Ann Lipton has a great analysis of the backstory of a classic partnership law chestnut.
I got an email from Walter Olson of the Cato Institute, who passed along links to his work on the Kim Davis controversy. I thought they would be of interest to many of my readers, so I'm happy to pass it along:
The Kim Davis story has focused public attention on the issue of religious accommodation, especially in the workplace, and I have written four (!) new pieces on that subject two of them just out today.First, if you haven't seen it, here's my Cato post from last Friday on the Kim Davis case itself:
I've got two pieces out today taking off in various directions from the Kentucky controversy. The longer one, just out at Newsweek, is an extended critique of the misnamed First Amendment Defense Act (FADA), a social-conservative priority that purports to shield believers in traditional marriage from any government discrimination whatsoever. It has been endorsed by Ted Cruz, Marco Rubio, and (incredibly) the RNC. Examine its provisions closely and you'll find it's really bad:Also today at Politico Europe, my piece on why the EEOC case of a Muslim flight attendant who doesn't want to serve alcohol ("scruples about screwpulls") does not legally have much in common with the Kim Davis case."Here’s the thing: The EEOC has *already* sided with Muslim employees who wish to avoid handling alcohol....If Charee Stanley or a future counterpart someday wins the right to bob and weave through the passenger cabin, handing out only beverages that meet with her spiritual approval, she’ll have this record of Congressional posturing to thank."
Nate Oman offered up a thoughtful analysis of the Kim Davis controversy, which draws on "old fashioned agency law." When I first read it, I think it is pretty persuasive, but now I want to push the edge of the envelope a bit.
Here's the gist:
Kim Davis says that she has sincere religious objections to same-sex marriage, objections that keep her from issuing marriage licenses as county clerk. Superficially, this sounds like a claim for a religious accommodation. Agency law, however, explains why it is not. In refusing to issue marriage licenses, Kim Davis is acting as the agent of Rowan County. As an agent, her actions are the the actions of the county. Indeed, the county, like any other juridical person, can only act through its agents. The problem, however, is that Rowan County, as a legal person, has no religious beliefs. Indeed, the Establishment Clause would, on my view, prohibit the county from having religious beliefs. Rowan County cannot claim a religious exemption without a violent change in our basic constitutional structure. The county must comply with the Supreme Court's interpretation of 14th amendment and issue marriage licenses to same-sex couples. In refusing to issue marriage licenses, Davis was both purporting to act as the agent of Rowan County and exceeding the scope of her authority as an agent. She cannot do this. In acting as an agent, she is the fiduciary of the county and must exercise that authority only on behalf of the county. The county as a legal person simply cannot have the religious scruples that Davis has.Now consider a hypothetical employee in the Rowan County Clerk's office with religious objections to same-sex marriage who asks that she be excused from issuing licenses to same-sex couples, requesting that a colleague without such religious scruples prepare and issue those documents. This employee would also be an agent of Rowan county, and thus her actions could potentially become the actions of the county. Unlike Kim Davis, however, this hypothetical employee is not seeking to act as an agent or exercise any authority on behalf of the county. Rather, the hypothetical employee is seeking to disclaim authority. She is asking that in this case she not be treated as an agent of the county. This would be a request that the county accommodate her religious scruples, and it is very different than what Kim Davis is claiming.There are, of course, all sorts of arguments about whether or not my hypothetical county employee should be provided with such an accommodation and whether there is any mechanism under current law by which she might claim an accommodation. My point is only that her case is fundamentally different than the case of Kim Davis. Davis wishes to act as an agent of the county and exercise authority on its behalf. My hypothetical employee, on the other hand, is trying to avoid acting as an agent and is disclaiming authority. In short, it is the structure of agency law that illuminates the fundamental difference between religious accommodations and what Kim Davis is trying to do.
But consider another hypothetical. During the Holocaust the signature of Klaus--an agent of the German government--is required on transfer documents before the individuals in question can be sent to a concentration camp. Due to his religious scruples, Klaus refuses to sign. Isn't that exactly how Oman sets up the Davis case:
In refusing to [sign the papers], [Klaus] was both purporting to act as the agent of [the German government] and exceeding the scope of [his] authority as an agent. [His] cannot do this. In acting as an agent, [his] is the fiduciary of the county and must exercise that authority only on behalf of the [country]. The [country] as a legal person simply cannot have the religious scruples that [Klaus] has.
