Biz Orgs Table of Contents

I. The Agency Relationship.......................................................................................................2

a. Principal / Agent Authority...........................................................................................................2
i. Actual (Express or Implied)...........................................................................................................2
b. Constructive....................................................................................................................................2
II. Liability of Principal...........................................................................................................3
a. Contracts..........................................................................................................................................3
b. Torts.................................................................................................................................................3
III. Fiduciary Duties of Agents................................................................................................4
IV. Partnerships........................................................................................................................5
a. Fiduciary Duties of Partners..........................................................................................................5
i. Duties Partners Owe to Each Other:............................................................................................5
1. Duty of Care: Refrain from acting w/ gross negligence, reckless conduct, intentional
misconduct, or a knowing violation of the law......................................................................................5
2. Duty of Loyalty: Account for profits, refrain from acting adversely, and do not compete.....5
b. Management Rights of Partners....................................................................................................6
c. Partnership Dissolution..................................................................................................................6
V. Corporate Law....................................................................................................................7
a. Limited Liability.............................................................................................................................7
b. Role and Purpose of Corporation..................................................................................................8
c. Duty of Care....................................................................................................................................8
I. Agency

An agent acts on behalf of or in place of another. A principal is the person for

whom or in whose place the agent acts.

Elements (§ 1.01 R3d):

a. Principal’s consent/assent
b. On principal’s behalf
c. Subject to principal’s control
d. Agent’s consent/assent

Gorton v. Doty: Highschooler injured in car driven by defendant (agent) who had
been given permission to drive car my Garst, football coach (principal). Court held
that a principal-agent relationship exists when two persons agree that one person
will act on behalf of, and subject to, the control of the other person.

a. Establishing Agency

1. Capacity as Principal

Must have capacity to enter a binding contract.

2. Capacity as Agent

Any person may be an agent, even w/o legal capacity to enter into a contact.

ii. Implied Authority

A. Gay v. Cargill: Defendant (principal) provided financing to warren – who

defaulted on contractual obligations to plaintiff. Court held that a principal-agent
relationship exists between a creditor and debtor when the creditor intervenes in
the business affairs of the debtor. Cargill’s overinvolvement with debtor formed a
principal-agent relationship.

b. Agents Power to Bind the Principal

Authority is an agent’s ability to affect the P’s legal relationship with third parties
or otherwise take actions that have legal consequences.

1. Actual Authority

P expressly or implicitly authorizes A to take actions with legal

consequences for the P.
 a. Express

P has expressly given authority to A,

b. Implies

c. Constructive

i. Apparent

Elements (§ 2.03 R3d):

“The power held by an agent or other actor to affect a principal’s legal relations w/
third parties when a 3P reasonably believes the actor has authority to act on behalf
of the principal & that belief is traceable to the principal’s manifestations.”

ii. Inherent

II. Liability of Principal

a. Contracts

Mill St. Church v. Hogan: Church hired Bill who regularly (with permission)
allowed him to hire his brother (Plaintiff). Injured on job. Court held there was
implied authority to act as an agent because the principal acted in a way that
reasonably led the agent/plaintiff to believe he had beeg given powers to carry out
duties.

Three-Seventy Leasing v. Ampex: Sole employee of Ampex (Joyce) signed

contract to sell memory units to 370 (plaintiff) through a salesman (Kays). Court
held apparent authority for an agent to bind a principal exists when the principal
acts in a way that would lead a reasonable person to believe that such agent had
authority, especially when agent acts in a way in-line with principal’s business.
Ampex giving Kays authority to negotiate deal and be sole contact gave reason to
plaintiff to believe that Kays was acting as Ampex’s agent.

Watteau v. Fenwick: Transfer of tavern to brewers (defendant) but kept seller on

as manager (Humble). Humble authorized purchases of ale and cigars, and
vendors were never paid. Court held that Humble was an agent of the defendant
regardless of whether that’s what the defendant had intended.

b. Torts

Humble Oil v. Martin: Unoccupied car struck plaintiff at gas station, which was
left unattended after parked by customer. Court held employee could have
 stopped it and gas station was liable because of their master-servant relationship.
A master-servant relationship exists when two parties agree that one will
work on behalf of another and subject to their control.

Hoover v. Sun Oil: Plaintiffs injured in fire caused by negligence of service

station employee owned by Sun Oil and operated by Barone (defendants).
Business based on lease and dealer agreement. Court held Barone was an
independent contractor and Sun Oil was not responsible for their negligence.
Did not control Barone’s day-to-day operations.

Miller v. McDonalds: Plaintiff bit into sapphire stone at McDonalds. McDonald’s

had a franchise agreement with 3k Restaurants which had very strict rules to
maintain uniformity with McDonald’s Restaurants. Court held franchisor
(McDonalds) who holds out another as an agent and causes a third-party to
reasonably rely on the care and skill of the apparent agent is liable.

Butler v. McDonalds: Glass door broke at McDonalds owned by a franchisee.

