Business Associations

Why is the Principal not Liable for an Independent Contractor Tort

"The reason for distinguishing the independent contractor from the employee is that...the Principal does not supervise the details of the independent contractor's work and therefore is not in a good position to prevent negligent performance... -Anderson v. Marathon Petroleum Co. Unless: -Principal retains control over the aspect of the work in which the tort occurs -Principal engages an incompetent contractor -Activity contracted for is a "nuisance per se" (inherently dangerous activity, or an activity that creates a peculiar risk of harm to others unless special precautions are taken" -Non-delegable duty

Rights of Shareholders of a Corporation

- vote on limited range of issues -receive payment of dividends when and as declared by the board -inspect corporate books and records -receive distribution upon termination -purchase proportionate share of new issuance or corporate stock to maintain current ownership percentage * have the right to file derivative suit to redress wrong suffered by the corporation (damages recovered belong to the corporation)

Types of Authority

-Actual -Apparent -Implied -Inherent -Estoppel -Ratification The legal consequences of an agent's acts depends on the type of authority the agent possessed

Common Clauses in Partnership Agreements

-Ownership of partners and partnership assets (presumed to be equal unless stated otherwise) -Accounting procedures (including maintenance of capital account belonging to each partner, etc.) -Distribution of profits and losses (presumed to be equal unless stated otherwise) -Liability of each partner to the others -Compensation for services (presumed to be none unless stated otherwise) -What happens if a partner resigns or dies (default rule: the partnership terminates) -Dispute resolution -Termination and what happens upon termination -How notice is given to each party -How agreement is modified -Costs and attorney fees -Life insurance agreements (Agreement must be executed by all parties)

Limited Liability Limited Partnership (LLLP)

-a limited partnership that elects limited liability partnership status by filing an application for LLLP registration -upon securing such registration, all partners in the limited partnership, including the general partners, are afforded personal liability protection -other than the limited liability component, an LLLP maintains all other characteristics of a limited partnership *ULPA (1976): "A limited partner shall not become liable as a general partner, unless, in addition to the exercise of his rights and powers as limited partner, he takes part in the control of the business."

Limited Liability Partnership (LLP)

-every member has one vote and must be unanimous (usually) -issues: hold-ups, free-riding -solutions: encourage management through executive committee, give one person all power to make decisions *some states require certain professions to be partnerships to hold them professionally liable

Transactions that Require Board Formal Approval

-mergers -amendments to the articles of incorporation

Limited Liability Corporation (LLC)

-mix between partnership and corporation -two types (member and manager) -harder to raise capital -less certainty because less case law than corporations

Fiduciary Duties of an Agent

1.) Care 2.) Loyalty

Joint Venture

1.) contribution by the parties of money, property, tme, or skill in some common undertaking, but the contributions need not be equal or of the same nature; 2.) a proprietary interest and right of mutual control over the engaged property; 3.) an express or implied agreement for the sharing of profits, and usually, but not necessarily, of losses; and 4.) an express or implied contract showing a joint venture

Vicarious Liability Issues

1.) if some harm is foreseeable: liability, even if the particular type of harm was unforeseeable 2.) conduct by the servant which does not create risk different from those attendant on the activities of the communitiy in generanl will not give rise to liabiltiy 3.) the conduct must relate to the employment

Incorporation Process

1.) promotion 2.) name search 3.) subscribers 4.) files articles of incorporation 5.) state charter 6.) first organizational meeting

Order of Payment During Dissolution

1.)creditors 2.)loans (other than capital on profits) 3.) capital contributors 4.)profits (split by percent of contributors)

UPA 1914 and 1997

1914: adopted by all states except Louisiana 1997: adopted by 37 states

Partnership Aggregate or Entity UPA (1997)

1997 considers a partnership a legal entity for nearly all purposes -to sue and be sued -to have judgments collected against its assets, and individual partners' assets -to own partnership property -to convey partnership property -to keep its own books -to file its own federal/state tax returns considers a partnership a legal aggregate for few purposes -joint and several liability of partners -Cf. partnership pays no state or federal income tax -taxes passed through to partners

Articles of Incorporation

2.02 The Articles of Incorporation must set forth: 1.) a corporate name for the corporation that satisfies the requirements of section 4.01 2.) the number of shares the corporation is authorized to issue; 3.) the street address of the corporation's initial registered office and the name of is initial registered agent at that office; and 4.) the name and address of each incorporator * unless a delayed effective date is specified, the corporation existence begins when the articles of incorporation are filed

Partnership Duty of Loyalty

409 A partner's duty of loyalty to the partnership and the other partners is limited to the following: 1.) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner; a.) in the conduct or winging up of the partnership's business b.) from a use by the partner of the partnership's property; or c.) from the appropriation of a partnership opportunity 2.) to refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a person having an interest adverse to the partnership; and 3.) to refrain from competing with the partnership in the conduct of the partnership's business before the dissolution of the partnership

Ultra Vires

A Latin term meaning "beyond the powers"; in corporate law, acts of a corporation that are beyond its express and implied powers to undertake.

Restatement § 144

A Principal "is subject to liability upon contracts made by an agent acting within his authority if made in proper form and with the understanding that the principal is a party"

Principal-Agent Problem

A conflict in priorities between a person or group and the representative authorized to act on their behalf (Agent). An agent may act in a way that is contrary to the best interest of the Principal.

Restatement § 14 O

A creditor becomes a Principal at that point at which it assumes de facto control over the conduct of the debtor *See Cargill

Vicarious Liability

A master is liable for torts of his servant committed while acting in the scope of employment Master is liable for all of the Servant's torts within the scope of his/her employment; and is liable for torts outside scope of employment if: - the master intended the conduct/consequences; or - the master themselves was negligent or reckless; or - the conduct violated a non-delegable duty of the master; or -the servant purported to act or to speak on behalf of the principal and there was reliance upon apparent authority, or he was aided in accomplishing the tort by the existence of the agency relation

The Guillotine Clause

A two-thirds majority of the Senior Partners, at any time, may expel any partner from the partnership upon such terms and conditions as set by said Senior Partners

Restatement § 220(2): Corporate Liability if Employees are Liable

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 relation of master and servant J.) whether the principal is or is not in business

Estoppel

Acts or omissions by the Principal, either intentional or negligent, which create an appearance of authority in the purported Agent The Third Party reasonably and in good faith acts in reliance on such appearance of authority The Third Party changed her position in reliance upon the appearance of authority

Partnership Advantages and Disadvantages

Advantages: -Simplicity -Single layer of taxation -More resources than sole proprietorship -Cost sharing -broader skill and experience base relative to sole proprietorship -Longevity Disadvantages: -Unlimited Liability -Potential for conflict -Expansion, succession, and termination issues

Ratification

An agency that occurs when: 1.) A person misrepresents himself or herself as another's agent when in fact he or she is not; and 2.) The purported principal ratifies (accepts) the unauthorized act

Buy Out (Buy Sell) Agreement

An agreement that allows a partner to end her or his relationship with the other partners and receive a cash payment, or series of payments, on some assets of the firm, in return for her or his interest in the firm

Corporation

An entity having authority under law to act as a single person distinct from the shareholders who own it and having rights to issue stock and exist indefinitely; a group or succession of persons established in accordance with legal rules into a legal or juristic person that has a legal personality distinct from the natural person who make it up, exists indefinitely apart from them, and has the legal powers that its constitution gives it. Private or Public 1.) Legal personality 2.) Limited Liability 3.) Separation of ownership and control 4.) Liquidity 5.) Flexible capital structure File Articles of Incorporation with Secretary of State *Venture capital funds last 10 years, after which, investors must get their money back (limited liability)

Fiduciary Relationship

Any relationship existing between parties to a transaction wherein one of the parties is duty bound to act with the utmost good faith for the benefit of the other party

Two Ways of Thinking About the Business Judgment Rule

As a Standard of Liability: -no liability for negligence -instead, liability based on fraud, illegal conduct, self-dealing As an Abstention Doctrine -Court will not review board of directors decision -preconditions: no fraud, no illegality, no self-dealing

Capital Structure Terminology Regarding Shares

Authorized shares: the articles must specify the number of shares the corporation is authorized to issue Outstanding shares: the number of shares the corporation has sole are not repurchased Authorized but unissued shares are shares that are authorized by the charter but which have not been sold by the firm.

Drafting a Contract Without Creating a Partnership

Avoid terms like -partnership -partners -joint venture -venturerers Include a disclaimer If profits are shared, say something like: "Southex shall receive 55% of the profits as payment for services as an independent contractor Use express language of UPA 1997 202

Relational Contract

Based on a continuing relationship of trust

Manifesting Consent

Can be shown in multiple ways: - explicit statements - assertive actions -dignitary mechanisms (job titles) -past practice -failure to correct mistaken assumptions after notice of them

Actions Which May Violate Partnership Fiduciary Duty of Loyalty

Competing with the partnership Taking a business opportunity away from the partnership Using partnership property for private profit Conflicts of interest

Consensus v. Authority

Consensus -collective decision making -requires constituents with a.) similar interests b.) comparable access to information c.) minimal collective action issues (eg. partnerships) Authority -central decision making body -arises where constituents have a.) differing interests b.) unequal information c.) collective action problems (eg. public corporations)

Rule of Law re Devidends

Courts will generally leave dividends to the discretion of the directors, but will intervene if refusal to pay amounts to "such an abuse of discretion as would constitute fraud, or breach of good faith"

Director and Officer Duty of Care

Directors and Officers are fiduciaries of the corporation Expected to act in good faith and the best interests of the corporation. Failure to exercise due care may subject individual directors or officers personally liable

Principal liability with employees

Employee (servant) --> Principal is liable if the Agent was within the scope of employment Non-employee agent (Independent contractor [agent-type])( non-servant agent) --> Principal is not liable except in special cases Non-Agent service provider (Independent contractor [nonagent])(nonagent independent contractor) --> Principal is not liable in agency law Exceptions: -Principal retains control over the aspect of the work in which the tort occurs -Principal engages an incompetent contractor -nondelegable duty -activity contract for is a "nuisance per se"

Types of Partners

General partner: manages Limited Partner: funds money

Role of Corporate Officers and Executives

Officers are hired by the Board of Directors Act as agents for the corporation and thus have fiduciary duties Most states same person can be both officer and director

Dissociation vs. Dissolution under 1997

Partner Dissociates Dissociation 1.) Dissociation per Article 7 (partner continuing with business can still operate) 2.) Dissociated partner is bought out 3.)Remaining partners continue Dissolution 1.)Dissolution per Article 8 (partners have no authority to continue operating under current company name) 2.)Partnership is wound up 3.)Partnership is liquidated

Differences Between Partnerships and Corporations

Partnerships: -limited life -unlimited liability -transferability of partnership interests -flexibility of structures Corporations: -unlimited life -limited liability -non-transferability of corporate shares -standardization of corporate forms Presentation 10

Murphy v. Holiday Inns, Inc

Rule of Law: If a franchise contract vests the franchisor with power to control the business activities of a franchisee, a Principal-Agent relationship arises, regardless of whether the parties disclaim that relationship Facts Murphy (plaintiff) sued Holiday Inns, Inc. (Holiday) (defendant) for injuries sustained from falling on a wet floor in a hotel which Murphy contended Holiday owned and operated. Holiday, which did not own the hotel, had a business relationship with the operator of the hotel, Betsy-Lin, pursuant to a franchise contract. The franchise contract enabled Betsy-Lin to operate the hotel using Holiday's system of operation, including the use of Holiday's trade name, style, furnishings, advertising, etc. In pertinent part, the franchise contract required Betsy-Lin to pay license fees, construct the hotel according to Holiday's specifications, promote the Holiday trade name, refrain from competitive hotel business, make quarterly reports to Holiday, and submit to Holiday's periodic inspections. The franchise agreement also contained a clause disclaiming an agency relationship. Holiday, contending that it had did not have a principal-agent relationship with Betsy-Lin, denied liability. Holiday also filed a motion for summary judgment. The trial court agreed with Holiday, and granted the motion for summary judgment. Issue Is a franchisor liable for the negligence of a franchisee's employee when their contract does not give the franchisor control over the franchisee's day-to-day operations? Holding and Reasoning (Knowles, J.) No. A principal is liable for the torts of its agent, but no principal-agent relationship was created by the franchise contract between Holiday and Betsy-Lin. A franchise arrangement typically provides for the franchisor's distribution of goods or services to an independent franchisee, who assumes the risk of profit or loss. Hence, a franchise contract usually provides for business conducted by independent contractors. But, a principal-agent relationship will arise if a franchise contract vests the franchisor with authority to dictate the franchisee's business operations, even if the contract states that the parties are independent contractors. That is not the case here. The purpose of this franchise contract was to establish uniformity of business identity and service for the benefit of the parties. To that end, the franchise contract required Betsy-Lin to protect Holiday's trade name, conform to certain specifications, and provide reports to Holiday. But, the contract gave Holiday no control over Betsy-Lin's day-to-day business operations. Betsy-Lin, which owned the premises, was given full authority over its expenditures, customer rates, profits, and employees. Consequently, there was no principal-agent relationship, and Holiday is not liable for the negligence of Betsy-Lin's employee. The judgment of the trial court is affirmed.

