to invest at the same price can be incredibly useful if the sharesare becoming more valuable

Another approach is to provide in the partnership agreement that the

managing partner can sell new partnership shares to anyone atwhatever price can be obtained. This is comparable to a corporationselling new shares of its common stock in order to raise new equityfunds.

Resolving Disagreements among Partners The UPA grants all partners the (default) all partners have equal

rights in the management and conduct of the partnershipbusiness,

UPA 18(e) But if the partners disagree, whose viewpoint wins out?

Hint: UPA 18 18(h) any difference arising as to ordinary mattersconnected with the partnership business may be decided by amajority of the partners.

National Biscuit Company v. Stroud (decided under UPA (1914) not(1997))Facts: Stroud and Freeman formed a partnership to run a grocery

store. Stroud told National Biscuit that he would not bepersonally liable for any more bread it sold to the store.Freeman ordered more bread and National Biscuit sued Stroud

for payment.Remember: full personal liability for debts of thepartnership. If the partnership is liable on the contract,then so is Stroud.

UPA 9(1) (1914):Every partner is an agent for the partnership for purposes of itsbusiness, and act of every partner for apparently carrying onin the usual way the business of the p-ship binds the p-ship,unless

the partner so acting has in fact no authority to act for thepartnership in the particular matter, and

the person with whom he is dealing has knowledge of thefact that he has no such authority.

UPA 1997 changes it to: UPA (1997) 301(1): Each partner is anagent of the partnership for the purpose of its business. An act of a partner, including the execution of an instrument in thepartnership name, for apparently carrying on in theordinary course the partnership business or business of the kind carried on by the partnership binds the

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partnership, unless the partner had no authority to act forthe partnership in the particular matter and the person withwhom the partner was dealing knew or had received anotification that the partner lacked authority.

Held:

Since a majority of the partners did NOT vote to end Freemansauthority to buy bread on credit from Nabisco, the partnershipwas not bound by Strouds objections.

The partnership is bound by Freemans orders since he is anagent of the Partnership

If the Partnership is bound, then so is Stroud The only way for Stroud to end his potential liability was to

dissolve the partnership and notify the suppliers.If he had gone out and bought diamonds then the question would be isthis in the ordinary course of business.

You could argue you are changing the nature of the partnership so you

need unanimity.Planning: What terms could be inserted into a partnershipagreement to avoid these problems in the future?

Allocate controlling interests;Appoint a tie-breaker;Require unanimous partner consent before doing businesswith a supplier (and notify creditors).

Day v. Sidley & Austin(Illustrates extent to which courts allow partnership agreement toderogate from statute)Facts: firms merge, Washington office becomes run by co-chairmen,

partner claims he was promised to be the chair of theWashington office when he joined the firm and that the decisionto appoint co-chairmen was made prior to the merger anddefendants concealment of that decision was a materialomission and without that prior information his vote of approvalfor the merger would not have been given.

Days Three Main Claims:Misrepresentation: S&As executive committee engaged inmaterial misrepresentations that induced his assent, and thusagreement is voidableBreach of K: He had a contractual right to remain the sole chairof the DC officeBreach of Fiduciary Duty: Secrecy of EC about mergernegotiations/consequences

MisrepresentationDefendants claim that any possible taint of plaintiffs vote in favor of the merger is of no consequence because only a majority was required.

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Court says plaintiff was not deprived of any legal right as a result of hisreliance on the statements. The partnership agreement sets forth indetail the relationship between the partners and no mention is made of plaintiffs status in the Washington office, and the partnershipagreement seemed to embody the complete intentions of the parties

as to the management of the firm.Breach of ContractUnder the partnership agreement partners could be admitted andsevered from the firm and the partnership agreement could beamended by majority approval. The merger could be considered eitheras the admission of new partners or the making of a new or amendedagreement, and thus majority approval was all that was required, anda post facto change in plaintiffs vote would be of no effect.Plaintiff claims that the merger was such a fundamental change in thenature of the partnership as to require unanimous approval, but common law and statutory standards can be overridden by agreement.

