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Business Associations, Officers Breach their Fiduciary duties when,…

- - - - Exists when agent reasonably believes he or she has authority to act on behalf of principal as a result of principal’s manifestations
        
        Implied
        
        Authority necessary or incidental to achieve the principal’s express objective
        
        Express
        
        What the principals communicates to the agent regarding authority
    - - Restatement 3rd of Agency §4.01
        
        “The affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with actual authority”
    - - When the third party reasonably believes that the actor has the authority to act on the principal’s behalf and that belief is traceable to the principal’s manifestations
        
        the doctrine of apparent authority is unavailable to one who knows an agent lacks actual authority.
    - - Binds a party to a contract entered into on its behalf even though the agent or other lacked apparent or actual authority
        
        Requires:
    - - Exercise 2.1 & 2.2
    - - Principal is liable for tort committed by an agent if:
        
        Agent is an employee of the principal, and
        
        Restatement 3rd 7.07
        
        An employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employer’s control. An employee’s act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to servant any purpose of the employer
        
        Agent committed tort while acting within the scope of employment
  - - - Default
        
        Partners are agents of the partnership and have apparent authority for ordinary course transactions
      - Partnership will be bound if:
        
        Act by a Partner “apparently carrying on in the ordinary course of the partnership business or business of the kind carried on by the partnership unless (see below)
        
        UNLESS
        
        (1) The partner had no authority to act for the partnership in the particular matter; AND
        
        (2) The person with whom the partner was dealing knew or had received a notification that the partner lacked authority
        
        (3) An act of a partner which is not apparently for carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership only if the act was authorized by the other partners
      - Governed by:
        
        Common Law of agency applies to partnerships and partners notwithstanding RUPA § 301
      - Cases and Exercises
        
        Etling v. Etling
        
        Exercise 2.3
    - - Individual Directors
        
        -cannot confer actual or apparent authority
        
        -can only act collectively as a board
        
        -Not an agent of the corporation
      - Officers
        
        -Agents of a corporation
        
        Owe Fiduciary Duties
        
        An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship
        
        4 Elements of Duty of Loyalty
        
        (2) “A duty not to deal with the principal as or on behalf of an adverse party in a transaction connected with the agency relationship”
        
        (3) “A duty to refrain from competing with the principal and from taking action on behalf of or otherwise assisting the principal’s competitors”
        
        (1) “A duty not to acquire a material benefit from a third party in connection with transactions conducted or other actions taken on behalf of the principal or otherwise through the agent’s use of the agent’s position
        
        (4) “A duty (1) not to use property of the principal for the agent’s own purposes or those of a third party; and (2) not to use or communicate confidential information of the principal for the agent’s own purposes or those of a third party
        
        -corporation’s bylaws usually specify the authority of at least some its executive officers
      - Shareholders
        
        -Not an agent of the corporation
        
        -do not have the authority to bind the corporation
        
        -can be given the authority by the board of directors (or whoever the corporation is acting through)
    - - RUPA
        
        -limit member authority of a member-managed LLC
        -manager authority of a manager-managed LLC to acts apparently carrying on the business of the LLC
      - Corporate Rule
        
        -member is not an agent of an LLC
      - Governed By:
        
        Depends on applicable LLC statute and the LLC’s governing documents:
- - - - Sub-C; Sub S
        
        Venture Capitalists prefer to invest in C-Corps
        
        want the option to issue preferred stock, the structure requirements, avoid dealing with pass-through taxation, want possibility of IRC 1202 favorable tax treatment
      - Default: Sub-C
    - - Default: SUB-K
      - Sub-C; Sub S
    - - Default: Disregarded
      - Sub- C; Sub-S
    - - Default: Sub-K
      - Sub-C; Sub-K
    - - Company itself does NOT pay taxes
        
        Business does not pay federal income tax
        
        Instead, it passes through income/losses to its owners
        
        Owners report the flow-through income/losses on their personal tax returns and pay tax at their individual income tax rates
      - Profit is allocated each year to each of the owners based on their ownership percentage
        
        Only Sub-K provides for allocating losses on a basis other than percentage of ownership
        
        "Special Allocation"
        
        A special allocation is valid for tax purposes only if it has “substantial economic effect”
        
        “Must at least appear that the partners agreed to it for economic reasons rather than to merely minimize the partners’ tax obligations”
      - Same as Disregarded
    - - Double Taxation
        
        both business entity is taxed and the owner(s) is/are taxed; profit taxed twice, once at the corporate level and then once to the shareholders upon distribution
        
        Business pays tax on its:
        -taxable income (profit) in the year it was earned at the corporate tax rate(s)
        
        Be Aware of C-Corp Zero Out Strategy
        
        Corporation pays out its shareholders in the form of salaries, bonuses, rent, interest, etc. an aggregate amount equal to the corporation’s profits for the year
        
