ISSUE:
Did Mosionzhnik violate her duty of loyalty to her employer?
REASONING: While the Shareholder’s Agreement permitted Mosionzhnik to engage in private art transactions for
her own benefit, the deals that led to the $500,000 secretly transferred to a Swiss bank account were
all related to Gallery transactions with Russian clients. Taking a kickback on a finder’s fee is legally
impermissible, even if such a practice is pervasive in the art world. Consequently, she must pay the
$500,000 in kickbacks to the Gallery.
The court refused to intercede to resolve disputes involving unethical and illegal practices between
disputants. Mosionzhnik is entitled to be paid the fair market value of her shares in the business in
accordance with the Shareholder’s Agreement.
CASE BRIEF: Lucini Italia Co. v Grappolini
2003 WL 1989605 (N.D. Ill. 2003)
FACTS:
Arthur Frigo, an adjunct professor at the Kellogg Graduate School of Management, formed Lucini Italia
Co. (Lucini) to import and sell premium extra virgin olive oil and other products from Italy. Lucini’s
officers hired Guiseppe Grappolini as their olive oil supplier. They also hired him as their consultant,
paying him hundreds of thousands of dollars in consulting fees. As their consultant, Grappolini signed
an exclusivity agreement and a confidentiality agreement acknowledging the confidential nature of
Lucini’s product development, plans and strategies. Grappolini was “branded” as a “master cultivator”
in Lucini’s literature and commercials. In 1998, Lucini and Grappolini, as his consultant, discussed
adding a line of extra virgin olive oils blended with “essential oils” such as natural extracts lemon and
garlic. It spent over $800,000 developing the market information, testing flavors, designing labels and
packaging, creating recipes and generating trade secrets for the new products. Vegetal-Progress s.r.l.
(Vegetal) was identified as the only company in Italy that was capable of producing the superior
products Lucini sought and Grappolini was assigned responsibility to obtain an exclusive supply
contract with Vegetal. In direct contravention of his representations to Lucini, Grappolini secretly
negotiated an exclusive supply contract for the Grappolini Company not Lucini. Moreover, the
Grappolini Company began to sell flavored olive oils in the U.S. which coincided with Lucini’s market
research and recipe development, which had been disclosed to him. When Lucini officers contacted
Vegetal, they acknowledged that Grappolini was a “bad boy” in procuring the contract for his own
company rather than Lucini, but they would not renege on the contract. Lucini sued Grappolini.
ISSUE:
Did Grappolini violate any legal duty owed to Lucini?
HOLDING: Yes. An agency relationship engenders a type of fiduciary affiliation in which the principal has the right
to control the agent’s conduct, and the agent has the power to act on the principal’s behalf. Once an
REASONING: Grappolini was Lucini’s agent and owed Lucini a duty to advance Lucini’s interests, not his own.
When he obtained an exclusive supply agreement with Vegetal for the Grappolini Co. instead of
Lucini, he was disloyal and breached his fiduciary duties. As a result, Lucini suffered lost profits and
damages of $4.17 million. In addition to these damages, Grappolini was ordered to pay $1,000,000 in
punitive damages to deter similar acts in the future. Additionally, a permanent injunction was issued
prohibiting Grappolini from using Lucini’s trade secrets.
3. Obedience and performance – all lawful instructions
4. Reasonable care
5. Accounting
6. Information
job:
P owns a cannery and employs A as an agent to buy produce for canning. A is given instructions, with
some degree of latitude, on the type of vegetables to be purchased this season. A has no authority to
purchase anything else. A negotiates the purchase of beans for P from T, a local grower. This
purchase equals the maximum number of beans P desires. Because the price of the beans is so
reasonable and A has purchased all the beans needed by P, A purchases 200 bushels for himself. Is
this a breach of A’s fiduciary duty?
c. Additional variations:
After purchasing the beans, A notices that T has an excellent price on high-quality peas and
purchases 1,000 bushels for himself; or A purchases 100 bushels of peaches for himself; or A notices
that T has a truck for sale that is used in hauling produce and purchases it for himself. Does it make a
difference if A’s principal uses the same type of truck at the cannery and one of the principal’s trucks
was recently destroyed in a fire? A purchases a Corvette from T for himself. Does it make a difference
if P collects Corvettes and P told A once, “Boy, if you ever see that model of Corvette for sale, be sure
to let me know, because I need it for my collection”?