Breach of Fiduciary Duty The basic fiduciary duties are: 1) a partner must account for any profitacquired in a manner injurious to the interests of the partnership, suchas commissions or purchases on the sale of partnership property; 2) apartner cannot without the consent of the other partners; acquire forhimself a partnership asset, nor may he divert to his own use apartnership opportunity; and 3) he must not compete with thepartnership within the scope of its business.What plaintiff is alleging concerns failure to reveal informationregarding changes in the internal structure of the firm. No court hasrecognized a fiduciary duty to disclose this type of information.

Rights to Manage the Partnership Recall that under UPA 18e

Each partner has equal rights to manage ==> right to avoice; to be consulted

Background Knowledge Under UPA 1914, when even one partner leaves the

partnership it is dissolved, the agreement mayhowever contain a provision specifying that theremaining partners will continue as partners underthe existing agreement in a continuation agreement.

Under UPA 1997, if a partner retires pursuant to anappropriate provision in the partnership agreementthere is a dissociation rather than a dissolution.When there has been a dissociation, the partnershipcontinues as to the remaining partners and thedissociated partner is entitled, in the absence of anagreement to the contrary, to be paid an amount

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determined as if on the date of dissociation, theassets of the partnership were sold as a price equalto the greater of the liquidation value or the valuebased on a sale of the entire business as a goingconcern without the dissociated partner. 701(a)

and (b)Default rule is that losses follow profitsDissolution must be carried out in good faith.

Expulsion provisions (review) Allow the partners, on a specified majority vote, to remove a

partner. Recall:

In UPA jurisdictions, expulsion is in reality adissolution of the partnership, followed

immediately by a reconstitution with all non-expelledpartners. Fiduciary duties constrain exercise of such provisions, but only as

regards certain motives: Self-interest, freeze-outs, bad faith, etc. Otherwise, partnership law gives a fairly wide berth

Dissolution v. Going out of BusinessDissolution is not the same as going out of business:

A dissolution is simply the change in relationship of thepartners caused by any partner ceasing to be associated inthe carrying on of the firms business. UPA (1914) 29.

3 Phases of Demise for a Partnership under the U.P.A.1 2 3

The Right to Dissolvethere always exists the power, as opposed to the right, of dissolution Collins v. Lewis

Dissolution by will of one or more partners. E.g., UPA(1914) 31(1)(b)Dissolution by operation of law. E.g. death, UPA (1914) 31(4)

Dissolution Dissolution

1

Winding Up

2TerminationTermination

40

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Dissolution by court order. E.g. lunatic, UPA (1914) 32(1)(a)

Causes of dissolution (UPA 31) Extraneous Causes:

Death, bankruptcy, impossibility, and/or special equitabledecree (see 32).UPA 32(1)

Commands dissolution decree in the event that:(a & b) A partner becomes incapacitated from performing;(c) A partners misconduct prejudicially affects business;(d) A partner willfully/persistently breaches PA or otherwiseconducts him/herself in a way that makes the ongoingrelationship impractical to carry on;(e) The business can only be operated at a loss;(f) Other circumstances render dissolution equitable;

Term PartnershipsExplicit term

Duration specified in partnership agreementSpecific purpose/object specified in partnership agreement

Implicit term Term implied by the nature of the partnershippurpose/objectives. (e.g. the partnership plans to buildand sell new condos at the Site.)

Dissolution: Effect on Partnership

Disassociation and Dissolution: UPA (1997)

Disassociation 601

Business continued per Article7

Purchase of disassociated partnersinterest ( 701)

Disassociated partner notautomatically released forobligations before disassociation(703 )

Business dissol ved per Article8Events of dissolution ( 801; x-ref

601(1))Business must be wound up

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After dissolution, the partnership must be wound up, absentagreement among the partners to carry on the business.

Assuming that the business will not be continued, thewinding up process generally contemplates that the firmsassets will be distributed to the partners.

Authority of partners to act on behalf of partnership terminatedexcept in connection with winding up of partnership business.UPA (1914) 33; UPA (1997) 804.

