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Business Law Notes - Agency Partnership Corporations

 

AGENCY
Forms of Business Organization

1. General Partnership
2. Limited Partnership
3. Limited Liability Companies
4. Limited Liability Partnerships
5. Corporations

AGENCY
I. INTRODUCTION
1. Definition: "Agency is a mutually consensus (factual) fiduciary relationship between 2 legal persons, where (p. 2): a. Manifestation by Principal that A shall act for him
b. A’s acceptance, and understanding that P is to be in control
Key terms: -Principal: right to control conduct of A
-Agent: person whom by mutual asset acts on behalf of another P and subject to his control
-consensus: not necessarily contractual, nor intended, just an agreement
-fiduciary relationship: duty of agent to act SOLELY for benefit for P
-consequences: liability either by
a. Contract side, or
b. Tort side: (see next point)

2. Tort Liability: e.g. Respondent Superior/ Master-Servant relationship. A servant subjects Master to personal liability to 3d parties while acting within scope of employment. Req'ts:
a. Master-Servant
b. Conduct of Agent while w/i scope of employment

3. Formation of Agency: Consent is essence of relationship. There are NO FORMALITIES req'd to form an agency. Agency can be inferred from conduct of parties, except:
a. Conveyance of Real Property: The "Equal Dignity Clause" in the Statute of Frauds requires a writing signed by the Grantor; however, if agent acts on behalf of Grantor, he requires a separate signed writing.

II. AUTHORITY: 1. Liability of P to 3dp:

P is liable: A principal will be liable under an agency contract made for the benefit of P if:
a. Agency relationship
b. Agent acts within scope of employment (had actual/apparent authority, was an agent by estoppel, had inherent authority, or P ratified the act))

P is not liable: A principal is not liable under agency contract if:
a. Agent acts without authority, or
b. Agent acts in excess of authority given.

***Exception to No Authority/No liability rule: i) Inherent authority
ii) Ratification
A. ACTUAL AUTHORITY: -(FROM AGENT’S PERSPECTIVE: an agent has actual authority to act na given way on P’s behalf if P’s words or conduct would lead a reasonable person in A’s position to believe that P had authorized him to so act)
-implies Principal created authority unilaterally through words or conduct
-requires communication from P to A that authority's been given

1. Expressed
2. Implied Authority: inferred from words or conduct, custom
i) Acquiescence: if P knowingly fails to object to authority
ii) Incidental: authority to do acts that are reasonably necessary to accomplish the authorized transaction, or usually accompany it.
iii) Custom and Usage: e.g. ship's captain, or authority to sell Real Property

B. APPARENT AUTHORITY: (FROM 3dp’s PERSPECTIVE: an A has apparent authority to act in a given way on a P’s behalf to a 3dp if the words or conduct of the P would lead a reasonable person in 3dp’s position to believe that ht eP had authorized A to so act)

-the agent is authorized to act as an agent (acts within the scope of his employment)
-the agent professes to act as an agent
-the 3d party reasonably believes that the agent was given authority
-P is liable if no actual authority, but there's apparent authority
-e.g. P is liable on actual and apparent authority: I write a letter to Agent to sell my car. I sent a copy of the letter to 3d party. Yes there's actual and apparent authority.
-e.g. P is liable based on apparent authority: same case, in P's letter to agent, he writes, "don't sell my car until you talk to me." Here, no actual authority, but there is apparent authority vis-а-vis 3d party.

3. AUTHORITY BY ESTOPPEL: FROM P.O.V. of 3dp--”RELIANCE” (A person who is not otherwise liable as a party to a transaction purported to be done on his behalf, is liable to persons who have changed their position b/c of their belief that the transaction was entered into on his behalf, if: a. he intentionally or carelessly caused such belief, or b. knowing such belief he did not try to notify 3dp)

-P negligently or intentionally caused or allowed 3d party to reasonably believe that the agent had authority and
- 3d party reasonably relies on this to her detriment and changes her position.
-P knowingly did not take reasonable steps to notify 3dp
-"Lock case:" 3d P is a traveling salesman who goes into hotel where he hands over jewelry for bailment to front desk person who purports to be manager of hotel. P is given receipt and keys to room. Next morning, jewelry is missing. The real manager denies that the person from last night was the actual manager, and because of this, denies liability. Hotel held liable.
-"Hallick v. N.Y.S.:" 2 landowners had their land condemned by State. They claimed that state lacked authority to do so. Almost all parties appeared in pre-trial conference; however, law states that attorneys appearing in a pre-trial conference must have authority to settle. BOth attorneys and only one of the l/o's showed up. Settlement was reached. It was held that the second l/o gave his attorney authority by estoppel to settle.

4. EMERGENCY AUTHORITY: a. Must be existing P-A relationship
b. Unforeseen emergency
c. Emergency relates to duty with which agent is charged
d. Impractical for agent to get in touch with P

EXCEPTIONS TO NO LIABILITY IF NO ACTUAL or APPARENT AUTHORITY:
5. INHERENT AUTHORITY (p. 13): (the authority to take an action that a person in the P’s position reasonably should have foreseen A would be likely to take, even though action was forbidden)

Test for INHERENT AUTHORITY: P.O.V. of Principal: Would a reasonable person in the P’s position have foreseen that despite his instructions, there was a significant likelihood that the agent would act as he did?
-Policy and Source of Liability: derived solely from AGENCY relationship, and exists for PROTECTION of 3dp who may be harmed by Agent, e.g. Vicarious liability/ Respondeat Superior
-Policies: P can better spread the risk of losses, prop allocation of resources is promoted, P is in better position to control A, A may reasonably believe it’s in P’s best interest to violate instruction, inequitable to allow P to benefit w/o compensating innocent injured 3dp, FORESEEABLE to P that A may violate his duty

3 types of Inherent Authority:
i) Respondeat Superior
ii)Authority given to make representation
iii) General Agency Doctrine:
1. General Agent: if authorized to conduct series of transactions
2. Specific Agent: authorized to conduct one shot deal

e.g. Logales Service Center case: 2 biz men in AZ wants to open gas station. Persuaded Arco Inc. to lend them money. 2 biz men met with an Arco rep. who purported to be marketing manager. The manager agreed to lend 2 biz men more money and further agreed to discount the price of fuel Arco sold to them. Subsequently, Arco didn't honour agreement because they claimed that marketing manager didn't have authority to make such a deal. Court held that Arco granted Inherent power to manager, thus held liable.
6. RATIFICATION: if no actual or apparent authority, P is bound if he ratifies transaction by "manifesting affirmance by P of a prior act which as not authorized, purportedly done on his behalf by an agent with authority."

-Key points: 1. "Purportedly done by Agent with authority"
2. Manifestation must be objective, needn't be in words
3. P must have full knowledge of facts
4. Ratification of ALL of agent's conduct

-Consequences of Ratification: 1. P becomes bound on K b/c of ratification
2. A is no longer liable on K
3 TYPES OF PRINCIPALS:
1. DISCLOSED: "3d party knows that agent is acting on behalf of a P at time of transaction, and 3d party knows identity of P"
2. UNDISCLOSED: "3d party is ignorant, thinks agent is the principal"
3. PARTIALLY DISCLOSED: "3d party has notice/knowledge that agent is acting solely for a P, but doesn't know identity of P"

2 TYPES OF AGENTS:
1. General Agent: authorized to conduct a series of transactions involving continuity of service
2. Special Agent: authorized to conduct single transaction

**These distinctions are important because of potential liability of agents
Case 1: 3d Party v. Principal All 3 types of Principals liable on agency contract: if A acts on P’s behalf with actual or apparent authority, or agent by estoppel, or had inherent authority, or ratified the transaction.
Case 2: Principal v. 3d Party: -General Rule: if A and 3dp enter into a K under which P is liable, then 3dp is liable to P.
-EXCEPTION; when P is UNDISCLOSED or PARTIALLY DISCLOSED and FRAUDULENT CONCEALMENT and A and P knew that 3dp would not have dealt with them had P been disclosed
-e.g.: P intentionally tells agent to conceal his identity in buying 3d P's car in order to get a better deal since 3d P hates P.

Case 3 and Case 4: 3d Party v. Agent, and Agent v. 3d Party
-Disclosed Principal: Agent is not liable to 3d P, only P is.
And 3d party not liable to Agent if disclosed P.
-Undisclosed P: Agent is personally liable to 3d P; A can enforce K against 3d P
-Partially Disclosed: Agent is personally liable even though P is bound, but there's a "REBUTTABLE presumption" that if A is sued personally, if he can bear the burden that he wasn't intended to be liable, then he won't be held liable.
-And, 3d P is liable to Agent,

Case 5: Agent v. Principal, Principal v. Agent: If Principal is bound b/c Agent acts w/o actual authority, but has apparent authority, then Agent is also bound to P
And, Principal is bound to Agent if Agent acts under actual authority
August 26, 1999

2 Main concepts: 1. AUTHORITY
2. DUTIES OWED BY AGENT TO HIS PRINCIPAL
DUTIES OWED BY AGENT:
a. DUTIES OF SERVICE: e.g. duty to use due care, obey, remain w/i authority given.
b. 1. General Rule Competition During Employment: DUTY OF LOYALTY/ FIDUCIARY DUTY/ DUTY NOT TO COMPETE, to act solely to advance interests of P, not to create conflict of interests. Can't solicit P's customers, nor compete, unless consensus, e.g. DUTY NOT TO COMPETE by opening own biz, or enter dual agency by representing someone else. Scenarios: solicitation of clients.

