Business Organizations: Business can be owned by more than one person (jointly owned implication)

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1 Day 1: 8/22/16 Business Organizations: Business can be owned by more than one person (jointly owned implication) Sole Proprietorship: Business owned by one person decides everything involved with said business. There are different types of jointly owned businesses Partnerships, corporations, or an LLC (Pg. 3) Target is an example of a corporation (Target, McDonalds) General Partnership Meaning all the partners have unlimited personal liability Limited Partnership At least one general partner and then a series of limited partners (Limited partners have limited liability, most you can lose is what you put into the business) LLC (Limited Liability Company) -Corporate attorneys are asked to determine which of the forms of business organization is the best choice for the Client Choice of entity -Certain Tax decisions? Certain Amount of money to begin? Issues to address throughout the course. -Beer Brewing Venture Example: Can be done through a market transaction (Meaning Sharon goes and buys beer from Jake and then resells it) What are some advantages of a simple Market transaction? She is not obligated to buy the beer from Jake. She also does not have to put any money in investing in equipment. For Jake, he may not have protection. He can t plan to make a specific amount because he doesn t know how much beer he will actually sell. The big disadvantage to Market is that you can t plan and it is unsure. You don t know how much you will either sell or buy week to week. Perhaps they can enter into the Contracts: They would want to know what the price is, how much to buy the beer for (This many dollars per case), how long the K last for, a minimum amount, incentives, maximums, opportunity for K to extend, do you need to opt into K or does it roll over, what happens if there is a breach, exclusivity, if there is an issue in the K how is it resolved? 1

2 -If there is indeed collaboration then perhaps they want to build a business organization (joint owners) if you were asked to help them form a business organization what questions would you have? 1.) What are they investing in the company, whether money or human capital. 2.) What are their expectations? 3.) Ownership? 4.) Allocation of profits? 5.) Who is responsible for the losses? 6.) How to split the roles? Ranges of authority/spears of influence (Brewing expertise vs. Marketing expertise) 7.) Willingness to take risks? 8.) Who decides when this business is done? For a market, it is over when the transaction is done. For a contract, set number of years? Capital Labor Paradigm = One person bringing the money, one person bringing the labor. -Finding the answers to these questions can be done in the Statutes, Cases & Private ordering [contract] -Wherever a corporation is organized, the laws of that state apply. -In partnership law, every state has their own partnership law. -Common law, Judges making law through cases. -Statutes can be default or mandatory/immutable. -Delaware GCL Section 141(b): The board of directors of a corporation shall consist of one or more members, each of whom shall be a natural person. Important statute we will study A mandatory/immutable rule. -Delaware GCL Section 141 (a) A default rule. Private Ordering Parties decide themselves with agreements and K s. 2 nd Half of Class Community Counseling Service, Inc. v. Reilly: Breach of Fiduciary Duty is the issue. (Restatement (Third) of Agency Section 1.01) Important Agency Law 2

3 The Agents Fiduciary Duties: What is the general statement regarding fiduciary duties owned by an agent? If you are a fiduciary, what is your general obligation? You must prefer the beneficiaries duties to your own. The agent must put the principal s interest above his or her own. -Law to Facts: 1.) Could Reilly think about going into business for himself while he was employed by CCS? Yes; 2.) Could he actively compete with CCS while he was employed by CCS? i.e., open up his own fundraising office? No -You cannot solicit future business while employed by CCS is what the Court said. It doesn t matter whether or not the clients would not be able to start fundraising until after Reilly quit or if the clients didn t want to work with CCS and they only wanted to work with Reilly. Hamburger Case: Logistical arrangements are alright, just can t compete directly. Is soliciting client s logistical arrangements? No, that is too close to actual competition. He could identify clients, hire employees, set up office space all examples of things he could do. -Conflict of Interest Transaction -Why does the law impose fiduciary duties on agents? Promotion of trust, behavior. -Why should Reilly have had a to put CCS first? -Why should David Hamburger have had to put Ace Wire & Burlap first? -Fiduciary duties are in place for Ethical reasons, practical reasons (facilitation of trust) -Protection against abusive power -Law says that certain types of relationships are fiduciary in nature. Day 2: 8/24/16 Agency Law (focused on fiduciary duties) -Every partner is an agent of the partnership 3

