By Jennifer Green,2014-06-29 09:04
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Corporations ...

Rahul Mukhi


This course is all about how people can organize themselves to make money

    (corporations is the main way people will do this).

     Aside: LLC, get the tax benefits of partnership (no double taxation) but limited

    liability of corporation, relatively new invention we will not be spending too much

    time on it, unclear if it is going to catch on

     Suppose Scott Turow does everything by himself (writes, manages, invests, etc.) we

    call him a sole proprietor, he should be compensated more than his work (and

    investment) would be worth on the market

     Turow could hire employees (office manager)

     Where is the business risk? In both cases it is going to Scott Turow (employees just

    have transitional costs of finding a new job). He is also the one who has all the

    control of the operation. He is also residual claimant (he has claim on whatever is left


     What if Turow wants money, he could get loan from bank at interest or theoretically

    go to the securities market, issue bonds at a certain interest rate, the business risk is

    still with Scott Turow

     He could find other co-owners, who put up money, they would share profits, risks and

    control. If you share profits/control, you are a partner. If he doesn‘t want them to be

    partners he would form a corporation and issue stock/equity and both would buy a

    certain amount of stock.

     Corporation is just a collection of people, the issue of who bears the cost, always look

    for people (creditors, equity holders, etc.)

     Control and risk tend to go together, when somebody is bearing risk they want control,

    if you don‘t specify the default rule is that if you bear risk you have control

     Corporations is a variation of K law, these are grown ups entering into relations with

    each other, corporate law are a bunch of default rules, if you don‘t make any specific

    agreements, corporate law controls, try to come up with agreement that people would

    have negotiated

    o Judges ask what would they have negotiated even though they didn‘t;

     We will also talk about fiduciary duties, relations among investors and between the stinvestors and the managers of their money (the directors), 1 investors are worried ndabout managers stealing the money, the 2 thing is that they will be lazy/indolence,

    you are worried about risk too but you are not risk averse

    o The fact that you lost all your money is not a claim

    o The managers are worried about trust, they want to bind their own hands,

    they can attract investors by showing them they will be held liable for


     2 Fiduciary Duties

    o Duty of Loyalty: Thou shall not steal

    o Duty of Care: Though shall not play golf during the week Business Judgment Rule, managers are protected from simple risks

I. Agency

     The way one group of individuals are bound collectively by the actions of another

    person or groups of people, covers both contract and tort liability

     Bruce Wayne enterprises, tells Alford to make a reservation and then Bruce Wayne

    cancels, the hotel can, of course sue Bruce Wayne, not Alford

     But suppose Alford makes reservation without telling Bruce, who is liable?

     First question is whether there is agency, if there is not then the action that is taken is nd question is once agency established, is what type not going to bind someone else, 2

    of action by the agent will impose liability to principal (express authority, apparent

    authority, implied authority, inherent agency power, respondeat superior (tort


     Is there agency? Are there grounds for liability for the principal? Does the agent

    violate some sort of fiduciary duty that they owe the principal?

     Rest. Says there is an agency relationship when A and B agree that B will act on A‘s

    behalf subject to A‘s control

     There has to be an agreement

     B has to be subject to A‘s control (how much?)

     Eleana Kagan is an agent for Harvard University, so is Larry Summers; lawyers are

    agents for their clients, your plumber is not your agent

     If we think it makes sense for someone to be liable we will call them an agent, thus

    often the logic is not the same as the restatement

     Two types of agents: those that are your servants and those that are independent

    contractors; servants: basic employees independent k‘s: lawyers, accountants

     Respondeat superior only kicks in for master-servant relationships not for

    independent contractor‘s, if you control just the end product you are not liable for

    torts but if you control the process you are liable

A. Who Is An Agent?

    1. Gorton v. Doty

     Doty is a school teacher who offers her car to a football coach to drive to a football

    game, Doty tells him Coach Garst can drive, Π sues Doty saying that Garst was her


     What if it was a pro team and Doty was the owner and Garst is the coach? What if

    Garst rented car from Hertz? Would Hertz be liable? No, Garst is not acting on behalf

    of Hertz.