Watteau v. Fenwick

Rule: A Principal is liable for the ats of an Agent who proceeds within the scope of authority typically given to an agent with similar duties, regardless of limitations the Principal imposes on the Agent Facts Humble transferred his tavern to some brewers (defendants), but stayed on to manage the tavern after the transfer. Humble's name remained painted on the tavern and the tavern license continued in his name. The transfer agreement gave most of the purchasing authority to the brewers. Humble was authorized to purchase ales and mineral water exclusively for the tavern. However, for several years after the transfer, Humble bought cigars, Bovril, a salty meat extract, and other supplies on credit to be sold at the tavern. The supplier (plaintiff) sued the brewers to collect for the price of the supplies Humble purchased. At trial, the brewers argued that since they limited Humble's purchasing power and did not hold him out as their agent, Humble lacked authority to purchase the forbidden supplies and they should not be liable to pay for them. The trial court held that the brewers were liable to pay for the cigars and Bovril because Humble was acting as tavern manager when he purchased those items, which were typically sold in taverns. Issue Is a principal bound by an agent's unauthorized actions in the course of duty when the agent does not disclose the identity of the principal to a third party with whom the agent contracts. Holding and Reasoning (Wills, J.) Yes. An undisclosed principal who employs an agent to run a business is liable to third parties who contract with the agent for transactions typical in the line of business, even if the agent's actions violate an agreement between the agent and principal. While the brewers are the owners of the tavern, they allowed it to remain in Humble's name and employed Humble to manage it. Although the brewers did not hold out Humble as their agent and remained undisclosed to the suppliers, under these circumstances Humble appeared to have authority to engage in transactions on behalf of the business. Humble's purchase of items normally sold in taverns, cigars and Bovril, were within the reasonable scope of an agent acting on behalf of a tavern owner. The supplier had no knowledge of Humble's limited purchasing authority, but rather had every reason to believe that Humble had authority to buy supplies for the tavern. Accordingly, the judgment of the lower court is affirmed, and the brewers are liable to pay for the cigars and Bovril purchased by Humble.

Gorton v. Doty

Rule: A Principal-Agent relationship exists when two persons agree that one person will at on behalf of, and subject to, the control of the other person Facts Richard Gorton, a high school football player, was injured in an accident while riding in a car owned by Doty (defendant) but driven by Garst, the football team's coach. The accident occurred when team members were being driven back from an away game by adult volunteers in privately owned cars. The day before the game, Doty asked Garst if he had obtained enough cars to transport the entire team. When Garst said that he needed an additional auto, Doty volunteered her car, on the condition that Garst agree to drive it. A key issue at trial was whether a principal-agent relationship existed between Doty and Garst at the time of the accident, which would result in Doty's full liability for the actions of Garst. In an attempt to show that no agency relationship existed, Doty testified that she had merely loaned her car to Garst, that Garst did not work for Doty, nor did Garst promise Doty any compensation for use of her car. But Doty also testified that she had asked Garst if he needed another car and that Garst could use Doty's car if he drove it. The jury awarded monetary damages to R.S. Gorton (plaintiff), father of Richard Gorton, finding that Garst was acting as Doty's agent, and consequently Doty was liable for the damages. Issue Is a principal-agent relationship established between the owner of a car and a driver when the parties agree that the driver will operate the car pursuant to a condition imposed by the owner? Holding and Reasoning (Holden, J. ) Yes. When the owner of a car authorizes an individual to drive that car for a specific purpose, the driver acts as an agent for the owner. No compensation or business association between the parties is necessary to create a principal-agent relationship. In Willi v. Schaefer Hitchcock Co., 25 P. 2d 167 (1933), this court held that ownership of a car is enough to create a presumption that an individual who drives that car acts as an agent for the owner. Doty's testimony confirms that she volunteered her car for the purpose of transporting football players to and from a game. Doty explicitly told Garst that he could use her car on the condition that Garst drive it, and Garst expressed his agreement by driving players to the game in Doty's car. The jury correctly found that a principal-agent relationship existed between Doty and Garst at the time of the accident.

A. Gay Jenson Farms v. Cargill

Rule: A Principal/Agent relationship exists between a creditor and debtor when the creditor intervenes in the business affairs of the debtor. Facts Warren Grain & Seed Co. (Warren), an agricultural company that operated a grain elevator, contracted with several local farmers (plaintiffs) to purchase grain for resale. In 1964, Warren sought financing for working capital from Cargill (defendant). The parties executed a security agreement by which Cargill would loan money to Warren on "open account" financing with a limit of $175,000, and Warren would receive funds and pay expenses through drafts drawn on Cargill through Minneapolis banks. The drafts were imprinted with Warren's and Cargill's names. In exchange for the financing, Cargill became Warren's grain agent, and Cargill was given right of first refusal to buy grain sold by Warren. In 1967, the parties executed a new contract which increased Warren's credit line and gave Cargill authority over some of Warren's internal operations, including requiring Warren to give Cargill annual financial statements, granting Cargill access to Warren's books, and requiring Cargill's approval before engaging in certain financial transactions. Cargill exercised its contractual authority and commenced a pattern of reviewing Warren's finances and operations and making business recommendations to Warren. By the mid-1970s, Warren was shipping 90% of its grain to Cargill. Cargill later discovered that Warren was engaging in some questionable uses of funds, but instead of calling the loan, Cargill executed new security agreements with Warren, increasing its limit to $1,250,000. Warren's debt later exceeded its credit line and Cargill became increasingly involved with Warren's finances, including keeping daily debit positions and opening a bank account in Warren's name, funded by drafts drawn on Cargill through a local bank. Warren subsequently went bankrupt. The farmers who sold grain to Warren sued Cargill for recovery of $2 million, alleging that Cargill had acted as principal for the grain elevator and was thus liable for its agent Warren's contractual obligations. At trial, the jury found in favor of the farmers. Issue Is a creditor liable as a principal for the contracts of a debtor when the creditor takes control of the debtor's business functions? Holding and Reasoning (Peterson, J.) Yes. When a creditor exerts control over the operations of a debtor, a principal-agent relationship is created between the parties, and the creditor is liable for the contractual obligations of the debtor. Cargill consented that Warren would be its agent when Cargill made its operational recommendations to Warren. Warren consented to be Cargill's agent when it obtained grain for Cargill under the operations financed by Cargill. Moreover, Cargill's influencing Warren's internal affairs, particularly its finances, demonstrates control over the grain elevator. Cargill contends that its business dealings with Warren were nothing more than that of a typical creditor-debtor relationship. But, the record shows that the main purpose of Cargill's financing of Warren was to obtain a source of grain for its business, not to make money from its loans to Warren. Cargill kept purchasing grain from Warren while increasing its financing of Warren, even when it became apparent that Warren was becoming a great financial risk. Cargill also asserts that its relationship with Warren was that of a buyer-supplier, not a principal-agent. However, in order for two businesses to have a strict buyer-supplier relationship, they must be independent businesses. In this instance, Warren's operations were financed by Cargill, Cargill established control over Warren's operations, and Warren sold nearly all of its grain to Cargill. Hence, Warren's business was not independent from Cargill's. Therefore there was ample evidence for the jury to find a principal-agent relationship in this case, and the decision of the district court is affirmed.

Dodge v. Ford Motor Co.

Rule: A company cannot take actions that harm its shareholders and are motivated solely by humanitarian concerns, not by business concerns Facts The Ford Motor Company (defendant) was incorporated in 1903, and began selling motor vehicles. Over the course of its first decade, despite the fact that Ford continually lowered the price of its cars, Ford became increasingly profitable. On top of annual dividends of $120,000, Ford paid $10 million or more in special dividends annually in 1913, 1914, and 1915. Then, in 1916, Ford's president and majority shareholder, Henry Ford, announced that there would be no more special dividends, and that all future profits would be invested in lowering the price of the product and growing the company. The board quickly ratified his decision. Henry Ford had often made statements about how he wanted to make sure people were employed, and generally run the company for the benefits of the overall community. The Dodge brothers (plaintiffs), who owned their own motor company, were minority shareholders in Ford, and sued to reinstate the special dividends and stop the building of Ford's proposed smelting plant. The lower court ordered the payment of a special dividend and enjoined Ford from building the smelting plant. Ford appealed. Issue Can a company choose to stop paying dividends and instead invest its profits in the communities in which it is active? Holding and Reasoning (Ostrander, J.) No. A business exists to conduct business on behalf of its shareholders. It is not a charity to be run for its employees, or neighbors. In this case, Ford was even more profitable in 1916 than it was in 1915, when it paid over $10 million in dividends. However, in 1916, Ford paid only its $120,000 dividend. While a corporation may choose to invest in future ventures, and may choose to maintain cash on hand to plan for future shortfalls, Ford had done that in prior years and still managed to pay special dividends. These actions, combined with Henry Ford's statements about putting profits into the business to provide for the workers, suggest that the decree against new special dividends was not motivated by any business concern. By taking an action with no business concerns motivating it, Henry Ford and the Ford directors who supported his decision were acting arbitrarily, to the direct detriment of the shareholders in whose interest they were supposed to be acting. The portion of the lower court opinion enjoining Ford from investing in the smelting plant is reversed, but the portion ordering Ford to pay out a multi-million dollar special dividend is sustained.

Owen v. Cohen

Rule: A court may order the dissolution of a partnership when the parties' quarreling makes it impossible for them to cooperate, or when one partner's acts materially hinder the partnership's business Facts Owen (plaintiff) and Cohen (defendant) entered into an oral agreement to become partners in a bowling alley. Owen loaned the partnership $6,986.63 to buy the necessary equipment, which the parties agreed would be paid back to Owen from the profits of the business. While the business proved immediately profitable, the parties started quarreling over issues such as management and policies of the enterprise, and their rights and duties under their partnership agreement. Cohen insisted on being the dominant partner, and was openly hostile toward Owen in front of customers and employees. Cohen refused to do any manual work, and appropriated partnership funds for personal use. Cohen further demanded that a gambling room be added to the bowling alley, which Owen vehemently opposed. The partners' constant arguments resulted in a steady decline of the bowling alley's monthly receipts. Realizing that the parties could not resolve their differences, Owen offered Cohen the choice of either buying out Owen's interest in the bowling alley, or selling Cohen's interest to Owen. Cohen refused to reasonably entertain either option, insisting that the business be continued until he was ready to sell at a price he would set himself. Owen subsequently filed an action in equity to dissolve the partnership. The trial court found that Cohen's behavior in relation to the business made it impossible for the partnership to continue, and decreed dissolution of the partnership. The trial court also appointed a receiver to sell the partnerships' assets, ordering that Owen receive half the proceeds, plus $6,986.63 as payment for the loan he made to the partnership. Issue Should a partnership be dissolved when one partner engages in a series of hostile actions that harm the partnership? Holding and Reasoning (Curtis, J.) Yes. A partner has a duty to act in the best interest of the partnership. When a partner continually antagonizes the other partner to the extent that business is adversely affected, the partnership can rightly be dissolved. Cohen contends that he and Owen's arguments were trivial, and that such minor disagreements do not warrant dissolution of a partnership. While it is true that small quarrels between partners would not justify breaking up a partnership, if such quarrels in the aggregate work to the detriment of the partnership's business, a court will properly grant a complaint for dissolution. Cohen's persistent cajoling and belittling of Owen, and his insistence on having his own way in policy matters, severely harmed the partnership's business. This is illustrated by the monthly reduction in gross receipts that grew worse as the partners' business relations deteriorated. The evidence shows that under these circumstances, it would be impractical for the partnership to continue. Cohen also argues that Owen should not be paid $6,986.63 out of the proceeds, as the parties agreed that Owen's loan would be repaid from the business's profits. This court disagrees. Cohen's behavior made it impossible for the business continue, let alone remain profitable. Cohen's acts violated his fiduciary duty to act in the best interest of the partnership. Accordingly, the trial court was justified in dissolving the partnership, decreeing the sale of assets, and ordering the distribution of the proceeds as it did. The decision of the trial court is affirmed.