Now before you get on your high horse and start writing letters to the dean and chancellor of my university, let me be clear: I am NOT comparing same sex marriage and the Holocaust. Such a comparison would be ludicrous, offensive, and asinine. Which probably won't stop some lunatic left-wing blogger from claiming that's what I'm doing. But I ask you to try reading the whole post with an open mind.
I am simply trying to tee up the question of whether agency law in fact does the work Oman claims. Oman is basically saying that there is no conscientious objector exception to the agent's duty to obey the principal. And that is the point I want to explore. I chose the Klaus example precisely because it is the strongest case I can imagine for saying that there should be a conscientious objector exception to the agent's duty to obey the principal.
If Oman (or the reader) thinks Klaus should get a conscientious objector pass on violating agency law, then it seems to me he must show that Klaus' situation differs in kind and not just degree from Davis'.
One possible way of doing so would be to focus on the wording of the agent's duty to obey as set out in the Restatement (Third) of Agency:
An agent has a duty to comply with all lawful instructions received from the principal and persons designated by the principal concerning the agent's actions on behalf of the principal.
Oman might argue that the orders given Davis to issue same sex marriage licenses were lawful and that she therefore had a duty to obey them. If so, I would agree. The Supreme Court has ruled, government action denying same sex marriage is unconstitutional, and therefore the orders given Davis were lawful instructions she has a duty to obey.
But then Oman must argue that the instructions given Klaus were unlawful. Assume that the laws in question were validly adopted under German law. Does their presumed invalidity under international human rights law excuse Klaus? Assume the answer to that is no, so that the question of whether Klaus gets a conscientious objector pass on obeying a lawful order is fairly presented by the hypothetical.
I think the problem here is that I (at least) intuitively want to give Klaus a conscientious objector pass. But that gets me into the difference in king versus degree problem.
The way of avoiding the whole difference in kind versus degree problem would be to acknowledge that there is no conscientious objector exception to the agent's duty to obey a lawful order period. Even for evil laws like the one Klaus must enforce.
In that case, the answer is clear, if Klaus' religious scruples preclude him from obeying a lawful order he should resign. And so should Davis. The right thing for her to do is either to issue the licenses or quit.
(Like Oman, I pass on the question of whether the county should accommodate her scruples by having somebody else issue the licenses.)
Usha Rodrigues reminds us that my old friend Larry Ribstein used to blast Business Associations teachers who waited until the end of the semester to teach LLCs and other "uncorporations" but then explains why she still leaves LLCs to the end:
I don't leave LLCs til the end of the semester because I think they're unimportant. It's because the cases are so damn thin. It's still such a new form, I just don't see much there there. Most of them wind up being trial courts who read the statute in completely stupid ways. Blech.
So I teach corporations and partnerships emphasizing fiduciary duty, default vs. mandatory rules, and the importance of the code. In fact, one semester I confess that I would ask a question and then intone, "Look to the code!" so often I felt like a Tolkien refugee. By the time I get to the LLCs cases, which are pretty basic, the class is ready for my message: the LLC is a new form. When dealing with something new, judges look both to the organizational statutes and to the organizational forms they know as they shape the law. Plus the LLC is such an interesting mix between the corporate and partnership form, it just makes sense to get through them both before diving in.
I take a slightly different approach. I do agency, partnership, and corporate law through formation to limited liability. Then I digress to cover LLCs. Then I go back to finish corporate law. (See sample syllabus here.) Why? I agree with everything Usha says, but I frequently run out of classtime before I cover the entire syllabus. If I left LLCs to the end of the semester, there'd be a substantial risk that some semesters I'd never get to them.
OTOH, Joshua Fershee agrees with Larry:
I want students (and lawyers and courts) to treat LLCs as unique entities. Leaving them to the end of the course reinforces the idea that LLCs are hybrid entities the combine partnerships and corporations. I just don't think that's the right way to think about LLCs. ...
