Académique Documents
Professionnel Documents
Culture Documents
Seventh Edition
Professor Mark Lowenstein
Spring, 2011
M.D. & Associates v. Sears, Roebuck & Co.. 749 S.W.2d 454 (Court of Appeals of Missouri, 1988)
Facts: Landlord company sued Sears, as tenant, claiming unlawful possession of the leasehold following termination of
the lease. Sears mailed an extension of the lease letter to Paul Hogg with a request for receipt. Paula Fraley, who worked
with Mr. Hogg, signed the receipt. The person who first received the notice gave it to an agent for the landlord (Hogg).
Hogg was an agent for the leasing company, Fraley was an agent of Hogg.
Issue: Did the landlord company ACTUALLY receive the letter through the agent of an agent? (Was Mrs. Fraley an
agent of Mr. Hogg and if so, was Mr. Hogg on notice of the extension, and if so was the landlord on notice?) Holding:
Yes.
Rule: The existence of agency and the authority of an agent can be implied by proof of facts, circumstances, words,
acts, and the conduct of the party to be charged with the agency. The prior conduct of the parties is a factor to be taken
into account if such conduct is a part of the circumstances surrounding the transaction.
Reasoning: Ms. Fraley had been picking up Mr. Hogg’s mail for months prior to the notice from Sears, and if not
expressly, than by acquiescence, she was authorized to do so.
Three Elements of the Agency Relationship: Restatement Second §1
1. On Behalf Of: The acting party must be acting “on behalf of” the principal (“for the benefit of”).
Risk? Look at who has the risk in the relationship. If the principle has the risk, likely an agency relationship. If the
acting party is acting on its own behalf, it is not a fiduciary, nor is it fair to subject the other party to the burdens of being
a principal.
Be careful though. Merely benefiting another by one’s conduct is not enough the agent must be acting primarily for the
benefit of the principal. (i.e. in Clapp v. Skewer, Skewer was benefited by Clapp’s regulations of the mall b/c he got a %
of the profits)
3. Consent: An agency relationship must be created by mutual agreement. One party in invitum cannot create it.
consent can exist even where the parties involved fail to recognize that they have created an agency relation or explicitly
avoid creating an agency. Cargill
consent can be implied as well as express (Sears)
o Assent can be found in nonverbal action (i.e. shaking head) or failure to object when action taken previously in
an agency capacity is again proposed.
4. Fiduciary Relationship: Ask whether or not the agent has a fiduciary duty to the principle. If no, not likely to be an agency
relationship.
They would have to exercise their agency with due care, and if they breach that due care and a third party is injured, the
principal is responsible.
Helpful also to ask that isf the agent is negligent (i.e. a retailer is negligent in setting up their store and a third party is
injured), would that third party be able to go after the principal?
Hunter Mining Laboratories, Inc. v. Management Assistance, Inc., 763 P.2d 350 (Supreme Court of Nevada, 1988)
o Facts: Hubco agreed to sell to Hunter Basic Four computer equipment, and install it for him. They did not
finish the instillation so Hunter hired Data Doctors to install it. They did not finish it either. Both Hubco and
Data Doctors were authorized resellers of Basic Four computer equipment. Hunter sued the manufacturer of
Basic Four computer equipment. The trial court found for D b/c they did not find any evidence that an agency
relationship between D and the two installers existed.
o Issue: Was there an agency relationship b/w Data Doctors and/or Hubco and (D)? Holding: No. Affirmed.
o Rule: In an agency relationship, the principal possesses the right to control the agent’s conduct. When the
owner retains title, sets the prices, and gives the person selling the goods (consignee) return privileges for
unsold goods = agency.
o Reasoning: Just because D was able to control some portions of how the installers re-sold its product, they did
not retain the power to control their business expenditures, fix rates, demand share in profits, etc.
Additionally, there was no “acting on behalf of” element because the installers were not acting primarily for
the benefit of D – they acted independently and in their own names.
o Class Notes: Courts will look if the purported agent acted on behalf of, with consent of, and in control of the
purported principal. Here, the court looks to the fact that the buyer took ultimate title to the goods and could
resell them at any price they want. However, just because someone has title doesn’t end the inquiry. See G.E.
below.
United States v. General Electric Co., 272 US. 476 (Supreme Court of the United States, 1926)
o Facts: Gov’t argued that GE was breaking anti-trust laws by fixing the prices of their products that were being
sold by 21,000 distributors. GE claimed they were selling the products through agents, and not requiring
resellers to sell at a certain price.
o Issue: Were the 21,000 distributors agents or buyers? Holding: They were agents. GE wins.
o Reasoning: The 21,000 distributors were not getting the title to the products, and they did not buy the
products from GE, they were basically receiving the products on consignment from the company to hold in
their custody until they could sell them. They were a way for GE to deal directly with the customer.
o Class Notes: What were the government’s best arguments? How could this be characterized as NOT an agency
relationship?
Control? How these distributors sell the lamps, as far as where they sell them, how the store is laid
out, how they are displayed, etc., was not under the control of GE. There were a lot of aspects of the
retailer’s business, besides the fixing of the price, that were not subject to the control of the
manufacturer.
Consent? The retailer consented to sell GE lamps, but did they consent to be their agent? Consent to
be controlled by GE in all aspects of their business? Consent to act on behalf of GE, or were they
acting on their own behalf?
On behalf of? Who had the risk? The resellers were paying for these lamps right?
o Bottom line: Other cases involving similar fact situations (manufacturer tries to fix prices by characterizing
retailer as its agent) have met with mixed success. It turns on the elements we have just gone through (above).
While there is no agency b/w franchisor and franchisee, there are a number of cases that have held the franchisor liable for the
franchisee’s actions because it APPEARED to a third party that there was an agency relationship. In this theory, what matters is
what a third party perceived, NOT the elements of agency.
3. Property Relationships
a. Co-ownership = this relationship does not in itself establish agency b/c one cannot fairly infer that one co-owner
consents to another acting on his behalf merely from the fact that they are joint owners of property.
b. Landlord-Tenant – in general, this relationship in itself does not involve agency.
nature of the lease could establish an agency relationship when the lessee was required to make
improvements.
4. Corporate Relationships
a. Directors
It’s a common misperception that directors of a corporation are agents of a corporation.
Directors don’t act on behalf of the corporation, but have general oversight of the corporation. Also, nobody
has the authority to tell the directors what to do.
Also, directors have no authority to act on behalf of the corporation individually; they can only act as a group.
They can however, agree to appoint one of the members to be an agent of the corporation for a number of
different purposes (i.e. acquiring property, etc.). For this purpose, the director would be an agent, but only for
that particular circumstance.
b. Officers of the corporation
Officers though clearly ARE agents b/c subject to control by board of directors.
c. Employees of the corporation
Employees are almost always agents of the corporation.
Some employees, like doctors, cannot be told what to do, because of their expertise.
d. Multiple Corporations:
Subsidiaries = i.e. one business entity (corporation, LLC, etc.) owns another business entity. Quite often, the
subsidiary will incur liability that it can’t pay (tort liability, contractual, etc.). The plaintiff will bring a claim
against the parent corporation looking for deep pockets. If the subsidiary is acting as an agent for the
parent, obviously the parent will be liable.
This relationship has a lot of the indicia of the agency relationship.
o The parent controls the subsidiary b/c it owns it.
o Acting on behalf of. The whole purpose of this entity is to increase profits for the owner.
o Consent? This is problematic because corporations many times create these subsidiaries for the sole
purpose of avoiding liability! So these two are at odds. So in order to solve this, the courts have
required more than the existence of a parent-subsidiary relationship before finding an agency
relationship. Many times courts will require a finding that the parent exercises so much control that
there really is no separate business.
In order to avoid liability, the parent company should allow the subsidiary to operate
independently.
Subsidiaries are assumed to not be agents unless the alter-ego rule is applied.
Alter-ego/instrumentality doctrine =
Admiral Oriental Line v. United States, 86 F.2d 201 (United States Court of Appeals 2nd Circuit, 1936)
Facts: Admiral Line (Line Co.) was an agent of Atlantic Gulf and Oriental Co. They were charged with fitting out the
steamship the Elkton on a voyage. There was a typhoon on the voyage and the Elkton was lost. The people who owned the
cargo onboard the Elkton sued Admiral for their loss. Admiral won the lawsuit but was out the money it paid to defend itself.
Admiral (agent) in turn sued Atlantic Gulf (principal) to recover the money it spent on its defense. Atlantic Gulf attempted
to bring in the United States claiming that they were agents of the United States and that the United States (remote principal),
as principle of the whole venture, was responsible not only to them for expenses incurred, but also for any which it might be
compelled to pay to the subagent.
Issue: Is the United States liable as the principle of the entire venture, for expenses their agent (Atlantic Gulf) is compelled
to pay to the subagent? Holding: Yes
Rule: An agent, compelled to defend a baseless suit, grounded upon acts performed in his principal’s business, may recover
from the principal the expenses of his defense.
Reasoning: The Shipping Board appointed the Atlantic Gulf as its Agent to manage, operate and conduct the business of
such vessel as it . . . may assign to the Agent,” and the company agreed to act as such “in accordance with the directions” of
the Board. Atlantic Gulf was to “man, equip, victual and supply” the vessels as the Board required, and to pay all expenses
and maintain them in seaworthy condition, all on the Board’s account. It was to issue all documents on the Board’s form,
appoint sub-agents, collect freights which it must deposit in a bank approved by the Board and in the Board’s name, and for
which it was to account on forms prescribed by the Board. For this the company was to be paid in percentages on the gross
receipts including salvage; out of these it was to bear its “administrative and general expenses of every nature,” not including
brokerage however, or commissions “for agency services rendered at foreign ports.” Atlantic Gulf was to furnish a bond for
faithful performance of its duties and was forbidden to profit in any way from the services rendered.
For these reasons it is difficult to construe the agreement as anything other than that of a straight agency.
It was the United States venture because they were the ones who had something to lose. They chose not to charter their
ships but to put them in trade on its own account, so they should be the ones who bear the hazard of defending
unwarranted suits.
Issue 2: Is the United States is liable to Atlantic for Admiral’s defense fees even though Atlantic hadn’t paid anything yet?
Holding: Yes.
Rule: Duty of exoneration. Before paying the debt a surety may call upon the principal to exonerate him by
discharging it; he is not obliged to make inroads into his own resources when the loss must in the end fall upon the principal.
Indemnification = Admiral sued Atlantic for indemnification. Exonneration = Atlantic sued United States for
indemnification.
Greencheckmark: The right to be reimbursed includes litigation expenses.
Greencheckmark: This extends to subagents. Admiral was a subagent because they were an agent of an agent and their
appointment was contemplated and consented to by the main principal. The agent is also responsible for the subagent’s
expenses.
Greencheckmark: The principal will indemnify the agent . . . so long as the agent isn’t at fault. This is a default term. If
the agent wants indemnification, even when they are at fault, they have to contract for that.
B. Duties of Agent to Principal – most of the duties run this way. This is because the principal is dependent on the agent.
d. Duty of Disclosure
Duty to inform the principal of all facts relevant to a transaction that the agent reasonably believes the
principal would want to know. R2d §381.
o Involves a duty of loyalty – to deal fairly with the principal. Most frequently litigated in the context
of “conflict of interest”.
o Conflict of interest– when agent is acting on behalf of a third party whose interest is adverse to that of
the principal.
o Self dealing – when agent is acting entirely or substantially for the agent’s own interest.
Principal bears burden of proof that Agent was aware of the undisclosed fact, that the fact was material. If the
facts raise a conflict of interest the burden to prove full disclosure is on the Agent (Vail Associates)
o principal must first prove the issue of conflict of interst. If he doesn’t do so the burden of proof is still
on him to prove lack of full disclosure.
Notes: If an agent acts as an adverse party with the principal’s consent he still has duty to deal fairly and
disclose all facts the agent should know would reasonably affect the Principal’s judgment. . Restatement
(Third) Agency §8.06
Olsen v. Vail Associates Real Estate, Inc., 935 P.2d 975 (Supreme Court of Colorado, 1997)
o Facts: D’s, Vail Associates, introduced third party Lindholm to the Olsens, P,s who were trying to sell
land they inherited as well as the children’s adjacent property. After offers and counteroffers, the
Olsens decided not to include the children’s property in the sale and withdrew that parcel from the
negotiations. Because Lindholm wanted another piece of land besides the estate property (so he could
control development of the Lower Pine Valley), he inquired through Ds about the Rickstrew property.