d. Discuss the practical aspects of when a selling agent can make a personal purchase of the items
A. Duties and liabilities of agent after termination of agency – only “winding-up” duties remain
B. Enforcement of liability of agent – the principal may recover losses
C. Duties and liabilities of principal to agent
1. Agent must perform according to contract terms
2. Compensation
I. How is an Agency Relationship Terminated?
A. Termination by act of parties
1. Expiration of agency contract – “Ends three (3) years from date signed”
4. Revocation by principal
Students tend to have a problem with the concept of power and right. Make certain the students
understand that an agency relationship can be terminated, even wrongfully, because the power to
B. Termination by operation of law
1. Death
2. Insanity
CASE BRIEF: Moore v. Lera Development, Inc.
274 Cal. Rptr. 658 (Cal. App. 1990)
FACTS:
William Moore, a fire chief for the city of San Francisco, suffered severe head injuries in a fall while
fighting a fire. Moore sued the building owner, Lera, for negligence. The attorneys for the parties held
a conference and reached a settlement at 5:15 p.m. Unknown to them, Moore had died at 4:50 p.m.
on that day.
ISSUE:
Was the settlement agreement binding?
REASONING: The death of either the principal or the agent terminates the agency. Thus, the death of a client
terminates the authority of his agent to act on his behalf. Because Moore died at 4:50 p.m., Moore’s
attorney no longer had authority to act on his behalf, and the settlement was not enforceable.
C. Disability of the principal under the UDPAA – subsequent disability or incapacity does not terminate agency
CASE BRIEF: Estate of Graham v. Morrison
607 S.E. 2d 295 (N.C. App. 2005)
FACTS:
On May 31, 2001, Thomas Graham made his niece, Lucille Morrison, his attorney-in-fact by executing
a durable power of attorney. It was notarized and filed at the Registry of Deeds. The power of
attorney granted Lucille broad powers and discretion in Graham’s affairs. However, it did not contain
express authority to make gifts. On October 26, 2000, Lucille conveyed 11.92 acres of property
valued at between $400,000 and $700,000 to herself based upon consideration of services rendered
to the principal, Thomas Graham. On June 5, 2001, Lucille, at attorney-in-fact for Graham, conveyed
Graham’s house in Charlotte to her son, Ladd Morrison. And on June 20, 2001, she conveyed
Graham’s Oakview Terrace property to her brother, John Hallman, for $3,000 to pay for an attorney to
defend Graham in a competency proceeding. Graham died on August 7, 2001, and the estate of
Thomas Graham sued to set aside the deeds, alleging Lucille’s breach of fiduciary duties. After a
judgment for the defendants, the estate appealed.
ISSUE:
Did Morrison’s durable powers of attorney allow her to make gifts to herself and to her son, and to
convey a home to pay for legal fees?
HOLDING: No, except for the conveyance of the home to pay legal fees.
REASONING: When an attorney-in-fact conveys property to herself based upon consideration of services rendered to
the principal, the consideration must reflect a fair and reasonable price when compared to the
market value of the property. There was no testimony regarding the value of Lucille’s services
compared to the value of the real property. The deed must be set aside. The conveyance of
Graham’s home to Ladd Morrison was a gift that was not authorized by her power of attorney and must
be set aside. Lucille had authority to sell the principal’s property to John Hallman to obtain funds to pay
at attorney to represent the principal.
DISCUSSION POINTS: Using the Estate of Graham v. Morrison case, have the students discuss the limits of a
durable power of attorney.