4 -When can agents bind Principals to a K? (in Actual Authority, Apparent authority or inherent authority) -Actual Authority: Principal Agent The agent has authority to act and the agent actually believes it (i.e. express actual authority, implied actual authority) -Apparent authority: Manifestations from the Principal Third Party (When a principal hires someone and that person goes to a third party uses their authority to act) -Inherent Authority: We are looking at what happened to determine what the more equitable thing to do is. This authority is there to help serve the needs of the third party. 1.) General agent 2.) Act is for the benefit of the GP, 3.) At is one normally done by the agent [i.e., not too big of a departure]. Problem Set #1: Patricia directed Anthony to purchase a computer for the business at a price of no more than 1500$. Anthony purchased a 1200$ computer. Ther Purchase K stated that Anthony was the purchaser of a computer There is actual authority because she expressly directed Anthony to use authority and he didn t exceed his authority. Problem Set #2: Anthony decided on his own that the business needed a new computer; he did not speak to Patricia about his decision and did not get her approval. He purchased a 1200$ computer. The purchase K stated that Anthony was the purchaser of a computer. The seller was not aware that Anthony purchased the computer on behalf of Patricia s Plumbing. When the seller learned that Patricia s Plumbing was the true purchaser of the computer, the seller submitted the 1200$ invoice to Patricia. Is she obligated to pay? Why or why not? No express authority here, but there is incidental implied actual authority because it is incidental to his job duties. The Principal (Patricia) hired the Agent (Anthony) to be office manager. Do office managers generally buy these things? Is it within the budget? Prior direction if he were allowed to buy the computer. This problem is an undisclosed principal because the seller doesn t know that there is even a principal. -Manifestations from the Principal to the Third Party do not have to be express. -There is power of position apparent authority (When A principal hires an agent and gives them a title, and sends them into the world to do their bidding, then that constitutes power of position apparent authority). 4

5 General agent vs. special agent (Why would one have more liability than the other if they both got the same instruction or direction) why should the amount of deviation matter necessarily? Who is at liberty to suggest (in that limited hypo) that 500$ is not a lot when we don t know the full budget of the company. Blackburn v. Witter: -Did Long have actual authority to bind Dean Witter? No -Did Long have apparent authority to bind Dean Witter? [case calls it ostensible authority ] Authority: Facts Reasonable belief (long standing relationship = trust), inquiry Facts Belief not reasonable (receipts) The Court decides that there was apparent authority. Sennott v. Rodman & Renshaw: An agent can bind a principal even if they don t have the authority to do so necessarily. When there is no actual authority and the principal is undisclosed there is no apparent authority and there is inherent authority 2 nd Half of Class -Recap (identify the Principal s manifestations & Determine reasonableness of belief that Agent had authority to bind Principal) -General Partnerships: Uniform Partnership Act (UPA) (1997) This act only applies to partnership law. -Q s from first day of class: Do P s owe a fiduciary duties to each other? How are GP s formed? -GP s vs. Joint Ventures -In General Partnership each partner has stake in running the company, meaning management rights. -Other types of Partnerships include (Limited Partnerships: One general partner and at least one limited Partner) 5

6 Limited Partners have limited management rights and passive investors/limited partners enjoy limited liability. (Limited Liability Partnership:) -How are General Partnerships formed? Section 202(a) Formation of Partnership. Except as otherwise provided in subsection (b), the association of two or more persons to carry on as co owners of a business for profit forms a partnership, whether or not the persons intend to form a partnership (No formal agreement needed) Byker v. Mannes (Pg. 54): -Byker s theory of liability? -202(c)(3). A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received (if people share profits in the business then they are generally partners unless the profits are being given because someone loaned money and they are getting their interest from the profits, then that is different) -On an exam, if you see people getting together and sharing profits then that is presumed to be a partnership unless it could be rebutted. -The only intent you need to form a partnership is to intend to be carry on as co owners of a business for profit. Hynansky v. Vietri (Pg. 58): -Hynansky s202 theory of liability? -Problem 2-1 (Pg. 65) Shady s Arguments (That it is a Partnership): That they intended to carry on business together and they intended to share profit Dale s Arguments (That it is not a Partnership): Lease, we never entered into an agreement, we never became partners, the profits are for Shady s obligation to pay rent. 6