Town & Country House & Home Service, Inc. v. Newbery

Rule: A customer base cultivated through a business's efforts may not be appropriated by former employees, regardless of whether they conspired to do so while employed by the business Facts Town & Country House & Home Service, Inc. (T&C) (plaintiff) was a house cleaning business run by Mr. Rossmore. Mrs. Rossmore, wife of T&C's president, built the company's customer base by randomly calling residents in a certain section of town that she determined might contain likely prospects. Selling T&C's service was very difficult. Mrs. Rossmore typically made hundreds of calls to gain a small number of prospects. After interested prospects were contacted, Mrs. Rossmore would make appointments to visit them personally to close the sales and determine the prices they would be charged. Newbery and some associates (Newbery et al.) (defendants) worked for T&C for nearly three years. After terminating their employment with T&C, Newbery et al. formed their own house cleaning company which directly competed with their former employer. Newbery et al. built their customer base by soliciting T&C's customers. After discovering that Newbery et al. solicited its customers, T&C sued Newbery et al., alleging that Newbery et al. had engaged in unfair competition. In its complaint, T&C contended that its business was "unique, personal and confidential" and that Newbery et al. breached their confidential relationship with T&C by appropriating its trade secrets, i.e., T&C's customer information, for competitive purposes. The trial court dismissed T&C's complaint, holding that there was nothing secret or confidential about T&C's business, and that T&C did not represent to Newbery et al. that its customer information was confidential. The appellate division reversed the trial court's decision, finding that Newbery et al., while working for T&C, conspired to quit T&C, form their own business and appropriate T&C's customers for their own gain. The Appellate Division held that Newbery & Assoc.'s actions constituted a violation of the fiduciary obligations they owed to T&C as employees, and thus T&C was entitled to relief. Issue May persons who were employed by a company solicit that company's customers for a competing business after they have terminated their employment? Holding and Reasoning (Van Voorhis, J.) No. A customer base that is procured though the business's hard work and advertising is part of a business's good will, and may not be solicited by former employees. Such appropriation of a former employer's customers for a competing enterprise, as Newbery et al. did, constitutes unfair competition. Mrs. Rossmore expended a great deal of time and effort in procuring T&C's customers. Newbery et al. did not assist Mrs. Rossmore in building T&C's client base, but learned the identity of T&C's customers while working for T&C in other capacities. Hence, Newbery et al. knew that T&C's customers desired housekeeping services and would be receptive to the solicitations of a competing company. Although Newbery et al. did not solicit T&C's customers until after they had terminated their employment with T&C, they built their customer base by soliciting T&C's customers exclusively. This court holds that Newbery et al. must cease its solicitation of T&C's customers and pay damages to T&C for improperly luring away its customers. The judgment of the appellate division is affirmed.

Majestic Realty Associates, Inc. v. Toti Contracting Co.

Rule: A landowner is liable for the torts of an independent contractor if the work to be done is inherently dangerous Facts Majestic Realty Associates, Inc. (Majestic) (plaintiff) and Bohen's Inc. (Bohen's) (plaintiff) sued Toti Contracting Co. (Toti) (defendant) and the Parking Authority of the City of Paterson, NJ (Authority) (defendant) for damages caused to a building owned by Majestic. The Authority contracted with Toti to demolish a number of structures on the street where Majestic's building was located. A Toti employee acted negligently in the demolition of the structure adjacent to Majestic's building, which resulted in severe damage to Majestic's property. At trial, expert witnesses attested to the fact that building demolition is very hazardous work, and that Toti's failure to follow safe and proper procedures caused the accident that damaged Majestic's building. The trial court acknowledged that the demolition work was hazardous by nature, but did not constitute a "nuisance per se." Hence, the trial court ruled that since the Authority did not have control over the demolition performed by Toti, an independent contractor, the Authority could not be held liable for Toti's negligence. The Appellate Division reversed and found that the Authority was liable for the damage caused by Toti. Issue Is a landowner liable for the negligence of an independent contractor hired to do work that creates a severe risk of harm to others, even if the landowner has no control over the independent contractor's work? Holding and Reasoning (Francis, J) Yes. When a landowner contracts with an independent contractor to perform work that is inherently dangerous unless the contractor takes specific precautions, and the contractor fails to take those precautions, the landowner is liable for harm the contractor causes. This is an exception to the general rule that a contractee is not liable for the torts of an independent contractor. Because demolition work involves a high level of risk to the public, the Authority was responsible for ensuring that Toti took the precautions necessary to ensure a safe operation. The Authority did not do so. Consequently, the damage to Majestic's building caused by Toti's negligence is the Authority's responsibility. The decision of the Appellate Division is affirmed.

Humble Oil & Refining Co. v. Martin

Rule: A master-servant relationship exists when two parties agree that one party will work on behalf of another party, and be subject to that party's control of how the job will be performed Facts An unoccupied car parked at a gas station owned by Humble Oil Company (Humble) (defendant) rolled down a hill and struck Martin (plaintiff) and his two daughters. The car was left unattended after it was parked at the gas station by a customer. At trial, the jury found that Humble was liable for the negligence of the gas station's employee, who failed to take rudimentary actions that would have prevented the accident. The court of civil appeals affirmed, holding that Humble was liable because a master-servant relationship existed between Humble and the gas station manager, Schneider, pursuant to a "Commission Agency Agreement" (Agreement). The Agreement, which was intended to enable Schneider to sell Humble products, contained a number of provisions that gave Humble control over the gas station's operations. Humble appealed the court of civil appeals' decision to uphold the trial court's finding that it was liable for the gas station employee's negligence. Issue Is an oil company liable for the negligence of an employee of a gas station manager with whom the oil company contracts to sell their products, when the oil company has power over the gas station's daily business? Holding and Reasoning (Garwood, J.) Yes. A master is responsible for the torts of a servant. A master-servant relationship arises from a contract, such as the subject Agreement, providing that one party has authority over the day-to-day operations of another party's business. Although the main purpose of the Agreement was to enable Schneider to market Humble's retail products at the gas station, it strongly indicates that a master-servant relationship existed between Humble and Schneider. Humble contends it did business with Schneider as an independent contractor, rather than as master and servant. Humble points to the Agreement's provisions giving Schneider complete authority over his employees to show that Schneider was an independent contractor. This court disagrees. The Agreement as a whole indicates a master-servant relationship. For example, the Agreement is terminable at Humble's discretion, and provides that Humble set the gas station's hours of operation and furnish its advertising and equipment. Perhaps most important, the Agreement requires Schneider to perform whatever duties Humble requires of him in connection with the operation of the gas station. Hence, in spite of the provision giving Schneider autonomy over his employees, the Agreement in total illustrates that Humble and Schneider's business relationship was that of a master and servant. As Schneider was Humble's servant, and, by extension, so was the employee on duty at the time of the incident, Humble is liable for injuries caused by that employee's negligence. The judgment of the court of civil appeals is affirmed.

Collins v. Lewis

Rule: A partner does not have a legal right to force dissolution of a partnership if the other partner fulfills his or her duties under the partnership agreement Facts Collins (plaintiff) and Lewis (defendant) each owned 50% interest in a partnership formed to own and operate a cafeteria. Their partnership agreement provided that Collins would provide funds to build and open the cafeteria, while Lewis would oversee the construction of the cafeteria and manage it once it opened for business. Lewis guaranteed repayment to Collins at a minimum rate of $30,000 plus interest the first year, and $60,000 plus interest annually thereafter. Collins initially advanced $300,000, based on Lewis's initial estimate of the cost to build and open the cafeteria. After a substantial delay in completing the cafeteria and increases in expenses, the initial cost had increased to $600,000. Collins expressed his displeasure about the cost increase, but he advanced the entire amount. Soon after the cafeteria opened, Collins discovered that the expenses far exceeded the receipts. Collins demanded that Lewis immediately make the cafeteria profitable, or he would cut off additional funding. Lewis accused Collins of unauthorized interference in the management of the business, while Collins charged that Lewis had mismanaged the building and opening of the cafeteria. Collins also made serious threats during the first year of the cafeteria's operation, forcing Lewis to lose his interest in the business. Lewis tried, but failed, to find financing to buy out Collins. Collins subsequently filed suit, seeking dissolution of the partnership. The trial court denied dissolution, based on the jury's findings that: (1) there was not a reasonable expectation of profit if Lewis continued managing the cafeteria; (2) but for Collins's conduct which decreased the earnings during the first year, there would be a reasonable expectation of profit; and (3) Lewis was competent to manage the cafeteria. Issue Can a partner legally force dissolution of a partnership when but for that partner's actions, the other partner could have performed his or her required duties? Holding and Reasoning (Hamblen, J.) No. In an action in equity, a court will force the dissolution of a partnership when, for example, a partner has breached his or her fiduciary duty to the partnership or the other partners. When a partner has performed his or her obligations and has not otherwise harmed the partnership, another partner cannot force dissolution through the courts. Collins asks this court to dissolve his partnership with Lewis, complaining that he should not be forced to continue in a partnership which the jury found has no reasonable expectation of profit. Collins's complaint ignores the other jury findings that Lewis was competent to manage the cafeteria, and that but for Collins's actions there would have been a reasonable expectation of profit from that enterprise. Lewis's duties under the partnership agreement were to oversee the construction, manage the cafeteria, guaranteeing repayment to Collins at the stipulated minimum rate. The jury found that Lewis could have performed his duties had not Collins interfered the way he did. Under these circumstances, the court finds that Collins has no right to have this court force dissolution of the partnership. Collins has the power to dissolve the partnership without the intervention of the courts, but he may thereby be liable for breach of the partnership agreement. The decision of the trial court is affirmed.

Meehan v. Shaughnessy

Rule: A partner has a fiduciary duty to provide, on demand of another partner, true and complete information of any and all things affecting the partnership Facts Meehan and Boyle (plaintiffs), disgruntled partners in the law firm of Parker, Coulter, Daley & White (Parker Coulter) (defendants), decided to quit that firm and form their own legal partnership. Meehan and Boyle were subject to a Parker Coulter partnership agreement which provided that partners leaving the firm could, for a fee, take clients who they themselves had originated, subject to the right of the clients to remain at Parker Coulter. While still employed at Parker Coulter, Meehan and Boyle secretly began preparing to take some clients with them. Meehan met with a big client to discuss transferring that client's business to the new firm. Boyle prepared form letters on Parker Coulter letterhead addressed to a number of clients, inviting them to become clients of the new firm. During Meehan and Boyle's last few months at Parker Coulter, various partners asked them if they were planning to leave. Meehan and Boyle denied their intentions, preferring to wait until the end of the year to give Parker Coulter one month's notice of their resignation. Almost immediately after tendering his resignation, Boyle sent his solicitation letters to selected Parker Coulter clients, and contacted attorneys who could refer additional clients to the new firm. The Parker Coulter partners asked Boyle for a list of clients he and Meehan planned to take with them, so they could inform the clients that they could stay with Parker Coulter if they wished. Boyle waited several weeks to provide that list. Meanwhile, Meehan and Boyle obtained authorizations from many Parker Coulter clients, agreeing to become clients of the new firm. After leaving Parker Coulter, Meehan and Boyle sued their former firm for compensation they claimed was unfairly withheld from them. Parker Coulter filed a counterclaim alleging that Meehan and Boyle had breached their fiduciary duty by unfairly acquiring consent from clients to remove cases from Parker Coulter. The trial court found in favor of Meehan and Boyle and denied Parker Coulter's counterclaim. Issue Is it a breach of fiduciary duty for partners, while associated with a partnership, to secretly solicit the partnership's clients for their own gain, while denying their intentions to other partners? Holding and Reasoning (Hennessey, C.J.) Yes. Partners owe each other a fiduciary duty to act with loyalty and in good faith to each other. Consequently, partners may not use their status as partners to purely benefit themselves, particularly if their actions harm the other partners. Meehan and Boyle took unfair advantage of the other Parker Coulter partners by acting in secret to solicit clients, falsely denying their plans to the other partners, and delaying the release of the list of clients they planned to take with them until after they had won their business. Also, the content of Boyle's client letters was unduly harmful to Parker Coulter. Pertinent ethical standards require that when attorneys planning to leave a firm solicit clients, they must state that the clients have a choice of staying with the firm or transferring their business to the departing attorneys' new firm. Boyle did not put that information in his solicitation letters. This court finds that Meehan and Boyle's actions constituted a breach of their fiduciary duty to the other Parker Coulter partners. The decision of the trial court is reversed and remanded for further findings and hearings consistent with this opinion.

