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More on Power to Bind by an Unauthorized Act

Friday, August 26th, 2011

In Sources of Apparent Authority, I discussed the apparent authority requires a holding out  (manifestation) by the principal; as a general rule apparent authority cannot be based only on the conduct of an agent.  That said, one of the traditional sources of apparent authority is appointing an agent to a position that, by custom, carries with it certain authority to act for the principal.  In most of the cases involving “power of position,” the principal does not communicate directly with the third person;  the only affirmative act by the principal is the appointment to the position.  That raises the question:  how is that apparent authority, as opposed to estoppel to deny agency power? That question leads to these further observations:

  • The traditional view is that an agent has implied authority to tell third persons the position to which the agent has been appointed.  A statement by the agent–a holding out–”I am the General Manager” (for example)–can be deemed to be a statement by the principal.  In Tutti Mangia Italian Grill v. Amer. Textile Maintenance Co., if the person who signed the contract as General Manager was, in fact, the General Manager (an additional fact), then the holding out by the GM was a holding out by the principal.
  • To the extent that you don’t buy the traditional view, then estoppel to deny agency power can apply.  The principal appoints the agent to a position with customary power.  The principal should reasonably foresee that the agent will tell his position to third persons, who will reasonably believe that the agent has the customary authority.  If the principal limited the agent’s authority, the principal’s failure to warn third parties of that limitation can form the basis of estoppel to deny agency power.
  • Where the agent is a general agent, apparent authority by position would also be inherent agency power (which Restatement Third of Agency rejects).

The point is that the Restatement categories tend to overlap.  Many states, such as California, tend to lump them all together into ostensible authority. 

As I tell my students, all these doctrines are just judges and professors trying to explain the circumstances in which power to bind by an unauthorized act arises.  But, as the Zen koan put its:  the finger that points at the moon is not the moon.

When Learned Hand was pointing at the moon, he probably didn’t intend to invent a new doctrine, inherent agency power.  Because he was the Revered Learned Hand, that’s what happened.  The Restatement Third would abolish the doctrine. Good luck with that.

posted by Gary Rosin

 

Posted in Agency, Cases, Commentary | No Comments »

Sources of Apparent Authority: Tutti Mangia Italian Grill v. Amer. Textile Maintenance Co. (Cal. Ct. App.)

Wednesday, August 24th, 2011

In Tutti Mangia Italian Grill v. Amer. Textile Maintenance Co., No. B227191 (Cal. Ct. App. 7/18/11), one of the issues was whether an agent who signed a contract containing an arbitration agreement was authorized to sign the contract.  The Court held that there was substantial evidence to support a finding of “ostensible” authority:

First, Christian signed the written agreement as the “General Manager” for TMIG, and a general manager generally has the authority to enter into agreements for the corporation. Second, the arbitrator found, based upon testimony at the arbitration hearing, that Christian “was in fact holding himself out as the General Manager and as one authorized to sign.” Accordingly, we affirm the trial court‟s finding that Christian was TMIG‟s ostensible agent, and thus, we conclude that there was a valid arbitration clause that required TMIG to arbitrate this matter.

Slip Op., at 12-13 (citations omitted) (emphasis added).

I know that “California’s a brand new game.” But apparent authority, and the other forms of power to bind by an unauthorized act, generally require some sort of conduct (or possibly negligence) on the part of the principal, and not just assertions by the agent alone.  It even says that in Section 2317 of the California Civil Code:

Ostensible authority is such as a principal, intentionally or by want of ordinary care, causes or allows a third person to believe the agent to possess.

So, the the arbitrator, the trial court and the Court of Appeal (Second District, Division 4) all misapplied the law.

But the arbitrator also found some of the facts necessary for a ratification:

There was never any disavowal of said Agreement by [TMIG] who impliedly accepted the benefits of same by operating thereunder.

Slip Op. at 4-5.  The contract was for “the provision of restaurant linens,” id. at 2, so the restaurant presumably took delivery of, and used, the linens.  That’s probably the acceptance of benefits to which the restaurant was not entitled, except under the contract.  The ” no partial ratifications” rule would prevent accepting only part of the contract (the linens), but not the other part (the arbitration agreement). 