In my experience, teaching LLCs at the end of the course seemed to frame the LLC as an entity that is just pulling from partnership or corporate law. As such, it seemed the students were thinking that the real challenge for LLCs was figuring out whether to pull from partnership law or corporate law for an analogy. Part of the reason for that, I think, is that so many of the LLCs cases seem to think so, too. See, e.g., Flahive. As Usha would say, "Blech."
The LLC is prominent enough in today's world that I think it warrants a more prominent role in the introductory business organizations course. If we don't bring the LLCs more to the fore, we allow courts to continue to misconstrue the entity form, in part because we aren't giving students the tools they need to ensure courts understand the unique nature of the LLC.
I take his point. But I think you can solve that problem by repeatedly mentioning that courts err when they treat LLCs as mere hybrids.
Joshue Fershee reviews the frustration many of us share with judicial attempts to shoehorn LLCs into corporate law doctrines that don't fit.
in the Klein, Ramseyer & Bainbridge Business Associations casebook we include the Delaware (Strine) decision in Haley v. Talcott on dissolution.
Haley and Talcott each held a 50% interest in Matt and Greg Real Estate, LLC. The LLC owned the land on which a restaurant called the Redfin Seafood Grill was located. According to Chancellor Leo Strine, Talcott “owned” the restaurant and Haley managed it pursuant to an employment agreement between Talcott and Haley. The two had a falling out and Haley sued for judicial dissolution. Talcott claimed that Haley was limited to the exit provision in the LLC operating agreement.
The case presents a nice conflict between two bedrock principles of Delaware business association law: (1) Freedom of contract, which is especially strong in the LLC context. (2) The power of the Delaware courts to strike down as inequitable conduct authorized by statute (as most famously stated in Schnell v. Chris-Craft).
Then Chancellor Leo Strine nodded in passing to freedom of contract, but then granted a decree of dissolution despite the existence of an apparently exclusive contractual exit provision. His analysis proceeds as follows: (1) The barebones LLC dissolution provision may be interpreted by analogy to § 273 of the Delaware General Corporation Law. (2) Under § 273, a shareholder is entitled to dissolution on grounds of deadlock if three conditions are satisfied: (i) the corporation must have two 50% stockholders, (ii) those stockholders must be engaged in a joint venture, and (iii) they must be unable to agree upon whether to discontinue the business or how to dispose of its assets. (3) All three conditions are satisfied on these facts. (4) It would be inequitable to limit Haley to the contractual exit provision because doing so would leave him subject to the guarantee he had given on the mortgage on the property.
And now my friend Jayne Barnard sent along a footnote to the case:
Sussex County restaurateur Matt Haley may have been the only Delawarean to receive a prestigious James Beard Foundation Award, but he didn't care much about fancy foods. ...
Friends, colleagues and people whom Haley, 53, touched through his restaurants and much-honored global humanitarian work were stunned to hear of his death Tuesday night from injuries suffered in a motorcycle accident in India.
Haley was one of Delaware's most respected culinary ambassadors and philanthropists. He owned eight popular restaurants in the state's beach resort towns, had a total of 25 operations in at least four states, served on several boards and was a frequent speaker. ...
The Rehoboth Beach resident was recognized for his good deeds both in Delaware and across the world.
The article details Haley's many humanitarian and philanthropic efforts.
Via Edward McNally we learn of Grunstein v. Silva, C.A. 3932-VCN (September 5, 2014), which poses some great questions:
This case presents a number of perplexing factual questions. Why would sophisticated businessmen proceed jointly to acquire a billion dollar company without a written agreement defining their relationship? Why did the participants attempt to document certain aspects of their relationship and not others? How much weight should be accorded to the fact that they attempted to document their rights and obligations based upon their collaboration but ultimately never completed this task? Why did the lawyer transfer legal control of the transaction to the investor if they did not have a partnership agreement? And why did the financier spend months underwriting 275 facilities if he did not have an oral (or written) agreement with the investor to do the HUD financing?
