Business Enterprises Outline UNIT I AGENCY LAW: AGENCY LAW 1. Fiduciary relationship where one person (agent) acts for another (principal) 2. Agency exists where: (1) one person (the principal) consents that another (the agent) shall act on P’s behalf and subject to P’s control and (2) A consents so to act 3. RULE: agent for an undisclosed/partially disclosed P is presumed to be a party to a K unless K explicitly specifies otherwise 4. It is the principal who creates the authority 5. P is only liable for A’s act w/in the scope of his authority 6. If A exceeds actual/implied authority & 3rd party relied, go after agent 7. Principal’s liability in contract: 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” Mill Street Church of Christ v. Hogan: Church hired painter, painter hired brother to help w/ job and brother broke arm i. Person has authority to do certain acts that will bind P based on past practices, the way business is operated, economical nature of job (2 person job) ii. He had implied authority b/c it was necessary to implement A’s express authority iii. There was apparent authority b/c he was allowed to hire brother in the past iv. Rationale? Court says: Implied authority “includes such powers 
as are rea carry out the duties” v. Different kind of implied authority: Did agent believe based on present or past conduct that he had authority? Job needed two men and the church had let him hire Sam in the past No clear instructions to the contrary expressed to agent, even if in principal’s “mind” vi. “Apparent authority is the power to affect the legal relations of another person by transactions with third persons, professedly as an agent for the other, arising from and in accordance with the other’s manifestations to such third persons.”- Restatement § 8 vii. Manifestation of consent: “authority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal’s account-Restatement § 26 viii. Rule of Law. Implied authority is actual authority that is proven circumstantially to indicate that the principal intended to delegate powers to the agent that are necessary for carrying out the agent’s duties, and one major circumstantial factor is prior work performed by agent for principal 370 Leasing Corp. v. Ampex Corp.: π contracted w/ ▲’s salesman to lease computer parts to ▲; ▲ later took back the deal b/c π couldn’t meet ▲’s credit requirements; π sued for breach of K i. A salesperson binds his employer to sale if he agrees to that sale in a manner that would lead the buyer to believe that sale has been consummated ii. Agent has apparent authority to bind P when P acts in manner as would lead a RPP to suppose that A has authority he purports to exercise; this sale was incidental to his capacity as salesperson iii. Factors that gave rise to apparent authority: employed as salesperson, reasonable for 3rd parties to assume salesman has authority to make sales 2. Fiduciary Duties of A to P a. Not absolute & can be changed through K’s b. Duty of care-mostly w/ Corps & partnerships c. Duty of candor/disclosure-mostly w/ Corps & partnerships d. Duty of good faith & fair dealing/duty of performance e. *Duty of loyalty-most important i. A can’t steal opportunities from P ii. A can’t act to the detriment of P iii. How to violate duty of loyalty: 1. A receives payment from 3rd party in connection w/ some transaction between P and 3rd party (kickback v/ tip) 2. A makes secret profit from agency relationship by secretly transacting w/ 3rd party 3. A uses his position to make personal profit for someone who has no relationship w/ P, General Automotive, Reading iv. Damages for breach of K less than for breach of fiduciary duty 3. Agency cost-cost that P assumes b/c A is looking out of his interest, which may be opposed to P’s a. Information asymmetry 4. Creditors & debtors do not owe one another fiduciary duties 5. Rule of Law. An agent has the apparent authority to act in a manner that is reasonable for a person in the agent’s position, and a third party can rely on those actions when a principal indicates through its actions that an agent had the appropriate authority. 6. Facts: Plaintiff was a leasing company that approached Defendant company’s representative, Thomas Kays, to purchase computer hardware. Plaintiff was going to act as a middle-man between Defendant and a second purchaser of the hardware that Plaintiff found. Defendants submitted an unsigned purchasing agreement to Plaintiff, and Plaintiff signed the agreement. Kays followed the exchange with a letter indicating that part of Plaintiff’s order would be shipped directly to the second purchaser. 