Court held franchisor could be liable under apparent authority these conditions:
(1) the actions of the putative principal would lead a reasonable person to believe
that such a principal-agent relationship exists, (2) a plaintiff actually holds that
belief and (3) the plaintiff’s injuries are caused by reliance on the care of the
putative agents.

Ira S. Bushey v. U.S.: Coast Guard ship damaged a drydock because Seaman was
drunk. Access to drydock required access through security gate. Court held an
employer cannot disclaim responsibility for the acts of employees that are
foreseeable as part of the operation of the employer’s business. Liability attaches
to an employer even if the act at issue was not done in service to the employer.

Manning v. Grimsley: Plaintiff injured when pitcher threw ball at him. Sued
Oriels. Court held that the employer was liable and when an employee commits a
battery on someone who interferes with employee’s ability to successfully
perform duties, employer is liable.

III. Fiduciary Duties of Agents

R (3rd) 8.01: An A has a fiduciary duty to act loyally for the P’s benefit in all
matters connected w/ the agency relationship.

Reading v. Regem: Reading (plaintiff) sued military to get money back from
escorting a truck loaded with cargo through the streets of Cairo. Court held soldier
was not entitled to keep profits when he unjustly enriched himself doing unauthorized
activates in military uniform.

Tarnowski v. Resop: Resop (defendant) acted as agent for Tarnowski (plaintiff) in

purchasing a business. Resop presented a seller’s fraudulent claims about the business
 to Tarnowski. Resop accepted a secret kickback for this act. Court held that principal
could recover money from an agent for breach of his fiduciary duty.

Gen. Auto. Mfg. v. Singer: Singer (defendant) had a competing side business even
though he had a non-compete agreement with his employer, General Auto. Court held
that not disclosing this side business was a breach of his fiduciary duty as an agent
and Singer is liable for profits made.

IV. Partnerships

Uniform Partnership Act § 202: “an association of two or more persons (can
include entities) to carry on as co-owners of a business for profit.” Partnership is
state law.

a. Fiduciary Duties of Partners

i. Duties Partners Owe to Each Other:

1. Duty of Care: Refrain from acting w/ gross negligence, reckless
conduct, intentional misconduct, or a knowing violation of the law
2. Duty of Loyalty: Account for profits, refrain from acting adversely,
and do not compete
3. Duty of Good Faith & Fair Dealing: Not a fiduciary duty but a central
principle - just like in K
4. Waiver of Fiduciary Duties in Partnerships: Partners can generally
waive specific, but not general duties (such as duty of Loyalty)

Martin v. Peyton: Brokerage firm through one of its partners (Hall) secured loan from
Peyton (defendant) and others for $2.5m worth of securities. Two lenders were made
“trustees.” Creditor sued lenders claiming that their transactions and agreements
made them parterns and thereby liable for brokerage’s debt. Court held that lenders
were not partners to firm because they had an agreement intended to protect the
financial interests. A partnership is not formed unless two or more parties are
closely associated to be co-owners carrying a business for profit. Trustees were
only appointed and in charge of their collateral.

Meinhard v. Salmon: Salmon (defendant) executed 20-year lease. Salmon formed a

joint venture with Meinhard (plaintiff) that provided Meinhard would pay Salmon
half required to run business property and Salmon would pay 40% of net profits for
first five years, and 50% after. Salmon then entered lease behind Meinhard’s back
and Salmon refused to hold it in trust. Court held as sharers in a joint-venture, co-
adventurers owe each other a high level of fiduciary duty.

Lawlis v. Kightlinger & Gray: Lawlis (plaintiff) partner at law firm who had a
drinking problem. Threatened to remove Lawlis as partner if he continued drinking,
which he did. Lawlis sued for breaching their partnership and acting in bad faith.
Court disagreed. When a partnership exercises its power under a partnership
agreement to expel a partner, it must be done in good faith and for a bona fide
reason, otherwise the agreement is breached.

Day v. Sidley & Austin: Firm merged with another without consulting non-executive
committee partners and Day (plaintiff) sued. Court held that partners have a
fiduciary duty to act in the interest of the partnership. Hence, partners may not
withhold any information that results in them being personally enriched while
harming the partnership. That did not occur in this case.

b. Management Rights of Partners

National Biscuit Co. v. Stroud: General partnership to sell groceries. One partner
bought bread to sell without the other’s permission and refused to pay the bread
company at dissolutin. Court held each partner can bind the other in matters
pertaining to the business.

Summers v. Dooley: Co-partners in trash collection business. One partner unable to

work and hired replacement without the other’s permission. Court held co-partner
who refused to hire replacement was not liable for wages and each partner has an
equal right in managing the business.

c. Partnership Dissolution

A partnership is either at-will or set for a term.

Page v. Page: Oral/handshake partnership to run linen supply company. Unprofitable

for a while. One partner sought to dissolve, the other didn’t. Court held a partnership
may be dissolved when there is no definite term set and partner is not required
to remain in at-will partnership.

Bane v. Ferguson: Retired law partner sued for negligence in handling retirement
benefits in dissolution and merger. Court held a partner does not have a fiduciary
duty to former partners.