        Caveats
        
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        Test for Determining Reasonable Compensation
        
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        Owners pay tax on:
        -money distributed to them (dividends for corporations) by the business in the year it is distributed to them (normally qualifies as “qualified dividend”
    - - Pass through
        
        Eligibility
        
        (1) Domestic entity (somewhere in the states)
        
        (2) 100 or fewer owners (101)
        
        (3) All of its owners are individuals, estates, certain types of trusts, or tax-exempt organizations;
        
        (4) None of its owners are nonresident aliens; and
        
        (5) One class of ownership interests outstanding (disregarding differences in voting rights)
      - Cases and Exercises
        
        Watson v. Commissioner
        
        Partner at LLP created a S Corp
        
        Was attempting to save on employment taxes
        
        Using the corporate zero out strategy to avoid paying employment taxes
    - - Exercise 3.1
- - - - Limited Liability Shield
    - - No Liability Shield
        
        Section 306
        
        Partner's Liability
        
        (a) Except as otherwise provided in subsections (b) and (c) all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law
      - Exhaustion Rule
        
        judgment creditor must first seek to recover against the partnership
        
        RUPA §307(d) A judgment creditor of a partner may not levy execution against the assets of the partner to satisfy judgment based on a claim against the partnership unless the partner is personally liable for the claim under Section 306
      - Indemnification Right
        
        RUPA 401(c)
        
        A partnership shall reimburse a partner for payments made and indemnify a partner for liabilities incurred by the partner in the ordinary course of the business of the partnership or for the preservation of its business or property
    - - Liability Shield
      - Piercing the Veil
        
        Green Hunter Energy Inc. v. Western Ecosystems Technology
        
        What is the Wyoming Test for Piercing the veil?
        
        (2) the facts are such that an adherence to the fiction of its separate existence would, under the particular circumstances, lead to injustice, fundamental unfairness or inequity”
        
        (1) The veil of a limited liability company is not only owned, influenced and governed by its members, but the required separateness has ceased to exist due to misuse of the limited liability company; AND
        
        Why did the court decide to pierce the veil?
        
        -LLC was not only owned, influenced and governed by Appellant (the corporation), but
        
        -The entities had ceased to be separate due to Appellant’s misuse of the LLC
        
        -Furthermore, the facts are such that adherence to the fiction of the LLC’s separate existence would, under these particular circumstances, lead to an unjust and inequitable result
        
        What should Western have done differently?
        
        Require Greenhunter or Greenhunter Energy, Inc. to guarantee the LLC’s obligations under the consulting contract as a condition to entering the contract
    - - Limited Partners have Limited Liability Shield
        
        General Partners = No liability Shield
    - - Company exposure to owners obligations
        
        PARTNERSHIP AND LLC's: LIMITED TO A CHARGING ORDER
      - In Re Albright
        
        Single Member Owed LLC
        
        Filed For Bankruptcy, Sole Member of LLC
        
        What is a Charging Order?
        
        A court order requiring an LLC to redirect any distributions intended for the debtor-member to the creditor to satisfy the debt of the member if and when distributions are made
        
        Creditors of LLC are limited to Charging order
        
        Questions
        
        What is the big caveat regarding outside liability shield of an LLC?
        
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        What could the Single Member LLC do to avoid creditors from getting money?
        
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        What was the courts reasoning for imposing the caveat?
        
        Court rejected the charging order. Charging order is meant to protect other members. With no other members there is no one to protect
        
        Is there any way around this?
        
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    - - Owners exposure to company obligations
        
        Owners equity in the business at risk
- - - - For our class: RUPA
    - - RUPA 101
        
        ) “Partnership agreement” means the agreement, whether written, oral or implied, among the partners concerning the partnership, including amendments to the partnership agreement
      - RUPA 103
        
        Except as otherwise provided in subsection (b), relations among the partners between the partners and the partnership agreement does not otherwise provide this [Act] governs relations among the partners and between the partners and the partnership
      - Non Waivable Provisions in Partnership Agreement
        
        Section 103 Effect of Partnership Agreement: Non-Waivable
        
        (1) Vary the rights and duties under Section 105 except to eliminate the duty to provide copies of statements to all of the partners;
        
        (2) Unreasonably restrict the right of access to books and records under Section 403(b)
        
        (3) Eliminate the duty of loyalty under Section 404(b) or 603(b)(3), but:
        
        (i) the partnership agreement may identify specific types or category of activities that do not violate the duty of loyalty, if not manifestly unreasonable; or
        (ii) all of the partners or a number or percentage specified in the partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty;
        
        (4) Unreasonably reduce the duty of care under Section 404(c) or 603(b)(3):
        
        (5) Eliminate the obligation of good faith and fair dealing under Section 404(d), but the partnership agreement may prescribe the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable
        
        (6) vary the power to dissociate as a partner under Section 602(a), except to require the notice under Section 601(1) to be in writing:
        
        (7) Very the right of a court to expel a partner in the events specified in Section 601(5)
        
        (8) Vary the requirement to wind up the partnership business in cases specified in §801(4), (5) and (6)
        
        (9) Vary the law applicable to a limited liability partnership under Section 106(b); or
        
        (10) restrict rights of third parties under this [Act]
    - - Default rule when asking whether a partnership has been created?
        