 7. Issue. The issue is whether Kays entered Defendant into a contract with Plaintiff under an apparent authority to act in that capacity. 8. Held. The United States Court of Appeals for the Fifth Circuit held that Kays had apparent authority to act on behalf of Defendant in contractual matters with Plaintiff, and that Kays did enter into an agreement when he promised shipment of the hardware. It was reasonable for Plaintiff to rely on Kays, a salesman, to conduct a sales transaction with Plaintiff. Defendant agreed to continue negotiations through Kays, and any evidence to demonstrate that Kays did not have that authority was never relayed to Plaintiff. Watteau v. Fenwick: Restatement calls it “inherent agency power”: “Inherent agency power is a term used in the restatement of this subject to indicate the power of an agent which is derived not from authority, apparent authority or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.” Restatement § 8A. Restatement § 161: “A general agent for a disclosed or partially disclosed principal subjects his principal to liability for acts done on his account which usually accompany or are incidental to transactions which the agent is authorized to conduct if, although they are forbidden by the principal, the other party reasonably believes that the agent is authorized to do them and has no notice that he is not so authorized.” Rule of Law. An undisclosed principal can be held liable for the actions of an agent who is acting with an authority that is reasonable for a person in the agent’s position regardless of whether the agent has the actual authority to do so. Facts. Defendant owned a hotel-pub that employed Humble to manage the establishment. Humble was the exclusive face of the business; Humble’s name was on the bar and the license of the pub. Defendant explicitly instructed Humble not to make any purchases outside of bottled ales and mineral waters, but Humble still entered into an agreement with Plaintiff for the purchase of cigars. Plaintiff discovered that Defendant was the actual owner and brought an action to collect from Defendant. 

 Issue. The issue is whether Defendant is liable for damages resulting from an agreement between Plaintiff and Humble, who is knowingly acting outside his actual authority as an agent for Defendant. Held. Defendant is liable for damages. Humble was acting with an authority that was inherently reasonable for an agent in that position. The situation is analogous to a partnership wherein one partner is silent but is still liable for actions of the partnership as a whole. 
 Discussion.
 The decision could not be based on apparent authority because the principal is disclosed under that doctrine. The principal is held liable for actions by an agent that are expressly forbidden, but the case limits a principal to actions of an agent that are reasonable under the circumstances. In undisclosed principal cases, what is the scope of the agent’s authority?: Watteau: “the principal is liable for all the acts . . . which are within the authority usually confided to an agent of that character” Restatement § 195 -“agent enters into transactions usual in such business and on the principal's account” Restatement § 161- “Ageneralagentforadisclosedorpartially disclosed principal subjects his principal to liability for acts done on his account which usually accompany or are incidental to transactions which the agent is authorized to conduct if, although they are forbidden by the principal, the other party reasonably believes that the agent is authorized to do them and has no notice that he is not so authorized.” LIABILITY OF PRINICIPAL TO THIRD PARTIES IN TORT: Humble oil & refining Co. v. Martin: Rule of Law. Determining whether a master-servant relationship exists, rather than an independent contractor relationship, is a question of fact that will be answered in the affirmative when the master exerts a considerable amount of control over the responsibilities of the servant. “A master is subject to liability for the torts of his servants committed while acting in the scope of their employment.” Restatement (Second) § 219 (1) Facts. Love left her car at a service station to get the brakes repaired. The station was operated by W.T. Schneider through a “Commission Agency Agreement” with Humble. Love did not correctly secure the car before handing control to the station, and the station did not check the car immediately to secure it. Love’s car rolled downhill, out of the station lot and into Plaintiff’s property, striking Plaintiff and his two children. Humble maintained that they were not liable because Schneider was an independent contractor. 