Upon inquiry from D, the owner of the Rickstrew property informed Ds that he would not negotiate
through a real estate agent and demanded to negotiate one on one with the buyer, Lindholm. They
reached an agreement contingent on the closing of the estate property and both properties were
subsequently purchased by Lindholm for 2 mil for the Rickstreet prop and 8.75 mil for the estate
property. Olsens sued for breach of fiduciary duty.
o Issue: Was the information that D had regarding the sale of the Rickstrew property and the price
material information such that it was a breach of fiduciary duty to conceal this from Ps? Holding:
No. Judgment affirmed.
o Rule: A breach of fiduciary duty occurs if the broker, as agent, conceals from the seller, as principal,
“material” information, i.e. “information that bears upon the transaction in question.”
o Rule: An agent is thus required to disclose to the principal any facts “which might reasonably affect
the principal’s decision.”
o Rule: The burden is on the principal to demonstrate that the agent was aware of the nondisclosed fact,
that the non disclosed fact is material, and that the agent breached his or her fiduciary duty.
o Rule: The matter is material if a reasonable person would attach importance to its existence or
nonexistence in determining his choice of action in the transaction in question. Restatement (Second)
Torts §538(2)(a)
o Reasoning: The knowledge of this information was not material because the plaintiffs did not meet
the burden of showing that it would have made any difference in their decision in this case. Testimony
that other potential buyers with Rickstrew had not caused the Olsen’s to alter their position in regartd
to the estate property.
e. Duty of Loyalty = must place principal’s interest ahead of his own; no self-dealing or conflict of interest through
adverst T. Even putting yourself in situation of conflict of interest is breach of loyalty. R2d §387
No self dealing = no benefit to herself to the detrmiment of the P.
No usurping the pringipal’s opportunity
No secret profits = may not profit from doing business with employer w/out his full knowledge and consent.
(Gefland)
These duties are default – can be changed by agreement.
A clear breach of loyalty occurs when an agent takes a bribe from a third party while acting for the principal.
Remedies of the principal:
o agent forfeits bribe and any compensation he would receive out of the transaction.
o forfeits compensation for agency during period of disloyalty (not a per se rule though);
o If the agent has made it possible for others to profit from his breach of loyalty he can be held
accountable for those profits whether or not he receives any part of them. This creates a windfall for
the suing principal but the principle is to deter the agent from this kind of conduct.
(i) loyalty during the relationship
o Scope of fiduciary duty = varies with the position held by the agent.
More trust placed in an agent = greater the discretion an agent has, the more demanding a
court will be about loyalty.
Duty of loyalty applies to all employees.
o An agent has a duty
(1) not to use property of the principal for the agent’s own purposes or those of a third party;
and
(2) not to use or communicate confidential information of the principal for the agent’s own
purposes or those of a third party.
o Misusing information = duty of loyalty includes a duty not to compete with the principal w/out his
knowledge and consent. This includes using confidential information in competition with or to the
injury of the principal.
“an agent has the duty not to use information acquired by him as agent of by
means of opportunities which he has as agent to acquire it, or acquired by him
through a breach of duty to the principal, for any purposes likely to cause his
principal harm or to interfere with his bueinsss, although hit is information not
connected with the subject matter of his agency.” Restatement Second §395
This includes not only confidential information but information the agent should know the
principal would not want revealed to others or used in competition with him.
This does not include matters of common knowledge.
o The duty not to compete is not violated if the principal knows or has reason to know that the agent
believes he is privileged to compete or self-deal.
o Gefland v. Horizon Corp., 675 F.2d 1108 (United States Court of Appeals, Tenth Circuit, 1982)
Facts: Gefland, P, was working for Horizon Corp, making land deals to his wife and other
third parties and profiting off of the deals. D terminated P’s employment and withheld
commissions owed to P. P sued to get his commissions.
Issue: Is D entitled to offset the commission owed to P for profits accruing directly to the P,
and/or for profits which accrued to third parties allied with the agent, P? Holding: Yes w/r/t
profits directly to P, no w/r/t 3d parties.
Rule: An agent occupies a relationship in which trust and confidence is the standard. When
the agent places his own interests above those of the principal there is a breach of fiduciary
duty to the principal. The fiduciary is duty bound to make a full, fair, and prompt disclosure
to his employer of all facts that threaten to affect the employer’s interests or to influence the
employee’s actions in relation to the subject matter of the employment.
Rule: A broker is not entitled to compensation where he acts adversely to his principal’s
interest.
Rule: A fiduciary will be held accountable for the profits reaped by a third party when, by
violating his obligation of loyalty, he has made it possible for third parties to make profits.
This is regardless of whether he has profited personally.
Reasoning: (1) The court determines that there was an agency relationship in (2) the agent
did in fact breach his fiduciary duty. (3) The court next determines that the amount D owed to
P should be offset by the profit accrued to P’s wife, $20,000, because P was using his wife
indirectly to profit b/c the profit could not be given to him directly. (4) Finally the court
determines that while P should not be held accountable for the profits realized by third
parties. The purpose of the rule is both punitive and compensatory, and serves to deter the
fiduciary from disloyalty. This is because (1) Horizon did not have a policy forbidding land
purchases by employees or required disclosure in such situations. Even still, Horizon was
aware of the sale. (2) There is no evidence that the third parties were going to pay P back for
his favor. According to the court it was an isolated incident in a long term of useful service
by P to D.
Notes:
The middleman = allowed to work for both parties in a transaction w/out owing anyone a duty of full disclosure. He is a go between
and has nothing to do with negotiation and thus it is of no importance that both parties pay him.
Class Notes: Only a lawyer would call this kid an employee. Why is the uncle liable here? Deep pockets theory.
Legal fiction that the agent and the principal are really one. Enterprise theory is that the uncle chose the agent and is
presumably in the best position to take steps to ensure the safety. He could watch what he does or have chosen a
better agent.
Lowenstein says it seems like there’s a moral basis for justifying the principal’s liability for the acts of the agent.
The recently popular rationale drift away from the deep pockets, and there is a notion of a fairness responsibility
for the actions of the agent.
d. Imputed Contributory Negligence = when a principal seeks to recover from TP for negligence (like in a car accident
where agent was driving), courts are split as to whether agent’s contributory negligence is imputed. if it is, principal is
liable for damages to TP and her own recovery is limited by amount of agent’s negligence.
Rule: a master is barred from recovery against a third person who negligently caused a loss to the master if the
servant also was negligent in the accident giving rise to the loss. Restatement (Second) of Agency §317
This has been rejected in many states.
a. The Concept
Kane Furniture Corp. v. Miranda, 506 So. 2d 1061 (Court of Appeals of Florida, 1987)
o Facts: Kane sold its carpet installation business to Perrone who continued to install carpet for Kane.
Perrone hired other independent carpet installers to help him finish the jobs. One of these was Krause. On
one such occasion, Krause got drunk and drove home while taking one of his workers to Kane’s furniture
store after doing a job. Mrs. Miranda died in this accident, and her husband, Dr. Miranda, sued.
o Proc. Hist: Trial court entered summary judgment finding that Perrone was Kane’s employee and that
Kraus was Kane’s subemployee.
o Issue: Was Krause Kane’s subemployee or an independent contractor? Holding: Independent contractor.
o Rule: In determining whether one acting for another is a servant or an independent contractor, the
following matters of fact, among others, are considered:
(a) the extent of control which, by the agreement, the master may exercise over the details of the work;
(b) whether or not the one employed is engaged in a distinct occupation or business;
(c) the kind of occupation, with reference to whether, in the locality, the work is usually done under the
direction of the employer or by a specialist without supervision;
(d) the skill required in the particular occupation;
(e) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for
the person doing the work;
(f) the length of time for which the person is employed;
(g) the method of payment, whether by the time or by the job;
(h) whether or not the work is a part of the regular business of the employer;
(i) whether or not the parties believe they are creating the relationship of master and servant; and
(j) whether the principal is or is not in business.
o Reasoning: Perrone and Kraus had unbridled discretion in the physical performance of their tasks.
Perrone did not report to anyone at Kane and had absolute discretion in contracting out installation jobs.
o Carpet installing is a distinct occupation and each Kraus and Perrone had their own independent
businesses.
o They both did work on an “as needed” basis.
o There is a high degree of training and skill involved.
o Kraus and Perrone each supplied their own tools.
o They worked on an “as needed” basis and the time spent on each job varied.
o They were paid on a per yard basis, not hourly.
o Furthermore, while the court did find a couple factors that tended toward employee, i.e. the fact that the
work was part of the regular business of the employer, the court held that this factor alone was not
dispositive and alone is insufficient to sustain a holding that they are employees.
Class Notes: LOWENSTEIN: DON’T SHY AWAY FROM THE RESTATEMENT FACTORS. WALK
THROUGH THESE ONE BY ONE FOR EACH PROBLEM.
Contract not dispositive = if contract claims only Independent Contractor relationship, but if right of control over
manner means, right to fire, non-compete, etc. show master/servant, disregard what contract calls the relationship.
(Sandrock)
The greater degree of control over a non-servant agent, the more likely they will be found to be an agent.
o A P will not have RS liability for non-servant agents.
o Non-agent IC = building contractor
o Agent IC / non-servant agent = “on your behalf” – lawyer – fiduciary duties but no Vic. Liab.
Lazo v. Mak’s Trading Co., 644 N.E.2d 1350 (Court of Appeals of New York, 1994)
o Facts: P truck driver delivered a shipment of rice to D who hired three neighborhood guys to help him
unload it. One of the neighborhood guys assaulted P. P sues D on the theory of respondeat superior.
o Issue: Were the three neighborhood guys employees or independent contractors? Holding: Independent
Contractors.
o Reasoning: D did not exercise actual or constructive control over the performance and manner in
which the work of the unloaders was performed.
o Concurrence: There was probably control here on the part of D over the three neighborhood kids.
However liability should not be found on the part of the D. An employer can’t be held liable for assault
on behalf of his employee because the employee was not acting in the scope of his employment when he
assaulted P and he was not furthering the interests of his employer when he did it either.
o Rule: Although an employer is often held liable for the torts of employees, an employer cannot be held
liable for an employee’s assaultive acts where the tortious conduct was not undertaken within the scope
of employment, the employer did not authorize the violence and the use of force is not within the
discretionary authority afforded the employee.
Notes:
o If a contract gives one party the right to inspect and supervise, this does not mean that party has the right to
control. If that party fails to exercise its right to supervise and inspect and injury occurs as a result, the
party cannot be held liable for the injury because there was not a legal duty to exercise that right. See
Wright v. United States, 537 F.Supp. 568 (N.D. Ill. 1982)
Soderback v. Townsend, 57 Or.App. 366 (Court of Appeals of Oregon, 1982)
o Facts: D was retained by Quasar to negotiate gas leases. While D was driving to check on some of the
leases, he was involved in a car accident.
o Issue: Was D an agent of Quasar or independent contractor? Holding: Independent Contractor.
o Rule: A principal employing another to achieve a result but not controlling or having the right to control
the details of the physical movements is not responsible for incidental negligence while such person is
conducting the authorized transaction. . . It is only when the right to control physical details as to the
manner of the performance is added to the principal agent relationship that the person in whose service the
act is done becomes subject to liability for the physical conduct of the actor.
o Reasoning: Quasar had no control over D’s actions. D was told generally the areas in which Quasar was
interested. Quasar placed maximum limits on D’s negotiating authority as to the price and duration of the
leases, but otherwise the manner and means by which he obtained leases were up to him. He set his own
work schedule and had no quotas. He did not contract for any specific piece of work and was paid a per
diem of $175 plus expenses and accounted to Quasar at two-week intervals.
Hunter v. R.G. Watkins and Son, Inc., 110 N.H. 243 (Supreme Court of New Hampshire, 1970)
o Facts: A truck operated by Davis, an employee of D, broke down. Davis was instructed to pick up the part
needed to fix the truck and bring it back to the job site the next morning. He left in his own car at about
noon, stopping at his apartment and in Salem on the way there and back from getting the part to run
errands. The accident happened that day at about 5pm when Davis was on his way back to his apartment.
o Issue: Was Davis an employee of D or was he an independent contractor when he got in the accident?
Holding: Employee.
o Reasoning: The court recognized that the rule in New Hampshire at the time was that the employer was
not liable for this type of accident because he was not exercising any control over the employee’s in the
management and operation of the employee’s automobile. However, the court said that this was an
anomaly and that the majority of states do not have this rule. They decided to change it and lay out a new
rule following the Restatement (Second) Agency, which lists factors relevant in determining whether an
employer employee relationship exists. Because he was acting within the scope of his employment and
with the knowledge and permission of the employer, the employer should be liable.
o Rule: Control should not be overemphasized and is not a controlling factor. The court is usually
concerned with whether on all the facts the community would consider the person an employee.
o Rule: When a regular employee is sent upon a specific errand, using his own car with the knowledge and
permission of the employer, and it is agreed he was acting within the scope of his employment at the time
of the accident, the employer is liable for his acts whether it had control of his detailed operation of the
motor vehicle or not.