The legal take home is the treatment of how to prove an oral partnership:
As with any contract, an “intention or desire to form a general partnership cannot bring the legal relationship into being . . . [where] [t]he parties were never able to reach a final accord on the essential elements” of a binding contract. The test for determining whether all material terms have been agreed upon is: “[w]hether a reasonable negotiator in the position of one asserting the existence of a contract would have concluded, in that setting, that the agreement reached constituted agreement on all of the terms that the parties themselves regarded as essential and thus that the agreement concluded the negotiations . . . .” Consistent with this objective test, the parties’ “overt manifestations of assent, rather than their subjective desires, control” when assessing whether they intended to be bound.
For better or worse, Delaware’s oral partnership law does not differentiate among the dollar amount involved, the number of terms, or the complexity of the agreement. Thus, an oral partnership agreement could be formed even if the partnership were worth billions of dollars and had dozens of material and complex terms. But as a practical matter, this type of oral agreement is unlikely for obvious reasons. Indeed, a reasonable negotiator could rationally assume that a complex partnership agreement involving an acquisition worth more than a billion dollars would necessarily have to be reduced to writing for all of the essential terms to be fully agreed upon. ...
Here, the evidence does not indicate that Silva or his counsel made an unequivocal statement that a written executed contract was a condition precedent to an agreement. They perhaps came close to making such a statement, but they never did. ...
Within the context of Delaware partnership law, there is substantial evidence showing that the parties had not agreed upon all the essential terms of the alleged partnership in August. If a partnership had been formed, why did the parties make several unsuccessful attempts to modify the original agreement? Why did Troutman propose inconsistent terms concerning control and funding of the initial deposit? Why did Fillmore’s counsel warn Grunstein that he was proceeding at his own risk? And why did Grunstein email Lerner to warn him that they were proceeding “on spec”? The Court’s inability to answer these questions satisfactorily prevents it from finding that a legally enforceable partnership agreement was formed in August. ...
From the perspective of a reasonable negotiator, [the] exchange of documents and proposals is indicative of a negotiation involving offers and counteroffers. ...
However, the events surrounding the Second Amendment present a slightly different picture in which the parties appear to have arrived at certain understandings. The record shows that the foursome had reached an agreement on the sharing of expenses. ...
Of course, an agreement to share expenses does not create a partnership. The $64 question is whether they agreed to share profits, although as is often the case the court also considers factors such as control, sharing of losses, and so on. Indeed, if anything, the court seems to underplay the extent to which sharing of profits creates a prima facie case of partnership, as where it opines that "Some of the critical elements of an enforceable partnership agreement include profits and losses, control, and ownership."
My bottom line? This seems like a case in which the parties would have been served to involve counsel and in which counsel should have advised them to consider a letter of intent to be followed by a written partnership agreement. Much trouble and expense might have been avoided had they done so.
Update: My friend, UCLAW colleague, and co-authir Bill Klein sent along these thoughts:
My guess is that this kind of disregard of the need for working out the terms of the deal is not all that rare, even for a project involving large sums of money. Two successful, up-from-nothing businessmen agree on a project. They are sure it will be a success; they are optimists by nature and their success confirms their thinking. They are excited about the project and want to move quickly. Lawyers, in their thinking, are pettifoggers who will only hold them up. By and large they hold lawyers in disdain, if not contempt. They proceed on the assumption that they can work out all the deal points. Then the project turns sour, their relationship turns sour, and the squabbling begins, along with the legal bills. Are they angry with themselves? Certainly not. They blame the legal system or the lawyers, or anyone else, and their dislike of lawyers intensifies. Maybe law schools should teach the psychology of clients.
From Joan Heminway.
John Cunningham writes:
Bennett v. Lally, C.A. 9545-VCN (September 5, 2014) is a recent Court of Chancery case about actions that can result in a person’s being a fiduciary of another person without even knowing it. It’s very relevant to lawyers who give “informal advice” to people. This advice could create a lawyer-client relationship. ... You can read the opinion here.