That said, the existence of an arbitration clause may be a material fact that might allow the restaurant to “avoid” its implied ratification, if it did not know of the clause.

posted by Gary Rosin

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When You’re Alone, You’re Alone: Hillman and Weidner on Partners without Partners

Friday, August 19th, 2011

In a partnership at will, unless the partners otherwise agree, the voluntary withdrawal of a partner (a much nicer word than “dissociation”) automatically causes dissolution of the partnership.  RUPA § 801(1).  For partnerships for a definite term or particular undertaking, after the voluntary withdrawal of a partner only results in dissolution of the partnership by the express will of at least half of the remaining partners.  RUPA § 801(2)(i). If the withdrawal of a partner does not result in dissolution of the partnership, the partnership must purchase the interest of the withdrawn partner.  RUPA §§ 603(a), 701(a).

But what if the partnership had only two partners?  does the remaining partner have the right to buyout the other partner? Robert Hillman (Cal-Davis) and Donald Weidner address this question in an article forthcoming in The Fordham Journal of Corporate and Financial Law, Partners without Partners:  The Legal Status of Single Person Partnerships (SSRN, draft dated Aug. 1, 2011).  Prof. Hillman is of the view that, under RUPA § 101(6),  the partnership dissolves by operation of law:

The core of RUPA’s definition is that a partnership is “an association of two or more persons to carry on as co-owners a business for profit.” If one partner leaves, the predicate association of two or more persons no longer exists, which means a partnership is constituted only for the limited purpose of winding up the business. In other words, the partnership that existed prior to the dissociation is no more.

Id. at 3 (footnotes omitted).  Dean Weidner, who was the Reporter for the RUPA, disagrees:

I obviously think you are asking the definition of partnership to do too much by effectively operating as a special dissolution rule whenever partnerships no longer meet the language of the definition. RUPA contains three separate articles on partnership breakups, defining when and how liquidations versus buyouts are to take place. To attach to the definition substantive breakup consequences would create yet another set of dissolution rules and certainly was not considered in the drafting of the RUPA.

* * *

RUPA’s breakup provisions are much more detailed than the UPA on how a departing partner is to be cashed out. * * *

* * * Section 801, by its terms, lists the “only” events that cause dissolution and winding up, and a departure from a term partnership is not on the list. Both Sections 603(a) and 801, therefore, require a buyout in this situation.

Id. at 6-7 (footnotes omitted).

In a recent opinion, the Third Division of the Fourth District of the California Court of Appeals reasoned that, by definition, a partnership requires at least two partners, and ruled that the withdrawal of one partner in a two-partner partnership automatically caused dissolution.  Corrales v. Corrales, G043598 (Cal. Ct. App. Aug. 10, 2011).

In many ways, this conundrum is a self-inflicted wound, in that it is an artifact of the RUPA generally embracing the “entity” concept.  Under the UPA, the withdrawal of a partner automatically dissolved the partnership, and usually gave each partner the right to liquidation.  But, in a partnership for a term or undertaking, UPA § 38(2)(a) gave the other partners the right to continue the business, either alone, or with others.

In any event, the problem of the partner-less partner under the RUPA illustrates how the entity approach can be a snare; you begin to believe that all partnership-related problems can be solved by the ritual invocation of the entity.  Even the RUPA retains aggregate elements, such as liability of the partners. Partnerships and sole proprietorships are the only business forms that can be formed without filing with the state.  The difference between the two has always been the partnerships were aggregates; it takes at least two to partner.  As Bruce Springsteen sang in When You’re Alone:

When you’re alone you’re alone
When you’re alone you ain’t nothing but alone

Hat tip:  Eric C. Chaffee (Dayton), Jay Adkisson.

Gary Rosin

Posted in Cases, Commentary, Partnerships, Scholarship | 3 Comments »

Doubling Down on Olmstead: Rossignol v. Rossignol (NY App. Div. 2011)

Monday, March 7th, 2011

In Court Decision Weds Business Divorce with Matrimonial Divorce, on New York Business Divorce Blog, Peter Mahler reports on Rossignol v. Rossignol, 2011 NY Slip Op 01560 (3d Dept Mar. 3, 2011).  In Rossignol, husband and wife were members of an LLC.  After wife filed for divorce, the court entered a restraining order against the husband preventing him from accessing funds in both their personal and the LLC’s banking accounts.  When husband then brought a separate action for involuntary dissolution of the LLC, the trial court dismissed the action because the proceeding for the divorce and the division of marital property involved the “same parties for the same cause of action.”  The appellate court affirmed, reasoning as follows:

Inasmuch as the husband and wife are the only owners of the LLC, and both are parties to the divorce action, we see no reason why any issues should be left for resolution after equitable distribution of the parties’ property. Given the availability of complete relief pursuant to Domestic Relations Law § 234 and our public policy of resolving equitable distribution within the context of a divorce action, we conclude that dismissal of the second action was within Supreme Court’s broad discretion….