Notes:
o Inferring the right of control: The fact that the employer did not exercise the right to control does not show
that it did not have the right of control, but it might be evidence of this. The right of control must be
determined by reasonable inferences shown by the evidence.
o The independent calling test: Professor Leidy in Salesmen as Independent Contractors, 28 Mich. L. Rev.
365, 370 (1930) laid out the alternative approach to identifying servant status. “The term independent
contractor has come to be used with special reference to one who, in pursuit of an independent business,
undertakes to do a specific piece of work for other persons, using his own means and methods, without
submitting to their control in respect of all its details . . . the true test of a “contractor” would seem to be
that he renders the services in the course of an independent occupation, representing the will of his
employer only as to the result of the work and not as to the means by which it is accomplished.”
Sandrock v. Taylor, 174 N.W.2d 186 (Supreme Court of Nebraska, 1970)
o Facts: D Taylor was driving a milk truck. Passenger vehicle had a passenger and a driver. The issue in
this case in the previous chapter was whether or not the passenger was the agent of the driver. This part of
the claim involves the claim by the passenger against the co-op that had a contract with the driver of the
milk truck. This is a simple respondeat superior claim claiming the co-op is responsible for the driver’s
actions. D Co-op was joined on the allegation that D Taylor was its servant driving in the course of its
business. Also the Co-op owned the trucks Taylor used to deliver the milk with.
o Taylor did not own his own milk delivery business, and the Co-op was the only people Taylor delivered
milk for.
o Issue: Was D Taylor an independent contractor or a servant/agent/employee of D Co-op? Holding:
Employee.
o Reasoning: Despite the appearance of lack of control in the contract, it was purely illusory as the Co-op
had provisions in the contract allowing it to terminate w/in 30 days whenever they wanted as long as
they gave written notice, and they also stated that they would consider the payments Taylor made
toward the truck voided if he worked for anyone else.
o So he worked solely for Co-op.
o He wasn’t in business for himself.
o Co-op paid him by the delivery.
o Rule: An employer cannot insulate himself against the burdens of the employer-employee relationship by
a contract that leaves him with the control benefits of that relationship. Nor can he escape his liability
under the doctrine respondeat superior by a contract that expressly provides that the workman is an
independent contractor, if in fact, under the entire contract, the workman only possesses the same
independence that employees in general enjoy.
o Class Notes: The key factors that caused the co-op to lose: they continued to give instructions to the
drivers, they had a non-compete clause with the “independent contractors” which is an odd thing in b/c
you expect independent contractors to work for as many people as they can handle, and the drivers were
bound to the co-op yearly while the co-op could terminate at any time w/30 days notice. This last one is
another indication of control b/c it means that the drivers were dependent on the co-op.
b. Limitation to the Independent Contractor Exception = a principal is liable for the torts of an independent contractor
only in 3 situations, but has indemnification (breach of K):
1) Inherently dangerous activity = work itself and not one input creates peculiar risk of harm (Hixon)
2) Non-delegable duty = usually originates in statute of K (landlord/tenant), from the special status of D (common
carrier), of b/c of gravity of public policy attached to farmed-out work (Rheingold = service of process is
nondelegable.)
3) Negligence in selection of IC = direct tort liability; hard to prove b/c burden to check out IC only when aware of
facts lead to believe IC is not competent.
Hixon v. Sherwin-Williams Co., 671 F.2d 1005 (United States Court of Appeals, Seventh Circuit, 1982)
o Facts: The Chess’s insurance company, American States Ins. Co., had to put in new floors in their home
b/c of water damage. They hired Hixon to put in new linoleum floors. Hixon in turn hired Sherwin
Williams who in turn hired Louie Benkovich who had been in the linoleum business for many years and
had a good reputation. Benkovich used a glue that was extremely flammable and did not read the warnings
on the bottle that said to ventilate the room and turn off the pilot light. As a result the glue exploded and
the Ins. Company had to pay $27,000 in additional damage to the Chess’s house.
o Proc. Hist: American States brought this lawsuit in a federal district court in Indiana against Sherwin
Williams . . . at the close of the plaintiff’s evidence the defendant moved for a directed verdict. The district
court granted the motion and dismissed the complaint on the merits. This appeal followed.
o Issue: Is Sherwin Williams liable for the negligence of Benkovich, who is not their employee but an
independent contractor, on the theory that Benkovich was engaged in an inherently dangerous activity?
Holding: This case does not fall w/in the hazardous activity exception. S-W is not liable under this
theory.
o Rule: The hazardous activity exception to the independent contractor rule = The more hazardous an
activity is, the higher is the cost-justified level of care; and if it is hazardous enough, the principal should
take his own precautions even though he does not supervise the details of the independent contractor’s
work.
o Issue 2: Is Sherwin Williams liable for the negligence of Benkovich who is not their employee but an
independent contractor, on the theory that they negligently selected him to perform the work? Holding:
No.
o Rule: A principal is liable for the consequences of negligently failing to select a competent contractor.
Reasoning: Benkovich had a good reputation as an installer and they didn’t have a duty to quiz him on
his experience laying linoleum with glue. Even if they were negligent, their negligence would not have
been the proximate cause of the accident because his lack of experience may have actually caused him to
look closer at the bottle of glue because he had never used it before.
o Notes:
Rule: Inherently dangerous has been defined as work “which, in its nature, will create some
peculiar risk of injury to others unless special precautions are taken 0 as, for example, excavations
in or near a public highway.” Prosser and Keeton on Torts 472.
Rule: Basically the only duty an employer has w/r/t choosing the independent contractor is to
look into his reputation. Courts have held that there is no duty to look into whether or not he is
insured, the adequacy of his equipment, or his personnel.
Kleeman v. Rheingold, 614 N.E.2d 712 (Court of Appeals of New York, 1993)
o Facts: plaintiff retained law firm to sue doctor for malpractice. The doctor in turn retained Fischer’s
service agency to serve the papers on the doctor. The lawyer delivered the summons to Fischer 2 days
before the statute of limitations and told him to serve them immediately. Fischer in turn selected a licensed
process server to deliver the papers. Fischer’s process server delivered the papers on time but to the
wrong person, so the plaintiff was non-suited when the suit came before trial.
o Proc. Hist: The trial court determined that a process server is an “independent contractor” rather than an
agent of the employing attorney, since “the attorney does not have control over the manner in which
the task is performed” he can not be vicariously liable.
o Issue: Can an attorney be held vicariously liable to his or her client for the negligence of a process server
whom the attorney has hired on behalf of that client? Holding: Yes. It is a non-delegable duty.
Judgment reversed.
o Rule: The general rule is that a party who retains an independent contractor as distinguished from a mere
employee or servant is not liable for the independent contractor’s negligent acts.
o Rule: The exceptions to this rule are:
Negligence of the employer in selecting, instructing or supervising the contractor
employment for work that is especially or “inherently” dangerous; and
instances in which the employer is under a specific nondelegable duty.
o Rule: Nondelegable duties = requires the person upon whom it is imposed to answer for it that care is
exercised by anyone, even though he be an independent contractor, to whom the performance of the duty is
entrusted.”
o Rule: Nondelegable duty is when the responsibility is so important to the community that the employer
should not be permitted to transfer it to another.
o Sub-issue: Is the service of a summons a non-delegable duty? Holding: Yes.
o Rule: A duty will be deemed nondelegable when “the responsibility is so important to the community that
the employer should not be permitted to transfer it to another. Prosser and Keeton at 512.
o Reasoning: Service of process is a critically important duty that a lawyer undertakes when he is retained
to commence an action. i.e. when an individual retains an attorney, timeliness and accuracy or service of
process is an integral part of the task that the attorney undertakes. Service of process is also a critical
component of a lawyer’s overall responsibility. A lawyer shouldn’t be able to evade responsibility for
its careful performance by the simple expedient of “farming out” the task to independent contractors.
o Green checkmark = generally, the principal is not liable for injuries caused by independent contractors.
There are two exceptions that could be collapsed into one – if the independent contractor is engaged in an
ultrahazardous activity or engaged in a duty, which, for public policy reasons, is deemed to be a
nondelegable duty – then the employer of the independent contractor could be liable.
3. Borrowed Servants
2 different kinds of loaned employees
1) Where the general employer is in the business of training and supervising the employees that it loans out
and typically loans them with some equipment.
in this situation, if the loaned employee acts negligently, it depends on who was exercising control
at the time of the accident.
2) Where the general employer is only nominally an employer. They don’t provide any training or even hire
the employee that they are loaning. Rather, the special employer does all the interviewing, and picks an
employee, then tells general employer they want so and so. This is increasingly common in business in the
United States. These general employers provide payroll services and benefits to the employees.
i.e. an off-site HR department. I think this is like AdminiStaff.
the general employer is hardly ever liable in this business model, Charles v. Barrett, 135 N.E. 199
(Court of Appeals of New York, 1922)
The general principal will remain liable for acts of borrowed servant so long as borrowed servant is furthering
business of general principal in rendering services to special principal. But if control is totally relinquished then no
longer servant of general principal and the special principal is vicariously liable for torts of borrowed servant.
Charles v. Barrett.
b. Intentional Torts – a P is not liable for the intehtional torts b/c it is rarely w/in the scope of employment.
Various tests:
o Did the conduct further the interest jof the employers? Bremen (stold bank money – no VL)
but maybe a bartender who overreacts there is intent to serve.
o Was it foreseeable? Is it fair to hold liable? BUshey (drunk sailor – VL)
o Was the tort engendered by employment? Lisa M. (assault during exam – no VL)
watt her ea nexus b/w employment and the tort?
o R2d §219(2) = was A “aided in accomplishing the tort by existence of agency relationship? Costos
(manager of hotel raped guest – VL)
was there but-for causation?
o Was there an implied contract where the plaintiff couldn’t leave? Nazareth (assaulted in ambulance)
almost always restricted to common carriers.
o R3d §7.07 = simplifies the R2d §219(2)
o Under either test, always look for direct liability; negligent supervision, negligent hiring, etc.
Bremen State Bank v. Hartford Accident & Indemnity Co., 427 F.2d 425 (United States Court of Appeals, Seventh
Circuit)
o Facts: Bank was moving locations. Bank employee accidentally put over $10k in a locker. Moving
company moved the locker and an employee found and stole the $10k. Bank is suing the moving company
to recover it on the theory that it is responsible for the misconduct of its employee.
o Issue: Is the moving company Bekins civilly liable for the loss occasioned by the criminal act of its
employee? Holding: No.
o Rule: The employer is liable for the negligent, willful, malicious, or criminal acts of its employees when
such acts are committed during the course of employment and in furtherance of the business of the
employer; but when the act is committed solely for the benefit of the employee, the employer is not liable
to the injured third party.
o Reasoning: there is no contention that the employee stole the money in furtherance of the business of his
employer. Neither the employer nor the bank gave him permission or even had knowledge that he had the
money.
o Note: The book lists a bunch of cases that concur with the result reached in this case, and they all have to
do with theft.
o Class Notes: What is the best argument the plaintiff can make for respondeat superior? He was where he
was supposed to be, during the time he was supposed to be there. But it fails here because the tortious
conduct wasn’t in furtherance of the employer’s purposes. This sinks almost all intentional torts. An
exception would be an overly aggressive bouncer. Even in the case of Scott Bertuzzi the Canucks could be
liable for. Even if the employer made it clear that the type of behavior was not going to be tolerated.
Class Notes: The mere fact that the tort was intentional doesn’t necessarily mean that the employer won’t be liable.
o Restatement Third Rule = Motivation test = was the employee intending to serve the purpose of the
employer?
o Lisa M. Rule = employer might be liable even if employee wasn’t intending to serve the purposes of the
employer under certain explicit exceptions.
A. Authority – the ability of A to affect the legal relations of P by acts done in accordance with P’s manifestation of consent to the
Agent. Authority may be either express or implied.
We’re not talking about independent contractors here. However, be on the look out for independent contractors who have a
piece of agency in their independent contract. i.e. a limo driver on the way to pick you up and you ask him to stop by your
office to pick up your briefcase and you’ll pay him for his favor. The point being you can carve out principal agent
relationships out of principal-independent contractor relationships.
1. Express Authority
King v. Bankerd, 303 Md. 98 (Court of Appeals of Maryland, 1985)
o Principal leaves power of attorney with his attorney that authorizes him to deal with some real property that
the principal, King, owned. The agent deeds the property to the estranged wife of the principal. The principal
comes back to claim property and finds out that his property has been conveyed to his estranged wife. He
doesn’t like this.
o The court says he has a claim for negligent breach of fiduciary duty. Lowenstein says it is plain and simple a
breach of contract b/c he had no authority under his relationship to convey the property to his estranged wife b/c
the contract did not give him the authority to gift the property. The principal does not benefit from this
transaction and if he wanted the agent to have that power he should have put it in the contract expressly.
o This case explores the interpretation of a power of attorney.
o Powers of attorney are interpreted narrowly.
Lamb v. Scott, 643 So. 2d 972 (1994)
o Rule: Powers of attorney will be construed strictly, restricting the powers to those expressly granted.
o Rule: One who accepts a power of attorney covenants to use the power for the sole benefit of the one
conferring the power and to use it in a manner consistent with the purposes of the agency relationship created
by the power of attorney.
2. Implied Authority = agent’s reasonable interpretation of express instructions. “Reasonableness” = words, custom, relations.
R.2d §7
Incidental Authority: unless otherwise agreed, an Agent has authority to do acts incidental to expressly authorized
transaction – necessary, usual, and proper. R.2d §35. E.g., authority to borrow = authority to execute promissory note
Delegation of Authority = authority to delegate to subagent must be express or implied: may be implied from type of
work – two man job. UNLESS – emergency – cannot contact Principal, do work by himself, and reasonably necessary to
protect Principal’s interests
B. Apparent Authority
Rule: A person who professedly acts as an agent has authority to bind the Pincipal, even if he is unauthorized if (1) P is
responsible for appearance of agency authority in A to TP AND (2) TP’s reliance is reasonable (Hansen & Jonhson). There
are three sorts of apparent authority:
o 1. Statements made by P to TP – i.e. P is liable for authority stated in a letter, even if given to A with instructions
not to diplay it.
Lingering Apparent Authority
It has to be reasonably interpreted by the third party based on representations by the principal.
And must make the T believe that principal consents to having agent acting on his behalf.
Smith v. Hansen, Hansen & Johnson, Inc., 818 P.2d 1127 (Court of Appeals of Washington, 1991)
o Glass wall purchased from a supposed agent of glass company begins to leak and building renovators sue glass
company.
o Business cards and office does not make someone an agent.
Sauber v. Northland and Insurance Co., 251 Minn. 237 (Supreme Court of Minnesota, 1958)
o Sauber calls up insurance company over phone and girl on other end says he could transfer the policy.
o Rule: One who answers a business telephone has apparent authority to discuss matters relating to the business and
it is binding. This is a presumption that may be rebutted if evidence that P is not acting in good faith.
o Notes: P is bound by acts of those he leaves in charge of his business. Employer liable to retailer when retailer
receives authorization over the phone to extend credit to someone purporting to represent the principal.
Foley v. Allard, 427 N.W.2d 647 (Supreme Court of Minnesota, 1988)
o Facts: A customer, Allard, is hanging out in a stock broker’s office. He tells the plaintiff that he can double her
money or guarantee that he can return her principal at least. She invests with him and loses everything. She sues the
stock broker’s office where this guy was hanging out.
o Cause of action = breach of K which is going to require some form of vicarious liability.
o The plaintiff will have to establish that Allard was an agent.
o Is Merill Lynch liable if one of their sales people defrauds a customer? While fraud might not be in the scope of
employment, investing money is so he was acting in the scope of employment in that sense. So, unless the plaintiff
acted unreasonably, the plaintiff should be able to maintain an action for respondeat superior liability against the
employer.
o The court holds however that there is no claim for respondeat superior of breach of contract here because he is no
agent. So court has to move to the theory of apparent agency. Court finds no apparent agency b/c to was
unreasonably for her to believe that he was an agent b/c if was fishy, she was sophisticated enough to realize that it
was fishy.
o RULE: the purported principal can be liable for the acts of someone who appears to be an agent. Theory = i.e.
negligence for not seeing who was on the floor of your store, walking up to customers, and soliciting their business,
etc. Theory = estoppel i.e. you’ve done something that had led me to believe that this person is your agent (i.e.
answering and transferring phone calls like in Foley) and so you should estopped fro denying that this person is your
agent.
Herbert Construction Co. v. Continental Insurance Co., 931 F.2d 989 (United States Court of Appeals, Second Circuit, 1990)
o Lingering apparent authority. Agent had power of attorney revoked but he misled company into believing that he
had one by fixing it up AND company never told P that the agent could no longer issue bonds.
o The plaintiff seeks to hold an insurance company liable on a performance bond that it never issued. Their claim is
breach of contract, defendant says “I don’t have a contract with you.” The plaintiff response, “you should be
estopped to deny that you issued this bond since we reasonably believed that Dixon was your agent as a result of
actions you took to lead us to believe that Dixon was your agent and we relied on these actions.” Dixon did not
have the authority to issue bonds on behalf of Continental. He was an agent though because he had the authority
to do some things on behalf of Continental, but he exceeded scope of his authority. So this is an apparent authority
case.
o Issue = does the agent of an insurance company have the authority to bind the insurance company? What is the
apparent authority of an insurance agent?
o A customer who receives a policy from an agent might reasonably believe that the company is bound.
o In this case, there’s almost an assumption that in order to have a valid policy, it has to be signed by somebody and if
the person with the authority to sign it, the person who does sign it has to have the apparent authority.
o If a person was once an agent and a principal failed to notify third parties that that person is no longer an agent, then
the court will treat that person like an agent.
o So we start from the premise that in order to bind the insurance company, the agent needs the power of attorney
because almost as a matter of law, the agent doesn’t have the actual authority to do that.
Continental Insurance Co. v. Gazaway, 453 S.E.2d 91 (Court of Appeals of Georgia, 1994)
o Facts: bond for $52,000 was filed in the probate court. Continental Insurance was named as the surety but it was
issued by George Robinson who did not have the authority to write bonds for Continental b/c his authority was
revoked. Continental says it was not liable even though the power was filed with the county clerk.
o Persons dealing with a limited agent have the duty to examine the agent’s authority. Especially when the bond was
not from Continental but from Transamerica Ins. Co. This court did not discuss its liability under apparent agency
and said that Principal did not hold agent out.
o Dissent = this was on file w/county cleak and could have been relied opon.
o Notes: It costs a lot to take away power and these things are all over the place and often not relied upon. Agency
costs = You bear certain risks working through an agent.
o Apparent authority difers from estoppel in that the principal becomes immediately a contracting party irrespective of
intent and with no reference to any change of position by the third party.
o Prior dealings can give apparent authority, but must be similar to the one at issue and have a degree or
repetitiveness.
C. Estoppel
Hoddeson v. Koos Bros., 47 N.J. Super. 224 (Superior Court of New Jersey, 1957)
o Shopping for furniture and Fake salesman steals cash from Plaintiff.
o A principal may be liable for failing to take reasonable precautions against an imposter claiming to be the principal’s
agent, failing to do so estopps a principal from claiming the agent is not his agent.
o The court rejects a notion of agency law that Estoppel requires some form of affirmative action on the part of the
defendant. This is what makes it different from the negligence theory when there is no agency relationship.
D. Inherent Agency Power Concept
Inherent agency = indicated power of an agent which is derived not from authority, apparent authority, or estoppel, but solely
from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.
Restatement (Second) §8A
Autoxchange.com, Inc. v. Dreyer and Reinbold, Inc., 816 N.E.2d 40 (Court of Appeals of Indiana, 2004)
o Actual authority = main claim. He was part owner of the company.
o Apparent authority = alternative claim. A corporate officer is an employee of the company and a salesperson.
Salespeople have the authority to tell people how to make payments.
o Inherent Authority = alternative claim
How does the inherent agency authority differ from apparent agency authority?
o Class Notes: They rely on the fact that he was a corporate officer.
o Inherent agency authority = principal bound by the actions that would normally be within the authority of the agent
based on his position in the company.
o i.e. Watteau v. Fenwick - also consider estoppel. In estoppel, if the principal held the agent out to have a position
with the company such as owner then they should be estopped from denying that they did not have the authority to
do whatever.
o Inherent authority allows the third party to reach the personal assets of the agent
Absent special circumstances, the law allows people to do business through agents w/out disclosing their identity. The law is
encouraging deceptive conduct.
o Kelly Asphalt Block Co. v. Barber Asphalt Paving Co., 211 N.Y. 68 (Court of Appeals of New York, 1914)
A competitor buys asphalt from its competitor case.
Cardozo’s rationalization for undisclosed principal = He says there is a contract in which the agent is
bound. There was no misrepresentation made. Contracts are presumptively enforceable. Agent could have
bought this and assigned it to anyone (including undisclosed principal)
This isn’t all that different from an economic point of view from a transaction in which an agent purchases
and resells to his principal, which, of course, is legal.
Cardozo leaves the door open if there was an act of misrepresentation on which the third party relied
then maybe that contract b/w the agent and the third party is voidable.
o Finley v. Dalton
Agent assembling parcels of property for the principal. The principal can’t do it directly b/c he knows that
if he was the one doing it the third parties would be able to drive a harder bargain and he would have to pay
more. So he sends an agent out there to solicit the sales for them. Agent outright lied to the third party
when asked why he was buying the land. So the landowner sells it to him. Subsequently finds out that it’s
Duke Power that actually bought it. The landowner wants to rescind the contract because he was lied to.
He is seeking an equitable remedy for rescission. In order to get rescission, you have to demonstrate that
the equities are in your favor by showing that there was some sort of fraud/deceit and there should be
rescission. Elements of fraud = misrepresentation, made by the defendant, which the plaintiff relied upon,
and which caused damage to the plaintiff.
Holding: The court does not grant rescission to the plaintiff.
Plaintiff’s claim of misrepresentation doesn’t work because it was not material.
It was not material because it wasn’t for that reason that he sold the property.
What would have been material? It is possible that the seller owned an adjoining piece of property and the
use of this piece of property would have been material.
Court says “it played no role in his decision to sell the property to this agent.”
Plaintiff’s claim of deception also fails. Deception = buyer did not disclose that the undisclosed principal is
Duke Power.
It fails because he did not have any duty to disclose. General Rule = Parties dealing at arms length with
each other do not have a duty to disclose unless required by statute.
Public policy of principals to act in an undisclosed fashion? This sanctions deceptions.
How do we resolve this policy dilemma?
If the seller straight out asked if the agent was working for someone else and the agent lied about
that, there might be a different outcome.
General Rule: The principal is bound by the contract and can be sued by the party contracting with the agent. Restatement
(Third) §6.03
2. Unauthorized Transactions
Watteau v. Fenwick, 1 Q.B. 346, (Queens Bench Division, 1893)
o Facts: Defendant owned a hotel-pub that employed Humble to manage the establishment. Humble was the
exclusive face of the business; Humble’s name was on the bar and the license of the pub. Defendant explicitly
instructed Humble not to make any purchases outside of bottled ales and mineral waters, but Humble still
entered into an agreement with Plaintiff for the purchase of cigars. Plaintiff discovered that Defendant was the
actual owner and brought an action to collect from Defendant.
o Issue: Defendant is liable for damages resulting from an agreement between Plaintiff and Humble, who is
knowingly acting outside his actual authority as an agent for Defendant. Holding: Defendant is liable for
damages.
o Reasoning: Humble was acting with an authority that was inherently reasonable for an agent in that position.
The situation is analogous to a partnership wherein one partner is silent but is still liable for actions of the
partnership as a whole.
o Reasoning: The decision could not be based on apparent authority because the principal is disclosed under that
doctrine.
o The principal is held liable for actions by an agent that are expressly forbidden, but the case limits a principal to
actions of an agent that are reasonable under the circumstances.
o Rule: An undisclosed principal can be held liable for the actions of an agent who is acting with an authority that
is reasonable for a person in the agent’s position regardless of whether the agent has the actual authority to do
so.
o Class Notes: This is an important case illustrating the general rule that an agent for an undisclosed principal,
can bind the principal even to unauthorized contracts provided that the contract is one that one would
otherwise think to be w/in the authority of the agent.
Senor v. Bangor Mills, 211 F.2d 685 (United States Court of Appeals, Third Circuit, 1954)
o Facts: Principal gave agent strict instructions about buying nylon yarn which was in limited supply. The
intermediary began to buy the yarn for more than was allowed by the Mills on their account for him. Bangor
was an undisclosed principal.
o General Rule: An undisclosed principal who entrusts an agent with the management of his business is subject
to liability to third persons with whom the agent enters into transactions usual in such business, and on the
principal’s account, although contrary to the directions of the principal.
o Court will not bind the undisclosed principal for acts of an agent beyond his actual authority.
o Class Notes: We start out with a general principal = an undisclosed principal is bound by a contract made by
its agent. Watteau says that this is true even if the principal didn’t authorize the agent to make that particular
contract. So what is Bangor’s defense here?
1) He wasn’t an agent at all b/c he was acting on his own behalf.
o Does a settlement by an agent also bind a principal?
o Even if Shetzline acted as an agent, the principal has settled with the agent, and therefore, the third pary has to
go after the the agent. This is because the third party ALWAYS believed that it was dealing with the agent, it
didn’t even know aobut the principal. And because of this it is ovbiouv that the third party was looking only at
the credit of the agent. So it is more or less of a windfall when the third party finds out that there is another
pocket out there.
o When the principal in good faith has ssettled with the agent, the third party is set out (this is the last para. on pg.