Fenwick v. Unemployment Compensation Commission

Rule: A partnership exists when two or more persons act as co-owners of a business for profit Facts Fenwick (plaintiff) employed Chesire as a cashier and receptionist at his beauty parlor. Chesire initially worked for $15 per week, but after several months she demanded a raise. Not wanting to lose Chesire, Fenwick agreed to increase her compensation if his beauty parlor made more money. Fenwick and Chesire executed an agreement which described their association going forward as a "partnership," and each of them as a "partner." The agreement provided that Chesire would continue her current duties and be paid her existing salary plus 20 percent of the profits "if the business warrants it." The agreement also stipulated that Chesire would make no capital investment in the beauty parlor, and that Fenwick would retain complete control of it and be solely responsible for its debts. Chesire continued to work as cashier and receptionist for three years after the agreement was executed. She subsequently terminated the agreement and quit her job to stay home with her child. A case was brought before the New Jersey Unemployment Compensation Commission (Commission) (defendant) to determine whether Chesire was Fenwick's partner or employee. If Chesire was Fenwick's employee, Fenwick would be responsible for paying into the state unemployment compensation fund. The Commission found that Chesire was Fenwick's employee, holding that the agreement was simply an instrument used by the parties to set the level of Chesire's salary. The New Jersey Supreme Court reversed, relying heavily on the terms of the agreement and ruling that Fenwick and Chesire were partners. Issue Is a partnership established by an agreement stating that two parties are partners, if one party retains sole ownership of the business and the parties conduct themselves as employer and employee? Holding and Reasoning (Donges, J.) No. In order for a partnership to be formed, the parties involved must have co-ownership of a business. Courts consider a number of factors in determining whether or not a partnership exists. The evidence in this case shows that Fenwick and Chesire were not partners in the beauty shop. The first factor is the intention of the parties and language of the agreement. Although the agreement listed Fenwick and Chesire as "partners," the intent of the parties in entering into the agreement was to give Chesire the possibility of a salary increase at her current job while at the same time protecting Fenwick from having to pay it if his business did not improve. Hence, the agreement was intended simply to memorialize the agreed-upon financial relationship between an employer and employee, and Chesire was excluded from most of the rights of a partner. Another factor is the right to share in the profits and losses of an enterprise. The agreement gave Chesire the right to share in some of the profits, but the losses were to be borne solely by Fenwick. A further factor is ownership, management, and control of the partnership property and business. Fenwick provided all the capital for the beauty parlor, and the agreement gave Fenwick complete ownership rights and control over managing the business. Another factor is the conduct of the parties toward third persons. While Fenwick and Chesire told the Commission they were partners and filed partnership income tax returns, they did not hold themselves out as partners to anyone else. Fenwick and Chesire carried on their business relationship as employer and employee. The final factor concerns rights upon termination of the partnership. When Chesire quit her job, she simply left her position, and the business continued. There was no "winding up the partnership" or any indication that a partnership had been dissolved. Considering the evidence in light of these factors, it is clear that Fenwick retained sole ownership in the beauty parlor after the agreement was executed. Hence, no partnership existed between Fenwick and Chesire. The judgment of the supreme court is reversed.

Miller v. McDonald's Corp

Rule: A person who holds out another as an Agent and causes a Third Person to reasonably rely on the care or skill of the Apparent Agent is liable for injuries to the Third Person for harm caused by that Apparent Agent Facts Miller (plaintiff) sued McDonald's Corporation (McDonald's) (defendant) for injuries sustained when she bit into a sapphire stone in a Big Mac hamburger she bought at a McDonald's restaurant. McDonald's had a franchise agreement (Agreement) with 3K Restaurants (3K) that conducted the business of the restaurant where the incident occurred. The Agreement had very strict and extensive requirements concerning how 3K was to operate the restaurant in conformity with McDonald's standards and practices. In essence, the Agreement required 3K to ensure that the restaurant appeared virtually identical to other McDonald's restaurants and provided the same type of food and standard of service. In spite of the rigid requirements, the Agreement stated that 3K was an independent contractor, solely responsible for injuries occurring at the restaurant. At the time of the incident, the general appearance of the restaurant and the food it served were indistinguishable from any other McDonald's restaurant. The restaurant, which was shaped like a common McDonald's restaurant, displayed McDonald's signs and served McDonald's food, including Big Macs. The restaurant's employees wore McDonald's uniforms. Outside of a sign near the front counter listing 3K as the owner of the restaurant, there was no indication that any entity other than McDonald's was involved in running it. At trial, Miller testified that she visited the restaurant because it looked just like any other McDonald's restaurant and she wanted the same type of food and service she had received in other McDonald's establishments. The trial court nonetheless granted McDonald's motion for summary judgment, holding that McDonald's was not liable for Miller's injuries because it did not own or operate the restaurant. Issue Is a franchisor liable for the negligence of a franchisee that is subject to an agreement requiring it to operate in a manner that closely associates it with the franchisor? Holding and Reasoning (Warren, P.J.) Yes. When a franchise agreement requires a franchisee to operate an establishment so as to closely identify it with the franchisor, the franchisor holds out the franchisee as an agent. Hence, the franchisee of such a uniform franchise is an apparent agent of the franchisor, and the franchisor is liable for the torts of the franchisee. In this case, there are questions of fact as to whether McDonald's held out 3K as its agent and whether Miller relied on that holding out. The restaurant very closely resembled other McDonald's restaurants, the food served was the same, and the employees dressed in McDonald's uniforms. The one distinguishing article was the sign listing 3K as the owner of the restaurant. Miller states that she went to the restaurant because its appearance and common menu and service led her to believe that it was owned and operated by McDonald's. Accordingly, this court reverses the trial court's decision to grant McDonald's motion for summary judgment.

Young v. Jones

Rule: A person who represents, or permits another to represent, that he or she is a partner in an existing partnership ro with other persons who are not partners, is liable to third parties who rely on that representation Facts Young and other investors (investors) (plaintiffs) deposited more than $500,000 in a bank, and the entire amount disappeared. The investors claimed that when they deposited their money in the bank, they relied on an audit letter from Price Waterhouse, Chartered Accountants (PW-Bahamas) confirming a financial statement that turned out to be falsified. The audit letter was printed on letterhead with a trademark signed "Price Waterhouse." The investors contend that PW-Bahamas and Price Waterhouse's partnership in the U.S. (PW-US) operated as partners by estoppel, and therefore PW-US can be held liable for the alleged negligence of PW-Bahamas regarding the audit letter. The investors argue that Price Waterhouse held itself out as a partnership with offices around the world, and PW-US made no distinction between itself and other PW entities around the world. As proof that PW-Bahamas and PW-US held themselves out as partners, the investors offer a Price Waterhouse brochure stating that Price Waterhouse is a large and respected global entity, with 400 offices throughout the world. The investors aver that the brochure was intended to present an image of a large international accounting firm, and that PW-US promoted that image to give the public confidence in Price Waterhouse's stability and expertise. Issue Does a partnership by estoppel exist when a third party does not rely on any statement or act by two companies it alleges were holding themselves out as partners, and when no credit was extended based on the representation of a partnership? Holding and Reasoning (Hawkins, C.J.) No. A partnership by estoppel is created when a third party relies on the representation of a person that he or she is part of an actual or apparent partnership. The investors present no evidence that they relied on any statement or act by PW-US that it was a partner of PW-Bahamas. Nor do the investors claim that they relied on the brochure when they decided to put their money in the bank. According to the state statute cited by investors in their complaint, a person who holds him or herself out as a partner is liable to a third party who has given credit to the partnership based on the person's representation. There is no allegation that the investors extended credit to PW-Bahamas or PW-US. Additionally, there is no contention that PW-US had anything to do with the audit letter upon which the investors claim they relied when depositing their money in the bank. This court finds no evidence of the existence of a partnership by estoppel. The investors claim against PW-US for US-Bahamas' alleged negligence is denied.

Benihana of Tokyo, Inc. v. Benihana, Inc

Rule: A transaction involving an interested director is valid if the material facts as t the director's interest are disclosed or known to the board of directors and the board in good faith authorizes the transaction by an affirmative vote of the disinterested directors. Facts Benihana of Tokyo, Inc. (BOT) (plaintiff) and its subsidiary, Benihana, operated restaurants across the world. Many of Benihana's restaurants needed renovation, but the company did not have the necessary funds. Benihana hired Fred Joseph to analyze the company's financial needs and determine a plan of attack. Joseph recommended that Benihana issue convertible preferred stock, which give the company the funds necessary for renovation. Subsequently, John Abdo, a Benihana board member, informed Joseph that BFC Financial Corporation (BFC) was interested in buying the convertible stock. Abdo was also a director of BFC, and he negotiated with Joseph for the sale of the stock on behalf of BFC. At a subsequent Benihana board meeting, Abdo made a presentation on behalf of BFC regarding its proposed purchase of the stock. He then left the meeting. The Benihana board (defendants) knew that Abdo was a director of BFC and Joseph informed the Benihana board that Abdo had approached him about the sale on behalf of BFC. At the same meeting, the Benihana board voted in favor of the sale to BFC. Two weeks later, BOT's attorney sent a letter to the Benihana board, asking it to abandon the sale on account of concerns of conflicts of interests, the dilutive effect on voting of the stock issuance, and the sale's "questionable legality." The board nonetheless again approved the sale. BOT then brought suit against the Benihana board of directors, alleging breach of its fiduciary duties. Issue Can a corporation's transaction directly benefitting one of the corporation's directors be valid? Holding and Reasoning (Berger, J.) Yes. A transaction involving an interested director is valid if the material facts as to the director's interest are disclosed or known to the board of directors and the board in good faith authorizes the transaction by an affirmative vote of the disinterested directors. In this case, the court determines that the Benihana board knew enough information about Abdo's involvement in the transaction to validate the sale. Although the board may not have known the full facts at first, by the time the board approved the sale, it knew that Abdo was a director of BFC, that he was the proposed buyer, and that he had made the initial contact about the purchase with Joseph. This is sufficient information to deem the board knowledgeable on the material facts of Abdo's interest. Therefore, because the board approved the transaction (without Abdo's vote), it is valid. The court finds in favor of the Benihana board of directors.