Slip Op., at 3-4 (citations omitted).

Mahler is rightly concerned about the apparent disregard of the difference between the LLC and its members.  After the Florida Supreme Court’s opinion Olmstead v. FTC, expanding the rights of personal creditors of the single-member on an LLC (see Charging Orders and Two Kinds of Exclusivity), the Court in Rossignol at least opens the door to a similar result in marital dissolution actions where the spouses are the sole members of the LLC.

posted by Gary Rosin

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EIRLs: France Adopts Limited Liabiity Sole Propreitorship

Monday, March 7th, 2011

Last year, France adopted legislation allowing sole proprietors to form an EIRL–”Entrepreneur individuel à responsabilité limitée”.   LOI n° 2010-658 du 15 juin 2010 relative à l’entrepreneur individuel à responsabilité limitée.  From my little-used college French, and the literal Google ® translation, the law requires a public filing of a Declaration of Trust identifying assets–and their values–dedicated to the business, as well as annual reports. 

My correspondent, Tadas Klimas, from Lithuania, also sends along this link to the Google ® translation of a post discussing EIRLs on Themis, “le blog sur la justice, la loi et l’équité” (original post).

For a law establishing a new unincorporated business entity, the EIRL law is astonishingly brief.  The law limits post-filing creditors of the business to declared business assets, but I couldn’t find anything about limiting distributions to, or the rights of personal creditors of, the sole proprietor.

As Grace Potter of Grace Potter and the Nocturnals sings, “If I were from Paris / I would say / Oooh la la la la la la.”

posted by Gary Rosin

Posted in Commentary, Legislation & Regulations, Unincorporated Business News | No Comments »

American Choppers: The Value of Craftsmanship

Friday, December 17th, 2010

The reality show American Choppers involves a custom motorcycle shop and the day-to-day tensions between the founder, and chief owner, and his employees, one of whom is his son.  As it turns out, the son is a 20% owner of the corporation that owns the shop.  After the father fired his son on the air, the network was upset.  To keep American Choppers on the air, father and son signed a letter agreement giving the father

an option to purchase all of [the son's] shares in [the corporation] for fair market value as determined by a procedure to be agreed to by the parties as soon as practicable.

Within a few months, the father attempted to exercise the option.  In its recent opinion in  Teutul v. Teutul, 2010 NY Slip Op 09248 (2d Dept Dec. 14, 2010) (emphasis added), the court rejected the reasoning of the trial court that fair market value was sufficiently definite in the context of a closely held corporation, threw out the agreement as an agreement to agree.  Peter Mahler’s New York Business Divorce blog has excellent discussions of both the trial court and appellate opinions.

Given the timing of the letter agreement, you would think that they hired a lawyer to advise them. Perhaps a transactional lawyer.  Or even a lawyer who specialized in representing the owners of small businesses, and who presumably would be familiar with issues related to buy-sell agreements.  Perhaps they did all of that.  Perhaps the quoted language was as close as father and son could get to reaching an agreement, and they were told that they really did not have an agreement.  Perhaps not. 

In any event, the case illustrates that craftsmanship is as important in drafting agreements among owners of small businesses as it is in manufacturing custom motorcycles.

Gary Rosin

Posted in Cases, Commentary, Corporations, Owner Agreements | 1 Comment »

Partnership Property & Continuation. Faegre & Benson, LLP v. R & R Investors (Minn. Ct. App. 2009)

Friday, October 9th, 2009

Faegre & Benson, LLP v. R & R Investors, No. A08-1899 (Minn. Ct. App. Sept. 29, 2009) involves the same issue as Putnam v. Shoaf, 620 S.W.2d 510 (Tenn. App. 1981):  a dispute over a partnership claim against a third person after the sale of an interest in the partnership.  Putnam involved an unknown claim, while R & R Investors involved claims against the federal government related to a pending lawsuit in which the trial court had found in favor of the government. 