Bohatch v. Butler & Binion: Partner in law firm complained that she thought another
attorney was overbilling. Investigation said bills were reasonable. Firm voted to expel
her partnership and Bohatch sued. Court held partners are at-will and can be
expelled for purely business reasons, to protect relationships within the firm and
clients.

McCormick v. Brevig: 50/50 partners in family ranching business, became

uncooperative with one another. Court orders the business dissolved, but the brother
wanted to continue business. Court held that when a business is ordered dissolved,
it must be liquidated under RUPA and one partner cannot buy out the other.
V. Corporate Law

Critical Attributes

a. Corporation is a separate entity from owners and is not liable for

obligations of its investors and the investors are not liable for obligations of the corp.

Makeup of Corporation

a. Promoters: Individuals who organize, make financing or other

arrangement for a corp. before it is formed, execute Articles of Incorporation, lay the
groundwork, initial contracts, etc.
i. Fiduciary duty: Duty of care & loyalty
ii. Considered an agent

b. Shareholders: Elect the board of directors and vote on fundamental

matters.
i. Not agents
ii. Residual takers snd are considered owners
iii. Delegate their responsibilities to the BOD
iv. Vote for: BOD, auditors, fundamental decisions, amendments to
AOI and by-laws

c. BOD: Strategy and oversight of corporation, retains discretion over

corporation
i. Not agents
ii. Responsible for issuance of stoke

a. Limited Liability

Walkoszky v. Carlton: Carlton was controlling s/h of 10 diff corps. His cab
struck/injured someone, P tried to sue all his corps - stating all entitled operated as
a single entity. Court held party cannot pierce the corp veil unless it is to prevent
fraud or achieve equity. Creditor not being able to recover fully is not a sufficient
reason to pierce corporate veil.

Sea-Land v. Pepper Source: D owned six separate business entities. They shared
expense accounts and were all run out of a single office. Reinforces that there
must be something more – injustice – to pierce the corporate veil.

b. Role and Purpose of Corporation

A.P. Smith Mfg. v. Barlow: S/h sued corp because it made a donation to Princeton,
which was not authorized in AOI. Court held corp could make donation as long as
it was consistent with state law and that AOI can be changed at any time.
 Dodge v. Ford Motor Co.: Ford ratified decision to stop making special dividend
payouts and instead reinvest money into business, Dodge sued. Court held Ford
could not do this and that corp conducts business on behalf of s/h. Further,
decision did not seem to be motivated by a business concern based on Ford’s
statements to keep cash in hand.

c. Duty of Care

The Business Judgment Rule: Presumption in favor of director decisions, puts the
burden on P to overcome. We don’t want judges making uninformed business
decisions. Defer to director decisions unless there is a really good reasons not to
present itself.

Substance Due Care

Court’s legal review of the substance of how corp arrived at decision.

Process Due Care

Court’s legal review of the process of how corp arrived at decision.

Shlensky v. Wrigley: S/h sued to hold MLB games at night to make a greater
profit. Court held there was not enough proof to show that the defendant was not
acting in the best interest of the business by not hosting more night games.

Kamin v. AMEX: S/h sued that corp wasted money by paying out stocks instead of
paying them. Court held they will not interfere with business decisions by BOD
unless there is fraud, bad faith or self-dealing.

Smith v. Van Gorkom: CEO negotiated buyout, no evidence of how he came up

with share value, somehow got it approved by board. S/h sued that decision was
uninformed. Court found in favor of plaintiff, swaying from BJR, for failing to
inform themselves. BJR was rebutted by showing of gross negligence.

In re Caremark Intern: Corp subject to criminal investigation for paying

medicare/Medicaid doctors for referrals. Resulted in 250m penalties. S/h sued
alleging directors breached duty of care by implanting a system to oversee this
activity but not properly monitoring it. Court held corp’s minimal efforts were
sufficient and therefore breach of duty claim unlikely to succeed.

Duty of care – directors and officers are exercising reasonable care when
exercising business decisions. Prevent negligence.

Duty of loyalty – competition, self-dealing

d. Director Good Faith & S/h Inspection Rights

In re Walt Disney: Company hired president, who was later fired on non-fault
basis. S/h sued alleging waste and breached fiduciary duty by not informing itself
of cost of non-fault termination. Court held in favor of company and that a
fiduciary acts in bad faith if he engages in an intentional dereliction of duty or a
conscious disregard of one’s responsibilities.

Stone v. Ritter: Bank in trouble for failure to file suspicious activity reports
relating to money laundering. Court refused to hod directors liable because of
their good faith implementation of oversight. The standard for such a
determination is whether the directors knew that they were not fulfilling their
oversight duties and thus breached their duty of loyalty to the corporation by
failing to act in good faith.

Teamsters v. Chou:

In re Boeing:

e. Duty of Loyalty

Bayer v. Baran: CEO/director hired wife/singer as feature for radio marketing.

Directors have an obligation to put their own interests ahead of their own. Here,
court found decision within BJR and board when through involved process to
make decision that benefited the corp.

Benihana v. Benihana:

Broz v. Cellular Info:

Sinclair Oil Corp. v. Levien: