Agency is the fiduciary relationship that results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.
LAW 561-002 – Business Associations
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The point at which the creditor becomes a principal is that at which he assumes de facto control over the conduct of his debtor
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Generally, when a plaintiff has a claim against a limited liability company, the plaintiff may only pursue that claim against the limited liability company itself and not its members.
However, in rare instances, a limited liability company's corporate veil may be pierced to hold a member personally liable. We have held that while there is no single rule or standard and the determination is fact-specific, “when the unity of interest and ownership is such that the separate personalities of the corporation and the individual no longer exist and to adhere to that separateness would work an injustice” it is appropriate to pierce the corporate veil.
The same factors apply for a reverse veil piercing to hold a company liable for a shareholder's personal liabilities.
A principal is generally not liable for an independent contractor's torts.
If the activity for which an independent contractor was hired is "abnormally dangerous," the principal is vicariously liable to the same extent as the contractor.
An activity is abnormally dangerous if it might very well result in injury even if conducted with all due skill and caution.
A majority shareholder of an LLC owes a fiduciary duty to the minority of "utmost good faith and loyalty."
This is not the rule in Virgina, where members do not owe duties to each other, even when a majority.
- the time, place and purpose of the act;
- its similarity to acts which the servant is authorized to perform;
- whether the act is commonly performed by servants;
- the extent of departure from normal methods; and
- whether the master would reasonably expect such act would be performed.
(3) Unless authorized by the other partners or unless they have abandoned the business, one or more but less than all the partners have no authority to:
. . .
- Do any other act which would make it impossible to carry on the ordinary business of the partnership;
[F]or a partnership to arise in law, two or more persons must intend to associate together to carry on as co-owners for profit. . . . "In general, the courts, in determining objective partnership intent, look for the presence or absence of the attributes of co-ownership, including profit and loss sharing, control, and capital contributions."
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[T]he three elements required to show the existence of an agency relationship include:
- a manifestation by the principal that the agent will act for him;
- acceptance by the agent of the undertaking; and
- an understanding between the parties that the principal will be in control of the undertaking.
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Ratification is defined as "the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account." Ratification requires "acceptance of the results of the act with an intent to ratify, and with full knowledge of all the material circumstances."
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"Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority."
A bona fide attempt to incorporate in compliance with a statute and actually using or exercising the corporate privileges will create a de facto corporation and allow the shareholders ot retain their limited liability in suits by third parties.
"The business of every such corporation shall be managed by the directors thereof, subject to the by-laws and votes of the corporation, and under their direction by such officers and agents as shall be duly appointed by the directors or by the corporation."
[A] person can be treated as a partner, and consequently exposed to personal liability for the corporation's debts, when representations are made that the enterprise is a partnership and the person is a partner. The representations must be made by the purported partner or with the purported partner's consent. . . . "If the representation is privately made, it may be taken advantage of only by persons to whom it was made; if it was publicly made, anyone (roughly speaking) can make use of it."
. . . . When a representation is private, the statute explicitly requires the claimant to establish that it "has on the faith of such representation, given credit to the actual partnership."
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The de facto corporation doctrine provides that a defectively formed corporation . . . may attain the legal status of a de facto corporation . . . . The most important aspect of a de facto corporation is that courts perceive and treat it in all respects as if it were a properly formed de jure corporation.
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"Where a body assumes to be a corporation and acts under a particular name, a third party dealing with it under such assumed name is estopped to deny its corporate existence."
(d) In a written limited liability company agreement or other writing, a manager or member may consent to be subject to the nonexclusive jurisdiction of the courts of, or arbitration in, a specified jurisdiction, or the exclusive jurisdiction of the courts of the State of Delaware, or the exclusivity of arbitration in a specified jurisdiction or the State of Delaware . . . .
. . .
- A partner’s duty of loyalty to the partnership and the other partners includes all of the following:
- To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property or information, including the appropriation of a partnership opportunity.
- A partner does not violate a duty or obligation under this chapter or under the partnership agreement merely because the partner’s conduct furthers the partner’s own interest.
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Under Missouri law, for an agent to have actual authority, he must establish that the principal has empowered him, either expressly or impliedly, to act on the principal's behalf. The principal can expressly confer authority by telling his agent what to do or by knowingly acquiescing to the agent's actions. Implied authority flows from express authority, and "encompasses the power to act in ways reasonably necessary to accomplish the purpose for which express authority was granted."
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Under Missouri law, apparent authority is created by the conduct of the principal which causes a third person reasonably to believe that the purported agent has the authority to act for the principal, and to reasonably and in good faith rely on the authority held out by the principal. An agent may have apparent authority to act even though as between himself and the principal, such authority has not been granted. Apparent authority does not arise from the acts of the agent.Page 42
If a principal allows an agent to occupy a position which, according to the ordinary habits of people in the locality, trade or profession, carries a particular kind of authority, then anyone dealing with the agent is justified in inferring that the agent has such an authority.
If one assumes to act for another without authority and the other affirms his act, it is a ratification which relates back and supplies original authority for the act.
A partnership is an association of partners, so any change in the personnel of a partnership will result in its dissolution.