Continuation per Agreement: Effect on Partnership Technically creates a new partnership

Recall confusing treatment of this issue in Putnam v. Shoaf Creditors of former partnership automatically become creditorsof new partnership. UPA (1914) 41.

Continuation per Agreement: Effect on Departing PartnerDeparting partner entitled to accounting

Fair value of partnershipInterest from date of dissolution in event of unreasonablefailure to pay

Departing partner remains liable on all firm obligations unlessreleased by creditors. UPA (1914) 36; UPA (1997) 703.

Continuation per Agreement: Effect on New PartnersIf a new partner joins the firm when it continues after adissolution, the new partner is also liable for the firms old debts,

but such liability can only be satisfied out of partnershipproperty. UPA (1914) 41(1); UPA (1997) 306(B). The new partner can not be held personally liable for theold debts, unless he or she expressly agrees to be so held.

UPA (1914) 18The rights and duties of the partners in relation to thepartnership shall be determined, subject to any agreementbetween them, by the following rules:(a) Each partner shall be repaid his contributions, whether byway of capital or advances to the partnership property and shareequally in the profits and surplus remaining after all liabilities,including those to partners, are satisfied; and must contributetowards the losses, whether of capital or otherwise sustained bythe partnership according to his share in the profits.

UPA (1914) 40 40(b): subject to contrary agreement, upon dissolutionpartnership assets should be distributed as follows: (I) Thoseowed to creditors other than partners, (II) Those owed to

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partners other than for capital and profits, (III) Those owed topartners in respect of capital, and (IV) Those owed to partners inrespect of profits. 40(d): "partners shall contribute, as provided by [18(a)] theamount necessary to satisfy the liabilities [set forth in 40(b)]. . .

."What is the Default Rule?Losses should follow profits

Buyout AgreementsWhat are the major concerns:

Restricting the right to sell stock to whomever I please.Providing the right to force the company or other owners tobuy back my stock.

What provisions might be included in our buy-sell Agreement?Right of First RefusalRight to require purchase of my stock

Right of First Refusal and right of company topurchase on dissociation are not the same, right of first refusal is the right to preempt the sale you wantto carry out, not the company forcing you to sell.

Stock Transfer restrictionsRight of Company to purchase on death, disability,dissociation.

Traditional buy-sellOne person gets to decide if they want out. I want toactivate buy-sell. The other person gets to set theprice. Other person gets to decide whether theywant to buy or sell at that price.

What devices can be used to establish price?AppraisalFormulaBook Value - add up the value, subtract the liabilities,sometimes this is more than the value sometimes it is lessBuy sell arrangement that sets the priceFixed amount

G&S Investments v. BelmanFacts: Partner Nordale becomes a crack head, causes a lot of problems

G&S want to kick him out of the partnership they sue fordissolution, Nordale objects, he dies, then G&S try to exercisethe buy out clause in the agreement

Law:

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Even though this was a limited partnership we are using thegeneral partnership rules because Nordale was a generalpartner.

The partners argue that his conduct, in contravention of thepartnership agreement, gave the court the power to dissolve the

partnership and allow them to carry on the business bythemselves.32 (1914) authorizes a court to dissolve a partnership when:

2. A partner becomes in any other way incapable of performing his part of the partnership contract.3. A partner has been guilty of such conduct as tends to affectprejudicially the carrying on of the business.4. A partner willfully or persistently commits a breach of thepartnership agreement, or otherwise so conducts himself inmatters relating to the partnership business that it is notreasonably practicable to carry on the business in partnership

with himHeld:Court says filling the complaint did not constitute a dissolution of the partnership requiring the liquidation of the assets anddistribution of the net proceeds of the partners.If filling the complaint was a dissolution then he would get thecurrent market value of the real estate which had gone up.

Funding the Buyout ClauseBuyout triggered by death

Key man life insurance funds buyoutBuyout triggered by retirement

Use pension fund?Buyout by partners or by partnership?

Lump sum or installment?