-In New York, the DUANE-JONES Rule: while Principal Agency relationship, A can't solicit P's customers. But, acts done to "PREPARE" to compete, not solicitation are allowed.
-e.g. Growbert v. Mowens: NY Ct of App. held that lawyers in lawfirm violated non-compete duty while employed as agents of firm b/c they actively solicited firm's clients

b 2. General Rule Competition After Employment: Once a Principal-Agent relationship has terminated, the former A is free to compete, if:
a. Doesn't violate Non-Compete K
b. In the process of competing, former A doesn't use former P's trade secrets, include. Customer lists

b 3. General Rule Contract Not to Compete After Employment: e.g., Agent signs K with P with clause that restricts A from competing w/i U.S.A. for 25 years after employment ends. A court will enforce this K, only to the extent that:
a. K must be reasonable in duration and geographical scope
b. K must either be necessary to protect trade secrets, or services are unique, special, or extraordinary

-State law defines what is “trade secret” (something that gives former A competitive advantage
-e.g. can lawyer solicit his former customers? Yes, doesn’t constitute using former P’s customer list.

b 4. General Rule: Principal’s Consent for A to Compete: Yes, P is allowed to compete, so long as there is FULL DISCLOSURE. Duty varies depending on whether:
a. A acts as the new 3d Party. If so, A has duty to fully disclose.
b. Whether A acts as dual agency. If so, disclosure obligation is to disclose all materials, facts that may affect P’s decision in permitting dual agency.

e.g. Sovern owns diamond and thinks it’s worth $1,000. He hires Mopp, an expert gemologist, who thinks the diamond is worth $100,000. Mischievously, Mopp asks Sovern to buy the diamond for $1,500. Sovern consents, but consent is not valid b/c Mopp didn’t disclose true worth of diamond.
e.g. Same case, Diamond worth $1,000. Mopp asks Sovern whether Mopp can represent Harry too, who wants to buy the diamond. S consents, but he doesn’t know that Mopp and Harry have had a long-standing relationship where Mopp gets commission for his finds. Sovern’s consent is not valid b/c failure to disclose all material facts that may affect Sovern’s decision to permit dual agency.
p. 19, Tarnaowski v. Resop: Resop acted as agent to Tarnowski (principal) to investigate a business he wanted to buy. Resop didn’t disclose all the facts, and made gross misrepresentations to Tarnowski about the profits have made in the past. Tarnowski already signed a K with 3d party. Tarnowski sought to rescind the K with 3d P in his first action. Court rescinded K. In this subsequent action, Tarnowski recovered commission Agent got from the sale as well as costs of bringing first action.
Held: If Agent is involved in conflict of interest, and doesn’t get proper consent based on full disclosure to principal, principal is entitled to:
a. rescind the transaction, and recover from culpable 3d parties, or agent
b. P can recover from A return of any payments, lost profits, agent’s benefits from 3d party, full indemnification from A any expenses principal incurred
-see Northeast Central v. Norlington (NY Ct of App.)

II. GENERAL PARTNERSHIP

History: British Partnership Act of 1890 inspired USA to draft their 1914 UNIFORM PARTNERSHIP ACT (UPA). Good law in 46 states, including N.Y. There is a revised UPA, (RUPA) with 4 versions, promulgated in 1990’s, latest in 1997. RUPA is very controversial, so most states don’t use it. 1916 UNIFORM LIMITED PARTNERSHIPS ACT became law in 1949. There’s been Revised ULPA’s, and most states are governed by 1976 RULPA.
-Entity v. Aggregate Theory (p. 40): Old school and UPA states that a partnership not recognized as legal person, but rather an aggregate . NOW, RUPA says that partnership is recognized as independent legal person and can be sued like one entity.
-Joint Venture v. Partnership: Joint Venture: one-shot deal/isolated transaction. Partnership: on-going relationship. If Joint venture, it’s governed by general partnership law anyway.
-At common law, a corporation can’t be a partner in a partnership (today, not true). So, corporations got around this by calling the so-called partnership a “Joint Venture.” Today, a court will call the partnership a joint venture, but will apply General Partnership law, EXCEPT:
-issue of Authority: the extent of a joint venture to bind the joint venture. A joint venture has less power to enter into ....

PARTNERSHIP: NO formalities nor filings req’d. This reflects that concept that partnerships status depends on the factual characteristics of a legal relationship between two or more persons, not on whether the persons think they have a partnership. UPA Sec. 6(a): a partnership is an association of 2 or more persons to carry on as co-owners a business for profit.
P. 46: Unless partnership agreement states otherwise, matter affecting ordinary business can be decided by majority vote. Extraordinary matters decided by unanimous vote; all partners have equal power to management
1. An association: whether parties “intend” to form an association
2. 2 or more persons: person + persons; or person + corporation
3. Carry-on a business: not one shot deal, but rather continuity of biz
4. For profit
5. as Co-owners of the firm: a. Joint-control
b. Profit-sharing

-ISSUE: Under what circumstances is a Court going to call it a partnership, and apply general partnership law when sued?

SCENARIOS: Case 1: What happens when business does very well and everyone wants to be a partner and reap the profits?
Case 2: What happens when business fails and creditors want to get damages, owner claims others were partners too and must share the losses?
-e.g. B is a millionaire widow and J falls in love with her. B paid for J’s expenses to buy some foreign art to be sold in N.Y. B didn’t know that J was already married with kids. Relationship deteriorated. J sued B to claim that he had a partnership with B, thus enabling him to reap the profits of the art sale. Judge Sweet held in favor of J!!!!!
-Justice Douglas in a Yale Law Journal article describes elements of “Joint-Control:”
1. Control- to set prices or reduce costs, affirmative exercise of control, more than veto power
2. Equity of ownership
3. Did P participate in profits
4. Did P participate in losses
-if 3 out of 4 of these elements met, then constitutes a partnership, impose liability
-Martin v. Peyton, p. 31
Hall was partner of KN&K, and represented them in negotiating a loan with Peyton, etc. Peyton agreed to transfer liquid securities as a loan. The loan consisted of an agreement, indenture, and an option to become partners. Petyon etc. agreed that the loan itself would not constitute a partnership, and that any profits they reaped would be purely for the purpose of repaying the loan. Peyton, etc. got veto power, and was kept up to date in the biz dealings. Hall later claims that Peyton etc. became partners and should thus share in lost profits.
-Issue: whether Petyon, etc. became partners with KN&K in an on-going business so to share the losses they incurred?
-Held: No.
-R.D.: a. A lot of control given to Peyton, etc. but doesn’t necessarily mean a partnership, even if there’s veto power.
b. Court completely ignores “OPTION” or “profit-sharing” as an issue in this case.
c. Even though UPA was in effect at the time, Court doesn’t allude to it, which says that if there’s profit-sharing, then there’s a REBUTTABLE presumption that there’s a partnership.
d. Where there’s a grey area, Court will honour intent of parties as requested in their documents.

Net Profit-Sharing
UPA Sec. 7(4) states that if there’s profit-sharing, then there’s a REBUTTABLE presumption of a partnership
Issue: What about Loss-Sharing? Is it an indispensable element to finding a partnership?
Held: No.
R.D.: UPA is silent about loss-sharing, suggesting that loss-sharing is not pertinent.
-e.g., Steinbeck v. Jerosa (NY Ct. of App.): dispute whether P was liable for NY income tax on gross receipts. P said there’s an exception to tax rule that if there’s a partnership in interstate commerce, then no tax. P claimed that he had a partnership with his publisher located in a different state.
-Held: No partnership b/c there’s an indispensable element to partnership to share profits and share losses, and if there’s no agreement to do this, then no partnership.
**Incorrect Holding! b/c:
1. UPA is silent about loss-sharing, and
2. Ct ignores importance of UPA Sec. 18A: “Partners don’t have to share losses (in order to qualify as partners.)”
3. Logical fallacy: ‘Denying the Antecedent:” e.g. all Dalmatians are dogs IS NOT THE SAME AS all non-Dalmatians are not dogs. Court essentially thinks that all non-loss sharing is the same as “Non-partnership”
4. Court blurs 2 ideas: Loss-sharing (percentage each partners is obligated to pay) as agreed among partners themselves, vs. loss-sharing in terms of merely being liable to 3d parties.
8/31/99

WHAT IS A PARTNERSHIP FROM PERSPECTIVE OF UPA Sec. 7?
1. If there’s profit-sharing, then there’s a presumption of a Partnership
2. But, there are a series of “NON-PRESUMPTIONS” of no partnership, if: “there’s profit-sharing, and it’s closely tied to a special objective, then draw no inference in favour/or against the existence of a partnership.
E.g. of “Instances when not to infer a partnership”
A. PROFIT-SHARING IN CONNECTION WITH REPAYMENT OF DEBT
e.g. House of Ward case: debtor ran business and owed money to creditors. Committee of Creditors ran his business with his consent until debt was repaid. NO PARTNERSHIP b/w debtor and Committee.
e.g. Lupien v. Malsbedenden: buyer of Bradley car wanted to buy car from Cragan, Malsbenden being the lender to cragan to build such car. Malsbenden, however, exercised control over day to day business. Subsequently, Cragan disappeared. So, P sues Malsbenden, but Malsbenden claims no partnership.
Issue: Whether Malsbenden is partners with Cragan so to be liable to Lupien?
Held: Yes (but this is an unusual holding, b/c: a. No provision in K for interest, b. loan not made in lump sum, c. No fixed rate repayment schedule.
R.D.: Malsbenden is partner b/c he exerted extensive control on an on-going basis by himself; he also had financial interest

B. PROFIT-SHARING LIMITED TO COMPENSATION GIVEN
C. PROFIT-SHARING LIMITED TO PAYMENT OF RENT
e.g. Tenant has lease in shopping center. Landlord put provision in lease that he’d acquire X% of tenant’s profits annually.
D. PROFIT-SHARING LIMITED TO PAYMENT OF ANNUITIES TO SURVING SPOUSE
E. PROFIT-SHARING LIMITED TO REPAYMENT INTEREST ON DEBT, OR SUBSTITUTES AS REPAYING INTEREST ON DEBT

e.g. Martin v. Peyton
F. PROFIT-SHARING LIMITED TO PAYMENT FOR GOODWILL OF A BUSINESS

e.g. an “Earn-out” provision in a K that states that “Seller will sell buyer his business at low price only if buyer agrees to give him X% profits annually.
CHAPTER 3
PROPERTY and PARTNERSHIP
3 Distinct Concepts:
1. PARTNERSHIP’S PROPERTY: an entity called a partnership can own property that is separate from partner’s property. This goes back to aggregate v. entity theory.