 
 Issue. The issue is whether Schneider is an independent contractor or whether a master-servant relationship exists between Humble and Schneider. Held. A master-servant relationship exists between Humble and Schneider. Humble maintained considerable control over Schneider by dictating several important aspects of Schneider’s business. Humble had significant financial control and supervision, rendering Schneider’s station a retail marketing enterprise for Humble’s products. • Exceptions Where P Liable Even if Outside Scope of Employment: a) Principal retains control over the aspect of the work in which the tort occurs • b)Principal engages an incompetent contractor • c)Nondelegable duty • d)Activity contracted for is a “nuisance per se” Hoover Hoover V. Sun oil company: Rule of Law. A master-servant relationship does not exist when an independent contractor controls the day-to-day operations of the entity that is responsible for damages suffered by a plaintiff. Held. Sun Oil is not responsible for the negligence of Smilyk because he is an employee of Barone, who in turn is an independent contractor. The Superior Court of Delaware, New Castle, did not find any evidence to support a master- servant relationship and therefore allowed Sun Oil’s summary judgment. Barone controlled all day-to-day operations of the station. Although Sun Oil worked closely with Barone in several day-to-day operations, Barone was not required to follow Sun Oil’s advice. Barone was also able to sell competing products even if he elected not to do so. Murphy v. Holiday Inns, Inc. Rule of Law. When establishing an agency relationship through a contract, the nature and extent of the control agreed upon will determine whether the agency exists. Facts. Plaintiff slipped and fell on a puddle of water that was dripping from an air conditioning unit at the hotel. Plaintiff wanted to hold Defendant accountable for her injuries. A third party owned the hotel, but they agreed to a franchise agreement with Defendant that dictated the name and look of the building and fixtures. The agreement also required the third party to submit reports and pay Defendant a certain amount per room per day. 

 Issue. The issue is whether the franchise contract established a master-servant relationship. Held. The contract did not establish a master-servant relationship. Many of the provisions of the contract were in place to protect Defendant’s trademark. However, normal day-to-day operations, such as hiring, price structure and business expenditures were still controlled by the third party hotel owner. Level necessary to create a principal-agent relationship? Minimal. A principal need not exercise physical control over the actions of its agent so long as the o principal may direct the result or ultimate objectives of the agent relationship o Hence, the requisite level of control may be found so long as the principal is able to specify th e task the agent is to perform, even if the principal is unable to ensure that the agent carries out that task FIDUCIARY OBLIGATION OF AGENTS: Reading v. Regem: Reading: if servant has unjustly enriched himself by virtue of his service w/o his master’s sanction, the law says he ought not be allowed to keep the $, but it shall be taken from him & given to his master b/c he got it solely by reason of his position while he occupied as servant to his master; the uniform & position as Crown’s servant were the only reasons why he was able to get the $; can’t work for your own benefit Rule of Law. An agent has a duty to act solely for the master, and any profit earned while violating this duty belongs to the master. Held:The agent was required to pay over to the principal the secret profits made as a result of his misuse of the agency position. The sergeant “[took] advantage of his service and violate[d] his duty of honesty and good faith to make a profit for himself.” Where “the wearing of the King’s uniform and his position as a soldier is the sole cause of his getting the money and he gets it dishonestly, that is an advantage which he is not allowed to keep.” Restatement (Second) Agency- § 387 – “Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency.” § 404 – “An agent who, in violation of duty to his principal, uses for his own purposes ... assets of the principal’s business is subject to liability to the principal for the value of the use. If the use predominates in producing a profit he is subject to liability, at the principal’s election, for such profit....” Town & Country House & Home Service Inc. v. Newberry: can’t take customers away from your former employer; violation of fiduciary duties to engage in unfair competition; employee can owe a fiduciary duty to their employer for the employer’s trade secrets after their service has been terminated; ▲ owe π profits they made from customers taken from π, but they do not have to cease their operations; ▲ had duty to protect π’s trade secrets & are prohibited