382).
o Restatement Third is more protective of third parties = takes tehe position tbat a contract is a contract.
3. Setoff
Situations where an agent enters into contract for undisclosed principal, perhaps motivated in part because the agent
owed the third party money.
Rights of a third party to setoff amounts owed to it by the agent when dealing with an undisclosed principal.
Restatement Third provides that “When an agent makes a contract on behalf of an undisclosed principal,
o (a) the third party may setoff:
(i) any amount that the agent independently owed the third party at the time the agent made the
contract and
(ii) any amount that the agent thereafter independently comes to owe the third party until the third
party has notice that the agent acts on behalf of a principal against an amount the third party owes the
principal under the contract
o (b) after the third party has notice that the agent acts on behalf of a principal, the third party may not set off any
amount that the agent thereafter independently comes to owe the third party against an amount the third party
owes the principal under the contract unless the principal consents. . .
Oil Supply Company, Inc. v. Hires Parts Service, Inc., 726 N.E. 2d 246 (Supreme Court of Indiana, 2000)
o Facts: William Dolin (a commodities broker) was indebted to Oil Supply (P) entered into an agreement with
Dolin under which Dolin would arrange sales through Oil Supply. The profits would be split b/w Oil Supply
and Dolin. Dolin was also indebted to Hires Parts Service, Inc. (Hire)(D). To remedy this debt, Dolin
represented to Hires that he had a load of 720 cases of anti-freeze that he would ship to Hires in exchange for
his debt to Hires. The cases were sent and received. Prior to this transaction, Oil Supply and Hires were
unaware of each other’s existence. Hires has neither paid for nor returned the antifreeze.
o Issue: If an agent is authorized only to contact in the principal’s name, does the other party have a set-off for a
claim against the agent only if the agent has been entrusted with possession of chattels which he disposes of as
directed or the principal has otherwise misled the third person into extending credit to the agent?
o Holding: Yes. If an agent is authorized only to contract in the principal’s name, the other party does not have a
set-off for a claim due him from that agent unless the agent has been entrusted with possession of chattels which
he disposes of as directed or unless the principal has otherwise misled the third person into extending credit to
the agent.
o Reasoning: Principals are generally in a better position to prevent potential fraud by their agents than are
buyers.
o Reasoning: Here, Oil Supply could have prevented this situation by making a confirmation of the sale, or by
closer supervision of its agent Dolin. These failings by Oil Supply were neglectful. On the other hand, Hires
might just as easily have prevented the defalcation by taking the time to ponder why some company it had never
heard of had just deposited a truckload of antifreeze on its doorstep. The principle that between two innocent
parties, the loss should be placed on the party who has put the agent out to deal does not apply if the party
seeking refuge in the principal haw wittingly or otherwise aided an unscrupulous agent to defraud the principal.
here, because Hired was chargeable with notice of the existence of Oil Supply as Dolin’s principal before it
accepted the goods, and because hires had the last opportunity to prevent the loss before the transaction was
complete, Hires should bear the loss. Hence, Hires was not entitled to set off its Dolin debt in the lawsuit
brought by Oil Supply. Accordingly, the court affirmed.
Class Notes:
o All of the shipping documents said that the shipment of anti-freeze came from Oil Supply so to say that Hires
should have known that the anti-freeze didn’t come from Dolin but from Oil-Freeze.
o The third party settles with Dolin after it receives its shipment. What if Hires PAID Dolin after it received
notice that it was working on behalf of an undisclosed principal? The rule is once the third party knows of the
existence of the agent then that person must settle with the principal and can not longer settle with the agent.
o Hires was on notice merely by looking at shipping document (however, Hires might have thought that Dires
paid oil supply).
B. The Agent’s Warranty of Authority – an agent is personally liable to third party is he contracts without, or in excess of, P’s
authority, unless he states that he lacks such authority
Agent will be liable even if he has a good faith belief that he possesses the authority.
Will not be liable if third party has actual knowledge that agent lacked authority/reason to know does not bar liability.
P may still be liable under apparent authority/estoppel theorys.
Husky Industries v. Craig Industries, 618 S.W.2d 458 (Court of Appeals of Missouri, 1981)
o When dealing with a corporate officer, how can a third party verify the officer has the authority to make the
transaction?
o Need something from board of directors.
o Is it enough that the corporate sends you a photocopy of the board of directors meeting? No, you probably need
something signed by the secretary of the board.
o Copy of resolution, certification from secretary, review the bylaws of the corporation to make sure the corporation’s
secretary was in fact authorized to do that, some indication that the persons who purport to be officers of the
corporation are in fact officers of the corporation. Still at some point you have to have faith that not everyone is
lying to you. You have to trust but verify as much as you can.
o If an agent breaches a warranty of authority is to place the plaintiff in the same position he would have been in had
the tort not occurred. This is a restitution case and not expectation damages
Coker v. Dollar, 846 F.2d 1302 (U.S. Court of Appeals, 11th Cir. 1988)
o Bottom line: If agent breaches an obligation to the principal, third parties cannot get judgment against the agent.
o Facts: Agent failed to set up an escrow account which caused the third party not to receive funds he otherwise
would have been paid. So the third party sues the agent.
o Here, the agent is absolved from damages, on the contract, but if an agent, in the course of executing an agency
relationship, personally injures a third party, the third party can bring an action for damages against the agent.
Economic damages resulting from breach of duty to principal? Personal injury damages also arising from breach of
duty to principal BUT ALSO arising from breach of duty to the third party (i.e. agent negligently driving craches
work truck, he breaches duty to both principal and third party._
AN agent is not liable to a person other than the principal for harm resulting from failiure to adequately perform his duties as
an agent – only Principal is responsible for NONFEASANCE – Coker; but 3rd party beneficiary might make agent liable for
nonfeasance.
Agent remains liable for MALFEASANCE – stil lliable in tort, acting as agent does not confer immunity for personal torts.
A. Introduction
General Rule: If notice is given to an agent in the course of an agency relationship, and the agent is authorized (expressly or
apparently) to receive such notice, then the principal is bound by that notice.
Rationale for this rule: We don’t want principals to be able to isolate themselves from the imputation of knowledge by
using an agent by saying “I didn’t know that. He never told me.” So if you choose to do business through an agent you’ll be
bound by notice given to the agent in the course of the relationship.
B. Notification
Notification = deliberate effort to bring some fact to the attention of a person or group of persons, or all present or future
persons who may have or claim an interest in the subject matter.
St. Louis & St. Charles Bridge Co. v. Union Electric Light & Power Co., 216 Mo. App. 385 (1925)
o Should an organization be held to the composite knowledge of several of its employees?
o A power company entered into a contract with a bridge company to string high tension wires aboce the bridge.
Power company promised to provide safety personnel whenever the Bridge companypainted the bridge upon
receiving notice that they were going to paint.
o One employee of Power company sees painters working on the bridge. Another employee knoew that Power
company is supposed to supploy safety personnel under that circumstance.
o Issue: Is power company subject to the composite knowledge of its two employees?
o Holding: no, unless this affair was entrusted to the agent tho observed the painters.
o It’s not only that the Bridge Company intended to give notice, but also that the power company has to know that
they’re being given notice. (must be received in an official capacity; can’t just be any agent).
Montana Reservoir & Irrigation Co. v. Utah Junk Co., 64 Utah 60 (Supreme Court of Utah, 1924)
o The agents of Montana Power were also Agents of Montana Reservoir (P), so their knowledge (that Rosenblatt
was an agent) is imputed to them.
o In this case, knowledge does not arise out of their relationship with the defendant, it arises out of their relationship
with another party.
o Disputed fact in the case = whether or not the Defendant had given notice to the plaintiff that they had terminated
their agency relationship with Rosenblatt. The court says though that we do not impute knowledge from a
principal to an agent.
C. Imputed Knowledge
The doctrine of imputed knowledge involves holding a principal to the knowledge of, and sometimes the wrongs (broadly
defined) committed by, his agent by imputing the knowledge of the agent to the principal.
Rationale for this doctrine =
o 1) creates an incentive on the part of the principl to select and monitor their agents with care.
o 2) discourages the use of agents to “insulate” principals from information of which principals consciously wish to
remain ignorant.
o 3) it is more efficient for third parties to communicate with agents rather than directly with principals and if there
was no doctrine of imputed knowledge, third parties would be discouraged from communicating with agents.
Constant v. University of Rochester, 111 N.Y. 604 (Court of Appeals of New York, 1889)
o Issue = if an agent learns of information in a prior unrelated agency relationship, is that agent deemed to still
have that knowledge in a subsequent unrelated agency relationship?
o Rule: If the complaining party can demonstrate by clear proof (more than a preponderance) that the agent
remembered the knowledge at the time of the subsequent transaction, then it would be imputed.
o Presumption = A person’s knowledge, obtained outside the scope of the agency relationship, is not imputed to the
principal. This presumption can be overcome though.
o Dealing with indirect proof. How do you prove whether or not someone remembers? Ask them? Has to be
something more than the agent’s own testimony. What more?
1) Time period between the two transactions. Question of fact. Longer the time period more likely the
agent forgot about it.
2) Prominence of the transaction. It’s one thing to forget what you had for breakfast 11 months ago,
another thing to forget that you won the lottery 11 months ago.
Bird v. Penn Central Co., 341 F. Supp. 291 (United States District Court, Eastern District of Pennsylvania, 1972)
o D&O said that A has known problems. Was A the A for everyone covered? Basically claimed that A made a
misremresentation and thereby voided the policy. Odd circumstances a bunch of innocent policy-holders have
coverage voided because A made a misrepresentation.
o Even if Bevan called in sick that day and said to Kirk, take care of insurance policy, it seems coverage might still be
denied. This is unfair because the policy covers not just the person signing the application. “No named insured is
aware.”
o ratification theory = you can’t argue that you get the benefit of the agent filling out the insurance application and at
the same time argue that he wasn’t your agent.
Shapiro v. American Home Assurance Co., 584 (United States District Court, District of Massachusetts, 1984)
o Shapiro court rejects the ratification argument that Bird accepted. They said because there was no control there
couldn’t be an agency relationship. Control turns not only on controlling what the agent does but the right to
control. The right to control arises from the consent of the parties.
o Applying this control criteria seems kind of artificial in this context. Some of the directors and officers may have
been unaware that the application was even being filled out and who was filling it out.
First American Title Insurance Co. v. Lawson, 177 N.J. 125 (Supreme Court of New Jersey, 2003)
o The insurance company is saying that they were defrauded b/c they made a material misrepresentation on the
insurance applications.
o The relief they seek is rescission.
o Defense = nonimputation of the agent’s knowledge on the insured. There are really two sets of insureds here 1)
officers and directors, and 2) the company.
o Adverse interest exception? It doesn’t work here. It’s not a breach of contract b/c we contemplated that it would
only void coverage as to the person who filled out the application not the other applicants.
A. Introduction
If two or more persons associate as co-owners of a business and take no steps to formalize their relationship, they have
created a partnership.
Partnership = default way of doing business b/c of its lack of formality. If you don’t file any papers or formalize the
relationship it’s a partnership.
UPA (1914) = at one time it was adopted in all states except LA. It is still governing law in about 1/3 of states. The other
states have adopted the RUPA.
o Defines partnership as “an association of two or more persons to carry on as co-owners a business for profit.”
o Mandatory rules = §§11-15
o Default rules = i.e. §18
RUPA (1997)
o Has replaced UPA in 32 states.
o Defines partnership identically to UPA.
o All rules in RUPA are declared default in nature except for a list of ten set forth in §103(b).
fiduciary duties are mandatory in §103(b)(3)-(5)
Elements of a partnership relationship:
o 1) Association = organized body of persons who have some purpose in common. A partnership is created by
agreement, express or implied, including delectur personae (choice of the person).
o 2) Persons – includes not only individuals but also corporations and other partnerships. Capacity to contract is only
requirement b/c partnership agreement is a contract.
o 3) To carry on as co-owners a business
UPA §6 & RUPA §202 = ownership includes “the power of ultimate control.”
Refers to ownership of the business, not of the capital contributed to the partnership.
UPA §2 & RUPA §202, cmt. 1 = business is defines as “every trade, occupation, or profession” and
consists of “a series of acts directed toward an end.”
o 4) For profit = self explanatory.
1. The Uniform Partnership Act (1914) and the Revised Uniform Partnership Act (1997)
JOINT VENTURES
o Joint ventures – arrangements in which two or more parties combine forces to engage in a specific economic
activity.
o Court apply partnership law to joint venture situations.