7 Day 3: 8/29/16 Review of Previous Class Generally: Introduced general partnerships, formation of GP s. Partnership: Agreement to carry on as co-owners a business for profit. -Labels aren t dispositive -Subjective intent to form a partnership is not necessary -Agreement to share profits Presumption that they are partners. -Facts & Circumstances dictate whether there is a partnership or not. Sharing Profits & Losses: What are profits? if the General Partnership makes a profit, does that mean that the GP gets a cash payment? No, not necessarily. Only if there is a distribution. What are lossess? If the General Partnership suffers a loss, does that mean that the GP has to write a check? No, not necessarily. The profits may be able to pay for it if they have been successful for years. Or if there are terms of agreement that they say. -How are profits split among GP s? Section 401 (b) of the UPA (Partners Rights & Duties) (b) Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partner s share of the profits. -Can we vary the general rule? 401(b) The partnership agreement trumps is a default rule. SECTION 103. EFFECT OF PARTNERSHIP AGREEMENT; NONWAIVABLE PROVISIONS. (a) Except as otherwise provided in subsection (b), relations among the partners and between the partners and the partnership are governed by the partnership agreement. (You can t adjust for Third Parties, i.e. creditors and other third parties only for partners and the partnership). To the extent the partnership agreement does not otherwise provide, this [Act] governs relations among the partners and between the partners and the partnership. -Assume four partners, under the default rule, how are profits split? 7

8 -Could partners agree that Partner 1 gets 50% of the profits, Partner 2 gets 30% of the profits, and Partners 3 & 4 each get 10% of the profits? - -When a company makes one million dollars and there are two equal partners, that profit of one million dollars if the partnership profit. Profits and losses are assumed by the partnership. Each partner will only get cash if the partnership makes a cash distribution. -Profits are what are on the books of the partnership. CAPITAL ACCOUNTS Section 401(a): Each partner is deemed to have an account that is: (1) Credited (increased) with an amount equal to the money [or property] that the partner contributes to the partnership and the partner s share of the partnership profits; and (2) Charged (decreased) with an amount equal to the money [or property] distributed by the partnership to the partner and the partner s share of the partnership losses. Problem Set Coverage: -What happens if the General Partnership goes out of business? Look to the Captial Account Document. Kovacik v. Reed Rule of Law 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 8

9 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. Capital Labor Partnership Issue: The court had two explanations: (1) Reed had already borne half the GP s Loss where one party contributes money and the other contributes services, then in the event of a loss each would lose own capital the one his money and the other his labor [Pg. 68] a. Would the case have out differently if Reed had been paid a salary for his services? (2) The parties had agreed that the value of Reed s services was equal to Kovacik s monetary contributions and should be credited to his capital account Kessler v. Antinora Superior Court of New Jersey, Appellate Division 653 A.2d 579 (1995) Rule of Law In the absence of a partnership agreement, it is assumed that partners intend to share equally in the profits and losses of the enterprise, regardless of the amount of money they contributed to the partnership. Facts Kessler (plaintiff) and Antinora (defendant) entered into a partnership agreement to build and sell a house. The partnership agreement stated that Kessler would provide the money and Antinora would act as the general contractor for the project. The agreement also provided that, after the house was sold, Kessler would be refunded his contribution plus interest, after which Kessler would receive 60 9