The partnership, R & R Investors, which owned and operated an apartment complex.  Over the years, several groups of partners came and went.  The “appellants” sold their interest in the business via several documents:

  1. a Purchase Agreement for the sale of the apartments and related personal property;
  2. an amendment to the partnership agreement transferring the selling partners’ interests in the partnership; and
  3. an indemnity agreement under which the purchasers assumed, and indemnified sellers against the obligations of the partnership.

Slip Op., at 5-6.  Unlike an earlier sale (id. at 4), no deeds or bills of sale seemed to have been used.  It is clear that the Purchase Agreement for the purchase and sale of the property was the primary document.  The Purchase Agreement provided that the purchase of the partnership was “[t]o facilitate the sale of this property”.  Id. at 5.

In Putnam, the Court rejected a claim that, because an existing, but unknown, claim was not included in the list of property being sold, the selling partner retained ownership of it.  The selling partners in R & R Investors took a different approach.  The sellers argued that

  • changes in partners dissolved the partnership,
  • the business was continued, but by a new partnership, and
  • the disputed claim was an undistributed asset of the earlier partnership.

Id. at 13-14.  The Minnesota Court of Appeals held that, under the Minnesota version of the UPA

we conclude that, absent agreement to the contrary, the partnership property of a dissolved partnership became the property of the partnership continuing the business without need for separate devise. We base our conclusion primarily on the former UPA’s treatment of partnership property and allowance for continuation of partnership businesses. Appellants’ reading of the former UPA would frustrate the purposes of these provisions.

Id. at 15-16.  Although the Court cited (Slip Op., at 16 n.6) only one portion of my article, The Entity-Aggregate Dispute:  Conceptualism and Formalism in Partnership Law,42 Ark. L. Rev. 395 (1989), its reasoning largely parallels my discussion of the treatment of partnership property in a continuation (id. at 427-43).

Gary Rosin

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Guardianships and Durable Powers of Attorney. Russell v. Chase Investment Services Corp. (OK 2009)

Tuesday, September 22nd, 2009

In Russell v. Chase Investment Services Corp., 212 P.3d 1178, 2009 OK 22 (2009)(on certified question), the Oklahoma Supreme Court, held that, under Oklahoma law, the appointment of a guardian for the estate of a person does not terminate an earlier Durable Power of Attorney.

Section 1074.A of the Oklahoma version of the Uniform Durable Power of Attorney Act provided:

If, following execution of a durable power of attorney, a court of the principal’s domicile appoints a conservator, guardian of the estate, … the attorney-in-fact is accountable to the fiduciary as well as to the principal. The fiduciary has the same power to revoke or amend the power of attorney that the principal would have had if he were not disabled or incapacitated.

29 OK 22 at ¶12 (emphasis in original).  The last sentence of Oklahoma Section 1074(b) differs from the bracketed last sentence of Section 108(b) the Uniform Act.

[The power of attorney is not terminated and the agent’s authority continues unless limited, suspended, or terminated by the court.]

Unif. Durable Power of Att’y Act § 108(b) (emphasis added).

Gary Rosin

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“Check the Box” as Diagnostic

Tuesday, September 22nd, 2009

Heather M. Field (UC-Hastings) argues in Checking in on “Check-the-Box,” 42 Loy. L.A. L. Rev. 451 (2009) that

… the check-the-box election … lacks a coherent set of limitations….  …the policy weaknesses … of the check-the-box regulations stem fundamentally from the existence of a multi-regime system for taxing businesses.

It’s not just the “multi-regime system.”  Partnership taxation is built on an extreme aggregate view of partnerships that was not true in 1954 (or before) and still isn’t true.  Even under the UPA’s tenancy-in-partnership, partners have no meaning individual rights in, or access to, partnership property.  Partnership property is dedicated to partnership purposes; all an individual partner has is the right to distributions (if, as and when approved by the partners).  RUPA-based partnership statutes now vest title to partnership property in the entity, and not the partners. 

It’s hard to ensure economic substance in partnership allocations when the partnership tax regime itself has no economic substance.  Well, apart from the tax regime itself.