This minimizes the practical significance of distinguishing b/w joint ventures and partnerships, with the
exception that the contractual and tort liability of members of a joint venture may be more limited than that
of partners due to the narrower scope of activities of a joint venture.
Martin v. Peyton, 246 N.Y. 213 (Court of Appeals of New York, 1927)
o An investment banking partnership had gotten itself into serious economic trouble through a series of bad
investments. Hall, one of the partners of the firm, had three wealthy friends who were persuaded to make
substantial sums of money available to the partnership but who wanted more than a mere loan with interest.
o An elaborate agreement was entered into b/w the partnership and the three individuals. The agreement provided that
the three individuals would make a substantial loan to the firm, receiving 40% of the profits of the firm as interest on
the loan, and that the management of the firm would be placed in Hall’s hands. Also, the three individuals were
entitled to inspect the firm books, to be kept advised on the conduct of the business, and consulted on important
matters. They had veto power over any business they considered injurious or highly speculative. In addition, they
were given an option to join the firm as partners. Finally each partner of the firm placed his resignation in the hands
of Hall. If at any time Hall and the three agrees, the resignation would be accepted and the partner forced to retire.
o Creditors of the firm sued the three individuals, claiming that this combination of profits and extensive control
created a partnership, not a creditor relationshipo. A unanimous court decided tht there was not enough evidence to
support a fair inference that a partnership was created at the time the agreement was entered into and there was
nothing in the subsequent conduct of the parties that added to the agreement.
o The three were merely creditors with a very strong presence I nthe business. Although they had the right to veto
business, they did not have the right to “initiate transactions as a partner may do.” Their receipt of profits was as
interest on their loan and thus did not constitute presumptive evidence of partnership status under UPA §7(4).
o This case is significant b/c of its express distinction b/w affirmative and negatice control by creditors. It appears to
sanction creditor control by veto power and to characterize a right to initiate transactions as inherently inconsistent
with creditor status, at least in ordinary situations.
1. Actual Authority
Actual authority = a partner is actually authorized to act with express or implied consent of fellow partners.
o Implied authority = was the acting partner reasonable in assuming he was authorizd to act based on
manifestation of fellow partner?
based on interpretation of partnership agreement; customary way business is run; prior authorizations
or ratification of similar condut; acquiescencein assumption of authority, etc. Babbitt (partners could
tacitly agree to partner assumption of power by not objecting).
Elle v. Babbitt, 259 Or. 590 (Supreme Court of Oregon, 1971) – implied authority
o Facts: The partnership is leasing tooling to the corporation. The motivation is not tax driven but
economically driven – the corporation doesn’t have the funds to do it. In this particular controversy
the partnership agreed to lower its lease fee to allow the corporation to put in a competitive bid on a
job. One of the partners complained that he has a larger stake in the partnership than he has in the
corporation so he got screwed. He complains about Mr. Beale himself b/c he was on both sides of the
transaction.
o Rule: UPA §22 provides “any partner shall have the right to a formal account as to partnership affairs
(a) if he is wrongfully excluded from the partnership business or possession of its property by his
copartners, (b) if the right exists under the terms of any agreement . . . (d) whenever other
circumstances render it just and reasonable. “
o Issue: Did Beale act without authority?
the source of Beale’s authority would be either the partnership agreement or statute.
did Beale exclude them from the management of the partnership? Their basis for this claim is
§18 which says that each partner has the equal right in the management and conduct of the
management of the business.
o Holding: the court holds that Beale had this authority by implication. Partners can agree otherwise
(forfeit, agree not to have management rights, etc.) and this can come about by implication.
o This is a powerful holding b/c the statute does not say that. But the court says that there was an
implied agreement among the parties that Beale would have full management authority and
therefore was not acting in contravention of the agreement and the partners have no claim because they
at least implicitly agreed to it.
o Rule: No act in contravention of any agreement b/w the partners may be done rightfully w/out the
consent of all the partners. UPA §18(h)
o Rule: The members of a partnership may if they wish agree to leave the management of the business
in the hands of a single managing partner. Such an agreement may be implied from the parties’ course
of conduct.
o Class Notes: This is a common fact pattern. Corporation engaged in some ongoing business activity
and it has some connection to partnership with common principles to both common partnership and
corporation. i.e. often partnership will buy real estate and lease it to the corporation the shareholders of
which are also partners in the partnership. There used to be tax advantages to this.
Summers v. Dooley, 94 Idaho 87 (Supreme Court of Idaho, 1971)
o Facts: Two trash partners. One of them wants to hire someone else. The other partner refuses. He
does it anyway.
o Rule: Any difference arising as to ordinary matters connected with the partnership business may be
decided by a majority of the partners. UPA §18(h)
o Rule: UPA §18(e) bestows equal rights in the management and conduct of the partnership business
upon all the partners.
o Rule: Thus the only reasonable interpretation of UPA §18(h) is that business differences must be
decided by a majority of the partners provided no other agreement between the partners speaks to the
issues.
o Rule: If the partners are equally divided, those who forbid a change must have their way.
o Holding: The guy who hired despite objection from his partner screwed up.
o Reasoning: The partner who dissented did not sit idly by and acquiesce in the actions of his partner.
He was vocal about his opposition.
o Class Notes: Explores the idea of forfeiture of management duties through implication principle even
further. Court says the co-partner could not recover what he shelled out personally to pay the new
employee. The court said that partnerships have to have majority consent, which he did not have.
What should he have done? Dissolved the partnership was basically his only option. The threat of
dissolution may encourage the parties to work it out.
National Biscuit Co. v. Stroud, 106 S.E.2d 692 (Supreme Court of North Carolina, 1959)
o One partner notifies a vendor “we don’t want anymore of your bread. My partner has no authority to
order it.”
o The partner orders anyway.
o National biscuit ignored the instructions of the partner told them that the other partner had no authority
to order. They delivered it anyway and seek to recover the costs. He says “I told you I was not going
to pay because he didn’t have authority to order it.”
o Court says, “sorry, you can’t limit the authority of your partner.”
2. Apparent Authority
Act of any partner for “apparently carrying on the business in the usual way” binds partnership. But, if (1) T knows that
partner lacks authority or (2) not act carrying on in usual way (unless authorized) doesn’t bind.
o Power of position = two factors determine whether in ordinary course: (1) usual in the course of the
particular business; (2) usual for similar businesses in same locale (Burns), RUPA §301 explicitly endorses
(2).
o Statement of Authority (RUPA §303): = filed with Secretary of state. Grant = conclusive in favor of BFP;
Limitation = only notive to T with real property, and then only if recorded in property transfer office.
o Other Constructive Notice to T under RUPA: 90 days after statement of dissocation or dissolution filed; cuts
off lingering apparent authority.
o An act that makes it impossible to carry on business of partnership cannot bind without consent – UPA §9(3)
Burns v. Gonzalez, 439 S.W.2d 128 (Court of Civil Appeals of Texas, 1969)
o Rule: Every partner is an agent of the partnership for the purpose of its business, and the act of every partner,
including the execution in the partnership name of any instrument, for apparently carrying on in the usual way
the business of the partnership of which he is a member binds the partnership, unless the partner so acting has
in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing
has knowledge of the fact that he has no such authority. UPA §9(1)
o Rule: The act of a partner binds the firm if such act is for the purpose of “apparently carrying on” the business
of t he partnership in the way in which other firms engaged in the same business in the locality usually transact
business, or in the way in which the particular partnership usually transacts its business.
o Rule: Under a reasonable interpretation of the language of §9(1), the burden of proving the “usual way” in
which advertising agencies transact business is on the third party. One who asserts that the particular act of an
agent is within the scopr of the agent’s authority has the burden of proving the extent of such authority.
o This case is a narrowing of authority. Third party acting in good faith with an agent of the partnership
(partners) and settles a dispute with the partnership (promissory note).
o This is a very close case. It illustrates the problem of “what is in the ordinary course of business”?
RNR Investments Limited Partnership v. Peoples First Community Bank, 812 So.2d 561 (Court of Appeals of Florida
2002)
o Partnership agreement required the general partner to prepare a budget covering the cost of acquisition of
property in Destin and construction of the project and further provided that in no event w/out limited partner
consent shall the approved budget exceet more than 5%, not shall any lime item thereof be exceeded by more
than 10%. Also restricted the general partner’s ability to borrow, spend partnership funds and encumber
partnership asets. Finally it also said that the general partner shall not incur debts, liabilityes, or obligations of
the Partnership which will cause any line item to be exceeded by 10%.
o General partner exceeded his budget. The partnership eventually defaulted. Bank sought to foreclose.
Partnership answered with defense of “you failed to look at the general partner’s limited authority before giving
him the money.” Negligently failed to investigate.
o Rule: even if the partnership agreement denies the partner authority, if the third party doesn’t know that, the
third party can hold the partnership liable.
o Rule: Knowledge and notice under RUPA §102 = a person knows a fact if the person has actual knowledge of
the fact. Further, a third party has notice of a fact if that party knows of the fact, has received notification of the
fact, or has reason to know the fact exists from all other facts known to the person at the time in question.
o Rule: Under RUPA §303 a partnership may file a statement or partnership authority setting forth any
restrictions in a general partner’s authority.
o Rule: Third parties have no duty to inspect the partnership agreement or inquire otherwise to ascertain the
extent of a partner’s actual authority in the ordinary course of business . . . even if they have some reason to
question it.”
o Class Notes: The drafters of RUPA were cognizant of the fact that it was very difficult to limit the authority of
a partner AND treat third parties fairly. No one wanted a situation in which a third party had to inspect a
partnership agreement before dealing with a partnership. This would be inefficient and add transaction costs.
Can we give third parties the assurance that the partner does have the authority w/out making the third party go
back and inspect the partnership agreement? Should there be some inexpensive way to put the third party on
notice? None of this was addressed in UPA.
o RUPA said = if you file a limitation or grant of authority w/r/t real estate transactions, this is binding on third
parties. Important innovation.
C. The Nature of a Partner’s Liability – Joint As Opposed to Joint and Several Liability
UPA §15 = Joint v. Joint and several. Partners are jointly and severally liable for torts; jointly liable for contracts. The
difference is that in joint liability partners have the right to have all partners over whom jurisdiction can be obtained
joined in the suit (if not joined can dismiss); in joint and several partners have no such right and can be indemnification
from other partners under §18(b).
o RUPA §306 = partners are jointly and severally liable for all firm obligations. Can seek indemnity from
partnership under §401(c).
Liability does not extend to obligations incurred prior to jointing the firm, absent contrary agreement.
(ii) Pre-empting business opportunities = information that is useful to the firm for any purpose within the scope of
its business which is learned while a partner belongs to the partnership, using that infor for personal advantage is a
breach of loyalty, even if used to compete only when partnership expires. (Meinhard). Partner must also disclose
intention if useful and within scope.
Meinhard v. Salmon, 249 N.Y. 458 (Court of Appeals of New York, 1928)
o Facts: 2 guys in a partnerhip/joint venture possess some real property under a lease. The lease comes
up for extension. The landlord asks Salmon, the managing partner, if he is interested in going in on a
re-development lease on his own. Salmon says okay. Meinhard finds out about it and goes nuts! Says,
“I thought we were partners.” He thinks he had a right to participate in the new lease/venture.
o Why does he think that he has this right? Where does this right come from?
o 1) good faith. The interpretation of the partnership agreement using the obligation of good faith in
order to fill in any gaps.
o 2) fiduciary duty. Salmon has an obligation to act in the best interest of Meinhard and the
partnership. He can’t hide anything from him and has to disclose to him everything that is going on.
o Cardozo’s language has been often quoted b/c it justifies every result you want if you want to impose a
duty on somebody. “not honesty alone but the punctilio of an honor most high, is the standard of
behavior”
(iii) Leaving the business = partners may plan to compete with the firm before leaving, but must not violate
fiduciary duties – Meehan. Remedy is disgorgement of ill-gotten profits, plus fees due for taking business as
provided by agreement.
Before leaving: fiduciary duty applies. (1) cannot unfairly solicit clients (joint-letter); (2) cannot conspire with
other employees or partners to leave in a way that would materially damage partnership – but may invite
personnel to join after serving notive of intent to withdraw; (3) duty to disclose material info to partnership –
tell them you’re leaving.
Meehan v. Shaughnessy, 535 N.E.2d 1255 (Supreme Judicial Court of Massachusetts, 1989)
o Holding: the way in which they soliciteated their former clients violated their fiduciary duties. When
co-partners asked if they were leaving they lied. When they were asked about former clients they
delayed. Court said this is just not right.
What is the reasonable expectation of the parties in these circumstances? This is the position that Andrews (dissenter) takes in
Meinhard v. Salmon.
w/r/t fiduciary duties RUPA is more contractual, UPA is more fiduciary.