10 percent of the profits of the sale and Antinora would receive 40 percent. The partnership agreement did not mention what would happen in the event of a loss. The house was sold at a loss. Kessler sued Antinora to recover 40 percent of his loss on the sale. The Law Division granted Kessler s motion for summary judgment, and denied Antinora s cross-motion for summary judgment. Issue Where there is no partnership agreement as to losses, and where one partner contributes money to the venture and the other contributes services or labor, in the event of a loss is either party liable to the other for any loss sustained? Holding and Reasoning (King, J.) No. Where there is no partnership agreement as to losses, and where one partner contributes money to the venture and the other contributes services or labor, in the event of a loss neither party is liable to the other for any loss sustained. Under New Jersey s Uniform Partnership Law, each partner must share equally in the profits of the partnership, and must contribute equally to the losses sustained, unless an agreement between the partners states otherwise. In this case, the agreement between Kessler and Antinora is controlling, not the statute. The agreement between them states that, after the house was sold, Kessler would be refunded his contribution plus interest, after which Kessler would receive 60 percent of the profits of the sale and Antinora would receive 40 percent. This agreement shows that the parties intended that Kessler would be repaid his investment from the sale of the house, not directly from Antinora. This court is persuaded by the reasoning of Kovacik v. Reed, 315 P.2d 314 (1957). In that case, the California Supreme Court acknowledged that, in the absence of a partnership agreement it is assumed that partners intend to share equally in the profits and losses of the enterprise regardless of the money they contributed to the partnership. However, the court in Kovacik further held that when only one partner contributes money, and the other partner contributes labor and services, neither partner is liable to the other for any loss sustained. When such a partnership suffers a loss, each partner will lose his contribution, one partner a portion of his money, and the other all of his labor. Here, Kessler lost some of his money, and Antinora lost the entire value of his labor. The written partnership agreement provided that Kessler would be repaid on his investment out of the proceeds of the house s sale, not out of Antinora s assets. In the absence of an agreement on how to apportion losses, both parties share in the loss, one in dollars, and the other in labor. The lower court s judgment is reversed, and summary judgment is entered for Antinora. Shamloo v. Ladd California Court of Appeal, Second District 2003 WL Rule of Law 10

11 Absent an express agreement to the contrary, a partner is not entitled to payment for rendering services to the firm. Facts In 1995, Farhad Shamloo (plaintiff) and Rick Ladd (defendant) formed Ginnytex, a partnership engaged in manufacturing. There was no written partnership agreement. Ladd contributed $75,000 as a capital investment and later loaned the firm an additional $75,000. Shamloo contributed only his labor and his knowledge of the industry. In November 1999, Shamloo sued Ladd for dissolution of the partnership and an accounting. Shamloo contended that his labor and expertise were capital contributions which should be repaid to him on dissolution. There was no specific oral or written agreement that Shamloo s services would be treated as a capital contribution, nor was there an agreement that Shamloo would be paid for their services. The trial court awarded Shamloo $27,344 as compensation for his services to the firm. The court also declined to award Ladd any interest on his loan to the firm. Ladd appealed both rulings. Issue Is a partner entitled to compensation for providing services to the firm in the absence of an express agreement that the partner will be compensated? Holding and Reasoning (Turner, C.J.) No. When a partnership dissolves, each partner is entitled to recover her monetary contributions to the partnership. Once all contributions have been repaid, the partners then share equally any profit that remains. A partner is not entitled to compensation for performing work towards the business of the partnership. Thus a partner who contributes only services does not normally receive a share of capital on dissolution, unless there is an express agreement providing for compensation. A partner is also not entitled to interest on his capital contribution. However, a partner who loans or advances money to the firm is entitled to interest on the loan or advance. In this case, there was no agreement regarding compensation for Shamloo. Therefore Shamloo is not entitled to any compensation for his services on dissolution. Further, Ladd is entitled to interest on his loan to the partnership. The second $75,000 was a loan and was not part of Ladd s capital account. Therefore the trial court s rulings providing compensation to Shamloo and denying interest to Ladd are reversed. Fiduciary Duties: 2 nd Half of Class -What happened in Meinhard v. Salmon? -Who did Gerry lease the property to? -Meinhard is upset here because after the lease, Salmon created a new lease with a third party and didn t inform Meinhard of it. 11