     In this case it seems like Garst is an agent of the school, not Doty rd Always 3 parties, principal, agent and 3 party

     Actual Express Authority

     i.e. How do you execute AOL-TW merger? Steve Case is president/CEO, board of

    directors votes for the merger, after that the shareholders have a vote, agency comes

    in because someone has to sign the merger document, BOD would also vote

    authorizing SC to negotiate the terms of the merger (they give actual, express

    authority to SC)

     Actual Implied Authority

     SC can charge travel expenses to negotiate the deal, even though the board does not

    say so explicitly

Apparent Authority rd Goes to what the principal tells 3 party, express and implied authority is based on

    what principal tells agent

     Managing Partner typically can hire associates at 120K, but suppose he offered a

    partnership, you want to see a document that gives him authority to offer partnership

    because it is not custom that managing partner can make partners on his own

     Suppose he also offers you a parking spot, there is probably apparent authority and

    there is probably implied authority as well


    o Principals know about it and let it happen (estoppel-like)

     Inherent Agency Power

    o Hard to come up with plausible realistic examples of this

     Respondeat Superior

    o Separate because principals never tell agents to be negligent and if you

    could shield yourself by just telling employees not be negligent, seems

    like bad policy

     Suppose Michael Eisner tells VP to hire anyone but Spielberg, is he still liable if VP

    does? Depends on what VP‘s in Hollywood in general can offer, there may be

    apparent authority even though ME told his agent he couldn‘t.

     A corporation has no way to act except through agents

     Question is who can bind a corporation?

     The greater the control the principal has over the agent the more likely they will be

    liable for torts as well

     Two category of agents servant and IC, if principal can tell the agent how to go

    about doing their work they are a servant, if they just tell them what job needs to be

    done then they are an IC, IC can bind principal in K, servant can also bind principal

    in tort

     There are also independent contractors who are not agents and none of the law of

    agency applies

     A VP is obviously a servant

     A lawyer is an IC, no respondeat superior liability for torts, but there is K liability for

    all the K‘s he enters

     Your waiter is not your agent just because you tell what and how to cook your order rd 3 parties: principal, agent and 3 party rd Potter goes to work at Nimbus, told to negotiate a merger of 3 party (slithering);

     If BOD passes a resolution giving him authority to negotiate the merger he has Actual

    Express Authority

     Travel Expenses are chargeable under Actual Implied Authority

     What if Potter tells his VP Herm not to pay more than $3MM, then calls Slithering to

    tell them Herm is coming over to negotiate, Herm signs a deal for a higher amount, is rdhe bound? Depends what he said to the 3 party, if he doesn‘t tell them she has a

    $3MM limit he and the corporation are bound under apparent authority.

     If BOD didn‘t authorize but they like the deal and accept it then we have ratification

     If there is a custom in the industry that these types of agents have the specific

    authority, may find inherent agency power

     What if Michael Eisner wants to make a Slasher movie not under the Disney label,

    tells Cameroon to make the movie without the Disney name attached Cameroon makes contracts doesn‘t pay them, is Disney bound? Yes, under actual

    express authority.

     What if Eisner tells Cameroon not to hire Bob, but he does anyway and doesn‘t pay

    him? Is Cameroon liable? Yes, the principal is not disclosed so the agent is liable.

    What about Disney‘s liability to Bob? No actual express authority, actual implied

    authority. Is there apparent authority? This involves communication between the rdprincipal and the 3 party, here Eisner has not said anything about his agent to the

    public at all. There is no apparent authority. What about inherent agency power?

    Assuming Cameroon is a general agent and he is doing something that ordinarily is

    done in the course of his business Disney may indeed be liable even though they were

    not disclosed. No apparent authority because the principal is undisclosed so look for

    inherent agency power.

    2. Gay Jenson Farms Co v. Cargill, Inc.

     Farmers are suing Cargill

     Farmers had been selling their grain to Warren (an elevator company), Warren

    doesn‘t pay them

     Why are they suing Cargill? Cargill has lent Warren a lot of money then sent

    managers to Warren and told them that they need to send purchases for approval


     Eventually Warren goes under and Cargill gets sued by the farmers, Court says

    Cargill is liable for the money owed the farmers by Warren.

     The notion is that Cargill is the principal and Warren is the agent. Needs to be an 1) agreement to act on 2) behalf and 3) subject to control Seems to be under control on Cargill but neither Warren nor Cargill thought that

    Warren was acting on behalf of Cargill

     Suppose it was a branch of C and then manager was a crook, would C be principal of

    the crook? The Crook is actually not acting on behalf of Cargill but we still hold

    Cargill liable, the reason being that we go based on what they agreed to and they

    didn‘t agree for him to be a crook

     This is a weird case, usually debtors are not agents of lenders Is ATT liable for the torts of ATT wireless (they own 60%)? No because it is a

    simply a corporation owning stock in another corporation. If it was 100%, it is a little

    trickier. Black letter rule is that parent is not liable for torts of the subsidiaries but

    sometimes we pierce the corporate veil. Corporations are not usually treated as


    B. Liability of Principal to Third Parties in Contract

    1. Authority

    a) Mill Street Church of Christ v. Hogan

     Church hires Bill who hires Sam, question is whether Church is liable? Court says yes under implied authority, Bill needed to hire someone to complete the


     In the past Bill was able to hire Sam, the logic is that since the past they allowed this

    they have made a representation to Sam that Bill had the implied authority to hire him

If there was no implied or apparent authority, Sam would still be Bill‘s agent (agent‘s

    agent), in this case Bill could be sued for Sam‘s torts but not the church.