Rash v. J.V. Intermediate, Ltd

Rule: An Agent has a fiduciary duty to fully disclose all matters pertinent to a Principal's business Facts J.V. Intermediate, Ltd. and J.V. Industrial Companies, Ltd. (JVIC) (plaintiff) hired W. Clayton Rash (defendant) to open and manage a division of JVIC in Tulsa, Oklahoma that would maintain oil refineries and power plants in that area. The employment contract required Rash to use all his work time for JVIC from 1999 to 2001. Rash served as manager until 2004 without a contract extension. As manager, Rash reviewed bids on projects for JVIC and selected Total Industrial Plan Services, Inc. (TIPS) to provide scaffolding services on several occasions. Rash never disclosed to JVIC that he was the owner of TIPS. Between 2001 and 2004, JVIC opened its own scaffolding division. Rash never employed JVIC's scaffolding services. JVIC brought a breach of fiduciary duty claim against Rash and sought summary judgment. Issue Does an agent have a fiduciary duty to fully disclose all matters pertinent to a principal's business? Holding and Reasoning Yes. As a manager of the Tulsa division of JVIC, Rash was in charge of all operations and was tasked with devoting all his full time work efforts to the company. Rash was therefore an agent of JVIC who owed JVIC a fiduciary duty. An agent's basic fiduciary duties include a duty to account for profits, a duty not to compete with the principal, and a duty of full disclosure on matters pertinent to the principal's business. Here, Rash failed to disclose to JVIC that he owned TIPS and that TIPS was selected to provide scaffolding services to the Tulsa division of JVIC. As an agent, Rash had a fiduciary duty to at least disclose such information to JVIC. Therefore, JVIC is entitled to summary judgment.

Hoover v. Sun Oil Company

Rule: An independent contractor relationship exists when one party works on behalf of another independently, with no control exerted by the other party over the contractor's day-to-day operations Facts The Hoovers (plaintiffs) were injured in a fire caused by the negligence of an employee of a service station owned by Sun Oil Company (Sun) and operated by Barone (defendants). Barone's business relationship with Sun was based on a lease and dealer's agreement that the parties executed when Barone commenced the service station's operation. The lease, terminable by either party upon notice, provided for rental fees based on the amount of gasoline sold. The dealer's agreement stated that Barone would purchase petroleum products from Sun and that Sun was to loan equipment and advertisements to Barone. The dealer's agreement allowed Barone to sell products from competing oil companies, but required him to sell the Sun products under the Sun label. The dealer's agreement prohibited Barone from mingling Sun products with competitors' products. The service station had large signs advertising Sun products, but Barone's name was posted as proprietor. A Sun representative, Peterson, made weekly sales calls to the service station. In addition to selling Sun products, Peterson would discuss various business issues with Barone and advise him on station operations. But, Barone was not required to follow Peterson's advice. Barone set his own hours of operations, assumed the risk of loss in his business, and had sole authority over his employees. The Hoovers allege that Barone was acting as Sun's agent at the time of the fire and consequently Sun is liable for their injuries. Sun moved for summary judgment, contending that Barone was an independent contractor and as such, Sun is not liable for the Hoovers' injuries. Issue Is an oil company liable for the negligence of an employee of a service station manager with whom the oil company contracted, when the oil company does not have authority over the gas station's daily business? Holding and Reasoning (Christie, J.) No. A company is not responsible for the negligence of an independent contractor or its employees. A company is an independent contractor if its contract with another entity does not enable that entity to control the company's day-to-day operations and that entity does not exert any such control. Barone's lease with Sun was that of a landlord-tenant agreement only. The lease enables Barone to do business in Sun's facilities and pay rent based on the amount of gasoline sold. It also gives Barone termination rights. The dealer's agreement provides for Barone's purchase of Sun's products, and imposes some restrictions as to how those products will be sold. Neither of these agreements gives Sun the authority to influence Barone's day-to-day operation of the service station. There is also no evidence that Sun's actions displayed control over Barone's business. Peterson's weekly sales visits were basically just that. Peterson's visits were primarily for the purpose of selling Sun products to Barone, discussing business matters, and offering him non-binding operational advice. Moreover, Barone conducted service station business as an independent contractor. He held himself out publicly as the proprietor of the service stations, assumed all risk of loss, and had complete authority over his employees. On the basis of the evidence, this court concludes that Barone ran the service station as an independent contractor. Consequently, Sun is not liable for the negligence of Barone's employee, and the motion for summary judgment is granted.

Three-Seventy Leasing Corp. v. Ampex Corp.

Rule: Apparent authority for an Agent to bind a Principal exists when the Principal acts in a way that would lead a reasonable person to believe the agent has such authority, particularly when the agent does things that are usual and proper to the Principal's business Facts Three-Seventy Leasing Corporation (370) (plaintiff), which buys computer hardware for lease to end-users, sued Ampex Corporation (Ampex) (defendant) for breach of contract to purchase computer core memories. After a meeting between 370's sole employee, Joyce, Ampex salesman Kays, and Kays' boss, Mueller, the parties commenced negotiations which resulted in Kays giving Joyce a written document containing the terms of sale of memory units from Ampex to 370. The document had signature blocks for a representative of each party to sign. Joyce signed on behalf of 370, but no one from Ampex signed the document. Shortly after Joyce signed the document, Mueller circulated an intra-office memorandum stating that Ampex had an agreement with 370 for the purchase of computer core memories, and that at Joyce's request all communications with 370 concerning the sale would be handled through Kays. A few days later, Kays sent a letter to Joyce confirming the delivery dates and installation instructions for the core memories. At trial, Ampex contended that the only employees who had authority to enter into a contract were Ampex's contract manager or supervisor, not salespeople. The district court nonetheless held that an enforceable contract existed between the parties. Issue Does a salesperson have authority to bind a company to a sales agreement when the company apparently holds the salesperson out as its agent? Holding and Reasoning (Dyer, J.) Yes. When a company gives a salesperson various powers in a sales transaction, it is reasonable for the customer to believe that the salesperson, acting in that capacity, has the power to bind the company to a sales contract. Ampex authorized Kays to negotiate with Joyce and to act as the sole point of contact with him. Those facts alone would give Joyce good reason to believe that Kays was acting as Ampex's agent regarding the sales agreement. Additional reason for that belief is provided by the letter that Kays sent to Joyce delineating the delivery and installation terms of the core memories. Ampex's argument that salespeople do not have authority to bind the company to a contact is irrelevant to the issue of apparent authority, unless the customer was notified of that fact. In this case, Joyce was not told of Kays' purported lack of authority to sign contracts, and Ampex gave no other indication to Joyce that Kays was not acting as its agent in the sales transaction. It was manifestly reasonable that Joyce would believe that Kays had the authority as Ampex' agent to execute the sales agreement. The subject document, when signed by Joyce, was an offer by him to buy the core memories. Kays' letter to Joyce was an acceptance, on behalf of Ampex, of the offer. Therefore, the district court did not err in its holding that an enforceable contract existed between 370 and Ampex.

Shlensky v. Wrigley

Rule: As long as a corporation's directors can show a valid business purpose for their decision, that decision will be given great deference by the courts. Facts The first game of night baseball was played in 1935, and since then, every team except the Chicago Cubs began playing night games. Most major league games were night games, except those played on weekends. The Cubs did not play night games. As a result, the Cubs sold fewer tickets and were less profitable than any other major league team. Philip Wrigley (defendant), the President of the Chicago National League Ball Club (defendant), which owned the Cubs, was opposed to playing night games, claiming that night games would be damaging to the neighborhood in which the Cubs played. Shlensky (plaintiff) filed a suit claiming that it would be financially practicable for the Cubs' stadium to install lights and begin playing night games, and would be very profitable in the long run. Shlensky alleged that the only reason the Cubs did not play night games is because Wrigley felt it was somehow against the spirit of baseball. The trial court dismissed the action, and Shlensky appealed. Issue Can a single aggrieved shareholder sue a board of directors alleging that the board is not maximizing profits? Holding and Reasoning (Sullivan, J.) No. A corporation's president and board have authority to determine what course of action is best for the business. While the president and board must have a valid business purpose behind their actions, a decision motivated by a valid business purpose will be given great deference. In this case, while Shlensky may disagree with the board's course of action, Wrigley could have reached the legitimate business conclusion that the Cubs were better off not playing night games. Wrigley and the board may be concerned about maintaining goodwill in the community from which the Cubs draw their fans; or they may be concerned about the costs of operating the lights. Wrigley and the board may have determined that night games would not have brought in additional revenue. Indeed, while Shlensky was able to prove correlation between night games and ticket sales for other teams, he did not prove that night sales would actually be beneficial to Cubs shareholders. Shlensky did not prove that night games would increase ticket sales, and did not prove that any potential increases in ticket sales would offset potential increases in costs. No convincing showing has been made that Wrigley and the board were acting in anything but the corporation's best interest. Accordingly, the trial court's determination that the complaint should be dismissed is affirmed.

Meinhard v. Salmon

Rule: Co-adventurers, like partners, have a fiduciary duty to each other, including sharing in any benefits that result from the parties' joint venture Facts Salmon (defendant) executed a 20-year lease (Bristol Lease) for the Bristol Hotel which he intended to convert into a retail building. Concurrent with his execution of the Bristol Lease, Salmon formed a joint venture with Meinhard (plaintiff). The joint venture's terms provided that Meinhard would pay Salmon half the amount required to manage and operate the property, and Salmon would pay Meinhard 40 percent of the net profits for the first five years, and 50 percent thereafter. Both parties agreed to bear any losses equally. The joint venture lost money during the early years, but eventually became very profitable. During the course of the Bristol Lease another lessor acquired rights to it. The new lessor, who also owned tracts of nearby property, wanted to lease all of that land to someone who would raze the existing buildings and construct new ones. When the Bristol Lease had four months remaining, the new lessor approached Salmon about the plan. Salmon executed a 20-year lease (Midpoint Lease) for all of new lessor's property through Salmon's company, the Midpoint Realty Company. Salmon did not inform Meinhard about the transaction. Approximately one month after the Midpoint Lease was executed, Meinhard found out about Salmon's Midpoint Lease, and demanded that it be held in trust as an asset of the joint venture. Salmon refused, and Meinhard filed suit. The referee entered judgment for Meinhard, giving Meinhard a 25 percent interest in the Midpoint Lease. On appeal, the appellate division affirmed, and upped Meinhard's interest in the Midpoint Lease to 50%. Issue Is a co-adventurer required to inform another co-adventurer of a business opportunity that occurs as a result of participation in a joint venture? Holding and Reasoning (Cardozo, C.J.) Yes. As sharers in a joint venture, co-adventurers owe each other a high level of fiduciary duty. A co-adventure who manages a joint venture's enterprise has the strongest fiduciary duty to other members of the joint venture. The Midpoint Lease was an extension of the subject matter of the Bristol Lease, in which Meinhard had a substantial investment. Salmon was given the opportunity to enter into the Midpoint Lease because he managed the Bristol Hotel property. Because Salmon's opportunity arose as a result of his status as the managing co-adventurer, he had a duty to tell Meinhard about it. Salmon breached his fiduciary duty by keeping his transaction from Meinhard, which prevented Meinhard from enjoying an opportunity that arose out of their joint venture. Accordingly, the judgment of the appellate division is affirmed, with a slight modification. This court holds that a trust attaching to the shares of stock should be granted to Meinhard, with the parties dividing the shares equally, but with Salmon receiving an additional share. The additional share enables Salmon to retain control and management of the Midpoint property, which according to the terms of the joint venture Salmon was to have for the entire length of that joint venture.

Kamin v. American Express Company

Rule: Courts will not interfere with a business decision made by directors of a business unless there is a claim of fraud, bad faith, or self-dealing Facts American Express (defendant) authorized dividends to be paid out to stockholders in the form of shares of Donaldson, Lufkin and Jenrette, Inc. (DLJ). Kamin, et al. (plaintiffs), minority stockholders in American Express, brought suit against the directors of American Express, alleging that the dividends were a waste of corporate assets in that the stocks of DLJ could have been sold on the market, saving American Express about $8 million in taxes. The American Express directors filed a motion to dismiss the case. Issue Can a stockholder maintain a claim against the directors of a corporation if the stockholder alleges only that a particular course of action would have been more advantageous than the course of action the directors took? Holding and Reasoning (Greenfield, J.) No. Courts will not interfere with a business decision made by directors of a business unless there is a claim of fraud, bad faith, or self-dealing. An error of judgment by directors, as long as the business decision was made in good faith, is not sufficient to maintain a claim against them. In the present case, the plaintiffs do not allege any bad faith on the part of the directors. The only wrongdoing that the plaintiffs claim is that the directors should have done something differently with the DLJ stock. This allegation without more is not sufficient to maintain a claim. Consequently, the directors' motion to dismiss is granted.