Review(1) Under UPA (1914) dissociation of a partnerautomatically triggered dissolution .Regardless of whether disassociation breached PartnershipAgreement.(2) Under RUPA 701 and 801, dissolution may or maynot be triggered.(3) But the wrongfulness of the dissolution (or thedissociation) does affect the options of the parties afterdissolution or dissociationE.g., forced sale; continuation option; suit under wrongfuldissolution

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E.g. buyout price less damages and potential delay until end of term(4) Term of p-ship may be implied from other evidence(5) Watch out for implied duties! Dissociation mayconstitute breach of Partnership Agreement if in bad faith

or if the purpose is to freeze out -- breach of fiduciaryduty.

Wrongful Dissolution Critical question revolves around characterizing whether the

dissolution that occurred breached any express/implied terms inthe Pship Agrmnt. or occurred before the end of the Pship Term

If yes => Wrongful; If no => Legitimate Two frequent situations:

X dissolves partnership, asserting that it is a partnership atwill. Y objects, claiming that the partnership is for a term,

or for completion of a specific uncompleted task; X dissolves partnership, using authority given in P.A. Y stillobjects, claiming that Xs decision is in bad faith,constituting a breach of fiduciary duty.

Wrongful Dissociation Under RUPA Under RUPA a partner who wrongfully dissociates will be

entitled to the greater of liquidation value of going concernvalue (its value as an operating business, Amazonexample), Minus damages. RUPA section 701(b and c)

The Stakes (UPA 38)Non-Wrongful PartnersNon-Wrongful Partners Wrongful PartnersWrongful Partners

Right to force liquidation and pro-rata distribution of P-ship

property/assets

Right to force liquidation and pro-

rata distribution of P-ship property/assets

Option to continue P-ship at termination with other partners

who remain

Option to continue P-ship at termination with other partners

who remain

Right to bring legal action against wrongful party (if any) for

breaching PA

Right to bring legal action against wrongful party (if any) for

breaching PA

No liquidation right No liquidation right

No option to continue. If othersdo, wrongful partner may have to

wait for share

No option to continue. If othersdo, wrongful partner may have to

wait for share

No legal cause of action. No legal cause of action.

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A partner who wrongfully dissociates will have to wait forpayment until the end of the term or undertaking, unlessshe can show a court that there will be no unduehardship to the business of the partnership. RUPA 701(h)It is calculated at the time the dissolution occurred, then

plus interest.Dividing Profits / Losses

Jewel v. Boxer Facts: law firm breaks up, no written partnership agreementHeld: In the absence of a partnership agreement , the UPA

requires that attorneys fees received on cases in progress upondissolution of a law partnership are to be shared by the formerpartners according to their right to fees in the formerpartnership, regardless of which former partner provides legalservices in the case after the dissolution.

It is unclear whether RUPA 401(h) gets us out of Jewel or not

Last Comments on Jewell Champion v. Superior Court (CA, 1988):

Chose not to follow Jewel in case of withdrawal of partner(but PA agreement provided for survival of p-ship).

If a partner withdraws, but... her share is not large portion of firms work... then there is no pro-rata sharing imposed during

winding up phase. RUPA 401(h):

A partner is not entitled to remuneration for servicesperformed for the partnership, except for reasonablecompensation for services rendered in the winding up of the business of the partnership.

Policy: What effect might the courts ruling in Jewel have on futurelaw firm dissolutions?

Incentive to dump cases right before dissolution

Meehan v. Shaughnessy Facts:

The Parker Coulter Partnership Agreement provides that PCis entitled to a fair charge for cases removed by adeparting partner.

PC takes all other unfinished business that is not removedand is NOT required to pay any charge, fair or otherwise.

This is different from the Jewel rule which was the defaultrule

Held:

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For cases improperly removed, MB must pay damages(less overhead) (i.e. disgorge profits)

Winds up being 89.2% which is what theirpercentage would have been had they stayed at PC.

Money treated as constructive trust like with breach

of agents duty of loyalty cases. What would you have asked PC to include in the

Partnership Agreement to improve MBs result?A fair share cost for PC

Unlimited Liability in General Partnership UPA v. RUPA UPA (1914) 15 All partners are liable: (a) Jointly and

severally for everything chargeable to the partnershipunder sections 13 and 14 [i.e., mainly torts]; (b) Jointly forall other debts and obligations of the partnership....