     Common problem: does agent have authority to hire subagent, the general rule is that

    if some discretion is required then there is no authority. If it does not require

    discretion then the agent have the authority to hire subagents. Example, implied authority

     Implied authority involve actions which are incidental what you are told to do, they

    usually accompany it or reasonably necessary

     Frodo marries, Fricka and have a baby, Braun. They go away and hire a babysitter

    and leave the number of Doctor and health insurance card. Baby gets sick and the

    babysitter runs up a tab above what health insurance will pay, Frodo and Fricka are

    liable. Even if there is no AEA, there is AIA for a babysitter to incur reasonable and

    necessary health costs for the baby. The fact they left insurance card they are making

    a manifestation of apparent authority to the hospital.

     What if she runs a big bill to Saks? They are probably not liable. What if they left

    there credit card is there apparent authority? Who knows.

    b) Lind v. Shcenley Industries, Inc.

     Herfeld is VP of P&T and Kaufman works for Herfeld and Kaufman offers Lind a

    1% commission, the issue is whether the employer is liable

     Herfeld tells Lind that Kaufman will tell him his salary

     Apparent Authority:

     Principal can be liable under apparent authority by representations of other agents

    (P&T bound by apparent authority represented by Herfeld)

     Majority finds apparent authority

     Dissent says that 1% is a huge amount, so Π maybe lying and the authority is not so

    apparent since it is such a huge amount

     Tom Brady tells secretary to buy a Ford. Bound by express and arguable apparent

    authority if she tells ford that she is authorized. What if he tells her not to pay more

    than $105K and she charges $120K, is he bound? Yes, because of apparent authority.

    If you hold someone out to the world as an agent and then you limit the agency then

    you better tell people the nature of the agency.

    c) Three-Seventy Leasing Corporation v. Ampex

     370 is buying computers from Ampex and then lease it to EDS

     Kays puts together a P.O. (unsigned) sends it to Joyce (370), who signs it Kay sends a letter saying we have a deal and then Ampex wants out There is no AEA, no AIA but there is apparent authority according to the court

    because of the letter even though Kay is a low level employee and it is $500K line of


     Ampex is holding him out as a salesperson, he apparently has the authority to close


     Morale is: watch your lower level employees

     Hypo: Standish tells Alden to ask Priscilla to marry him, is Standish bound? Yes. What if after Alden asks Pirscilla (she is thinking about) Standish revokes his agency

    and then Priscilla accepts, is Standish bound? Yes, because there was authority when

    the offer was made.


Invented by writers of Rest. To make sense of cases that didn‘t fit

     General Agents and Special Agents General Agents authorized to conduct a series

    of actions and doesn‘t required fresh authorization each time (GM/VP, etc.); Special

    Agent authorized to complete specific transactions

     IAP -- GA is doing something usually accompanies or incidental to what the agent is

    supposed to be doing

     When would you have something that meets IAP but not AA? Not very many, rd party knows about the principal; particular when you look at disclosed principals (3rdundisclosed 3 Party does not know there is any principal out there). IAP takes the

    result you would get in disclosed cases through AA and maps to undisclosed

    principals. (See Foundry example above)

    a) Kiv. Fenwick

     Π is the seller, he thinks he is dealing with Humble but he is suing Fenwick, who

    becomes in this case rd Humble agent, Fenwick principal, Watteau 3 Party Humble doesn‘t tell Watteau that someone else owns the bar, Humble doesn‘t pay

    and Watteau finds out that there is a principal and sues them; Fenwicks defense is that

    he never authorized Humble to buy cigars and bovral (sp?)