Bayer v. Beran

Rule: Directors have an obligation not to put their own interests before the interests of the corporation. Rule of Law Directors have an obligation not to put their own interests before the interests of the corporation. Facts The directors (defendants) of the Celanese Corporation of America (CCA) started a radio advertising campaign for the corporation. CCA had advertised before, but never on the radio. In making its decision to start advertising on the radio, the directors reviewed studies given to them by CCA's advertising department, brought in a radio consultant to help them determine the station and time to advertise, and hired an advertising agency to produce the ad. In addition, the advertising commitments were subject to cancellation at any time, and the board voted to renew the advertising contract after it had been running for a year and a half. One of the singers on the program on which CCA decided to advertise was the wife of Camille Dreyfus, one of CCA's directors. The plaintiff brought suit, claiming that the advertising campaign was started due to the benefit to Mrs. Dreyfus as it "subsidized" her career and was "a vehicle for her talents." Issue Does a director necessarily breach his duty of loyalty to a corporation by advertising the corporation's product on a program on which the director's wife is a singer? Holding and Reasoning (Shientag, J.) No. Directors have an obligation not to put their own interests before the interests of the corporation. This duty of loyalty supersedes the business judgment rule so that fraud may be avoided. The burden of establishing that the duty of loyalty is not violated is on said directors. However, that burden may be met if after "rigorous scrutiny" it is determined that the transaction in question was made in good faith and would have been made even in the absence of the personal interests of the director. In the present case, the court finds that the directors did not violate their duty of loyalty to CCA by advertising on Mrs. Dreyfus's program. The directors went through an involved process to determine whether to advertise on the radio, and on what station and channel to advertise. Although the advertising choice may have enhanced Mrs. Dreyfus's career, it also greatly benefited CCA and the evidence supports a conclusion that the same decision on advertising would have been made if Mrs. Dreyfus was not on the program. Accordingly, the court finds in favor of the CCA directors.

Mill Street Church v. Hogan

Rule: Implied authority to act as an agent exists when it is shown that at Principal acted in a manner that would lead an Agent to reasonably believe that the Principal intended for the agent to have such powers as are practically necessary to carry out the duties delegated Facts Mill Street Church of Christ (Church) (defendant) regularly hired Bill Hogan to paint and maintain the church building over a period of time. The Church had routinely allowed Bill Hogan to hire his brother Sam Hogan (plaintiff) as an assistant on painting projects. In 1986, Church Elder Dr. Waggoner hired Bill Hogan again to paint the church. No mention of hiring a helper was made during the discussion between Dr. Waggoner and Bill Hogan. During his painting, Bill Hogan reached a point where he could not finish the job without an assistant. Bill Hogan approached Dr. Waggoner about hiring a helper. The parties agreed that a helper was necessary and discussed the possibility of hiring a Mr. Petty to assist, but Dr. Waggoner acknowledged that Mr. Petty was hard to reach. The next day, Bill Hogan offered Sam Hogan the helper job. After hearing the details of the position, Sam Hogan accepted the offer and commenced work. A half hour after he started work, Sam Hogan fell and sustained an injury that required hospitalization. Bill Hogan reported the accident to the Church treasurer, who paid Bill Hogan for hours spent on the project, including the half hour Sam Hogan worked. Sam Hogan filed a claim for workers' compensation. The Old Workers' Compensation Board (Old Board) ruled that Sam Hogan was not an employee of the Church and denied his compensation claim. The New Board reversed the Old Board's ruling, concluding that Bill Hogan had implied authority as a Church agent to hire Sam Hogan, and that Sam Hogan was a Church employee entitled to compensation. The Church petitioned for review of the New Board's decision. Issue Can implied authority be established by evidence showing a course of conduct between two parties which would lead an agent to reasonably believe that a principal intended the agent to have authority under the circumstances? Holding and Reasoning (Howard, J.) Yes. When a principal has routinely granted an agent certain powers, implied authority is assumed when the agent exercises those powers. Implied authority is proven circumstantially when it is shown that the principal intended the agent to have such authority as was necessary to perform the duties the principal assigned. The Church had previously allowed Bill Hogan to hire Sam Hogan to assist in painting projects. In this case, Bill Hogan could not have finished his work without a helper, and Dr. Waggoner acknowledged that fact when he and Bill Hogan discussed the possibility of hiring an assistant and recognized that Mr. Petty would be hard to reach. Additionally, the Church paid Bill Hogan for the time Sam Hogan worked on the project. The evidence shows that the Church's actions led Bill Hogan to reasonably believe that he had authority to hire Sam Hogan. Hence, Bill Hogan had implied authority to hire Sam Hogan. Based on the evidence, this court finds that Sam Hogan was an employee of the Church at the time of the accident and affirms the New Board's decision.

Martin v. Peyton

Rule: In order for a creditor to be a partner in a firm, the creditor must be closely enough associated with the firm so as to make it a co-owner carrying on the business for profit Facts The brokerage firm of Knauth, Nachod & Kuhne (KN&K) made a series of bad investments, which resulted in the firm suffering severe financial difficulties. In order to save KN&K, one of its partners, Hall, entered into a transaction with Peyton (defendant) and other persons (lenders) for a loan of $2,500,000 worth of securities to KN&K. In return for the loan, the lenders were to receive 40 percent of KN&K's profits until the debt was repaid. The transaction was based on three documents: an agreement, indenture, and option. The agreement provided that: (1) two of the lenders were appointed "trustees" who were to be informed of transactions affecting them, paid dividends and income from those transactions, had the power to buy and sell their loaned securities and substitute those securities with those of equal value, but could not commingle those securities with KN&K's other securities, and were required to keep the securities valued at a certain level; (2) Hall was given the power of directing the management of KN&K until the loan was repaid, and his life was to be insured for $100,000 with the insurance policies given to the trustees as additional collateral; (3) the trustees were to be kept informed of the important matters of KN&K's business, could inspect the books, and had the power to veto certain business decisions that could affect their collateral; and (4) each KN&K member was to assign their interest in the firm to the trustees, member could receive a loan from KN&K, the members' draw amount was fixed, and no other distribution of profits could be made. The indenture was basically a mortgage on the collateral delivered by KN&K to the trustees. The option: (1) gave the lenders the opportunity to buy into KN&K by buying 50% or less of the members' interest at a listed price; (2) enabled the formation of a corporation to replace KN&K if its members and lenders agreed; and (3) provided for the resignation of any KN&K member at the demand of Hall. Martin (plaintiff), a creditor of KN&K, sued the lenders, claiming that their transaction with KN&K, as illustrated by the agreement, indenture, and option, made them partners in that firm and thereby liable for KN&K's debts. The trial court held that the lenders were not partners of KN&K. Issue Do agreements intended to protect the financial interests of creditors necessarily make them partners of a debtor firm? Holding and Reasoning (Andrews, J. ) No. A partnership is not formed unless two or more parties are closely associated so as to be co-owners carrying on a business for profit. When, as here, creditors have executed loan documents with a debtor firm that contains provisions for the collection of collateral, this court must examine the extent to which those documents associate the creditors with the business operations of the firm. In this case, no partnership was formed. The agreement's providing for appointment of two of the lenders as trustees, for example, does not indicate a partnership. The trustees were in charge only of transactions affecting their collateral, and they were prohibited from commingling the collateral with KN&K's other securities. Similarly, Hall's life insurance and management power does not imply an association with KN&K because Hall was trusted by the other lenders to keep an eye on KN&K and work to ensure that it was run efficiently enough to return to profitability and pay back the lenders. And, the trustees' veto power does not indicate a partnership, as it gave them the ability only to safeguard against bad investments concerning their collateral. The trustees had no authority to initiate transactions on half of KN&K, nor bind the firm by their actions. Further, the assignment of firm interest to the lenders is not indicative of a partnership, because the intent was to protect the firm's profits, which represented the lenders' compensation for the loan. The indenture was basically a mortgage, containing the terms of KN&K's performance of the loan. The indenture did not contain any terms of partnership. The option's provision giving Hall the right to demand the resignation of KN&K members was unusual, but as the intent was to protect the lenders against speculative transactions that could render the option itself worthless, it does not show that a partnership was formed. Questions of whether a partnership is formed between various entities are a matter of degree, to be determined on a case-by-case basis. In this case, the loan documents do not show that a partnership existed between the lenders and KN&K. The judgment of the trial court is affirmed.

Walkovszky v. Carlton

Rule: In order to maintain a cause of action for piercing the corporate veil, the plaintiff must allege that a shareholder used the corporate form to conduct business in his individual capacity. Facts William Carlton (defendant) owned a large taxicab business. Carlton was a controlling shareholder of 10 different corporations, each of which held title to two cabs and no other assets. Each cab carried $10,000 in car liability insurance, which was the minimum required by state law. John Walkovsky (plaintiff) alleged that he was struck and injured by a cab owned by Seon Cab Corporation (defendant), one of Carlton's entities. Walkovsky sued Carlton, Seon Cab Corporation, and each of Carlton's other cab corporations, arguing that they all functioned as a single enterprise and should be treated accordingly. Carlton moved to dismiss the complaint as to him personally for failure to state a cause of action. The trial court granted the motion. Walkovsky appealed, and the appellate court reversed, reinstating the complaint as to Carlton. Carlton appealed. Issue May a party maintain a cause of action to pierce the corporate veil without alleging that a shareholder used the corporate form to conduct business in an individual capacity? Holding and Reasoning (Fuld, J.) No. Under New York law, courts will pierce the corporate veil when necessary to prevent fraud or achieve equity. Agency-law principles guide the inquiry into possible abuse of the corporate form. If a corporation functions merely as an agent of its shareholder, courts will hold the principal vicariously liable for the corporation's conduct on the theory of respondeat superior. At the pleadings stage, it is insufficient to state that a corporation lacked a separate identity, was part of a single enterprise, and was deliberately undercapitalized. Rather, the plaintiff must show that a shareholder used the corporation as his agent to conduct business in an individual capacity. In this case, Seon Cab Company was undercapitalized and carried only the bare minimum amount of insurance required by law. This is relevant, but it is not enough to allow a plaintiff to pierce the veil. Otherwise, owners would be on the hook every time their corporation accrued liabilities outstripping its assets, and limited liability would be meaningless. Instead, there must be some evidence that the owners themselves were merely using the company as a shell. Although Walkovszky alleged that each of Carlton's companies was actually part of a much larger corporate entity, he could offer no proof to that effect. The mere fact that Walkovszky might not have been fully able to recover his damages is not enough to justify letting him pierce Seon Cab's veil. The decision of the appellate court is therefore reversed. Carlton's motion to dismiss is granted, though Walkovsky is given leave to file an amended complaint.

Kovacik v. Reed

Rule: Monetary losses will be apportioned equally between partners who make capital contributions Facts Kovacik (plaintiff) and Reed (defendant) entered into a partnership to remodel kitchens. Kovacik would contribute funds to the enterprise in the amount of $10,000. Reed would contribute labor and skill, acting as an estimator and superintendent of the projects without compensation. The partners did not discuss the apportionment of losses. While the two received some jobs, they lost money. Kovacik asked Reed to contribute money to cover half of the total losses. Reed refused, and Kovacik filed this lawsuit. The lower court held that the partners had agreed to share profits and losses equally, and Reed was thus liable for half the shortfall. Issue Is a partner who contributed only skill and labor liable for the monetary losses of the enterprise? Holding and Reasoning (Schauer, J ) No. Generally, when there is no explicit agreement as to losses, losses are to be divided equally between the partners, without regard to the amount each partner contributed to the venture. That rule, though, is only applied in cases where each of the partners contributed capital to the enterprise. In cases where one party contributed only labor and the other only capital, the rule is not applied because the partner contributing labor takes a loss in the form of his lost labor. In this case, both partners have endured losses: Kovacik with the loss of his monetary investment, and Reed through the time and effort he contributed that went uncompensated. Reed is not liable for any of Kovacik's monetary losses. Accordingly, the decision of the lower court is reversed.