2. PARTNER’S PROPERTY: Tangible things; e.g. partner’s table in a lemonade stand business
3. PARTNER’S PARTNERSHIP INTEREST: partner’s equity share in the partnership

I. PARTNERSHIP’S PROPERTY v. PARTNER’S PROPERTY--how to make distinction of whether asset creditor wishes to attach in a lawsuit is the partnership’s or the partner’s:

A. Look at INTENT of partners w/ respect to asset in question by looking at Agreement.
-usually expressly stated in K, e.g. “I will make contribution of $X as the capital contribution to the firm.”

If not expressly stated:
B. Look for INDICIA:
1. Use, Occupancy, or Possession of Land: e.g. I own a piece of RP and all of a sudden the firm starts manufacturing on my property, but legal title still remains in me. Courts are split: Most courts hold that title still is in the partner.
2. RP bought with Partnership’s Money: Title in partnership
3. Record Title in Partnership’s Name: is evidence of intent, thus partnership’s property
4. Books of Account: i.e. firm’s record of purchases
5. Miscellaneous Factors: “Who paid taxes, mortgages, insurance, repairs, maintenance?”

C. REAL PROPERTY: Now that a partnership can own property in firm’s name, set forth in UPA Sec. 8(3) and (4).

II. PARTNERSHIP ‘S PROPERTY v. PARTNER’S PARTNERSHIP INTEREST: What are partner’s right to partnership property as defined by UPA Sec. 24?

A. SPECIFIC PARTNERSHIP PROPERTY: Sec. 24 is illusive in defining partner’s specific partnership property. Moreover, Sec. 25 takes away normal attributes of partner’s property rights.
B. PARTNER’S RIGHT TO PARTICIPATE IN MANAGEMENT: (UPA Sec. 18(e)): absent express provision to the contrary, each partner has one vote.
C. PARTNER’S PARTNERSHIP INTEREST: (UPA Secs. 24-27): it is a property right which is not tangible, and is classified as personal property/equity share. UPA Sec. 26 is a ‘Partner’s Share” in profits and surplus (equity share in interest, or right to get X% interest). “Surplus” is defined as what’s left after partnership discharges all liability.

III. WHO’S ENTITLED TO POSSESS A PARTNERSHIP INTEREST/Equity Share?

A. Look at POSSESSION: UPA Sec. 25: Each partner has equal right to possess other’s right to use firm’s assets to promote firm’s business
B. ASSIGNABILITY: UPA Sec. 25: A partners has no right to transfer his own share for own interest; he can only assign firm’s interest, i.e. assign rights of all partners in same property
Sec. 27: A partner’s right to assign his partnership interest is FREELY ASSIGNABLE, absent provision to the contrary. However, UPA puts so many restrictions on ASSIGNABILITY that it’s nearly impossible to do so.
RESTRAINTS:
1. DELECTUS PERSONI: UPA Sec. 18(g) “choice of person;” an AE can’t become partner w/o the consent of ALL other partners. Thus, a mere AE gets very few rights.
-Prohibition of Assignment is possible if expressly provided in agreement

e.g. Rappoport v. 55 Perry Co: 2 families were in a 50/50 partnership to manage property. K said, “no partner shall have right to assign unless majority of partners agree. This provision, however, was subject to an exception: doesn’t apply to assignment to immediate family.” One of the families assigned to their child and cited the exception. Court Held: Delectus Personi: need consent of other partners.
UPA Sec. 27:
2. AE doesn’t get usual rights that partner gets to INSPECT BOOKS and RECORDS:
3. AE doesn’t get right to ACCOUNTING OF FIRM’S FINANCIAL STATUS: Mere AE only gets this right in the wake of a dissolution
4. Other partners have RIGHT TO DISSOLVE FIRM IF UNANIMOUS VOTE:
5. AE has no right to GO TO MEETINGS

WHAT RIGHTS DOES AE GET?
1. AR’s rights to profits
2. AR’s rights to surplus
3. Some limited rights to force dissolution:
a. If a partnership for a term or to accomplish a specific objective is over, then AE can enforce a dissolution
b. If partnership-at-will, then AE can force dissolution

DO WE REALLY MEAN IT WHEN COURTS WILL LITERALLY ENFORCE PRINCIPLE OF DELECTUS PERSONI?
-Yes. Courts will literally enforce this principle w/o inquiry into evidence to the contrary, even if egregious case. However, Delectus Personi is counter-intuitive b/c partnership concept is very old form of business organization, and so deeply encrusted.

C. CREDITOR’S RIGHTS TO PARTNER’S PARTNERSHIP INTEREST:

UPA Sec. 25(c): Creditors of individual partners can’t go after firm’s assets/specific partnership property. But if firm sued as a whole, then specific partnership property is subject to attachment.
Creditor’s rights to Partnership Interest: Creditor has right to go after partner’s partnership interest but he’ll be given status of mere AE (insubstantial rights).
-UPA Sec. 28: Creditor has rights like an individual partner once he has a judgment, and he’ll then apply to the Court to get a charging order (LIEN) to apply over intangible partnership interest.
(New York doesn’t require judgment.)
-”CHARGING ORDER” Not much case law. Very few rights in this order:
1. A ct can appoint a receiver to sit as a mere AE, but lacks many rights. He’ll just collect profits and surplus if dissolution.
2. Once order is granted, all non-charged partners can dissolve partnership immediately.
3. In addition to Court appointing receiver, it can order a foreclosure sale of partnership interest. But even if creditor bids, they can only get rights of an AE.

CHAPTER 4
Rights & Duties owed by Partners w/i Firm
1. SHARING PROFITS/LOSSES: each partner has unlimited personal liability. If K is silent, profits shared equally. (UPA Sec. 18(a), 40(d)).
2. CAPITAL CONTRIBUTIONS: identified by intent of partners in an operating K, if one exists (e.g. intent of partner when he contributed a table to the lemonade business) (UPA Sec. 18: don’t receive interest for capital contribution).
3. RIGHT TO INDEMNIFICATION and CONTRIBUTION: (Sec. 18(b), 40(b), (d), (f)
-Individual partner is entitled to be indemnified by firm for any obligations he undertakes on behalf of the firm (e.g. business expenses, plane tickets, meals). Indemnification is a “partnership’s liability”, where the “partner” has a right to be indemnified.
-When firm doesn’t have the assets to indemnify partner, then each partner must make additional contributions. Contribution is the “partner’s liability” where the partnership is a right to require contribution for lack of assets to pay off firm’s liability. (p. 54).

4. RIGHT TO PARTICIPATE IN MANAGEMENT: (Sec. 18(e), (h): each partner has one vote. Vote of affirmative majority of partners is required.
-See Summers v. Dooley, p. 43
-Exceptions: 1.
2. Judicial: A court can label a particular decision as extraordinary and some courts can require unanimity instead of majority, e.g. on decision to incorporate, or sell real property. (UPA Sec. 9(3)).
5. COMPENSATION: (UPA Sec. 18(f)): Absent an agreement, a partner is not entitle to compensation for reasonable value of his services, b/c of the profit-sharing nature of a partnership
6. DUTY TO RENDER SERVICES: not found in UPA, only in case law
7. DUTY TO KEEP ACCURATE BOOKS & RECORDS: of accounts and transactions. Partner has absolute right to inspect them
8. DUTY TO RENDER FULL INFO TO OTHER PARTNERS w/ respect to DEALS ENTERED INTO BY ACTING PARTNER
9. DUTY TO ACCOUNT: how much did partner spend in re K he entered into on behalf of firm for all assets partner handles
10. DUTY OF LOYALTY TO EACH PARTNER: (UPA Sec. 21) derived from Agency law on Fiduciary duties
-E.g. a. Claim that partner misappropriated partnership assets for himself
b. claim that partner misappropriated a business opportunity for himself instead of for best interest of firm
c. Claim that partner is competing with firm

-Meinhard v. Salmon, p. 72: J. Cardozo, 4-3 decision: P and D entered into a joint-venture to lease Hotel Bristol and renovate it. Meinhard helped finance the deal, and Salmon was made the managing partner. Gerry, owner of the hotel and surrounding land agreed to lease the hotel to P and D for 20 years. When 20 yrs was up, Gerry offered to lease the hotel again for a really good price so long as P and D agreed to erect a building beside the hotel; the land value around the hotel/mid town N.Y. was skyrocketing.
-Salmon didn’t inform Meinhard of the deal and justified not doing so by stating that the duration of the join-venture had expired. Meinhard sued claiming that Salmon breached his fiduciary duty.
-Held: Salmon breached his fiduciary duty in a joint-venture in which general partnership law is applied.
Key points: 1. Court takes it as given that this is a joint-venture because there was a lack of join control, and thus partnership law is applied.
2. A lot of Cardozo’s rationale is based on theme that salmon had special obligation being managing partner. Today, no one really believes that the Court’s decision turned on “CONTROL” position of salmon. But rather, it turned on breach of fiduciary duty.
3. Dissent: Many people believe Dissent’s argument is more sound b/c if the deal involved a mere extension of the hotel, and Salmon still behaved as he did, then it’d then constitute a breach of fiduciary duty.
4. Cardozo says Salmon has duty to disclose the proposed deal. This duty to disclose entails more than a mere phone call. It means advising and giving opportunity to partake in deal.