from profiting from secrets even after employment ended; customer listing was formulated through many much efforts on behalf of π, but their methods of cleaning house were nothing so secretive as to justify prohibiting ▲ from continuing their cleaning services i. Case implicitly applying a duty of loyalty ii. In a law firm setting, it is probable that most clients would like to keep their lawyers b/c of a closer relationship iii. Rule of Law. An employee can owe a fiduciary duty to their employer for the employer’s trade secrets after their service has been terminated. iv. What is the default rule in Town & Country? : The law of trade secrets is incorporated as the default rule. Accordingly, ex-employees may not use a customer list that qualifies as a trade secret UNIT II- PURPOSE OF THE VORPORATION AND THE LIMITED LIABILITY: The Corporate Entity and Limited Liability (i.e. Piercing the Corporate Veil a. What do you need to pierce the corporate veil? 1. Failure to observe corporate formalities (keep funds separate, have annual meetings) 2. Corp is inadequately capitalized at the outset (show that it is insolvent) 3. Requires injustice or a similar wrongdoing (protect creditors/other outsiders) f. Some jurisdictions permit piercing solely on showing of total disregard for separate existence of corporation g. Some jurisdictions adopt muli-factor test that appears related to general injustice req. h. Recognition of injustice in corp were no recognized in Walkovsky, Sea-Land, In re Silicone b. Means that the SH’s, officers, or directors will be personally liable for corporate obligations b/c the Corp is abusing the legislative privilege of conducting business in the corporate form c. In the case of a parent/subsidiary relationship, when parent and subsidiary fail to follow separate corporate formalities (both have the same board, do not hold separate directors meetings), when both are operating the same business, subsidiary is undercapitalized, the public is misled about which entity is operating which business, corporate assets are intermingled, subsidiary is operated in an unfair manner d. When SH’s treat the assets of the corp as their own, use corporate funds to pay their private debts, fail to keep separate corporate books, and fail to observe corporate formalities (holding meetings, issuing stock, conducting business by resolution), this usually means that the corporate entity is the mere alter ego of the SH. This operation results in some basic injustice e. Contract, Tort, and Bankruptcy cases involve piercing the veil; less likely in K case. f. DGCL102(b)(6):“[The certificate of incorporation may also contain a] provision imposing personal liability for the debts of the corporation on its stockholders to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation's debts except as they may be liable by reason of their own conduct or act” g. MBCA § 6.22(b): “Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct” h. Walkovsky v. Carlton (MAJ): π was hit by taxi owned by ▲-corp; in complaint, π alleged that ▲ was 1 of 10 cab companies of which ▲-individual was a SH & that each corp. had all but two cabs registered in his name; each cab corp. only carried the min auto liability insurance required by law; supposedly, they were operated as single entities-financing, repairs, employees; each corp. & its SH’s were named as ▲ b/c multiple corp. structure constituted an unlawful attempt to “defraud members of the general public.” ▲ was fraudulently holding out the corps as separate entities when they actually work as one large corp. a. Π would have to show that ▲ didn’t respect the separate identities of the corps a. Assignment of divers, use of bank accounts, ordering of supplies b. The fact that the corporations may have been one large corporation, however, does not prove that Defendant was controlling the corporations for his own behalf. b. Rule: using a corporation to further own interests pierces the corporate veil; whenever anyone uses control of the corp. to further own business, will be liable for corp.’s debts c. Upon the principal of respondeat superior, corp. is liable for negligent acts & commercial dealings of its employees/officers/directors d. Where a corp. is a fragment of a larger corporate combination which actually conducts the business, courts will not pierce the corporate veil to hold individual SH’s liable absent some injustice or wrongdoing e. Rule: The corporate form may not be disregarded simply because the assets of the corporation, together with liability insurance, are insufficient to assure recovery – not enough to pierce veil f. Enterprise Liability: while the corporations may have separate names, they are really all just the same thing; allows P to reach the TOTAL enterprise but still keeps P away from the individuals a. Definition: when the P can reach the assets of other subsidiary corporations organized under the same corporate umbrella, but not any of the SH’s