J. Claims by Personal Creditors of a Partner Against the Partnership Interest of the Partner = personal creditory may go after
the partnership interest, but not partnership property (UPA §25 – all partners must be joined in transfer of property rights). Apply for
charging order from court under UPA §28 – distributions (payments of profits and surplus) are made to creditor. Courts have broad
discretion to modify order to meet circumstances. i.e. appoint receiver, modify notce provision, etc. (Kroc)
if a creditor will not satisfy debt w/in a reasonable amount of time through distribution, courts will allow foreclosure on and
sale of interest. UPA §28(2). Only the partner’s economic interest is lost, he still has managerial rights and is still a partner.
o the partner may redeem the interest before judicial sale and may use partnership property if they agree
The purchaser is an assignee of the partner’s interest and has no management rights or right to inspect books – §27, but may
apply for judicial dissolution under 32(2) if term p’ship must wait until end of term, can apply at any time in at-will.
Assignee is not owed any fiduciary duties or other duties arising from p’ship agreement – Bauer. Under RUPA §601(4)(ii)
other p’ners may, by unanimous vote, expel a p’ner who has transferred substantially all of his interest.
Tupper v. Kroc = charging orders
o Tupper, a general partner, and Kroc, a limited partner, each with fifty percent interest purchased land together.
Tupper had financial problems and asked Kroc for a loan. Kroc did loan him the money, but filed an action to
recover on the notes. He recovered $54,609. Then to collect, he forced the partnership into receivership, eventually
purchasing Tupper's share for $2500.
o Issue: Does the court have the power to charge one's partnership interest and have it sold to satisfy a money
judgment?
o Holding: Yes. No partnership agreement can divest the court of the power it has to charge and sell an interest of a
partner in a partnership agreement to satisfy a judgment against a partner. Failure to follow through with dissolution
caused the bankrupt partner to remain in control.
o Judgment: Affirm
o Analysis:
o This was pretty harsh, as it closed off the ability of Tupper to collect his surplus or his share of the profits.
o Because he did not dissolve, he lost the ability to terminate the partner. Kroc owned the entire corporation, yet had
to keep the partner.
o Take away:
partnership is not dissolved upon retention of charging order.
RUPA §504(e) = charging order and foreclosure this is the exclusive remedy. can’t ask the court to place
you in there as a partner (i.e. Blomfield).
o Bauer v. Blomfield Co./Holden Joint Venture
Facts: creditor had a charging order. partners decided that they didn’t like the creditor. decide they’re
going to give him a hosing. partners give the creditor a hosing by distributing all the money among
themselves (through commissions or some other form). Creditor sues.
What is creditor’s argument? The partners owe the creditor a duty of good faith. What are the sources of a
duty of good faith?
1) Contract = if you have a right under the contract, you have to exercise it consistent with what the
partners expected.
either default provision in UPA
or agreement between parties
Here, the creditor can’t find a contractual source for the duty of good faith because he wasn’t a
party to the agreement
2) Fiduciary relationship = a fiduciary owes a duty of good faith to the beneficiary
here, nobody owes the creditor a fiduciary duty.
most courts find this as flowing from the contract, not a free flowing obligation.
Bottom line:
1) there’s still a judgment out there. the judgment debtor does have some incentives here to
protecte the interets of the creditor b/c if the debtor has any other property, the creditor may be
able to reach that too. so the creditor should still have an advocate in the partnership.
2) He could threaten foreclosure preventing that partner from ever realizing anything from that
partnership.
3) Coases theorom
4) Parties can contract around this, this is just another default rule
Under UPA
Dissolution is the change in relation between p’ners by any p’ner ceasing to be associated – UPA §29; Liquidation rights –
allows a p’ner to have p’ship property applied to discharge liabilities; surplus reduced to cash and paid out to p’ners. The
reduction to cash is effected though sale of the p’ship and its assets.
o Unless otherwise agreed, dissolution automatically triggers liquidation rights in each p’ner - §38(1): (1) P’ship
agreement may provide for continuation of business and buyout of departing p’ner’s interest, (2) if all p’ners,
including departing p’ner, agree to continue business after dissolution.
o Dissolution does not trigger liquidation for (1) a p’ner expelled in good faith; (2) where a p’ner wrongfully
dissolves, remaining p’ners may unanimously elect to continue the business under §38(2)
Some courts allow a p’ner that wants to continue business to buy out other p’ner, even though agreement is
silent, if it is possible to establish value of interest by determining how much would be generated in a sale
o Estate of deceased p’ner possesses liquidation rights, but many courts say no rights if hardship to p’ship. Under
RUPA, doesn’t come up often bec. default rule is that death doesn’t trigger dissolution.
o The default rule is that cash must be paid outside extraordinary circumstances – Dreifurst: only where (1) no
creditors to be paid from proceeds; (2) no market for assets; (3) fair to all p’ners may distribution in kind be ordered.
RUPA §402 provides that no p’ner has a right to receive nor can be forced to accept distribution in kind.
Surplus after payment of obligations must be paid in cash to p’ners §605.
Causes of Dissolution: UPA §31: A p’ner always has the power to dissolve, even if no right.
o Dissolution w/o violating agreement – (1) at the end of the term (date or undertaking); (2) by express will of any
p’ner if no term specified (giving notice – Haley); (3) expulsion of any p’ner under terms of agreement; (4) if all
p’ners in a term p’ship elect to dissolve
An at-will p’ship may be dissolved by express notice to any p’ner but must be exercised in good faith –
good faith is satisfied when adequate compensation is paid to fellow p’ner when purchasing interest; in
evaluating interest the p’ner must pay for newfound prosperity of p’ship; if he attempts to appropriate the
newly successful p’ship to himself without adequate compensation to p’ner then breach of good faith (and
loyalty) – Page. Just because dissolution causes harm to other p’ners however (e.g., bec. under
disadvantageous circumstances) is not breach of GF.
P’ship Term may be express or implied – but will be implied only where there is clear evidence. Where a
p’ner loans substantial sums to p’ship with the understanding that loan is to be repaid from profits, then
p’ship is for term necessary to recoup loan – Owen. Also where there is a discrete and terminable objective
(build and operate until can be sold).
While there may have been an understanding in former p’ships that profits would pay obligations,
if there is no understanding as to present p’ship then no term – Page.
o Dissolution in contravention of agreement – express will of any p’ner; often applies in a term p’ship, but will also
apply when breach of good faith involved, or other breach of agreement.
Wrongful dissolution – 38(2): remaining p’ners may continue business by unanimous agreement. No
liquidation: buyout rights = value of interest minus damages for breach of K; no goodwill in valuation. In a
term p’ship damages include profits that would have been received by non-breaching party if term would
have continued – Southern Oaks. Must indemnify p’ner against present and future p’ship liability.
o Provisions of agreement irrelevant, these situations cause dissolution – (1) death; (2) bankruptcy of p’ner; (3)
dissolution by decree of court under §32; (4) becomes unlawful to carry on p’ship business
Dissolution by Decree of Court - §32: a p’ner should apply for dissolution IF (1) it’s a term p’ship and
wants to preserve liquidation rights; (2) want to expel a p’ner, but have not provided for it in p’ship
agreement. Court will dissolve if (1) incapacity; (2) misconduct; (3) not reasonably practicable to carry on
business w/p’ner; (4) on application of assignee.
Dissolution for misconduct results in wrongful dissolution for guilty p’ner – but courts generally
require serious misconduct; this means that misconduct has affected the p’ship business – Potter. Many
trifling interferences may be sufficient if they destroy cooperation and affect business.
Under RUPA: Dissociation (Art 6) and buyout (Art 7); Dissolution (Art 8)
Under RUPA dissolution DOES = termination of business; happens under §801 when: Not waivable: (1) upon judicial
decree under 801(5); (2) application by assignee; (3) unlawful to continue business. Waivable: (1) p’ner gives notice to
withdraw in a p’ship at will; (2) term expires; (3) in term, if at least ½ p’ners agree to wind up w/in 90 days of a p’ner’s
dissociation by death/bankruptcy/wrongful dissociation (under UPA all p’ners must agree)
o In all other situations, and in waivable situations if waived by agreement, there is a buyout of p’ners interest
under §701 (they are deemed to be dissociating), and the business continues unaffected. Death or bankruptcy,
p’ship continues automatically.
A p’ner does not have the power to dissolve a term p’ship during term – p’ner dissociates wrongfully and gets buyout under
§602. Wrongfully dissociating p’ners do not forfeit goodwill under RUPA. Not entitled to payment until end of term –
unless court finds it will not harm p’ship. Is not wrongful if withdrawal from term is w/in 90 days of another’s dissociation
by death/bankruptcy/wrongful dissociation.
Wrongful Dissociation: §602 - only if: (1) breach of express provision of agreement; (2) for term: (a) left before term, (b)
expelled under §601(5), (c) dissociated by becoming a debtor in bankruptcy. Liable for damages to p’ship.
o Expulsion under §601(5): expulsion by judicial determination, including willful breach of p’ship agreement, or other
conduct that adversely and materially affects p’ship business. Cannot be waived
o RUPA does not refer to dissolutions as rightful or wrongful – there is no wrongful dissolution under RUPA, and
a judicial decree of dissolution does not entitle other p’ners to damages. Either the dissolution was provided for by
agreement or by §801(5) – which cannot be altered by agreement – or the decree was wrongful and should be
reversed – Southern Oaks.
Ability to bind P’ship to Ts: effective when no notice of dissolution (Apparent Authority)
Under UPA §35 – Ts who extended credit to p’ship prior to dissolution require individualized notice to cut off lingering
apparent authority; Ts who merely knew of firm get constructive notice through publication.
Under RUPA Dissociated P’ner binds P’ship to Ts with no notice of dissociation - §§702, 703. Under §704, p’ship may
file a statement of dissociation, which operates as constructive notice 90 days after filing. Lingering authority terminates
after 2 years w/o filing. Similar provisions for dissolution under RUPA §804-5
Look for problems when p’ship incorporates or otherwise becomes a limited liability entity – is there sufficient notice? Some
say continuous use of corporate checks is good, but cf. Jensen.
CONTINUING THE BUSINESS
All P’ners Can Agree to Continue Business and waive Liquidation Rights – except wrongfully dissociating p’ner, even if there is no
prior agreement to do so. Business continues as if dissolution had never occurred.
Buy-Sell Agreement – calls for remaining p’ner to purchase withdrawing or deceased p’ner’s interest and avoid liquidation.
This is the most common way for liquidation to be avoided under both UPA and RUPA.
o Two standards for evaluating interest: (1) fair value – total value of p’ship as going concern X % interest; (2) fair
market value – includes discounts like minority interest and market demand. Unless p’ship agreement specifically
includes costs incurred on purchase in evaluation of buyout then FV – Seattle First.
o P’ners may also agree to set buyout price every year, but court will fashion new price if unfair
Continuation Clause – this prevents not only liquidation, but also dissolution; still must include buyout terms for
withdrawing p’ner. There is no question as to the validity of this type of provision under RUPA §801 (except with
nonwaivable causes).
o Under UPA this is not permitted under §§29, 31, 32. The departing p’ner argues that UPA controls and not
agreement to avoid unfavorable buyout terms – Straube. But, this argument would fail because regardless of
whether continuation clause succeeds, there is no doubt that buy-sell provision succeeds under UPA, so liquidation
rights are waived by that provision. This is why it best under UPA to draft these provisions in the alternative.
o When all p’ners agree to continue under UPA – (1) creditors of first p’ship are creditors of second; (2) liability of
new p’ner for debts of old p’ship is satisfied out of p’ship assets only; (3) withdrawing p’ner is still liable to
creditors but is entitled to indemnity from p’ship, unless creditors agree to change.
Winding Up – the process of settling p’ship affairs after dissolution. Dissolution – point in time when p’ners cease to carry on
business together. Termination – when all p’ship affairs are wound-up.
Under UPA §37: subject to agreement, any p’ner has the right to wind-up so long as he is not wrongfully dissolving, and
would otherwise be able to obtain winding up by the court. RUPA §803 same.
No Compensation Rule – a p’ner owes a duty to wind-up old business and is not entitled to extra compensation for doing so.
Income collected by p’ner for winding up affairs is distributed by % interest. – Resnick. However, under 18(f) if dissolution
is caused by death, then surviving p’ners entitled to compensation. Under RUPA §401(h) – a p’ner is entitled to
compensation for winding up.
P’ners owe each other fiduciary duties in the course of winding up. However, p’ners may eliminate winding up and
proceed directly to termination; there are no fiduciary duties owed after termination. Langhoff – p’ners accomplish this by,
e.g., agreeing that departing p’ner will take certain business upon payment of a fee and that surviving firm gets the rest
(Meehan). No fiduciary exist with respect to the “new business” – Langhoff
Termination – Order of Distribution of Assets upon Liquidation – UPA 40(b): (1) creditors outside p’ship; (2) claims of p’ners
other than capital distribution (e.g., indemnity); (3) capital contributions returned; (4) balance distributed equally as profit, subject to
contrary agreement (default rule is that profits are shared equally in Gen p’ship).