9/2/99

Issues:
1. Can a Fiduciary Duty be waived?
2. RUPA and why it is not liked

1. Can Partners add a provision to their partnership K that each partner waives their fiduciary duty tot he firm?

-New School of thought (“Contractarians”): Economic and policy argument that partners should be able to do what they want; get rid of traditional paternalistic view that fears abuse and believes in fundamental duties.
-Traditionalists: Fiduciary duty never waivable
-reality: cases don’t support either extreme view. Fair reading of cases show that courts will enforce and recognize limited waives if FULL DISCLOSURE and DETAILED DESCRIPTION.
-e.g. A goes into partnership with a very successful corporation. The corporation may request a provision in the agreement that allows them to enter into a similar K with other businesses. Court will probably enforce this waiver.

2. RUPA Sec. 404, 103: Original UPA calls for standard of duty of care as “ORDINARY.” Drafts of new UPA proposes incomprehensible standard of care. RUPA Sec. 404 says “duty to avoid gross negligence” (lower standard of care than UPA), and language that this is not waivable. But Sec. 103 says duty is waivable if reasonable. Original UPA standard of “good faith and faire dealing” is also watered down by RUPA. RUPA is victory for contractarians.

Anti-RUPA view: Price of revision is not worth it b/c it’s incoherent. It’s a bad idea right now, insidious, premature b/c it turns core value of American partnership law. These opt-outs are new to contract law and are found only in corporate law. Should wait for it to play out. General partnerships are very different from corporate law b/c partners are much more vulnerable because unlimited personal liability, other partners can expose him to unlimited liability, and people are labeled partners w/o realizing it.

CHAPTER 5

Relations b/w Firm and Third Parties

I. ISSUES OF AUTHORITY THAT BIND THE FIRM

A. A Partner is both PRINCIPAL and AGENT when dealing with 3d party, unless expressly provided. (Sec. 18).
B. Every partner is an AGENT of firm under APPARENT AUTHORITY. Sec. 9
Sec. (9)(2): If a partner lacks actual authority and is not working within the scope of his duty (apparent authority) then the firm is not bound (unless authority by estoppel, emergency authority, etc…)
C. UPA Sec. 9: APPARENT AUTHORITY:

Sec. 9(1): Examples of Apparent authority when 3d party v. partner: signing legal instruments related to normal course of business, borrowing money for firm, hiring Ees and agreeing to compensation.
Sec. 10: Conveyance of Real Property of Partnership by Person w/o Actual Authority:
(incomprehensible rules): 1. Partnership can own and sell RP
2. Partnership can be bound by partner conveying RP, by preservation in record title.
e.g.: Acting partner sell w/o authority RP of the firm which has record title to a 3d party. Is firm bound? Analyze problem in two ways:
1. IF RECORD TITLE IS INTACT THEN FIRM IS BOUND: 3d P honestly thinks partner is conveying RP as RP of the firm with authority. If 3d P buys the RP, he is bonafied b/c he wasn’t on notice of the lack of actual authority since the record title was apparently good. Firm is bound b/c the chain of record title is not broken, and partner acts with apparent authority, w/i scope of duty.
2. IF RECORD TITLE IS BROKEN THEN FIRM IS NOT BOUND: 3d P will get equitable title, but not good record title b/c deed is not in name of firm, thus buyer should be on notice of bad title. In this situation, Equitable title is when 3d P has good title vis a vis Firm. Legal title is if Firm conveys to another 3d P.

UPA Sec. 9(2): Acts not w/i apparent authority of partner and thus, FIRM NOT BOUND.
e.g.: K for suretyship: e.g.: Partner and girlfriend go to buy a condo. The bank requires more proof of credit. Partner shows credit of partnership. NO APPARENT AUTHORITY b/c not w/i scope of his employment.
e.g. Subscribing share of stock
e.g. charitable undertakings

UPA Sec. 9(3): List of acts beyond partner’s authority, REQUIRING UNANIMITY OF PARTNERS:
UPA Sec. 9(4): Acts forbidden by partnership K won’t bind the firm if 3d P has knowledge of the lack of authority/restriction.
D. TORT LIABILITY: UPA Secs. 13, 14, 15
General Rule: In connection w/ tort liability committed by partner, firm is thus bound and individual partners are jointly and severally liable in which case a partner was acting in actual or apparent authority.
e.g. Fraud/Misappropriation of Funds
Rows v. Collier: wealthy widow walked into law firm and wanted to invest all the money she inherited. One of the lawyers gave her a receipt for the money, and ran off with it. Widow sued. Firm defended by saying that the lawyer acted beyond the scope of his duty, and thus had no apparent authority. Court Held: in favor of FIRM.
Croissand v. Ward, p. 2: Accounting Firm: one partner misappropriated funds of client. Client sued. Firm defended that they’re no in the business of investing funds. Court Held: in favour of firm, but said that apparent authority should be defined by perspective of what a reasonable person thinks partner is authorized to do.
E. PARTNER BY ESTOPPEL, Sec. 16
Requirements: 1. Actual Reliance
2. Representation
e.g.: If X represents that he is partner in Firm A, or allows the firm to represent that he is a partner in Firm A, or if X represents to Y that Smith is a partner with him, then X will be liable as a partner in Firm A, and he will also be liable for any K smith enters into. X will be estopped from denying his partnership.
e.g. Royal Bank v. Weintraub, Gold, Albert
Law firm agreed among themselves that they’d dissolve, but they kept the lease, phone listing in firm’s name, stationery with firm name. Former Partner A had a client who wanted to borrow money from bank., but bank required more credit history/assurance. So, Former Partner A wrote a letter saying that “the Firm” would take the money the bank loans and put it in escrow for the client. Money was attained, and client disappeared with it. Bank sues. Court held for Bank b/c Partner was a partner by estoppel.
II. ENFORCEMENT:

1.
2. Can a 3d Party sue a Partner?

UPA Sec. 15: a. If Tort liability, then Partners are liable Joint and Severally
b. If Contract Liability, then Partners are liable Jointly. If liability is joint, then all obligors must be sued jointly.
-Under Common Law, each partner can require partners to join all partners, and if plaintiff can’t do so, then too bad (find, serve, get jurisdiction).
- Almost all states have softened Joint liability Rule. New York CPLR 1501, 1502 sets forth that if firm is insolvent, then a creditor can go after any partner whom is served in fact.
-If liability is Several, then each obligor is liable.

III. DISSOLUTION: UPA Secs. 29-40

“Dissolution:” refers only to the fact of a partner ceasing to be associated with the business, not ending the firm.
“Winding up:” is the same as liquidation; process dissolution of settling partnership affairs, liquidation, distributing shares to partners.
“Termination:” point of end of liquidation; when all affairs finished; firm ends
“Continuation:” partners elect to go on
1. Causes of Dissolution
2. Effects of Authority
3. Effects on Liability
4. Liquidation
5. Continuation

1. TRIGGERING EVENTS-Causes of Dissolution:
a. Non-Judicial: dissolution w/o judicial intervention
b. Judicial: judicial declaration of dissolution required

A. NON-JUDICIAL DISSOLUTION:

A1. Dissolution not in Violation of Agreement:
i) End of duration of agreement specified, or accomplishment of objective in agreement.
ii) Dissolution at the express will of any partner when there’s a partnership-at-will:
-Can a partnership be held liable for dissolution of firm at will in bad faith?
-Yes. Court won’t inquire into bad faith b/c of literal application of DELECTUS PERSONI principle. Justification: partner is so vulnerable to unlimited liability.
-Page v. Page, p 83: 2 partners entered into linen-supply business 50/50 as partners-at-will, but it failed. Partner B owned a separate supply company that supplied and lended money to the business. All of a sudden, an air force base was constructed nearby, demanding supplies of linen. But, partner B wanted to now get rid of A. Partner B wanted to dissolve, liquidate, and sell shares. B would be the only one buying shares. A sued, claiming bad faith, and that this partnership wasn’t really one at will, claiming that the partnership was run with the agreement that they’d do so until debts were paid off. Court Held: NO partnership for implied term, but there’s a fiduciary duty of good faith, and part of it includes that a partner shouldn’t be allowed to appropriate partnership for himself when prosperity in sight.
-Narrow holding.

iii) Dissolution at the Express Will of all partners who have not assigned interests to a mere AE, or have ....charging order
iv) Dissolution b/c of expulsion of a partner, if expulsion is pursuant to agreement:
e.g. in drafting a clause to rid to get rid of true non-cooperative party w/o having to provide rationale.
A2. DISSOLUTION IN CONTRAVENTION OF AGREEMENT, UPA Sec. 31(2):
A dissolution in violation of the K is in fact a dissolution. Very controversial, and only permitted in America. Similar to application of Delectus Personi principle. Justification for applying this: partner is vulnerable.
A3. DISSOLUTION FOR SUBSEQUENT ILLEGALITY
A4. DISSOLUTION FOR DEATH OF PARTNER