It's not just lawyer-client relationships, of course. As I explain in my book Agency, Partnerships & LLCs:
An agency relationship comes into existence when there is a manifestation by the principal of consent that the agent act on his behalf and subject to his control, and the agent consents to so act. The requisite manifestation of consent can be implied from the circumstances, which makes it possible for the parties to have formed a legally effective agency relationship without realizing they had done so. The purpose of the relationship need not be a business one; in theory, if you send a friend to the vending machine to get you a soda, you have retained an agent. ...
The requisite consent may exist even where the parties are unaware that their relationship constitutes an agency relationship and did not intend for their relationship to carry with it the legal consequences of creating an agency relationship. To be sure, there is no such thing as an “unwitting agent,” in the sense that every agency relationship requires knowing consent by both parties. What then is it to which the parties must “consent”? The principal must consent that the agent shall act on the principal’s behalf and subject to the principal’s control. The agent must consent to so act. If they do so, they have an agency relationship, even if they did not “consent” to the legal consequences that follow.
 Restatement of Agency (Second) §1.
 See, e.g., A. Gay Jenson Farms Co. v. Cargill, 309 N.W.2d 285, 290 (Minn. 1981) (“An agreement may result in the creation of an agency relationship although the parties did not call it an agency and did not intend the legal consequences of the relation to follow.”).
 State v. Luster, 295 S.E.2d 421 (N.C. 1982) (“We find the phrase ‘unwitting agent’ to be a contradiction in terms.... An agency relationship must be created by mutual agreement.”).
Both Francis Pileggi and Keith Paul Bishop recently addressed an interesting development in LLC law. Pileggi first:
Seaport Village Ltd. v. Seaport Village Operating Company, LLC, et al.,C.A. No. 8841-VCL (Del. Ch. Sept. 24, 2014). This decision by the Delaware Court of Chancery highlights a counterintuitive statutory rule. The Delaware LLC Act provides that each LLC member, and the LLC itself, are considered parties to an LLC operating agreement, even if they did not sign the agreement.
He goes on to quote a passage from the opinion explaining the statutory basis for that result.
Meanwhile Bishop explains that California law gets to more or less the same place by the simpler and different route of simply declaring that the LLC is bound by its operating agreement without making the LLC a party to that agreement:
California’s new Revised Uniform Limited Liability Company Act (RULLCA) defines “operating agreement” as “the agreement, whether or not referred to as an operating agreement and whether oral, in a record, implied, or in any combination thereof, of all the members of a limited liability company, including a sole member, concerning the matters described in subdivision (a) of Section 17701.10.” Cal. Corp. Code §17701.02(s). Because the statute refers only to an agreement “of all the members” and not an agreement of the members and the LLC, it seems that an LLC need not be a party to its own operating agreement. This conclusion is further reinforced by the fact that the statute also provides that an operating agreement of an LLC having only one member is not be unenforceable by reason of there being only one person who is a party to the operating agreement.
But if the LLC isn’t a party to the operating agreement, what exactly is the relationship of the operating agreement to the LLC? Section 17701.10(a) provides that the operating agreement governs, among other things, “relations among the members as members and between the members and the limited liability company”. Thus, RULLCA creates an odd situation in which LLCs are bound by contracts that they did not execute and to which they seemingly are not parties. This result is reinforced by Section 17701.11(a) which provides "A limited liability company is bound by and may enforce the operating agreement.”
The agency chapter of the Business Associations casebook I co-author with Bill Klein and Mark Ramseyer relies heavily on cases involving franchise relationships. Is the franchisee an agent of the franchisor? If the franchisee a servant or independent contractor of the franchisor? And so on.
The franchise cases can be problematic, because franchising is such a unique form of business relationship. As of this morning, however, I can't help wondering if the NLRB ruling that McDonald's and its franchisees can be treated as joint employers will affect the way we teach these cases?
McDonald's Corp. could be treated as a joint employer with its franchisees in labor complaints, according to a National Labor Relations Board legal determination that could have far-reaching implications for how restaurant companies deal with their workers.
The decision by the NLRB's general counsel, announced on Tuesday, came in response to complaints alleging that McDonald's and its franchisees violated the rights of employees involved in protests against the company.