Botticello v. Stefanovicz

Rule: Ratification of an act allegedly done on behalf of a person by another requires that the person accept the results of the act with intent to ratify and complete understanding of the material circumstances of the act. Facts Mary and Walter Stefanovicz (defendants) own a farm as tenants in common. Mary and Walter each have an undivided half interest in the farm. When Mary and Walter purchased the farm, Walter attended to many of the business matters of running the farm, including paying the mortgage, taxes, and insurance. Botticello (plaintiff) subsequently visited the farm and commenced negotiations with Walter to buy it. Walter and Mary discussed selling the farm, and Mary said that she would not sell it for less than $85,000. Botticello and Walter agreed to a price of $85,000 and executed a lease with an option to purchase the farm. Walter signed the lease/option-to-purchase agreement (Agreement) on his own, without representing that he was acting on behalf of Mary. After taking possession of the farm, Botticello regularly paid rent and openly made extensive improvements to the property. Several years later, Botticello exercised the option to buy the farm. Walter and Mary refused to honor the purchase option and Botticello sued to enforce it. At trial, Botticello argued that regardless of whether a principal-agent relationship existed between Mary and Walter, the Agreement was binding on Mary because her actions, including accepting Botticello's rent payments and acknowledging his land improvements, showed that she had ratified it. The trial court decided in favor of Botticello and ordered specific performance of the Agreement. Issue Does a person's acceptance of the benefits of an agreement to which she was not a party constitute ratification of that agreement? Holding and Reasoning (Peters, J.) No. The mere receiving of benefits, without more, does not prove ratification of an agreement. A person's acceptance of benefits can be illustrative of ratification if an intent to ratify and knowledge of material circumstances are also proven, which they were not in this case. Botticello argues that by accepting his rent payments and acknowledging his property improvements, Mary demonstrated her intent to ratify the Agreement and displayed knowledge of the material circumstances surrounding it. This court disagrees. Mary's actions do not indicate intent to be bound to the Agreement, nor do they show that she understood all the relevant circumstances of the Agreement. Mary's actions simply illustrate that she knew that Botticello's rent payments and development of the property were pursuant to an agreement she had not signed and concerned land in which she has one-half interest. Moreover, Walter did not represent that he was acting on behalf of Mary when he negotiated and signed the Agreement. Because there is no evidence that Mary ratified the Agreement, the trial court's holding against her is reversed, and the case is remanded to the trial court with instructions to rule in her favor.

Frigidaire Sales Corp. v. Union Properties, Inc

Rule: The corporate directors of a parent corporation that exerts control over a subsidiary do not incur liability for the subsidiary for acting in their role as directors Facts Mannon and Baxter were the co-owners of Union Properties, Inc. (Union) (defendant). Mannon and Baxter were also the limited partners of Commercial Investors, a limited partnership in which Union was the general partner. Commercial had a business relationship with Frigidaire Sales Corporation (plaintiff). Frigidaire sought to hold Mannon and Baxter directly liable for the obligations of Union, because neither Union nor Commercial were adequately capitalized, and because Mannon and Baxter directly controlled Commercial's operations through Union. The trial court and court of appeals both held that Frigidaire could not get past Union's limited liability. Frigidaire appealed. Issue Can a creditor that has never dealt with a company's owners as anything other than representatives of the company hold those owners generally liable for the company's debts? Holding and Reasoning (Hamilton, J.) No. Mannon, Baxter, Union and Commercial chose a very specific corporate form, one which shielded Mannon and Baxter from the general liability which Commercial incurred, and which Union incurred through Commercial. Frigidaire was never told that Mannon or Baxter would be responsible, only that Commercial and Union would be. While Union acted through its owners and officers to control the operations of Commercial, those officers were only acting as agents of Union. Union exerted sufficient control over the operations of Commercial to be held liable for Commercial's obligations, as the corporate setup explicitly allows for that. Nothing bars a corporation from being a partner in a partnership, and there was no fraud involved in Union being the managing partner for Commercial. As such, there's no reason to allow Frigidaire to pierce Union's veil.

Pav-Saver Corporation v. Vasso Corporation

Rule: The terms of a partnership agreement cannot override the statutory law governing partnerships in the jurisdiction Facts Pav-Saver Corporation (plaintiff) entered into a Partnership with Vasso Corporation (defendant) to manufacture and sell paving machines. Pav-Saver contributed certain intellectual property to the Partnership. Pav-Saver's principal would manage the operation. The partnership agreement stated that the partnership would be permanent unless both partners agreed to terminate. The partnership agreement also stated that if one party terminated unilaterally, Pav-Saver would take back its intellectual property, and that the party not terminating would receive liquidated damages. Illinois had adopted the Uniform Partnership Act, which provided that when a partnership is terminated in violation of the partnership agreement, the non-terminating partners may continue the enterprise, as long as they pay the terminating partner the value of their interest, not counting good will value. Eventually, Pav-Saver terminated the partnership unilaterally. Vasso responded by taking over the Partnership's operations, including retaining control over the intellectual property contributed by Pav-Saver. Pav-Saver sued to recover its intellectual property, and Vasso countersued for a declaration that it was entitled to the property. The trial court found that Vasso was entitled to retain control of the intellectual property and to liquidated damages. Issue Can the terms of a partnership agreement override statutory law? Holding and Reasoning (Barry, J.) No. The agreement stated that the partnership would be perpetual, except by mutual agreement of the parties. The parties agreed that by ending the partnership unilaterally, Pav-Saver ended it wrongly. Because the partnership was terminated wrongfully, the Uniform Partnership Act gave Vasso the right to continue the business. Vasso elected to continue the business, and to continue in possession of the partnership property. That property includes the intellectual property contributed by Pav-Saver, which is absolutely essential to the manufacture and sale of paving machines. While the partnership agreement stated that Pav-Saver was entitled to return of its property, that agreement does not override the Partnership Act in force. Thus, Pav-Saver cannot win the return of its patents. The Partnership Act requires Vasso to pay the exiting partner the value of his interest. In this case, the only evidence of value that Pav-Saver introduced was testimony of good will. The Partnership Act specifically states that good will not be considered when determining the value of a terminating partner's interest. The decision of the lower court to assign liquidated damages is affirmed.

Smith v. Van Gorkom

Rule: There is a rebuttable presumption that a business determination made by a corporation's board of directors is fully informed and made in good faith and in the best interests of the corporation. Facts Jerome Van Gorkom, the CEO of Trans Union Corporation (Trans Union), engaged in his own negotiations with a third party for a buyout/merger with Trans Union. Prior to negotiations, Van Gorkom determined the value of Trans Union to be $55 per share and during negotiations agreed in principle on a merger. There is no evidence showing how Van Gorkom came up with this value other than Trans Union's market price at the time of $38 per share. Subsequently, Van Gorkom called a meeting of Trans Union's senior management, followed by a meeting of the board of directors (defendants). Senior management reacted very negatively to the idea of the buyout. However, the board of directors approved the buyout at the next meeting, based mostly on an oral presentation by Van Gorkom. The meeting lasted two hours and the board of directors did not have an opportunity to review the merger agreement before or during the meeting. The directors had no documents summarizing the merger, nor did they have justification for the sale price of $55 per share. Smith et al. (plaintiffs) brought a class action suit against the Trans Union board of directors, alleging that the directors' decision to approve the merger was uninformed. The Delaware Court of Chancery ruled in favor of the defendants. The plaintiffs appealed. Issue May directors of a corporation be liable to shareholders under the business judgment rule for approving a merger without reviewing the agreement and only considering the transaction at a two-hour meeting? Holding and Reasoning (Horsey, J.) Yes. Under the business judgment rule, a business determination made by a corporation's board of directors is presumed to be fully informed and made in good faith and in the best interests of the corporation. However, this presumption is rebuttable if the plaintiffs can show that the directors were grossly negligent in that they did not inform themselves of "all material information reasonably available to them." The court determines that in this case, the Trans Union board of directors did not make an informed business judgment in voting to approve the merger. The directors did not adequately inquire into Van Gorkom's role and motives behind bringing about the transaction, including where the price of $55 per share came from; the directors were uninformed of the intrinsic value of Trans Union; and, lacking this knowledge, the directors only considered the merger at a two-hour meeting, without taking the time to fully consider the reasons, alternatives, and consequences. The evidence presented is sufficient to rebut the presumption of an informed decision under the business judgment rule. The directors' decision to approve the merger was not fully informed. As a result, the plaintiffs are entitled to the fair value of their shares that were sold in the merger, which is to be based on the intrinsic value of Trans Union. The Delaware Court of Chancery is reversed, and the case is remanded to determine that value.

Bohatch v. Butler & Binion

Rule: There is no whistle-blowing exception to the at-will nature of partnerships Facts: Bohatch questioned the billing practices of another partner in the law firm. The client had not problem with the billing. Bohatch was asked to leave by the other partners. When she filed suit for, inter alia, breach of fiduciary duty, the partners voted to expel her from the firm. Issue: Can a partnership expel a whistle-blowing partner merely for reporting in good faith the alleged misconduct of another partner? Holding: The Texas Supreme Court stated there was no whistle-blowing exception to the at-will nature of partnerships. Therefore, the partners were free to expel Bohatch and were not liable for damages for doing so. Protecting partnership business is appropriate.

Boilermakers Local 154 Retirement Fund v. Chevron Corp.

Rule: Under Delaware law, forum selection bylaws adopted pursuant to articles of incorporation without a vote by stockholders are not facially invalid. Facts Chevron Corporation's (Chevron) (defendant) articles of incorporation authorized the company's board of directors to adopt bylaws without a vote by stockholders. Because Chevron was often subjected to litigation in multiple forums involving the same issue, the board adopted bylaws providing that any litigation involving the company would be conducted in Delaware. Certain Chevron stockholders (plaintiffs) brought suit in the Delaware Court of Chancery, alleging that the bylaws were both statutorily and contractually invalid. The plaintiffs' statutory claim rested on the notion that the bylaws in question referred to an external matter, rather than an internal matter, such as stockholder meetings, the board of directors, and officerships. Relevant Delaware law stated: "bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees." Issue Are forum selection bylaws adopted pursuant to articles of incorporation without a vote by stockholders facially invalid? Holding and Reasoning (Strine, J.) No. Forum selection bylaws adopted pursuant to articles of incorporation without a vote by stockholders are not facially invalid. In terms of statutory validity, the proper subject matter for bylaws under Delaware law includes "process-oriented" directives "relating to the business of the corporation," such as regulation of stockholder meetings and the board of directors. Forum selection bylaws, while not traditional bylaw subject matter, are "process-oriented," because they determine where stockholders can file lawsuits, as opposed to whether stockholders can file lawsuits. Accordingly, the forum selection bylaws at issue in this case are not statutorily invalid, and the plaintiffs' claim on that ground must fail. Simply because forum selection is not a traditional subject matter for bylaws does not make bylaws involving that subject invalid. In terms of contractual validity, bylaws are a part of any contract between a company and its stockholders and, as such, regulate the rights of stockholders. However, if the articles of incorporation so provide, the board may take unilateral action to amend those bylaws without stockholder vote. The stockholders are still bound by bylaws adopted in that manner. Indeed, when stockholders initially obtain stock under such a contractual framework, they are assenting to allowing the board to amend the bylaws unilaterally and without their vote. The plaintiffs in this case thus had notice that the board could unilaterally amend the bylaws. The fact that an amendment under this framework alters the contractual agreement does not make it invalid. In sum, the forum selection bylaws in this case are not statutorily or contractually invalid. As a result, the plaintiffs' claims are dismissed.