UPA (1997) 306(a): ... all partners are liable jointly andseverally for all obligations of the partnership unlessotherwise agreed by the claimant or provided by law

Compare MBCA 6.22(b): ... a shareholder of a corporation is not

personally liable for the acts or debts of the corporationexcept that he may become personally liable by reason of his own acts or conduct

Rise of unincorporated limited liability entities Limited partnerships

Defined: A partnership formed by two or more persons andhaving one or more general partners and one ormore limited partners.

Formation: The limited partnership is formed by filingdocuments required by statute.

Typically filed with Secretary of State Tax aspects: Pre-Tax Reform Act of 1986, significant tax shelter

advantages Post-TRA, those advantages eroded but still widely

used to generate passive lossesGeneral Partner Liability in Limited Partnerships

Full personal liability BUT!

Corporation may serve as generalpartner

Limited liability companies (LLCs) Limited liability partnerships (LLPs) Limited liability limited partnerships (LLLPs)

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Shareholders entitled to vote on:Election of directors (MBCA 8.03-.04)Any amendments to the articles of

incorporation and, generally speaking, by-laws(MBCA 10.03, 10.20)

Fundamental transactions (e.g., mergers;MBCA 11.04)

Odds and ends, such as approval of independent auditors

4. Liquidity Secondary trading markets

5. Flexible capital structureCapital structure:

The permanent and long-term contingentclaims on the corporations assets and futureearnings issued pursuant to formal contractualinstruments called securities

Many ways to package such claims; e.g.,stocks and bonds

6. The corporation is an entity with separate legal existence fromits owners

1. Legal fiction, but a useful one2. Possesses (some) constitutional rights3. Separate taxpayer

S Corporation

Statutory creation of tax code. Usually a close corporation Principal advantage:

Combines pass-through taxation with limited liability. Disadvantages:

Constraints on # of shareholders, types of shareholders(other companies cant hold stock), capital structure youcan only have one type of stock capital structure, limits onhow you can deduct pass-through losses.

A simpler structure, usually a small closed corporationAdvantages: pass through taxation, and limited liability

Up till LLCs it was the best thing to use for pass through taxation andlimited liabilityA c corporation is the normal corporation

Debt and equity securities Bonds and other debt securities typically consist of two distinct

rights:

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The bondholder is entitled to receive a stream of paymentsin the form of interest over a period of years

At the end of the bonds prescribed term (i.e., at maturity),the bondholder is entitled to the return of the principal

Creditors; not owners

Equity securities (a.k.a. shares) represent the units into whichthe proprietary interests in the corporation are divided Residual claimants: equal right to participate in

distributions of the firms earnings and, in the event of liquidation, to share equally in the firms assets remainingafter all prior claims have been satisfied

A limited right to participate in corporate decision makingby electing directors and voting on major corporatedecisions

Capital structure terminology

Authorized shares: The articles must specify the number of shares the corporation is authorized to issue. Outstanding shares: The number of shares the corporation has

sold and not repurchased. Authorized but unissued shares: shares that are authorized by

the charter but which have not been sold by the firm. Treasury shares: shares which were once issued and

outstanding, but which have been repurchased by thecorporation

The MBCA has eliminated the concept of treasury shares,so that reacquired shares under the RMBCA are simply

classified as authorized but unissued shares.

Issuance of stock Board of directors prerogative.

Shareholders involved only if: Board wants to sell more shares than are presently

authorized in its charter Board of directors wants to issue a new class of

shares not authorized in the charter So long as the charter authorizes the class of shares in

question and there are sufficient authorized but unissuedshares, the board is free to sell shares for any validpurpose as long as the corporation receives adequateconsideration for the shares.

Corporations: Sources of Law Statutory and Case Law within each state Because of specificity of codes, the relative incentive to contract

around corporate code may be smaller

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Principal Problem w/ Promoters:Enter agreements and contracts with 3d parties on behalf of an as-yetfi

busorgs -- chasalow -- outline + flowcharts

Documents