McDonald's vowed to fight the decision, which business and labor groups both said could set a precedent for restaurants and retailers that rely on franchising. ...
Allowing companies to be treated as joint employers with their franchisees could crimp their ability to claim that they aren't responsible for the labor actions of those franchise partners, making companies like McDonald's more vulnerable to campaigns by labor groups for higher wages and improved conditions for restaurant and retail workers.
"This legal opinion would upend years of federal and state legal precedent and threaten the sanctity of hundreds of thousands of contracts between franchisees and franchisors," said Steve Caldeira, chief executive of the International Franchise Association, who called the decision "wrong and unjustified."
At the moment, the decision probably doesn't require Business Organization teachers to do anything. It may not hold up to court challenge. If it does hold up, it will initially be just a factor in NLRB cases. But might it not bleed over into employment law, especially employment discrimination? And might it eventually bleed into agency law?
Doug Branson has a new article Alternative Entities in Delaware -- Reintroduction of Fiduciary Concepts by the Backdoor?, which argues that:
In the mid-1990s, the Supreme Court of Delaware resoundingly held that “nothing in a contract can override directors’ fiduciary duties,” holding invalid deal protection provisions in a contract between Viacom International and Paramount Pictures. Nearly a decade later, the Delaware Legislature trumped that judicial ruling, at least in cases for what in Delaware are termed “alternative entities” (Limited Liability Companies (LLCs) and Limited Partnerships (LPs)). The legislative enactment did not set draftsperson as free as it might seem, giving absolute priority to freedom of contract. The reason is that the statute makes clear that the implied covenant of good faith and fair dealing still applies to LLC operating and limited partnership agreements. This article explores the question of how much application of the implied covenant results in application of fiduciary like concepts if not fiduciary duties themselves.
Personally, I am deeply skeptical that the implied covenant will prove to be much of a constraint on the behavior of members of LLCs and so on, but Doug's article makes some very valid and important arguments.
Jeffrie Murphy has noted that “John Rawls claimed that justice is the first virtue of social institutions,” but Murphy then went on to ask “what if we considered agape to be the first virtue? What would law then be like?” When I was asked to contribute a paper on business organization law to a conference organized around Murphy’s question, the conference call immediately brought to mind then-Judge Benjamin Cardozo’s opinion in Meinhard v. Salmon, which famously held that a managing partner “put himself in a position in which thought of self was to be renounced, however hard the abnegation.” The parallels between Cardozo’s framing of the partner’s duties and a standard definition of agape, which holds that it is a “self-renouncing love,” are obvious and striking.
What then would partnership fiduciary duty law be like if it were organized around the value of agape? This essay concludes that partners need not love one another, at least as a matter of legal obligation. Agape is simultaneously too indeterminate and too demanding a standard to be suitable for business relationships. On the other hand, however, I conclude that partners ought to love one another. An analysis of Cardozo’s rhetoric and the intent behind it suggests that agape has great instrumental value. Partners who love one another can trust one another. In turn, partners who trust one another will expend considerably less time and effort — and thus incur much lower costs — monitoring one another. Agape thus should not be the law, but the law should promote agape as best practice.
Presented at the Law and Love Conference, held at Pepperdine University School of Law, on February 7-8, 2014, and the National Business Law Scholars Conference, held at Loyola Law School (Los Angeles, on June 19, 2014.
My article Must Salmon Love Meinhard? Agape and Partnership Fiduciary Duties has been published at 17 GREEN BAG 2D 257 (2014) and can be downloaded here.
Abstract: Jeffrie Murphy has noted that “John Rawls claimed that justice is the first virtue of social institutions,” but Murphy then went on to ask “what if we considered agape to be the first virtue? What would law then be like?” When I was asked to contribute a paper on business organization law to a conference organized around Murphy’s question, the conference call immediately brought to mind then-Judge Benjamin Cardozo’s opinion inMeinhard v. Salmon, which famously held that a managing partner “put himself in a position in which thought of self was to be renounced, however hard the abnegation.” The parallels between Cardozo’s framing of the partner’s duties and a standard definition of agape, which holds that it is a “self-renouncing love,” are obvious and striking.