Now, if I were the Tax Czar, I’d  like to see

  1. an entity-level income tax on all multi-owner businesses, with deductions of distributions to owners, and
  2. an income tax on distributions to owners, except for, in a liquidating distribution, the amount of the original investment.

That level would the field, both as between entities, and as between debt and equity. 

Hat-tip to Paul Caron (Tax Prof blog).

Gary Rosin

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Discretion and Fiduciary Duties. Bernards v. Summit Real Estate Management, Inc. (OR 2009)

Friday, August 28th, 2009

Bernards v. Summit Real Estate Management, Inc., 229 Or. App. 357, 213 P.3d 1 ( Ct. App. 2009) involves a demand-refusal derivative suit by a member of two member-managed Oregon LLCs.  Each LLC owns an apartment complex that is managed by Summit Real Estate Management, Inc. (apparently unrelated to any of the members).  After Summit and one of its officers embezzled substantial sums from each LLC, Bernards demanded that each LLC sue them.  When other members refused “without explanation,” Bernards filed a derivative suit against Summit and its officer.  Later, Bernards joining the other members, alleging that breach of both contract and fiduciary duties.  213 P.2d at 360-362.

Section 63.801(b) of the Oregon LLC Act allows derivative suits on a showing of demand futility, but allows the operating agreement to change that rule.  Section 5.4(d) of the operating agreement of each LLC required unanimous member consent for a derivative suit.  213 P.2d at 360-61 & 366.  The Court rejected the argument that Section 5.4:

Section 5.4(d) cannot carry the freight with which defendants would load it.  There is no logical connection between the premise that the consent of every member is a contractual prerequisite for legal action, and the conclusion that every member has the unfettered authority to withhold consent.  That is particularly true in light of the well-settled rule that the parties to a contract are bound by a requirement of good faith and fair dealing.  Even more to the point, another provision of the operating agreement, Section 5.10 (as noted above), provides that a member can be held liable for action or inaction taken in bad faith, “gross negligence, fraud, or willful or wanton misconduct.”  The operating agreements, then, confirm rather than contradict the proposition that, although every member’s consent is required before another member may take legal action, that consent cannot be withheld except for a valid business reason.

Id. at 366-67 (emphasis added)(citations omitted).

As indicated by the court, Section 5.10 of the operating agreement provided that members were not liable

… for honest mistakes of judgment or for action or inaction taken in good faith for a purpose reasonably believed to be in the best interest of the Company; provided that such mistake, action, or inaction does not constitute gross negligence, fraud, or willful or wanton misconduct.

Id.at 364 ( emphasis added) (internal quotations omitted).  The Court clearly saw good faith as that required of a fiduciary, rather than the contractual obligation of good faith and fair dealing. 

Although the Court did not discuss this, Section 63.160 of the Oregon LLC Act limits the use of operating agreements to eliminate member (and manager) liability of damages, and uses language similar to that of Section 102(b)(7) of the Delaware General Corporation Law to do so: 

However, no such provision shall eliminate or limit the liability … for … 

  1. Any breach of the member’s or manager’s duty of loyalty to the limited liability company or its members;
  2. Acts or omissions not in good faith which involve intentional misconduct or a knowing violation of law;
  3.  Any unlawful distribution …; or
  4.   Any transaction from which the member or manager derives an improper personal benefit.

Section 63.160.  Section 63.160(2) differs from DGCL Section 102(b)(7)(ii)

acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law

(emphasis added).  Arguably, the omission in the Oregon statute of the word “or” limits the scope of “good faith.”  That said, the Oregon statute also prohibits elimination of liability for breaches of the duty of loyalty.  If it was not already clear that acts not in good faith breach the duty of loyalty, the Delaware Supreme Court has now settled that question as a matter of Delaware law (In re Walt Disney Litigation and Stone v. Ritter).

In any event, Section 5.10 of the operating agreement in Bernards arguably conditions the waiver of liability to acts taken in “good faith.”  Thus, the exclusion of “gross negligence, fraud, or willful or wanton misconduct”  applies only to acts taken in good faith.

The problem with complaint was that it did not plead any specific facts indicating misconduct by the members in rejecting the demand.  The court rejected that argument that the misconduct by Summit and its officer was clear that a failure to sue them could only be explained by misconduct.  213 P.3d at 267-70.

Gary Rosin

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