A&P Flashcards
Elements of Agency Relationship
Fiduciary relation resulting from (1) manifestation of consent by one person to another (2) that the other shall act on his behalf and (3) subject to his control, and consent by the other so to act.
- Consent: both principal and agent; express or implied
- On Behalf of: agent is acting primarily for benefit of principal
- Control: agent must act subject to principal’s control
To form an agency relationship, does the principal have to have capacity? does the agent?
Principal: has to have contractual capacity
Agent: no
Actual Authority
The authority that the AGENT reasonably thinks she possesses based on principal’s words or conduct.
Can be express or implied
Express: conveyed by P in words (oral or written)
Implied: Authority that the AGENT reasonably believes she has as a result of P’s actions
How can actual authority terminate?
(i) specified time/event
(ii) change of circumstances
(iii) breach of fiduciary duty
(iv) unilateral act by P or A
(v) death/incapacity of P or A
Apparent Authority
Exists when P holds out another as possessing authority and a THIRD PARTY is reasonably led to believe that authority exists.
Note: need manifestation from P
Title/position can establish apparent authority
Note: apparent authority can exist after actual authority ends
Ratification
P can be bound by a K entered into by A, even where A had no authority (actual or apparent), if P ratifies the K.
Ratification can be express or implied
––Implied: P accepts benefits of K
Requirements for ratification
(1) P must have knowledge re all MATERIAL FACTS of the K
(2) P must accept the ENTIRE transaction
(3) Ratification cannot be used to alter the rights of intervening parties
General rule for P/A liability on K
P is liable on K entered into by agent if agent had actual authority, apparent authority, or if P ratified the K.
A is generally not liable.
––But note: A can be liable to the 3P under breach of implied warranty of authority if A acted without authority.
––Also note: if undisclosed or partially disclosed P, then A is ALSO liable on the K–i.e., both P and A will be liable on a K entered into on behalf of an undisclosed or partially disclosed principal.
What duties does A owe P?
Agent owes fiduciary duties to principal
Duty of Care: A must carry out agency w/ reasonable care
Duty of Loyalty: A owes undivided loyalty to P…
––(i) must account for profits
––(ii) must act for sole benefit of P
––(iii) must refrain from acting on behalf of adverse party
––(iv) must not compete
––(v) must not use P’s property for non-agency purpose
Duty of Obedience: obey all reasonable directions of P
What duties does P owe A
Does NOT owe fiduciary duties!
- -Must indemnify
- -Must compensate
Is P liable for torts committed by A? Is P liable for torts committed by an independent contractor?
P’s liability for torts committed by A: liable if within scope of employment. P and A are jointly and severally liable.
––Scope of employment: factors…(a) was the conduct of the kind the agent was hired to perform? (b) did tort occur within time/space limits of employment? [detour v. frolic] (c) was the conduct to benefit P?
––Intentional torts: typically considered to be OUTSIDE the scope of employment, such that P is NOT liable for them. Exceptions: (i) nature of job; (ii) motivate to serve P; (iii) authorized/ratified by P
P’s liability for torts of IC: P is generally not liable
How to distinguish between an agent and an independent contractor
At a high level, if the principal controls the MEANS that the person uses to achieve the particular result, that person is an agent; if the principal only controls the RESULTS, but not how those results are achieved, the person is an independent contractor.
Does P have the RIGHT TO CONTROL the manner and method by which the person performs his tasks?
––(a) skill required: more skill = IC
––(b) tools/facilities: if P supplies = A
––(c) period of employment: if indefinite = A
––(d) basis of compensation: per job = IC
––(e) business purpose: to further P’s biz = A
––(f) distinct business: if exists = IC
What happens if employee is loaned to someone else and the employee commits a tort?
Who is liable (between the loaning P and borrowing P) depends on who had the PRIMARY RIGHT OF CONTROL over the employee
General Partnership: formation
2 or more persons associate to carry on as co-owners a business for profit.
––Key factor: sharing of profits –> a person who receives a share of profits is presumed to be a partner (unless profits received as payment of a debt, as rent, as interest on a loan, or as wages or other comp.)
Subjective intent is IRRELEVANT
NO filing is required
Partnership by Estoppel
If no partnership was formed in fact (i.e., legal definition is not met), the parties may still be liable as if they were partners to protect reasonable reliance by 3Ps
General Partnership: Voting
Default: all partners have equal rights in management of business and equal votes
General Partnership: Voting––threshold for ordinary course decisions
Majority
General Partnership: Voting––threshold for matters outside ordinary course of business
Unanimity
General Partnership: Do partners have a right to salary/other compensation?
No, unless otherwise agreed to
General Partnership: Sharing Profits and Losses
Default: profits are shared equally; losses are shared in same manner as profits
Note: if the partnership agrees on how to share LOSSES (e.g., 60-30-10), but does not specify how to share PROFITS, the default rule still applies––profits will be shared equally (33-33-33).