b. Enterprise liability limits liability of the investor; gets to all the subsidiaries but not the common owner c. How to argue enterprise liability-all subsidiaries are doing the same thing; they are held under one umbrella; court should hold all liable d. The corp. is an entity is a form in and of itself g. Standard by which court decides whether or not to pierce the veil: a. Where a shareholder uses control of the corporation to further his own, rather than the corporation’s business, he/she will be held liable for the corp’s acts and debts on a principal-agent theory. h. Enterprise Liability: this is NOT piercing the veil a. P could recover if he could show that all 10 corporations could be considered one entity f. Would have to show that the separate corps did not adhere to “separateness” and really acted as one entities b. A separate theory P may be able to recover on w/o piercing the veil i. Under the principal-agent doctrine, the drivers/investors were the agents and the corporation was the principal; the agents would be responsible for the principal a. Agency theory doesn’t go through the company; it goes around the company; you are suing the owner as a principal under Respondeat Superior j. Dissent: Thinks that we should have corporate social responsibility; D intentionally undercapitalized for purpose of avoiding responsibility; taking advantage of the corp. form k. Reverse pierce-goes through the corporation and to the owner Sea-Land Services v. Pepper Source: π was an ocean carrier who shipped peppers for ▲; π couldn’t collect its money b/c ▲’s corp. dissolved & ▲ had no assets; π wanted to pierce the corporate veil and hold the sole SH of ▲-corp. (& other corps) personally liable & reverse pierce to get through to other entities partially or wholly owned by ▲ l. Reverse pierce: seize the assets for themselves & take w/ priority that is at least equivalent as a secured creditor; this lets them take the assets w/o going through all the formalities a. If π can pierce the corporate veil to get through to ▲ individually, then can get to the other assets of ▲ (stock in other corps) via reverse piercing b. Pecking Order for when a corporation goes bankrupt: i. Lawyers for bankruptcy – “super-priority” ii. Secured creditors iii. Unsecured creditors iv. Insider lenders – owner/director of the corporation who lends $ v. Shareholders – usually by this time there’s nothing left 2. Test for Veil Piercing: a. A corporate entity will be disregarded and the veil of limited liability pierced when two requirements are met: (1) there must be such unity of interest and ownership that the separate personalities of the corporation and the individual (or other corp) no longer exist and (2) circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice b. ELEMENTS: c. (1) Unity of interest & ownership between the corporation & an individual, and – “alter ego” test • i Lack of corporate formalities, including failure to maintain adequate corporate records: a)Failure to hold shareholder meetings • b)Failure to hold board meetings • c)Failure to keep minutes of said meetings • d) Failure to keep separate books • e)Failure to issue stock • f)Failure to appoint a board • g)Failure to adopt charter or by-laws i. Commingling of funds & assets ii. Undercapitalization iii. Use by one corporation of assets of another as if those assets were its own d. (2) Where adherence to the fiction of a separate existence would sanction a fraud or promote justice i. Once the first element (alter-ego test) is established, either the sanctioning of a fraud (intentional wrongdoing) or the promotion of injustice will satisfy the second element (need to show that honoring the separate corporate existences would sanction a fraud or promote injustice) ii. Promotion of injustice needs more than just unsatisfied judgment – you need some additional unjust enrichment, illegality, or fraud 1. Some element of unfairness, something akin to fraud or deception or the existence of a compelling public interest must be present in order to disregard the corporate fiction e. Here, Alter Ego test met: corporate records & formalities have not been maintained, funds and assets have been commingled, D was undercapitalized, and corporate assets have been moved without regard to their source i. Single phone, physical presence, moves $ around corps & himself ii. Today, the single phone and one physical presence is not dispositive f. The second part of the test is more problematic: An unsatisfied judgment, by itself, is not enough to show that injustice would be promoted. This is because every veil-piercing action includes the prospect of an unsatisfied judgment – if this were all that was required then the veil would often be pierced. i. Have to show unjust enrichment or the deliberate use of corporate form to escape/defeat creditors g. Under this case, Carlton would’ve probably been decided the other way b/c having min. insurance is perhaps unjust