A mere assignment of one's "interest" without transferring management rights, such as as collateral for a loan, will not dissolve the partnership.
This is called the aggregate theory of partnership, which is followed by the UPA.
"[A]gency" is the relationship which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.
"A principal who puts a servant or other agent in a position which enables the agent, while apparently acting within his authority, to commit a fraud upon third persons is subject to liability to such third persons for the fraud."
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The creation of an agency relationship ultimately turns on the parties' intentions as manifested by their agreements or actions.
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[C]ourts . . . have considered three characteristics as having particular relevance to the determination of the existence of a principal-agent relationship:
- the agent's power to alter the legal relations of the principal;
- the agent's duty to act primarily for the benefit of the principal; and
- the principal's right to control the agent
The three factors used in determining whether an agency exists are valid, but they are not determinative and must be viewed within the context of the entire circumstances.
The general common law rule is that partnership contracts only create a joint liability, and partners are only individually liable if the assets of the partnership are inadequate. However, Alabama law unequivocally states that partners are "jointly and severally" liable for all debts and obligations of the partnership.
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Several liability is "[l]iability separate and distinct from liability of another to the extent that an independent action may be brought without joinder of others."
A judgment debtor's interest in a partnership may be foreclosed upon and sold without the other partners' consent, provided the foreclosure does not unduly interfere with the partnership business.
[W]here a proprietor of a place of business by his dereliction of duty enables one who is not his agent conspicuously to act as such and ostensibly to transact the proprietor's business with a patron in the establishment, the appearances being of such a character as to lead a person of ordinary prudence and circumspection to believe that the impostor was in truth the proprietor's agent, in such circumstances the law will not permit the proprietor defensively to avail himself of the impostor's lack of authority and thus escape liability for the consequential loss thereby sustained by the customer.
"The employer should be held to expect risks, to the public also, which arise 'out of an in the course of his employment of labor.'"
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A contract with the promoter is not one with the corporation absent some subsequent corporate act or agreement. . . . [I]f a pre-incorporation contract made by a promoter is within the corporate powers, the corporation may, when organized, expressly or impliedly ratify the contract and, thus, make it a valid obligation of the corporation.
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In order to constitute a valid novation, however, the creditor must assent to the substitution of a new obligor, but this assent may be inferred from his acceptance of part performance by the new obligor, if the performance is made with the understanding that a complete novation is proposed.
Probable cause to initiate or to prosecute a lawsuit is viewed leniently by the courts. The lawsuit need only be "legally tenable." "Only those actions that any reasonable attorney would agree are totally and completely without merit may form the basis for a malicious prosecution suit."
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"All property originally brought into the partnership stock or subsequently acquired, by purchase or otherwise on account of the partnership is partnership property."Page 201, Bottom
[T]he Uniform Act does not prevent a partnership from acquiring real estate by having the partners take title as cotenants, and that where record title to real estate was in the name of the partners as tenants in common, ". . . The criterion of whether property not held in the partnership name is partnership property is the intention of the parties to devote it to partnership purposes, to be found from the facts and circumstances surrounding the transaction considered in connection with the conduct of the parties in relation to the property."
This is very different than the newer rule in RUPA, which concerns intent very little.
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Kaycee Land & Livestock v. Flahive
An LLC should be treated like a corporation and piercing the veil should be allowed without fraud being present.
The rights and duties of the partners in relation to the partnership shall be determined, subject to any agreement between them, by the following rules:
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- Each partner shall be repaid his contributions, whether by way of capital or advances to the partnership property and share equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied; and must contribute towards the losses, whether of capital or otherwise, sustained by the partnership according to his share in the profits.
Concretely, a power is said to be coupled with an interest when the power forms part of a contract, and is a security for money or for the performance of any act which is deemed valuable, and is generally made irrevocable in terms, or, if not so, is deemed irrevocable in law.
If as a whole a contract contemplates an association of two or more persons to carry on as co-owners a business for profit a partnership there is. On the other hand, if it be less than this no partnership exists. Passing on the contract as a whole, an arrangement for sharing profits is to be considered. It is to be given its due weight. But it is to be weighed in connection with all the rest. It is not decisive.
There is an implied contract to pay an agent for his services when the circumstances were such that the principal had been expected to pay for such services.
[M]embers of limited liability companies owe one another the duty of utmost trust and loyalty.
This is not the rule in Virginia, where members do not owe each other fiduciary duties.
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[P]artners owe each other a fiduciary duty of "the utmost good faith and loyalty." As a fiduciary, a partner must consider his or her partners' welfare, and refrain from acting for purely private gain. Shelley, supra. Holmes, supra. Partners thus "may not act out of avarice, expediency or self-interest in derogation of their duty of loyalty."
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A partner has an obligation to "render on demand true and full information of all things affecting the partnership to any partner."
Joint adventures owe to one another the duty of the finest loyalty.
A co-adventurer has a duty to disclose and concede any opportunities that come by virtue of his agency.
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[A]n agent for an undisclosed principal subjects the principal to liability for acts done on his account if they are usual or necessary in such transactions. This is true even if the principal has previously forbidden the agent to incur such debts so long as the transaction is in the usual course of business engaged in by the agent.