If assets are insufficient to discharge obligations to creditors: losses are shared by solvent p’ner equally or in the proportion
that they share profits if they agree to share profits differently; If insufficient to return capital, again losses share shared as
they have agreed to share profits, if no agreement then equally. – 18(a); 40(d)
Distribution order may be varied, except that outside creditors may not be prejudiced w/o agreement.
Under RUPA §807 – abolishes priority of outside debt over inside debt (p’ners as creditors), but this doesn’t really make a
difference bec. p’ners still liable for unsatisfied outside debt.
Judicial Sale – when a sale is ordered, any p’ner may bid at that sale even when that p’ner wrongfully excluded another,
unless that p’ner acted in bad faith by attempting to avoid paying adequate compensation for the other p’ner’s interest or
otherwise acted fraudulently – Prentiss; wrongfully dissolving p’ner (breach of GF) is only entitled to buyout so could have
avoided sale to begin with.
Definition – form of doing business made available by statute and created by filing a certificate for a p’ship consisting of at least one
general and one limited p’ner. Has tax advantages of p’ship form and shields L p’ners from personal liability so long as (1) it is
properly formed and (2) the L p’ners are careful not to exercise control over the business.
Differences from Gen P’ship – (1) filing required to create; (2) liability protection for LPs; (3) LPs do not have an equal
right to management under default rule; (4) profits are shared according to capital contributions, rather than equally in Gen,
under default rules; (5) LPs do not have agency power; (6) Limited P’ships are harder to dissolve.
The General P’ner – has the rights and powers and is subject to the liabilities and restrictions of a p’ner in a Gen p’ship – RULPA
§403. Thus the provisions of UPA and RUPA apply to GPs, specifically with regard to fiduciary duties, personal liability (unless
LLLP), agency powers, and managerial rights
Generally, GP has intensified fiduciary duties – but Courts are split on the extent to which a GP would be able to tailor
their duties to allow them to take personal benefits or otherwise breach default duties:
o Appletree – while p’ners are free to vary many aspects of their relationship, they are not free to destroy its fiduciary
character. Thus, agreement could not substitute narrow disclosure obligation (only upon demand) for broad CLAW
one (omission is fraudulent and breach if knew material to affairs of p’ship and should have known that p’ners did
not know) because it would encourage fraud.
o Gotham – the trend, especially in DE, is to increase flexibility to eliminate or reduce fiduciary duties (although
elimination is controversial with regards to LP, it has been recognized with GPs). DRULPA §1101(d) – allows for
expansion or restriction of duties and creates a Safe Harbor for a p’ner who relies in good faith on the provisions of
the agreement, where the terms of the agreement supplant CLAW duties e.g., by providing that specific powers
may be exercised at the “sole discretion” of the GP, though they may have misinterpreted the agreement. Gotham
interpreted the provision to mean that such p’ner is not liable though they may have breached the agreement (and
breached CLAW fid duties) as a result of the misinterpretation, but only where the terms of the provision were
ambiguous. It also recognized another approach where the GP is not liable IFF it has accurately applied a provision
supplanting CLAW fid duty.
Duty of Disclosure – RULPA §305 – LPs have a right upon reasonable demand to obtain info from GPs. This does not
supplant broad CLAW duty to disclose all material facts that GP should know LP does not know – Appletree
(sophistication of buyer revealed nothing because they still would not have known that building contained asbestos). Whether
this can be varied by agreement will depend on jurisdiction – above – Appletree said no.
Generally – (1) Have freedom from personal liability for business debts (K or tort), p’ship taxation, and option to manage the
business. Owners are liable for personal wrongdoing.
Management: can be member managed (informal like a p’ship) or manager managed (like a LP – non-managers are
passive)
o This is relevant to the question of whether investment in an LLC is a “security” (something is a security when a
person invests his money in a common enterprise with the expectation of profits solely from the efforts of
others) and thus whether registration and disclosure are required. Manager managed LLCs (like LPs which are
normally securities) may require compliance with securities law,
o Taxation – Check the Box Regulations allow LLCs to have corporate characteristics (continuity of life, free
transferability of interest, limited liability, centralized management) and be taxed as p’ship by default.
Creation of an LLC - Must file articles of organization, which contain, at a minimum: name, designation as LLC, address of
principal place of business, and name/address of agent for service. Must file annual reports with state, or else face administrative
dissolution.
After AOO are filed, organizers enter into Operating Agreement, but lack of one is not fatal - ULLCA §103 (will be
governed by default provisions). LLC will be funded by contributions of property or Ks for services – ULLCA §401.
Conversion into an LLC – an entity, whether Gen or Lim. P’ship or sole proprietorship, that converts to an LLC retains
by operation of law all of the rights and obligations of the previous entity. The LLC may sue on and enforce Ks to which
the previous entity was a party and is a successor in all other interests. A T maintains all suits against the p’ship or p’ners
of the p’ship in their individual capacities, or sole proprietor that it had before conversion - ULLCA §903 (as applied to
p’ships; C & J Builders as applied to sole proprietorships).
The Agreement – the policy of the ULLCA is to give maximum effect to freedom of K and enforce the agreements - Elf
The LLC itself does not need to sign the agreement – requires signature of “member or members” – Elf
An operating agreement can probably contract around derivative actions; essentially stripping the power of a claimant of
his power to enforce his rights. Elf
o In Delaware there are certain non-waivable provisions, but derivative actions are not non-waivable. This is
quite concerning.
A forum selection clause is conclusive, even if it waives jurisdiction granted by statute and even if it classifies those
claims as derivative (individual suit by shareholder to enforce a corporate cause of action against directors, officers, or
Ts; these are allowed against management of LLC provided that managers will probably not bring it) or direct– Elf.
Piercing the Veil – when a creditor asks the court to disregard the corporate or LLC entity so as to make the personal assets of its
owners available to satisfy the liabilities of the entity; Reverse piercing is when the creditor asks that the corporate assets be made
available to satisfy the personal debts of the owner (even though ownership of entity property is vested in the entity itself ).
Will happen when a corporate entity has been so controlled and dominated that justice requires liability to be imposed:
two disjunctive test:
The Instrumentality: 3 elements -
o (1) Control: complete domination of finances, and policy and practice such that with respect to the transaction
attacked, the corporate entity had no separate mind. Factors:
o Don’t Need to Know
Absence of corporate formalities – regular distributions not made, no meetings held
Inadequate capitalization
Funds withdrawn for personal use/corp’s property used as if it were owned by user – in Howell:
funds used to pay personal expenses, purchase gifts and give interest free loans to family members
Overlapping officers/personnel – in Howell Δ owned 97% and 100% of each LLC (the overlap was
between her personally and the entity). She was GM of both entities
Common office space (address/phones) – both entities operated out of same space in Δ’s house
The amount of business discretion by the allegedly dominated corp
Whether corporations dealt with each other at arms length – retention of revenue generated by other
corp w/o reimbursement.
Whether the corporations are treated as independent profit centers - ditto
Payment or guarantee of dominated corp’s debt
Majority or even complete stock ownership by itself is not enough
o (2) Such control was used to commit a wrong – fraud, violation of statutory duty, dishonest or unjust act.
Howell – Δ started LLCs after Π had obtained DJ against her in a foreign jurisdiction, but before
enforcement in home jurisdiction. She used the LLCs to pay her expenses directly instead of getting
salary or distribution, thereby depriving Π of any means of collecting judgment against her (by
getting a charging order).
o (3) The aforesaid control and breach of duty was the proximate cause of injury – because she transferred her
personal assets (liquidated life insurance policy) to the LLC, Π was prevented from getting satisfaction of
judgment.
Identity Rule – must show that there was such a unity of ownership and interest that the independence of the corp
ceased or had never begun, and observance of fiction of separate existence would sanction a fraud or promote injustice.
Factors: stock or interest ownership, using control of company to manage assets as if it were the dominator’s own.
Note that Instrumentality required a fraudulent conveyance, but Identity might not
Entity Theory and the LLC – an LLC is a “person” for purposes of sale, transfer, or assignment.
Members of an LLC have no interest in specific LLC property; once members contribute assets to an LLC those
members lose any interest they had in the assets and therefore any individual control over them that they formerly had –
ULLCA §501(a); Equilon (holding that contribution of gas stations to LLC was a “transfer” bec. title, possession, and
control were relinquished)
o But if the owner of property transfers title and retains some ownership/risk characteristics, it is not a “sale”
under a brokerage agreement. Premier Van Schaack (Owner transferred property into development LLC and
retained some interest and remained liable on the debt. Court held that it was not a sale and the broker did not
receive a commission.)
o It is difficult to square Premier and Equilon.
Operation of an LLC
Management – ULLCA §404: Unless otherwise provided, In a member managed LLC each member has equal rights in the
management of business and majority vote is required for any matter relating to business except some crucial matter in (c)
(admission of a new member, ratification of acts that would violate duty of loyalty, dissolution, etc.).
o In a manager managed LLC – each manager has an equal right to management, and all matters may be decided
exclusively by the manager, or by a majority of the managers if there is more than one.
o Members may base voting rights on capital contributions rather than the default per capita rule (e.g., 1 person with
60% outvotes 2 with 20% apiece)
Authority and Apparent Authority of Members – depends on whether the LLC is member or manager managed –
ULLCA §301:
o Member Managed: (a) each member is an agent for the LLC and act of a member for apparently carrying on in the
ordinary course binds the company. Unless, had no authority and T knew it. IF not in the ordinary course of
particular company’s business or businesses of that kind, then binds only if authorized.
o Manager Managed – a member is NOT an agent in this case. A manger is an agent as above. If act was not in
ordinary course, it must be authorized under §404, which provides that manager has sole discretion, unless it would
violate fid duty and then ratification by all members required.
o Instrument Transferring or Affecting LLC’s Interest in RP: signed and delivered by any member of a member
managed LLC or any manager of a manager managed LLC is conclusive in favor of a BFP for value who gave w/o
knowledge of lack of authority.
Raghipour – a manger has apparent authority to execute a mortgage on the property even though the OA
expressly forbids it.
o Restrictions on the authority in the OA do not affect apparent authority, but as in the other entities, the wrongful
member or manager will be liable for breach of K/duty to obey, and maybe loyalty or care.
o But, a limitation on authority of anyone to affect the LLC’s interest in RP is effective if reflected in the
Articles of Organization when filed. It is effective even against BFP’s giving value without knowledge of lack of
authority.
o Also, apparent authority terminates for a dissociated member 90 days after statement of dissociation is filed; or 2
years after dissociation if no filing both are effective even against persons w/o knowledge of dissociation.
Fiduciary Duties - §409 distinguishes between member and manager managed:
o Member Managed: The only fiduciary duties owed by members are (1) loyalty – limited to (a) account for benefit
received in the course of business, winding up, including appropriation of an opportunity; (b) acting as or on behalf
of a party having an adverse interest; (c) refrain from competition with business before dissolution AND (2) care –
gross negligence, intentional misconduct or violation of law
Duty of good faith – duties under statute or agreement must be performed in good faith; not fiduciary duty.
VGS – although technically members vote was proper, they knew that disclosure of plans to majority
manager would have foiled them, so they kept their plans from him, in contravention of maj’s right
to notice inferred from structure and purpose of agreement. In so doing they violated their duty of
loyalty to him and also failed to exercise their rights in good faith (equity looks to intent rather than
form)
A member may lend money/transact business with LLC – is treated as nonmember for purposes of said
transaction.
o Manager Managed: NO duties owed by member to company or other members in this case. Manager has all duties.
A member in a manager managed LLC may have duties imposed if he exercises some or all the rights of a
manager pursuant to the agreement; i.e., if agreement allows a member to exercise managerial powers, all
duties are imposed with respect to said exercise of authority.
o Terminates on Dissociation – but member may not use confidential info obtained adversely to LLC. Also must
exercise care in completing on going transaction and account for profits from old.
o Agreement may not waive or eliminate any of the duties – but may identify activities and determine standards for
measuring performance of them if not manifestly unreasonable – ULLCA §103(b).
An agreement that allows members to compete with the LLC will be upheld and a member will not be
liable if he competes, even in a member managed LLC because the duties imposed are those created by
agreement among members – McConnell (provision allowing competition applied to case where member
took advantage of opportunity declined by LLC, might be manifestly unreasonable if provision was
interpreted to allow direct/secret competition, as in Salmon)
Many agreements say that reliance on advice of counsel is conclusive evidence of good faith: this will save manager/member only if
advice was sought for purpose of benefiting LLC – Flippo