A5. DISSOLUTION FOR BANKRUPTCY OF EITHER FIRM, or PARTNER
B. JUDICIAL DISSOLUTION:
(most judicial dissolution’s are litigable)
B1. Incompetence
B2. Incapability of partner to carry on duties, e.g. sickness
B3. Misconduct of partner--must materially interfere w/ firms conduct
B4. Willful or persistent (material) breach of partnership K
e.g. Potter v. Brown: accounting partnership. Senior partner was going to die, so he wanted to transfer his share to his protege. Other partners objected. Senior partner then withdrew his request, but other partners already initiated lawsuit and wanted to dissolve. Court held that it was an immaterial breach, so no dissolution.
B5. Partners forced to operate at a loss
B6. Other Circumstances where Judge feels that Dissolution is equitable.
2. AUTHORITY OF PARTNERS--Consequences:
(consequences on the normal operation...like, what happens the day after dissolution?)
See Sec. 33-35:
I) Need to wind up/liquidate partnership--actual authority:
-UPA says that except acts done to wind up, all actual authority to enter into new business ceases at moment of dissolution
-as to winding up acts, authority is placed equally in every partner
-WINDING UP includes finishing prior K, paying off debts, collecting, paying off 3d party creditors, selling firm’s assets, entering into new K to pay off debts....and then taking what’s left and DISTRIBUTING AMONGST PARTNERS

ii) Need to protect innocent 3d Parties:--apparent authority e.g., those who’ve extended credit to the firm and who were not on notice of the dissolution
GENERAL RULE: unauthorized post-dissolution acts of a partner will bind the firm, thus all partners are personally liable if those acts would be in what would’ve been within the partner’s apparent authority prior to dissolution, unless:
a. If cause of dissolution is ILLEGALITY, then partners not personally bound b/c 3d p should’ve been on notice
b. If cause of dissolution is BANKRUPTCY of partner or firm b/c this is public knowledge and 3d p would be on notice
c. If firm gives APPROPRIATE NOTICE: (“appropriate notice” the UPA distinguishes between regular 3dp and those 3dp who’ve extended credit. If it’s the latter, then they are entitled to ACTUAL NOTICE (special treatment); but if the former, then they’re entitled to CONSTRUCTIVE NOTICE, e.g., newspaper, general circulation of where firm conducts business

iii) Need to protect partners from improper acts entered into after dissolution by partner on notice: e.g., partner loses contribution rights
-protect partners by limiting contribution of innocent partners, e.g., if a bad partner enters into a bad K, all partners are bound. But among the partners, bad partner should be primarily liable and relieve other partners of regular requirement to CONTRIBUTE.
-e.g. if the firm dissolves, partner commits act w/i his winding up authority, such act is authorized.
-e.g. if the firm dissolves, bad partner commits acts not w/i his winding up authority, such act isn’t authorized.
-GENERAL RULE: Acting partner is entitled to indemnification if:
a. Act is w/i prior his prior apparent authority, AND
b. Dissolution must have been caused by express will of the partner, death of partner, or bankruptcy of partner, AND
c. Acting partner didn’t have knowledge of the bankruptcy.

-2 schools of thoughts in re the 3 acts req’ in #b: 1. These 3 acts are poorly drafted, don’t read statute literally; 2. these 3 acts are drafted well b/c/ specificity/plain meaning rule suggests that the drafters intended the 3 acts to be read literally. Also, it makes sense b/c back in the day, all other types of dissolution should put partner on notice.

3. WHAT ARE THE EFFECTS OF DISSOLUTION ON FIRM’S LIABILITY?
Sec. 36: Dissolution doesn’t discharge existing liability of any partner. (the remainder of the act merely elaborates).
-e.g. Sec. 36(2): retiring partner gets out of liability only if he gets novation releasing him from liability from creditor.

4. LIQUIDATION /WINDING UP (p. 50):
Sec. 40: we need to determine which assets are available for liquidation. They are:
a. All firm’ s property, plus
b. any contributions that may be required (to be made by partners to pay off liabilities)

-PRIORITY AMONG CLAIMANTS--ORDER OF DISTRIBUTION IN 4 TIERS: (who gets paid first?--tiers of priority are ranked serially, i.e. each prior tier must be paid off in full before lower tier gets anything.
1. CLAIMS OF 3dp CREDITORS
2. CLAIMS BY PARTNERS, other than for capital or surplus profits on assets, e.g., partners advances, any indemnification payments owed
3. REPAYMENT OF ALL CAPITAL CONTRIBUTIONS BY PARTNERS
4. ALL CLAIMS TO PARTNERS WITH RESPECT to PROFITS, i.e. surplus (whatever’s left)

-what if there’s not enough assets to repay all the tiers? Obligation to contribute, thus partners will have to put in their share, e.g.:
Gains & Loss % Capital +Gain/=Share
X 50% $50,000
Y 25% $25,000
Z 25% $25,000

Partners XYZ agree to dissolve. They agree to the above loss-share apportionment. Total pot after liquidation of assets is $100,000. So they paid in full Tier 1 in the amount of $100,000. Nothing owed to Tier 2, but Tier 3 is owed
-supposed liquidation produced a total pot of $160,000. Tier 1 is paid off. In tier 2, X gets $50,000, if expressly provided, and then Gain-Share. If K is silent, then $60,000 is split equally.
-partners must contribute their loss/gain % to repay the tiers not paid off.
-If Z is bankrupt, remaining partners will have to pick up Z’s share on top of their own.

*New York Sec. 71-a: variation which says that all unpaid EE WAGES and benefits gets a superior priority over 3dp creditors
5. CONTINUATION: What are the universe of possibilities in which a firm can continue?
a. AGREEMENT SAYS SO:
b. AGREEMENT IS SILENT< but all partners unanimously agree to continue: this is unusual. Each partner alone can force dissolution
c. CAUSE OF DISSOLUTION WAS A “DISSOLUTION IN CONTAVENTION OF AGREEMENT”:
Sec. 38: (Contravention is when a partner in a partnership-for-term wants to dissolve prematurely before term is completed)
breaching partner can’t dissolve
all of the partners can choose to continue w/o the breaching partner, but they must:
a. pay breaching partner off in case (ALL FIRM’S ASSETS - FIRM’S LIABILITIES x HIS PARTNERSHIP INTEREST) excluding goodwill, or
b. post a bond, approved by court, to secure breaching partner so that he’ll know he’ll get paid later

-in either case, the remaining partner must INDEMNIFY breaching partner for all liabilities
-POLICY ISSUE: Sec. 38 only applies to one kind of breach of partnership-for-term and partner walks out prematurely. What about other culpable breaches, e.g. those requiring judicial dissolution? Most cases say read UPA literally. Others like Draschner case, p. 94, holds that P caused wrongful dissolution, and there should be a dissolution based on his misconduct. Breach by misconduct should be treated like a breach in contravention, thus, he shouldn’t be entitled to good will, which was the largest asset in the firm.

4. PARTNER EXPELLED PURSUANT TO AGREEMENT
(underlying assumption is that the expelled partner isn’t culpable, thus should be treated better than Case 3.
-remaining partners can insist on liquidation, or agree to continue if unanimous vote, but they must take care of expelled partner by:
a. Discharging him of all firm’s liabilities by paying him or by getting a novation
b. Pay him now in cash he’s owed for his firm’s interest
c. entitled to share of goodwill

THEMES OF GENERAL PARTNERSHIP:
1. Unlimited personal liability
2. You can be in general partnership w/o knowing it
3. General instability

LIMITED PARTNERSHIP

-a limited partner has liability limited to the capital she contributed to the firm

History: 1916 marked the finish of ULPA, 1976 recent revision = RULPA, = 1985 amendments
The utility of limited partnership is a tool for raising capital b/c limited liability, and special tax provisions (pass-through income tax laws)
-1980s: when limited partnerships most popular. Not so today, b/c LLC’s succeeded it.

Cons of LP’s: uncertainty in limited liability, major decrease in ability to shelter paper gains, and income w/ paper losses, a publicly traded LP no longer retains the pass-through tax benefit (see 77-04 IRC)
2 FORMATION OF LP: unlike General Partnership, LP formation has formalities:
a. Definition: there must be 1 General Partner who retains unlimited liability, and at least 1 Limited Partner
b. Paper required: File certificate of LP (RULPA Sec. 201), which includes firm’s name, variation of address, names of all general partners, etc. Al General Partners must sign certificate then file it, usually with the Secretary of State, and at which moment, the LP is formed.
* New York: Publication Requirement (Sec. 201) take certificate and publish it in 2 papers of general circulation in each county of the state for 6 weeks.

3 STATUS OF LIMITED PARTNERS:
i) How do I become one? (RULPA sec. 301)
a. agreement authorizes it
b. unanimous authorization by all partners
c. AR was authorized to make me limited partner

ii) Rights
a. General inspection of all books (sec. 305)
b. Right against general partner to be treated according to Fiduciary laws
c. Capital contributions: LP can contribute promissory note, or services, or case and property as consideration for partnership interest

iii) Assignments
Sec. 702: unless otherwise provided, LP interest can e assigned but mere AE doesn’t become LP without one of 3 above. AE just gets AR’s rights to profits/surplus

4. HOW DOES A LIMITED PARTNER LOSE HIS LIMITED LIABILITY (according to old ULPA)?
(see handout for ‘Control-Liability Test”)
Old rule: p. 105: A limited partner is not liable beyond his capital investment unless he takes part in Control of the business. But no court has ever held a Lpartner generally liable based on mere “possession” of control--he must exercise it. Also, many scholars and a few courts adopted a “reliance test”: a Lpartner acts like a General Partner, and 3dp relies on a belief that he is a General partner based on the conduct of the limited partner, then limited partner is exposed to unlimited liability.
PAST & PRESENT CASE LAW: “When does “exercise of control” become blurry?
a. Party is both a Lpartner & EE of co.
b. Party is Lpartner who’s also asked to advise the general partner b/c he has a lot of experience. Does giving such advice rise to the level of “exercising control?”
c. Lpartners have right in documents to appoint general partner, or power to fire general partner--does this power constitute “exercise of control?”
d. Lpartner makes all the day to day business decision
e. INCESTUOUS CORPORATE general partner: suppose we are Lpartners and concerned about losing limited liability, but we want to keep pass-through tax benefit. So, we propose to form a LP, stay away from business as stockholders so not to ‘exercise control” and hence, lose our limited liability, (Cts are split). See Frigidaire case, p. 108: policy issue here: legislature has authorized general partners to be partners in LP. Thus, the court didn’t impose unlimited liability on limited partner.