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A principal may be held liable for the unauthorized acts of his agent if the principal ratifies the transaction after acquiring knowledge of the material facts concerning the transaction.
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Where the principal retains the benefits or proceeds of its business relations with an agent with knowledge of the material facts, the principal is deemed to have ratified the methods employed by the agent in generating the proceeds.
Whether one party is an agent or an independent contractor is to be measures by the employee's right to control the activities of an employee. If the employer's right to control extends to the manner in which a task is to be performed, then the employee is not an independent contractor.
[P]laintiff bears the burden of convincing the court to disregard the corporate form, and must first establish that "the corporate entity was the alter ego, alias, stooge, or dummy of the individuals sought to be charged personally." This element may be established by evidence that the defendant exercised "undue domination and control" over the corporation . . . .
[P]roof that some person "may dominate or control" the corporation, or "may treat it as a mere department, instrumentality, agency, etc." is not enough to pierce the veil. In Virginia, "something more is required to induce the court to disregard the entity of a corporation." Hence, plaintiff must also establish "that the corporation was a device or sham used to disguise wrongs, obscure fraud, or conceal crime."
Unless there is an agreement to the contrary, no person can become a member of a partnership without the consent of all the partners.
The District of Columbia does not allow the doctrines of de facto corporation or corporation by estoppel.
"A partner who wrongfully dissociates is liable to the partnership and to the other partners for damages caused by the dissociation." A partner's dissociation is wrongful if "[i]t is in breach of an express provision of the partnership agreement."
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[I]n the absence of an agreement to such effect, a partner contributing only personal services is ordinarily not entitled to any share of partnership capital pursuant to dissolution. Personal services may, however, qualify as capital contributions to a partnership where an express or implied agreement to such effect exists.
Remuneration for a partner's services in the absence of an agreement to provide compensation is prohibited by statute.
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A subagent is "a person appointed by an agent empowered to do so, to perform functions undertaken by the agent for the principal, but for whose conduct the agent agrees with the principal to be primarily responsible." "[T]he subagent stands in a fiduciary relation to the principal, and is subject to all the liabilities of an agent to the principal, except liability dependent upon the existence of a contractual relation between them."
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The fiduciary duty owed by an agent to a principal includes the duty of undivided loyalty. Moreover, agents are prohibited from taking any action in competition with their principal or adverse to their principal's interests.
[L]iability is imposed on a partner for the tortious acts of his partner only where
- the act occurred in the ordinary course of the partnership's business, or
- the tortfeasor partner acts with the authority of his partner or partners.
"Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners . . ."
Certain documents, like loan agreements, bind an LLC when executed by a manager.
An LLC's operating agreement can limit or eliminate the authority of a manager to bind an LLC.
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"If an agent has received a benefit as a result of violating his duty of loyalty, the principal is entitled to recover from him what he has so received, its value, or its proceeds, and also the amount of damage thereby caused, except that if the violation consists of the wrongful disposal of the principal's property, the principal cannot recover its value and also what the agent received in exchange therefor."
Page 107, Paragraph 6
[W]hether or not the principal elects to get back the thing improperly dealt with or to recover from the agent its value or the amount of benefit which the agent has improperly received, he is, in addition, entitled to be indemnified by the agent for any loss which has been caused to his interests by the improper transaction.
In order for an agent to avoid personal liability on a contract negotiated in his principal's behalf, he must disclose not only that he is an agent but also the identity of his principal, regardless of whether the third person might have known that the agent was acting in a representative capacity. It is not the third person's duty to seek out the identity of the principal; rather, the duty to disclose the identity of the principal is on the agent. The disclosure of an agency is not complete for the purpose of relieving the agent from personal liability unless it embraces the name of the principal; without that, the party dealing with the agent may understand that he intended to pledge his personal liability and responsibility in support of the contract and for its performance. Furthermore, the use of a tradename is not necessarily a sufficient disclosure of the identity of the principal and the fact of agency so as to protect the agent against personal liability.
The LLC Act establishes that a manager of an LLC owes a duty to the company, but the LLC Act does not impose fiduciary obligations towards, among, or between members.
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[W]here, . . . the recipient's vote as a director was necessary to the fixing of the amount of his compensation, then the burden of showing the reasonableness of such compensation clearly falls upon its recipient
Page 543Several factors are considered when deciding if compensation is excessive:
- What similarly situated executive received
- The ability of the executive
- What the IRS has allowed the corporation to deduction
- The relationship between the salary and the success of the company
- The amount previously received as salary
- The relationship between the salary and services rendered
- The amount of the salary compared to other salaries paid by the corporation
[T]he following criteria [determine] whether an employee was in the scope of his employment:
- Conduct of a servant is within the scope of employment if, but only if:
- It is of a kind he is employed to perform;
- it occurs substantially within the authorized time and space limits;
- it is actuated, at least in part, by a purpose to serve the master * * *
- Conduct of a servant is not within the scope of employment if it is different in kind from that authorized, far beyond the authorized time or space limits, or too little actuated by a purpose to serve the master.