     No AEA, no AIA

     Is there AA? No, there is no manifestation from Fenwick to Watteau, Fenwick has

    said nothing

     Court says that Watteau still wins under AA, because court is unsure IAP exists in

    NY law

     Restatement writers later on fit this into an example of IAP (see pg. 19)

    b) Kidd v. Edison rd Principal is Edison, Agent is Fuller and Kidd is 3 Party Fuller guarantees a full tour‘s contract for testing, Edison says that Fuller is not

    authorized to offer full tour‘s worth of singing engagements

     There is no AEA, no AIA

     Is there apparent authority? Edison is holding Fuller out as a senior representative, to

    find AA you would have to say that people who have the title that Fuller does usually

    are able to make these promises

     But Hand decides to go beyond saying there is AA to say there is something like IAP


    c) Nogales v. Arco rd Arco‘s Agent is Tucker and Nogales Service Center is the 3 Party

     Tucker offers NSC a loan, a $.01 discount and keep the service center ―competitive‖

     NSC sues Arco on the $.01 discount and Arco says that Tucker was not authorized to

    do it

     No AEA, No AIE, might be AA but jury says no there isn‘t

     The Court says they can‘t argue IAP because this should have been argued during the

    jury instructions

     This case spells out IAP very clearly and spells out another set of facts you might see


     By definition you only have this when there is no AA, very hard only when there is

    an undisclosed principal or a case like this when the jury says there is no AA

3. Ratification

     A retroactive/ex-post authority, an agent who is not authorized does it anyway,

    principal learns about it and says it makes sense and says go ahead Has to be that the agent is purporting to act on behalf of the principal, agent does not

    have the authority to do it (though principal could have authorized), the agent does

    what he/she is not authorized to do, principal manifests something that they think it is

    good idea or does something that is only justifiable if they made that choice a) Boticello rd Mary and Walter are Tenants and Common, Boticello is the 3 Party

     Boticello goes to Walter, they make a deal to sell the farm for $85K (rental/option to

    buy), unclear whether Mary is happy with the deal, Boticello makes a variety of

    improvements and wants to exercise his purchase option and Mary Objects (in

    between they learn that Mary is co-title owner) rd Mary is the principal, Walter is the Agent and Boticello the 3 Party

     There is no AEA, AIA

     Court says no AA, IAP just because they are married

     Unclear whether Walter was purporting to act on the behalf of the party Walter does not have authority but Mary could have give it to him Does Mary manifest something that she was treat the sale as though it was in fact

    authorized, court says no

     Walter is liable for the sale and false representation but Court says that taking the

    $$ is not a manifestation on the part of Mary because she might not be on notice of

    the purchase option (as opposed to rental)


     AV wants to buy a Townhouse, goes to TH Management finds the janitor, who shows

    him around and gets AV to sign a K, is the TH liable? There is no AEA, no AIA, no

    AA, and no IAP. TH is not bound.

     What if they let AV move in, rent for a couple of months, then can they kick him out?

    At that point there would be ratification.

     What AV asks DR to buy a BMW, DR buys him a Porsche? Is AV bound? No AEA,

    AIA, no AA (undisclosed), and no IAP (Rodman is not a general agent). But if AV

    drives it around there would be ratification.

     Suppose AV negotiates with janitor to for a discount in exchange for mowing the

    lawn every week, AV moves in Feb, come June (TH has been collecting 4K/month

    rent), AV can probably held liable for mowing the lawn.

     TB has an agent, AV wants a new car and TB‘s agent sells his Porsche to AV for 60K,

    TB takes the 60K it is ratified, what if the agent tells AV that it comes with 90-day

    warranty and the cars break down and AV wants to be paid under the warranty, is TB

    bound (no original authorization)? The problem is that the agent stuck in the warranty.

    NO, not apparent to TB that there is a warranty; this is the same as the Boticello

    problem (taking the money can just indication of rental not necessarily with an option

    to buy)

     Could there be a duty of care to figure out exactly what your agent had sold? If TB was a car dealership then holding an agent there would be apparent authority to

    sell a car warranty

     Can principals ratify tort? Seems weird but the issue comes up

Oracle has an office on Rt. 128 and comes out with new software, LS drives around

    delivering the software and he gets into a car accident and then goes on delivering the

    rest of the software, is Oracle bound? Typically you would say that LS is not a

    servant, just an agent. But if Oracle gets paid for all the software he delivered, Court

    may deem that they ratified his acting as a servant and may be liable for the torts.