WHAT ABOUT NEW “RULPA?”
-Control-test: RULPA outlined the test, as in old statute
-Reliance-test: (as above, i.e., 3dp relied on LP’s representation to his detriment)
-Safe Harbours: A list of common activities of Lpartners based on case law is deemed not to trigger loss of limited liability:
a. L partner who signs K, like EE of firm
b. Lpartner who is officer, or stockholder of firm
c. Lpartner who consults w/ general partner
d. Lpartner who exercises voting rights as listed in the partnership agreement, including voting on any other matters left to be voted on by other partners in he agreement,

Unanswered Questions:
a. We form a LP and we put in a provision that only Lpartners make decision...is that permissible?
b. How in fact would the 5 cases under the old statute come out today, based on safe-harbour list?
c. Frigidaire issue: Sec. 303 uses words “Lpartner won’t lose limited liability “solely” by being an officer or director....How to interpret “solely”? (See handout, #1-7) #1 covered in above, but remaining 6 are not realistic situations. However, control liability is litigated a lot.

Silly Sec. 303 provision:
Sec. 303(d): name liability: if you go to join a new firm, and you put your name in firm’s name, you then lose your limited liability.
Sec. 304: erroneous goodfaith belief: P thinks he’s a limited partner, but mistake was made in he filing of the LP certificate which stated that he was a general partner. If he doesn’t correct this, he then loses his limited liability.

STATUS OF GENERAL PARTNERS
RULPA Sec. 401-405
Main points:
a. General Partner has main power to make decision
2. General partner keeps same obligation and unlimited liability to 3dp and limited partners as in a general partnership, e.g. fiduciary duty...
3. Fiduciary duty Can Limited Partners waive all claims based on this duty?
-plain meaning reading of RULPA says Yes to across the board waiver (except as provided by act, or in the partnership agreement)
-an alternative reading of RULPA says that the current case law supports a reading of the RULPA to mean that “limited and specific waivers” are enforceable (e.g., time, scope), but not across the board waiver.

PARTNERSHIP TAXATION
2 main principles:
1. Conduit/Pass-through principle: a partnership IS NOT a taxable entity. Instead, each tax item (income, gain, loss, production, credit. . .) we ignore the firm and it passes through to individual partners and they’ll report it on their own income tax returns
-flow of revenue is thus taxed lower b/c no double taxation on individual person AND firm.

2. Definitional issue: “what is a ‘partnership’ for tax purposes?”
see p. 113: suppose we form a LP, but has many atypical traits like a Corp. IRC 7701 says if entity not recognized as a partnership by IRS, then it will be called an ASSOCIATION and taxed doubly! Very messy area of law,
-This resulted in a ruling: IRS’ Kintner Regulation: a. 6 regulations, b. If a particular entity had 3 or 4 of the following traits (continuity, centralized management, limited liability, transferability) then it will be called an ASSOCIATION. If 2 or less of these traits, then it’s a LP.
-”Check-the-box” (IRS 77-01, and see supp., both of which don’t follow the above)
-some entities treated as per se corporations, e.g., if you form a corp, you won’t get treated like a partnership
-if the entity is eligible as a pass=through entity, it may elect to be treated as a partnership, but what constitutes an eligible entity? Any general partnership, LP, any LLC organized under state’s law.
-What if you forget to make the election? IRS will decide for us, i.e. partnership.

LIMITED LIABILITY COMPANY
-new form of biz started in 1977
-The benefits of this form of biz org is that it’s a hybrid of tax advantages of partnership & Limited liability of stockholders of corporations.
-blend of RULPA and state’s corporate statute
-see Keating excerpt:
a. Statute contains Default rules
b. Operating agreement: mandatory? New York requires one, but a LLC should have one anyway.
c. LLC v Corporation advantage of an LLC is that it’s treated like a pass-through entity
d. What about an “S” Corporation? it can only have one kind of stock, and limits how many people can be a part of it (see )
e. Don’t have to find general partner with unlimited liability, like a LP.
f. LLC is black letter certainty, no more grey areas of potential loss of limited liability

Typical LLC:
1. FORMATION: Every state requires FILING w/ central officer, or secretary of state, with a short piece of paper, e.g. certificate of organization identifying the name of the LLC, general partners, address. Some states require an operating agreement
2. MEMBERS (investors): Every state’s statute has direct statement, “both Managers and Members are to have NO PERSONAL LIABILITY beyond their capital contribution.” See N.Y. Sec. 609, ULLCA sec. 303
-majority: courts will adopt and apply corporate law interpretation: a member who causes a wrong will be personally liable (PIERCE THE CORPORATE VEIL--apply personal liability beyond capital contribution)
-minority: plain meaning rule
-ASSIGNABILITY: memberships are assignable, but Mere AE gets no more than cash flow, but don’t get member status.
-VOTES: votes are in proportion to capital contribution, if K is silent
3. MANAGEMENT: Default rule: mangement is vested in members, unless operating agreement says otherwise. Thus, if members wish, they can renounce it, and delegate it to a manager.
-FIDUCIARY DUTY & WAIVER: some statutes follow Corporate Law Statute. Managers owe a fiduciary duty of care, loyalty, and will be liable if not. But if there’s a provision waiving fiduciary duty, then not liable, unless egregious conduct.
4. SHARING PROFITS/LOSSES/DISTRIBUTIONS of INCOME;
-can write own rules in operating agreement
-if agreement is silent, then default rule like RULPA: look to capital contributions members to determine these apportionment’s
5. DISSOLUTION: If dissolution, MUST LIQUIDATE, unless some specified high % vote
6. LLC: can have a “one person LLC”

-generally, LLC’s are very popular as a new biz org., and is often entered into as a joint-venture b/w 2 corporations

LIMITED LIABILITY PARTNERSHIP
LLP: a mix of Gen Partnership + Registering it =LLP w/ limited liability to amount of capital contribution
-some states allow LP for any business, but half of the states, including N.Y. confine LLP’s to professional. If the state statue confines it to this, the statute will say that for malpractice acts, for matter of professional responsibility, members retain unlimited personal liability for own acts
-a lot of law firms and accounting firms are llp

9/14/99
INTRODUCTION TO CORPORATE LAW
-see handout
3 Theories to origin of Corporate Law:
1. Garden of Eden Theory: This theory is rooted in the 1930s, and is now dominant: “once upon a time there was s a Garden of Eden in Corporate law where States governed the law, i.e. enforced effective State regulation. At this time, SH also had more power to govern corporation.

Weaknesses to Garden of Eden Theory:
a. Inherence Theory: this theory has debunked the Erosion theory.
I) Earlier scholars ignored that U.S. has a deep mistrust in large financial institutions. So many laws are passed to regulate large institutions. If small SH have no power, then perhaps laws should be passed to put the power back in the SH. After the Vietnam War & Civil Rights movement, the result was social fragmentation, and distrust in large financial institutions. There was also Corporate misbehavior in the 1970’s, e.g., bribe foreign officials, illegal campaign contributions. The focus in the 1970’s was internal governmental problems. This resulted in reform-minded people to save ourselves: propose Majority-Vote boards, proposed Federal charter of regulations, National Directors core
ii) It was ignored that there was a rise in debt markets??????????
iii) It was ignored that there was rise in securities markets, i.e. stock markets: SH found that they could sell their shares in liquid markets, and thus they had less of an interest in the control of the corporation
iv) Spanning v. Property: hostile takeover: greedy managers effectively punish SH

2. Erosion Theory: effective state regulation eroded
-see Ligget v. Lee
a. Corporate Franchise was only possible through concession, i.e. getting a grant from Legislature through haggling, and was expensive. This process resulted in effective State Regulation. This however, is much opposed today.
b. Before, Legislature limited how much equity that could be invested in corp.
c. Starting in 1896, Rise of General Inc. Laws that eroded effective State Regulation, and legislature restricting role
-J. Brandeis said that this began the rise of Laxity, to see who has more lax laws, see p. 125
-Laxity v. theory of rising market discipline
-Pro-Manager control, or pro-SH control

3. Separation theory: As Corporations grew, SH lost ability to control and make decisions, i.e. a divorce of ownership of shares and control of corp. SH lost a lot of power to professional managers/officers who may not have the same interests (prestige, effective corporate structure) as SH (getting maximum dividends).
-see Burley & Means cases,
-Professor Hurst: Legitimacy of corporation is measure by: a. whether large corporations are effective, and b. Do they exhibit social responsibility and comply with the law? Hurst thinks the answer to both is yes, and is optimistic.