Giles v. Giles Land Company

Rule: Under Kansas law, dissociation is appropriate if a partner engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business with the partner Facts Giles Land Company, L.P. (partnership) (defendant) was a family-owned farming company. The partners were all related. The partnership held a meeting to consider converting the partnership to a limited liability company (LLC). One of the Giles children, Kelly (plaintiff), was unable to attend the meeting, but later received notice of the partnership's determination to convert to an LLC. Kelly formally requested the partnership's books and records for his review. He was not satisfied with the books and records turned over, so he brought suit against the partnership and the other partners (defendants), claiming that he was improperly denied access to the books and records. The defendants filed a counterclaim, arguing that Kelly should be dissociated from the partnership. The defendants presented evidence that Kelly had threatened them and that the family relationship was broken beyond repair. The defendants also presented evidence that they did not trust Kelly and vice versa. The trial court ruled in favor of the defendants on all counts, finding that it was not practicable to continue the partnership with Kelly as a partner. Kelly appealed the trial court's order regarding his dissociation from the partnership to the Kansas Court of Appeals, arguing that he had not engaged in conduct relating to the partnership. Issue Is dissociation appropriate where the partner engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business in partnership with the partner? Holding and Reasoning (Green, J.) Yes. Dissociation may be proper based on impracticability or a partner's wrongful conduct. Dissociation on account of impracticability is based on dissolution law. Dissociation is appropriate if the partner engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business in partnership with the partner. Just as "an irreparable deterioration of a relationship between partners is a valid basis to order dissolution, [it is also, therefore] a valid basis for the alternative remedy of dissociation." Alternatively, dissociation may be ordered if a partner has engaged in wrongful conduct that adversely and materially affected the partnership. Under the impracticable route to dissociation, despite Kelly's claims that he had not engaged in the alleged conduct relating to the partnership, threats against family members are related to a business when: (1) the business is a family business, and (2) those threatened family members are the other partners in the business. Kelly's threats against his family members were thus related to the partnership, because his family members were the other partners in the partnership. Those threats combined with the lack of trust make it not reasonably practicable to carry on the partnership with Kelly as a partner. The trial court thus did not err by ordering Kelly's dissociation. Additionally, the trial court did not err by finding that Kelly was subject to dissociation for the same actions based on the wrongful conduct route to dissociation. Due to Kelly's wrongful conduct, the partnership was essentially at a standstill until the issues with him were resolved. Accordingly, Kelly's conduct adversely and materially affected the partnership. As a result, the trial court's ruling in favor of dissociation is affirmed.

Holzman v. DeEscamilla

Rule: When a limited partner in a limited partnership takes a direct role in management, he becomes liable to the partnership's creditors as a general partner Facts James Russell, H.W. Andrews, and Ricardo de Escamilla (defendants) were partners in Hacienda Farms, a limited partnership. Russell and Andrews were limited partners and Escamilla was the general partner. Escamilla always conferred with Russell and Andrews on what crops to plant, and Russell and Andrews sometimes overruled him. Any checks drawn on Hacienda's account had to be signed by at least two of the partners, meaning that Escamilla could not withdraw money on his own. Eventually, Russell and Andrews forced Escamilla to leave his job as manager. Hacienda Farms went bankrupt, and the bankruptcy trustee, Lawrence Holzman (plaintiff), sued all three partners on behalf of Hacienda's creditors. The lower court ruled that Russell and Andrews, through their direct control of the enterprise's operations, had become general partners. Russell and Andrews appealed. Issue Can a limited partner take part in business decisions and exercise a veto over spending decisions? Holding and Reasoning (Marks, J.) No. In a limited partnership, the general partner is directly involved in the enterprise's management and is personally liable to the partnership's creditors. The limited partners take no part in management and are not personally liable for the partnership's debts. However, if a limited partner takes control of the business, he can be held to be liable to the partnership's creditors as though he was a general partner. In this case, Russell and Andrews exercised enough control over Hacienda Farms to be declared general partners. While it was important that they chose what crops would be planted and chose Escamilla's replacement, the most important fact was that Russell and Andrews had collective control over the Partnership's bank accounts. Even before they took direct control by replacing Escamilla, Russell and Andrews could have effectively managed any decision through their control of the funds. The decision of the lower court is affirmed.

Prentiss v. Sheffel

Rule: When a partnership is legally dissolved, any partner acting in good faith may purchase the assets Facts Prentiss (defendant) and two other individuals, Sheffel et al. (plaintiffs), made an oral agreement to enter into a partnership to buy and operate a shopping center. The agreement did not specify any term for the partnership's existence, nor did it delineate the operational or management duties of the respective partners. Sheffel et al. owned a total of 85% interest in the partnership, while Prentiss owned 15% interest. The partners engaged in many serious arguments concerning the title of partnership property, which resulted in an irreparable rift between Prentiss and Sheffel et al. Prentiss added to the problems by being unable to pay his proportionate share of the shopping center's operating losses. Sheffel et al. subsequently excluded Prentiss from all management duties and sought dissolution of the partnership, alleging that Prentiss had been derelict in his partnership duties. Sheffel et al. also sought a court-supervised dissolution sale whereby they would bid on all the partnership assets. Prentiss filed a counterclaim, seeking to prevent Sheffel et al, from bidding on or purchasing the partnership assets. Prentess contended that he had been wrongfully frozen out of the partnership, and would be unfairly disadvantaged if Sheffel et al. were permitted to buy the partnership assets at a judicial sale. The trial court found that a partnership at will existed, and that Sheffel et al. dissolved it when they froze out Prentiss. The trial court also ordered a judicial sale of the assets and denied Prentiss's request to prohibit Sheffel et al. from bidding on the partnership's assets at that sale. Sheffel et al. were the high bidders in the judicial sale, and the trial court entered an order confirming the sale of the assets to them. Issue May partners who legally excluded a third partner from management duties be permitted to buy partnership assets at a judicially-supervised dissolution sale? Holding and Reasoning (Haire, J.) Yes. Partners may dissolve a partnership-at-will by excluding another partner from management duties, as long as they act in good faith. Such partners may also bid on and purchase any assets in a dissolution sale. The record shows that Sheffel et al. excluded Prentiss from management duties and broke up the partnership because the dissention Prentiss caused made it impossible for the partnership to effectively continue. Prentiss did not offer any evidence that Sheffel et al. acted in bad faith or had any ulterior motive in dissolving the partnership-at-will. Consequently, there is nothing to prevent them from purchasing the assets at a dissolution sale. Also, Prentiss was not disadvantaged by Sheffel et al.'s participation in the asset sale. Sheffel et al.'s bids vis-à-vis the other participants resulted in a final sales price that was higher than it would have been had they not bid on the assets. Consequently, Prentiss's 15% interest in the partnership was enhanced by Sheffel et al.'s bidding. The judgment of the trial court is affirmed.

Reading v. Regem

Rule: When a servant uses his or her position for personal profit without the consent of the master, the master is entitled to the proceeds of the unauthorized undertaking. Facts Reading (plaintiff) was a sergeant in the Royal Army Medical Corps. (defendant), stationed in Cairo, Egypt. Reading decided to make money by escorting a truck loaded with cargo through the streets of Cairo and delivering them to a third party, Manole. Manole paid Reading handsomely for his efforts. Reading was in full uniform while he was transporting the cargo. When the army discovered that Reading had a great deal of money in his Egyptian bank accounts and in his apartment, it launched an investigation. When it was discovered how Reading had made the money, the army impounded the funds. The army kept the money on the ground that Reading violated his duty by using his status as a soldier to escort the trucks through Cairo for pay. Reading sued to get the money back, contending that it rightfully belonged to him. Issue Is a soldier entitled to keep the profit he made by using his military status to further the business interests of a third party? Holding and Reasoning No. If a servant unjustly enriches him or herself by engaging in unauthorized activities while acting in the capacity for which he or she was hired, the master is entitled to keep any profits made thereby. The only reason Reading was hired to transport the cargo was because, as a British soldier in full uniform, he could ensure that the trucks he escorted could pass easily through the police checkpoints in Cairo. Reading thus violated his duty to the government by taking advantage of his status as a member of the armed forces to personally profit thereby. This case is distinguishable from those involving servants profiting from unauthorized ventures that have nothing to do with the master's enterprise while on duty. In those cases, the servants did not act in their official capacities when they made their money, and were adjudged entitled to keep it. In this case, by contrast, the government is entitled to keep the money Reading made because he acted as a representative of the armed forces while engaged in his illicit enterprise. Accordingly, this court holds that the money belongs to the government and finds for the defendant.

Corporate Governance

Shareholders: -own the company, participate in profits (dividends) Board of Directors: -collectively the corporate principal -elected by the shareholders -owes a fiduciary duty to the shareholders -principal-agent relationship with managers (principal) Managers: -principal-agent relationship with board of directors (agent) -appointed by the board of directors Employees

Actual Authority

Specific powers expressly conferred by a Principal to an Agent to act on the Principal's behalf, and the Agent does so. The Agent is bound by contract Can be either: - Express; or - Implied

Capacity to Be a Principal

Test: 1.) Does the Principal have the capacity to do the act for which the agent was appointed 2.) Generally any person having capacity to contract can appoint an agent

Inherent Authority

The Agent did not have authority, but the contract is still enforceable against the Principal as the Third Party had no reason to recognized the Agent as part of the Principal

Business Judgment Rule

The Director's decision is final, and not subject to review by the Court, unless it contains FRAUD, ILLEGALITY, or CONFLICTS OF INTEREST (self dealing) * Business decision must be informed

Dissolution of a Partnership

The change in relationship of the partners caused by any partner ceasing to be associated in the carrying on of the firm's business UPA (1914) 29 Not the same as going out of business

Agency

The fiduciary relationship that results from the manifestation of consent by one person to another that thee person shall act on his behalf and subject to his control, and consent by the other to do so

Apparent Authority

The power of an Agent to act on behalf of a Principal, even though not expressly or impliedly granted. This power arises only if a Third Party reasonably infers, from the Principal's conduct, that the principal granted such power to the agent. If an agent has apparent authority, the Agent's Principal will be held liable for the actions of the agent which are within the scope of the apparent authority. *Cannot have apparent authority if the Principal is undisclosed *When the Agent is not authorized, the contract may be ratified and binding

Winding Up

The process of shutting down post-dissolution Assuming that the business will not be continued, the winding up process generally contemplates that the firm's assets will be distributed to the partners The authority of partners to act on behalf of the partnership terminated except in connection with winding up of partnership business

Variant: Vote

The vote of the majority of the directors present at the meeting at which a quorum is present shall be the act of the board of directors unless the certificate of incorporation or the bylaws shall require a vot of a greater number

Restatement (Third) § 8.04

Throughout the duration of an agency relationship, an Agent has a duty to refrain from competing with the Principal and from taking action on behalf of or otherwise assisting the Principal's competitors

Digression: Partnership by Estoppel

To establish a partnership by estoppel, 4 elements must be proven: 1.) Plaintiff must establish a representation, either express or implied, that one person is the partner of another 2.) The making of the representation by the person sought to be charged as a partner or with his consent 3.) A reasonable reliance in good faith by the third party upon the representation 4.) A change of position, with consequent injury, by the third person in reliance of the representation

What is a Partnership

UPA (1914) Section 6)1): "A partnership is an association of two or more persons to carry on as co-owners a business for profit"

Implied Authority

Under the circumstances, the Principal actually intended the Agent to have certain authority/powers which are not expressly stated but are necessary to carry out the duties actually delegated

Arising Out of Position

Was the position which he occupies the real cause of his obtaining the money as distinct from merely affording the opportunity for getting it An agent has a duty not to acquire a material benefit from a third party through the agent's use of the agent's position An agent has a duty not to use the property of the principal for the agent's own purposes or those of a third party

Wrongful Dissolution

When one partner did not have the right to dissolve the partnership

Asymmetric Information

When the Agent has information that the Principal does not have

Shareholder Primacy

When you only care about how the stock of the company is doing, not stakeholders, effect on the country, not consumers' best interests, etc

Factors Relevant to Control (Alter Ego) Doctrine

Where a shareholder uses control of the corporation to further his or her own, rather than the corporation's business, he or she will be held liable for the corporation's acts and debts on a principal-agent theory Factors: -commingling funds -under-capitalization -disregard for corporate formalities (failure to hold shareholder/board meetings, failure to keep minutes, failure to keep separate books, failure to issue stock, failure to appoint board, failure to adopt charter or by-laws)

Passive Control

not active control so as not to be deemed a partner, or to not have a Principal/Agent relationship, adn to avoid liability