    4. Estoppel

     This is the bakery/JVP/cop example, JVJ was never an agent, question is whether

    bakery was so negligent/culpable that they will be held liable

    a) Hodison

     Hodison makes a deal with an apparent salesman in the furniture store (but turns out

    to be an impostor) and Hodison sues the furniture company for the delivery (she

    already paid)

     Court allows her to collect by saying that even though the apparent salesman was not

    their agent but there is a reason they were able to do it and it was because you were

    not careful enough

     Could also say it that there is a duty of care to the public (like the duty that the floor is

    not slippery)


     LS turns down an econ prof for tenure, the junior prof goes to a conference and runs

    up big charges at the first day of the conference, they notify LS who laughs, and then

    the next day Hodison throws a big party, Harvard might be liable

     Divide it up: post notice tab and pre-notice tab

     LS doesn‘t really have a duty of care to the hotel, but it does have a Hodison-like feel

     For the Pre-notice charges, the case is less tenuous for estoppel least, but there is case

    for apparent authority for the pre-notice charges, LS has held the professor out as a

    junior prof, when it revokes the agency that had a duty to notify that the agency

     Why is there not ratification? The junior prof is not an agent of LS, he has been fired.

     Sometimes the agent is liable

     In cases when there is AEA or AIA agent can‘t be liable

     When Kagan signs K‘s on behalf of HLS she is not personally liable rd If the agent makes a reservation with 3 party and doesn‘t disclose the principal and

    Agent is on the hook, the principal is also on the hook if there is AEA

     What if there is no principal, agent is liable (Atlantic Salmon)

    5. Agent‘s Liability on the Contract

    a) Atlantic Salmon rd Boston International Seafood Exchange, Agent is Curran and 3 Party is dealing with

    some Norwegian Salmon Exporters

     Supposed BISE actually existed, BISE would be liable for K‘s and Curran would not

    be (AEA)

     Suppose there is no corporation such as BISE, Curran is liable

     Suppose there is a corporation called Marketing Designs whose VP is Curran and MD

    is doing business as BISE, is Marketing Design‘s liable? Yes they would be liable

    because Curran is their agent and has AEA, doesn‘t matter that the corporation is

    undisclosed. Is Curran also liable? Court says yes because he does not disclose the

    real corporation he is working for (MD). In this case MD was also non-existent at the

    time of the transaction.

C. Liability of Principal to Third Parties in Tort

     When agents commit torts is the corporation liable for the tort? Agent has to be a

    servant rather than an Independent Contractor

     One policy question why do this? The actual tortfeasor is always liable (agent). Want

    to make the entity which can control risk liable, in this case the employer will reduce

    risks of accidents if they are held liable.

     Also, corporations more likely able to pay.

     But why not on the Independent Contractors? IC‘s tend to be richer, but the actual

    distinction the law makes is that employers controls risk levels of servants but not

    independent contractors, but this seems circular. If you made employer‘s liable for

    IC‘s they would start controlling them more. One reason is that it is easier/cheaper for

    corps to control servants.

    1. Servant v. Independent Contractor

    a) Murphy v. Holiday Inn

     Murphy was staying at Hotel owned by Betsy Lane but the franchise is Holiday Inn Murphy slips and falls, Betsy Lane is liable the question is whether Holiday Inn is

    also liable, in this case the answer is no. Is BL a servant? Has BL agreed to act on

    behalf of Holiday Inn.

     Court says they have no control over the day-to-day janitorial work, etc. even though

    the franchise may control many requirements

     Court says there is not sufficient control here for respondeat superior 2. Tort Liability and Apparent Agency

    a) Billops

     Rents a ballroom at the Hilton, owned by Magnees (franchisee)

     The Banquet Manager makes a reservation and then demands extra money, Billups

    says no, the Banquet Manager shows up and ruins the party

     Here the Court says Hilton is liable, even though the facts are very similar to Holiday


     Of course, the Banquet Manager and Magnus would be liable (Banquet manager is a

    servant of Magnus but respondeat superior also requires that the act is within scope of

    employment, but court never addresses this).

     The Manager is liable, Magness is liable (Manager is agent & servant, so Magness is

    liable for torts of manager within the scope of the manager‘s employment)

     Problem is scope of employment, is this the type of conduct he is authorized to do

    (well extortion no, but securing reservations, yes), it is during time/place, is this

    motivated in part to serve the master, it gets dubious (if he is extorting money for

    Magness then yes but not if it is to put it in his own pocket)

     Respondeat Superior, time/place and motivated in part on behalf of the employer (but

    in this case looks like Banquet Manager is just trying to extort money for himself) If there is no respondeat superior to Magness first then there cannot be respondeat

    superior to Hilton.

     For respondeat superior, there needs to be an agent, that agent needs to be a servant

    (principal have control over how agent does his business), and the agent be acting

    within the scope of his/her employment.

     For liability:

    o Within the conduct the employee is authorized to do

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