CORPORATE GOVERNANCE PROJECT: all of this culminated in 3 different schools of thought on how corporate law should develop:
1. Managerialists/Pragmatists: This system works well. They think that # of persons on BOD should be small so to make effective decisions; should separate the CEO from Chairman of the Board so to allow more independent judgment from the BOD; elect directors for 5 year terms, and at the end of their term, evaluate them on whether the accomplished their stated goals; compensate directors with common stock, not merely cash.
2. Chicagoans: they think Deregulation is best; competition among states is good, i.e incorporation laws are good; hostile tender offers are good; and it’s proper to view the corporation as the nexus of contract making: see p. 235, p. 24: “a corporation is the nexus where implied contract are made b/w Managers and SH.
a. Contractarian idea, i.e. Chicagoans are mere contracting parties, not owners of the corporation, and thus, their rights will eventually disappear.
b. Power vested in Management is a good thing b/c SH are clueless about the market
c. Main purpose of Corporate law should be to facilitate K formation. Where there’s no express clause, Judges should use corporate law to figure out what’s intended.
d. Chicagoans think SH are like Principals, and Managers are like Agents.
e. Market for Corporate control: When there are greedy managers, then the corporation may not function efficiently, thus the value of stock will pummel. This will result Managers wanting to be more honest, and they’ll want to buy-out SH, i.e. hostile takeover.

3. REFORMERS: themes:
a. Market regulations are good
b. Market failure happens more often than you think
c. Statutory & Regulatory law works to change the economy
d. Managers have too much power, and the power should be put back in SH
e. Fiduciary duty owed from managers to Sh should be enforced
f. There should be non-waivable rules governing all corporations
g. BOD should just monitor/oversee senior managers, since the extent of the directors duties is meeting once a month. Also, the BOD would better function if there were independent members, esp. CEOs who have no economic ties to the corporation, so they can make effective decisions.
h. Individual Institutional SH should take more active role in the corporation than merely selling stock, see p. 241.

Issues:
I. Whether to Incorporate or choose another form of biz?
II. Where to incorporate?
III. How to incorporate?

I. A. Tax-Considerations
B. Non-Tax Considerations
Tax Considerations: I. Pass-Through entity: A partnership keeps its pass-through privilege if it doesn’t go public . The cons to this though, are that partners need distributions right away/or at year-end because they have to pay tax at the end of the year, so partnership can’t keep the profits/surplus invested. However, if the partnership accumulates too much income and there’s a failure to distribute it, then the IRS will think it is attempting to avoid tax through its pass-through privilege. The result: a penalty is imposed. But, the PROS include being able to shelter the partnership’s revenue from tax and use corporation’s losses to shelter income, no double taxation.. However, in 1994 marginal tax rate changed, and didn’t really allow to much tax savings for the corporate form.
CONS of incorporating: double-taxation
PROS: 1. Since 1994 the Marginal tax rate allows corporations to pay tax at a slightly lower tax rate than the natural person. SO, if we’re long term investors, it’ll pay off to form a corporation than a limited partnership.
2. Corporation can distribute its dividends to SH when it’s the best time, unlike a partnership that requires the distributions be made to partners at year-end so to avoid an accumulated tax penalty, and so that partners can do their income tax filing
3. Fringe benefits such as health insurance are deductible. But, not many benefits are deductible.
4. It is possible to elect to be an “S Corporation” as opposed to a “C Corporation” so to get the pass-through privilege, and get treated like a partnership, with the exception of the Minimal capital gains tax
-the Cons of an S Corporation are very few. But, the investors in an S Corporation can’t reallocate tax items like losses.
-Eligibility for “S Corporation:”
1. No more that 75 SH
2. Only 1 class of stock
3. Some kinds of corporations can’t qualify, e.g. Bank
4. All SH must agree to make an election

Pass-Through entity v. Corporation:
1. Pick Corporate form if you intend to go public within a short time b/c publicly traded entities get taxed like a corporation. If you convert from a partnership to a corporation later on, then there will be tax issues.
2. Pick Pass-through entity if you intend to stay private, e.g. if Principal wants to take out distributions, or losses are expected in the future so to avoid double tax.
3. Pick a “C Corporation” if clients intend to reinvest profits b/c they’re taxed marginally lower than individual person income tax rate.

B. Non-Tax Considerations:
1. Limited liability? then pick Corporation or an LLC. However, every state has limitations to limited liability rule:
a. Doctrine of piercing the corporate veil: if bad things done by the corporation, then SH impose personal liability
b. ** New York Sec. 630: unlimited personal liability will be imposed jointly and severally to the 10 largest SH in regard to EE’s unpaid wages and benefits. This reflects a public policy that work must be paid. This is disincentive to forming a business in New York, but not elsewhere.

2. ACCESS to FUTURE CAPITAL: if you want this, then choose Corporation because public investors are used to seeing Stock, not partnership interest. This will allow more opportunities to create different capital instruments, e.g. different types of stock
3. CONTINUITY OF EXISTENCE: Corporations are deemed to have perpetual existence, vs. partnerships which have a lifetime of a term specific, or until goal accomplished. Partnerships are also easier to dissolve.
4. Free TRANSFERABILITY of SHARES: A corporation allows SH to sell shares to someone else.
5. Centralization of Management: Corporations are run with a centralized management in the professional officers and SH have no governing power. Partnerships are anti-centralized, and all partners usually actively participate in running the biz.
6. Costs; Corporation is more expensive to form but it’s all relative to the level of sophistication desired.

****All these provision can be drafted around
II. WHERE TO INCORPORATE?

There’s a presumption that a corporation will incorporate locally unless:
a. Large Business
b. If main business activity is elsewhere
c. If public participation is likely, then incorporate elsewhere
d. New York Sec. 630 on unpaid EE wages may make corporations incorporate elsewhere

Delaware: “laxity”
1. Incorporation fee & Franchise tax is low
2. Few restrictions on management, and protect their decisions
3. Fewer big deal items need to get SH approval vote
4. Delaware has its own court for business law, i.e. the Court of Chancery, and that promotes much clarity and certainty in business law

III. HOW TO INCORPORATE?
-compare with other state statutes. See also, handout

1. Call Incorporating Service: a professional service incorporates your corporation by phone, and then they’ll generate forms, and give you a certificate, seal... This will cost about $150-400. This is the normal way to do it.
2. Read book, Pesky Brothers in Law, “How to form a corporation in New York w/o a lawyer for $75”
3. Lawyer:
. Are you in the right jurisdiction
A. Follow State statute on how to incorporate. See N.Y.B.C.L. Sec. 402, Del. 102, Model 2.02:
-Name of Corporation: must use “Corp.”, or “Inc.” or “Ltd.” in corporation’s name. Some states allow “Co.”, but not New York. You can also pick 3 reserve names, not already taken. Also, need an incorporator who’ll sign the COI. It can be anyone or corporation. But in New York: need an actual person to do this.
B. Address of Corporation: Old rule: specific address, Today: general description. New York: if you use a general description, you must add a provision that states, “provided that the corporation is not formed to engage in ...” There’s no need to address power distribution.
C. Where the Registered Office and Agent is located: This address is required so someone can be served process if your corporation is sued. New York doesn’t require this because by appointing the Secretary of State is sufficient, and need only to identify the county agent & office located.
D. Capitalize the Corporation: “Authorize/create” # of Shares that corporation will have power to issue. (The corporation can’t sell its shares until it authorizes them). State whether they’re PAR or NON-PAR, and then state what the value is. Do the same with each class of stock.
-PAR VALUE v. NON-PAR-VALUE: this is an out-dated concept and is just a formality, but still significant because of its impact on the firm’s stated share & income: in many jurisdictions, including New York and Del., dividend distributions and stock repurchases can only come out of the corporation’s funds in surplus, NOT from Stated Capital. The reasons for this is to protect creditors from an insolvent firm, i.e. by making corporations use only surplus funds for these purposes, the corporation will preserve enough capital so there will be something for creditors to go after.

Surplus = Assets - Liabilities - Stated Capital (see Sec. 102, 103)
PAR VALUE: see N.Y. Sec. 504, 506
-If we issue stock with Par Value, then the full amount of par value of the shares we sell must be declared in Stated Capital, and the corporation/directors therefore cannot (reallocate) take out and use any amount that leaves less than par-value of the corporation’s stocks in stated capital. This creates no flexibility for surplus use. So, to remedy this, set an Arbitrary par value & charge investors higher than that value, then put the balance of the selling price into assets, which results in Surplus so to later issue dividends.
-NO PAR VALUE: If no par value is declared, then Directors can put all the money collected from whatever price the shares are sole for into Stated Capital, but Directors also have discretion to reallocate the funds to have Surplus.