D. Termination of agency coupled with an interest
E. Protection of agent from termination of authority
1. Exclusive agency – collection of commissions is protected
F. Effect of termination of authority
1. Authority ends when an agent receives termination notice
2. Notice to third persons is required when agency is terminated by an act of principal
ANSWERS TO QUESTIONS AND CASE PROBLEMS
1. Definition of agent; agent distinguished from others. An agent represents a principal or makes a contract on the
principal’s behalf and is under the control of the principal. The agent may be an independent or a free-lance agent or
may be a full-time agent or an employee of the principal. The independent contractor makes a contract to produce a
The real estate broker is typically an independent contractor who is not under the control of the property owner or the
buyer and merely undertakes to find a buyer or a seller, but does not enter into any contract obligating the broker to
Typically, the real estate broker does not have authority to make a contract that would bind the principal to the third
2. Creation of authority by appointment; ratification. The legal result of agency action is the same whether the agent
Both appointment and ratification require the same intent on the part of the principal, although there are situations in
Ratification is subject to five conditions discussed in § 39:9(b). Thus, the fact that the principal intended to ratify may
not be sufficient. If any one of the five conditions is not satisfied, the ratification is not effective. This means that
3. Extent of durable power of attorney. The expressed intent of the durable power of attorney was to provide for the
father’s maintenance and care. It did not authorize the son to create any other beneficial interests in the father’s
Authors’ Comment: The son, believing Ms. Gradl exercised a great deal of influence over the father, perhaps
anticipated that the father would terminate the durable power of attorney. Although the father was old, he was
4. Discharge of agent by principal in violation of contract. Jones is liable to Stayword. While Jones is correct in stating
that the principal has the power to terminate the agency by discharging the agent, in this case, the principal did not
5. Authorization by the principal’s conduct as to third persons. Plymouth was liable. Strich had apparent authority to
make the contract in the name of Plymouth Optical Co. After having permitted Strich to do business in the manner
6. Effect of termination of authority of the agent on third persons. Judgment for Wagner. Since the agency of Berry
had been terminated by the voluntary act of the principal, it was necessary that notice of termination be given to third
7. Authorization by acquiescence. Vern Lundberg had no way of knowing the limitations on Herb Bagley’s authority. To
8. Principal’s duties according to terms of the agency contract. Judgment for Blum for the full amount of the Noravian
contract less the commission paid in the subsequent sale to the Sterns. Mr. Blum acknowledged that when the
Holzmans decided to pursue the Sterns’ offer, he did not advise them about their obligation to pay the full
In a footnote, the court pointed out that given Mr. Blum’s testimony as to “his desire to do the best” for the clients, “it
is somewhat surprising that the Broker, in effect, opposed its client’s desire to obtain the highest possible purchase
price for the property. Similarly, in pursuing its contract claim against the Sellers, we assume the Broker fully
9. Durable power of attorney. Judgment for Capitol Federal. Capitol Federal was presented a power of attorney that it
is agreed was signed by Tillie, its depositor. Martha Flanders was properly identified as being the Martha Flanders
designated as attorney in fact. The request to cash the CDs and the issuance of the checks in the individual
10. Ethical principles of integrity and honesty [Preface]; principal’s conduct as to third person. Boulos and Durso paid
cash for the items and did not pay a sales tax. Delivery to a hotel room was to take place at night. The nature of the
The court conducted its analysis of the case under agency law and entered a judgment for Lew. The court
determined that no apparent authority existed in this case. Boulos and Durso had to show that based on the
11. Scope of agent’s authority, apparent authority. No. Clearly, the express prohibition of “no blue jeans” would
communicate to the ordinary person that blue denim outfits were contrary to her principal’s instructions. Actual
12. Apparent authority. The titles of president and administrator are insufficient to show apparent authority. This is
especially so based on the unusual character of the contract in question, that of transferring hospital bed capacity
Schilling obtained board approval of the first contract. A principal’s right to approve the actions of its agent cannot
be defeated by the act of delegating to its president the duty of executing one prior contract. Much more is needed
13. Agent’s duty of loyalty. Alley breached his fiduciary duty to the seller, Wayman Ellison, and he must remit to him
14. Agent’s duty of loyalty. Joan not only did not have the authority to enter into the transaction, she violated her duty
as an agent by making herself a beneficiary of a transaction when, as an agent, she was to act in the interests of
her father, not in her own self-interest. [Gagnon v. Coombs, 654 N.E. 2d 54 (Mass. App.)]
15. Agency by ratification. Judgment for Werlein’s. Although Daniels did not authorize the purchase of the television
set, the evidence shows that she ratified the unauthorized signing of her name to the contract for the purchase of
system for classroom use.