        RUPA 202
        
        (a) Except as otherwise provided in subsection (b), the association of two or more persons to carry on as co-owners a business for profit forms a partnership. Whether or not the persons intend to form a partnership
        
        (b) An association formed under a statute of another jurisdiction is not a partnership under this [Act].
        
        *Do not look at intent to form a partnership per se  look at intention to make a business for profit
        
        Case About Formation of Partnership
        
        Holmes v. Lerner
        
        What Facts in this case point to there being a partnership?
        
        Communications:
        
        Conduct of the Parties
    - - Exercise 4.1 4.2; Holmes v. Lerner
    - - Default Rule RUPA 401
        
        Partners Rights and Duties
        
        (f) each partner has equal rights in the management and conduct of the partnership business
        
        RUPA 401 (f)
        
        (j) a difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and (really OR impossible to have both) an amendment to the partnership agreement may be undertaken only with the consent of all of the partners
        
        RUPA 401(j)
        
        If Inside exposure
        
        Majority Vote
        
        If outside or amend the partnership
        
        All to Agree
        
        CAN BE OVERRIDDEN BY PARTNERSHIP AGREEMENT
      - If you are an attorney what would you include in your draft?
        
        -Put it in there to override the default; default might change and no ambiguity
        
        -Allocating votes proportionately based on ownership interest
        
        -Delegating management authority to a managing partner or committee
    - - RUPA Section 404
        
        (a) the only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections (b) and (c)
        
        Duty of Loyalty
        
        Duty to “account to the partnership and hold as trustee for it any property, profit, or benefit . . . derived from a use by the partner of partnership property.”
        
        RUPA 404(b)
        
        Duty of Care
        
        -“refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law”
        
        RUPA 103(b)(3)
        
        Prohibited to eliminate duty of care
        
        RUPA 404(c)
        
        Obligation of Good Faith And Fair Dealing
        
        (d) A partner shall discharge the duties to the partnership and the other partners under this [Act] or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing
      - Cases and Examples:
        
        Meinhard v. Salmon
        
        Rule: Co-adventurers, like partners, have a fiduciary duty to each other, including sharing in any benefits that result from the parties’ joint venture
    - - RUPA 502
        
        The only transferable interest of a partner in the partnership is the partners share of the profits and losses of the partnership and the partners right to receive distributions. The interest is personal property
        
        RUPA §101: Definitions in this Act
        
        “Partnership interest” or “partner’s interest in partnership
        
        all of a partner’s interests in the partnership, including the partner’s transferable interest and all management and other rights
      - RUPA 503
        
        (a) a transfer, in whole or in part, of a partner’s transferable interest in the partnership:
        (1) is permissible;
        
        “Transfer”
        
        Includes an assignment, conveyance, lease, mortgage, deed, and encumbrance
    - - Section 401
        
        (b) Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partners share of the profits
      - Allocation does not equal Distribution
      - Look in partnership agreement for both distributions and allocations
      - Exercise 4.6
    - - Dissociation
        
        RUPA 601
        
        RUPA default: a dissociated partner by default has the right to be bought out by the partnership (subject to some exceptions)
        
        -When a partner leaves a partnership can be voluntary or involuntary
        -i.e., Death, bankruptcy, voluntary dissociation
      - Dissolution
        
        RUPA 801
        
        Different triggering default rules depending on type of partnership (at will, definite term, particular undertaking)
        
        Once triggered, partnership must be wound-up (partnership liquidates its assets, pays off its creditors and distributes any remaining $ to its partners”
      - Exercise 4.7
- - - - Why did CF trust nonetheless pursue reverse veil-piercing?
        
        Because of the way Peterson evasively structured his business dealings, these maneuvers failed to yield any payment on the judgment CF Trust obtained with respect to the notes
        
        Factors to Consider
        
        (1) Undercapitalization
        
        (2) Co-Mingling of Funds/ Assets
        
        (3) Lack of Following the Formalities
        
        (4) Fraud
        
        (5) The way he conducted business and personal affairs
      - Same as Piercing the Veil
- - - - A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior
    - - (1) to account to the partnership and hold as trustee for it any property, profit, or behavior 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, including the appropriation of a partnership opportunity