LIABILITY FOR “WATERED SHARES”: Watered shares are shares that claim to be sold, but the funds collected from selling the share never actually appear in the Stated Capital/ get “paid in” by the corporation (probably directly diverted into surplus so that the company has money to readily reinvest). If this is the case with shares w/ Par Value, then the corporation’s liability equals the balance of the share price not in stated income (e.g., if the corporation declares it sold shares X at $10 and only paid in $5, then its liability will be the missing $5.
-see American Cat Corporation: Corporation formed by D & J, with 50/50 SH power. They decided to authorize 200 shares of common stock with par value of $5/share ($1000 total). They issued to themselves 100 shares. However, they only contributed in $250 each($500 in assets). $500 from outstanding Shares goes into Stated Capital. The problem here is that they have no surplus, unless they earn something so to issue dividends.
Surplus = Assets - Liabilities - Stated Capital
0 $500 0 $500
-So, They should charge an arbitrary par value higher than the one above so they can take the excess cash and put it into surplus. If SH pay $10/share, D & J will have $1000 in assets ($500 from what D & J contributed, and $500 reallocated from Stated Capital), and State capital is still $500 (because with an arbitrary par value, the corporation is allowed to just declare in State Capital the par value x # of outstanding shares), but $500 in assets.
Surplus = Assets - Liabilities - Stated Capital
$500 $1000 $500
NO PAR VALUE: Same thing. If SH pays $5/share, then that amount must go into stated capital, but the board has the advantage of reallocating that amount to assets. The advantages of this: avoid watered share liability; and can have surplus, so to issue dividends.
REALITY: It is most common to use par value shares, pick a low par value, and then charge SH a higher value.
SHARES:
1. Par v. No par:
2. Different classes of shares: It the corporation only issues one class of stock, then they’re “Common”
-If it creates additional shares, the corporation must indicate this on the COI, and describe the differences, relative rights of each type of shares
3. If there are more classes, then: some may be:
a. “Preferred Shares” p. 135; which allow two preferences:
i). Give SH preference to dividends before the Common SH gets to it
ii) Liquidation preference: when the corporation dissolves, the preferred SH will get paid the value of their preferred share before the Common SH gets paid.
b. “Redemption Share”: see BCL Sec. 512: This creates a class of shares that a corporation has a right to repurchase and compel the SH to resell at stated price
c. “Convertibility Shares”: BCL Sec. 519: the SH has an option at any time to convert her shares, so long as it’s stated in the COI

E. Designate the Secretary of State: as upon whom service of process may be made. Also include an address where the Secretary of State can send the process to, but also, most states say that the Secretary of State will be your agent even if you forgot to include this in your COI.
F. Incorporated Sign, Notarize, and File.

Comments:
1. The Corporation does not need Minimal capital
2. Corporation can amend the COI pursuant to Sec. 801-803 of statute, requiring: a. Director’s authorization, and b. Sh agree by amount of majority specified in the statute
3. Sec. 402b states that if you want to shield Directors and SH from liability, then must do so in the COI
4. Corporation can prefer to have SH run the company, but must state so in the COI
5. Bylaws: not mandatory, but practical
6. Organizational meetings, p. 137: a meeting held by the Incorporators where Incorporators elect the 1st directors, and Incorporators adopt the initial set of bylaws. The Incorporator is just a dummy, can be your secretary...
7. Directors’ meeting: to appoint officers, secretary, adopt corporate seal, banking resolutions, attend to financial structure, e.g. issue of shares, valuing of property, accept subscription agreements signed by SH, sec. 503-04, to provide financial security

V. POWER OF CORPORATIONS:
Every state statute describes what powers each level of member of corporation should have, e.g. New York Sec. 202.
These powers include: a. Power to issue guarantees in furtherance of corporation and business interest. Some states will not allow this power if an affirmative majority vote is shown.
b. prohibit loans to Directors, unless authorized by the BOD and is in furtherance of the corporate business
c. Make charitable gifts irrespective of corporate benefits.

1. Ultra Vires: If the corporation acts beyond its powers. The old rule was that the corporation could have a valid defense if it could establish that the act was beyond the power of the corporation, but the 3dp had reason to know it was beyond that person’s power.
-see N.Y. Sec. 203: “No corporate act shall be invalid because of a lack of power, unless . . . The rule allows Sh action to enjoin such an act
-see Goodman case

2. De Facto Power (most states don’t honour this defense): see Cantor v. Sunshine Grocery: Sunshine’s COI was never filed properly b/c it got lost somewhere. Thus the corporation was defective. However, before Sunshine was properly incorporated, it entered into a K, and thereafter defaulted on it. P sues the partners of Sunshine individually/ personally liable. HELD: Although a De Jure corporation did not exist at the time, a De Facto one did and will be recognized as preventing the partners from being personally liable.

3 Elements to “De Facto” Corporation defense:
a. A statute existed describing how to form a corporation
b. The partners demonstrated a good faith effort to incorporate
c. There was some exercise of apparent corporate authority

**New York Sec. 403: most states follow New York in not honouring a de facto corporation defense just because it’s so easy to incorporate, there isn’t any excuse.
-see Robertson v. Timberline

Active Participation: If SH actively participated in the management of corporation then it will be held jointly and severally liable

3. PROMOTER’s LIABILITY with respect to pre-incorporation liability:
General Rule: promoters who sign K will be held personally liable, unless it is clear intent is expressed otherwise in the K w 3dp that the corporation hasn’t been incorporated??????????????
-see R.J.L and Goodman , p. 140: owners of an apartment complex contracted with Goodman/promoter to do repairs. They signed a K as “X Corporation in formation” but this was held not be clear enough.

Minority Rule: Quaker Hill case: the promoter should not be held personally liable. Instead, the K he enters into should be interpreted as a “continuing offer” intended to be a communication with the Directors.
Corporation’s Liability: see p. 148: The Corporation is liable if it impliedly ratifies the K, the K is deemed a continuing offer, the corporation has taken benefits from the K and shall be estopped from denying its liability.
-However, this doesn’t solve promoter’s liability. The promoter will escape liability only if it receives a Novation or the corporation Ratifies the K.
-”Ratification”: “Dual Capacity Rule”: in order for the principal to validly ratify the K, he must have legal capacity when the agent acted, and when the principal ratified the K.

4. PIERCING THE CORPORATE VEIL:
(this is the most litigated issue in corporate law)
General Rule: There is no personal liability for SH, except specific circumstances
1. 3 DIFFERENT THEORIES for Piercing the Corporate Veil:
a. Court ignores the corporate fiction and holds SH’s liable
b. Where the SH is another corporation, not a natural person, then the Court will more likely pierce.
c. Enterprise liability model, p. 172: Where a group of corporations that are all affiliated, but merely do different things, the court will pierce the corporate veil in one of the entities and make all the assets liable.

2. Does it matter if the claim is TORT or K?
Courts don’t make a distinction but a lot of scholars say in a negligence claim, the claimant had no choice but to sue. But in a breach of K claim, the injured had chances to inquire into the financial soundness of the corporation, negotiate, so maybe K claims shouldn’t warrant piercing the veil...
3. Never Pierce Corporate Veil of Public Traded Corp: perhaps Ct not willing to hold passive rather than actively participating SH liable.

4. PROS of Not Piercing Corp Veil/ or limiting personal liability: Cons for Not Piercing Corp. Veil:

a. Helps in raising capital such that investors will feel confident they won’t be sued personally a. It’s not fair to dump losses on innocent 3dp, esp. tort claims

b. ????????? b. Limited liability encourages investors to take bigger risks

c. It’s not fair to impose liability on passive SH
c. Insurance markets would develop

d. Diversification of Porfolio: limited liability reassures the investor that It won’t have to worry about spending a lot on insurance, and thus spend more on investing d. encourages SH to monitor organizations for assets, i.e. more SH control over managing the Corp

e. Encourages socially desirable risk taking, e.g. Medicine, R & R, Technology experimentation

ISSUE: What Triggers will lead a Court to Pierce the Corporate Veil?
Old Rule: see Milwaukee Refrigerator case, p. 205:
1. Intermingling of financial accounts
2. Diversion of funds
3. Holding out the corporation to be a branch of a larger system
4. Evasion of a Contract obligation
5. NEW RULE: “Control Unity Test” or “Alter-Ego” test:
-Corporation was just the mere alter-ego of the individual, or a mere instrumentality, or “total and complete domination, p. 174

6. Formalities not Observed: see Berkey case, p. 173.
-If formalities such as keeping the minutes, the books, weren’t followed, then the court may pierce

7. Under-capitalization: see Walkovszky v. Carlton, p. 165 (seminal case—the “shuttling funds” case): CONTROL-UNITY TEST
P was severely injured by a cab driver. The company that owned the cab was SEON where D was a SH, as well as in 10 other similar companies. D had minimal insurance, i.e. $10,000 per incident, and this led to P suing the corporation on the grounds that it was under-capitalized and there was intermingling of funds, and warranted the court to pierce the corp veil so he could recover more $.
HELD: P didn’t allege “SHUTTLING of funds”, nor corporate formalities weren’t followed, nor D was actively participating in conducting the biz, or for personal ends.
-This case spells out the New York Rule, i.e. the “Control-Unity” test. New York considers the role of undercapitalization as one of the big factors, but not the only factor.

*What is the role of undercapitalization in regard to foreseeable risk? Depends. In Walkovsky, the Dissent said the capital in the corporation was too small, while the Majority said that undercapitalization was not the controlling factor in the analysis of foreseeable risk. Instead, the majority said one should look to see whether there was “shuttling” of funds. Other Court have adopted the Ballantine theory: what was the role of undercapitalization in relation to foreseeable risks?
-the problem with this analysis is that the risk already happened by the time the case appears before the Court. Thus, the Court would probably be inclined to hold that the risk should have been foreseeable!

8. Shuttling Funds
9. Engaged in Conduct for Personal ends.
10. INSTRUMENTALITY TEST: see Zyst v. Olsen, which stated an alternative rule to the Control-Unity test: a. Did D have control in fact over the corporation?
b. Was his use of the corporation harmful to P?
c. Was control and use of the corporation the proximate cause of the harm?

Zyst v. Olsen: Olsen owned 5 separate but related corporations, e.g. one does the building, the other purchases equipment, etc. Corp. A contracted with Zyst to build a shopping mall. Olsen defaulted on the K and Zyst sued corporation A. He also wanted to pierce the corporate veil and hold Olsen personally liable.
HELD: Ct pierced the corporate veil.
New York: Filing of the COI is conclusive evidence of the existence of a corporation, except the A-G has a right to challenge this.
CONTRACT-side:
Whether to pierce the corporate veil when there’s a contract between the 2 parties
1. Generally Courts look at the same factors as Tort cases to decide this
2. Academics urge the Courts not to pierce the corporate veil in