––Losses follow profits
––Profits do NOT follow losses
General Partnership: tort liability
Partnership is liable for tortious conduct of partner committed when acting in ordinary course of business or with authority of the partnership
General Partnership: K liability
Partnership is liable for contracts entered into by partner with actual or apparent authority:
––Actual authority: either stated in partnership agreement, voted on by partners, or in “statement of partnership authority” filing
––Apparent authority: partner is an agent of the partnership and has apparent authority to bind the partnership for ordinary course transactions
General Partnership: K liability–are 3Ps bound by filed grants of a partner’s authority? filed restrictions of a partner’s authority?
It depends on whether the K is for real or personal property
––––REAL PROP: 3Ps are bound by BOTH grants and restrictions on a partner’s authority that have been filed with SoS [deemed to have constructive notice]
––––PERSONAL PROP: 3Ps are bound by filed grants but are NOT bound by filed restrictions, unless the 3P had actual notice of the filed restriction
General Partnership: exhaustion requirement for liability
Each partner is jointly and severally liable for all obligations of partnership, but π must first exhaust partnership resources b/f collecting from individual partner’s assets
Can partners agree to limit liability to 3Ps? (i.e., A, B, and C are in a partnership and agree C won’t be liable to 3Ps)
No. Partners cannot limit a 3P’s rights without 3P’s consent. But, the agreement is effective amongst the partners themselves.
Is a newly admitted partner liable for the debts incurred by the partnership before his admission?
No––he is not personally liable
What duties do partners in a general partnership owe to each other and the partnership?
Fiduciary duties
Duty of loyalty
––(i) accounting; (ii) refrain from acting or on behalf of adverse party; (iii) refrain from competing
Duty of care: refrain from engaging in grossly negligent/reckless/intentional misconduct
––Note: ordinary negligence ≠ violation
Partnership agreement CANNOT eliminate duty of loyalty or duty of care
+ statutory duty of disclosure
When does property belong to the partnership as opposed to an individual partner?
If acquired in partnership’s name –> PSHIP property
If acquired in partner’s name w/ indication she is acting for the partnership –> PSHIP property
If partnership funds are used to purchase –> presumably PSHIP property
If acquired without partnership funds and no indication partner was acting for partnership –> presumably PARTNER’s property
Is a partner a co-owner of partnership property?
NO. Can only use property for partnership purposes.
What are the components of a partner’s “partnership interest”?
(1) Management rights
2) Financial rights (right to receive profits
Can a partner unilaterally transfer his management rights?
No. Needs unanimous vote of existing partners. This reflects the pick your partner principle.
Can a partner unilaterally transfer his financial rights? What consequences?
Yes. The transferee gets the right to profits, but does NOT become a partner; the transferor retains his management rights
What is dissociation?
Withdrawal of a partner (i.e., partner ceases to carry on in being associated with the business)
What events give rise dissociation? [4]
1) “express will” [partner gives notice of desire to WD]
2) partner is expelled, dies, or goes bankrupt
3) agreed-upon event
4) receiver is appointed for partner
What constitutes wrongful dissociation?
- breach of partnership agreement
- withdrawal
- expulsion
- bankrupt
At-will partnership
Default – no agreement to remain partners until expiration of a definite term or completion of a particular undertaking
Term partnership
Partners have agreed to remain partners for a definite term or until completion of a particular undertaking
What happens when a partner dissociates? [2 avenues + when each avenue is appropriate]
Avenue 1: dissolution + winding up – i.e., liquidation of partnership
––Happens when…
––––In an at-will partnership, a partner dissociates by express will
––––In a term partnership, there is a wrongful dissociation or a partner dies, but only if within 90 days after dissociation 50% of remaining partners agree to wind up biz
Avenue 2: partnership continues to exist, but dissociated partner gets bought out
What are the liabilities of a dissociated partner?
Liable for PRE-dissociation obligations
Liable for POST-dissociation partnership liabilities incurred within two years after dissociation
––How can partner protect himself: notify 3Ps or file statement of dissociation (which becomes effective 90 days after the filing
––––Note: partnership should do the same to protect itself
What is the priority of asset distribution upon dissolution?
(1) pay creditors
(2) pay back capital contributions
(3) allocate profits/losses
What should a partnership do upon winding up to avoid continued liability?
Notify creditors of dissolution; file statement of dissolution (effective 90 days after filing)
Limited Partnership: definition
At least one GP and at least one LP; formed by filing certificate of limited partnership with SoS
Limited Partnership: what does the certificate of limited partnership have to include?
(1) name of the limited partnership
(2) name + address of agent for SoP
(3) name + address of each general partner
Note: name needs to contain “LP” in some form
Management of Limited Partnership
General partners manage
Vote threshold for ordinary course: majority
When is the votes of all GPs and all LPs required?
(i) amendment of partnership agreement
(ii) admission of new partner
(iii) sale of all or substantially all of LP’s property (assuming that is outside ordinary course)
How are distributions calculated for LPs?
Based on partners’ contributions
Are general partners liable for obligations of limited partnership? are limited partners?
GPs: liable
LPS: not personally liable for debts of business –> they have limited liability
Does a limited partner owe fiduciary duties to the LP or other partners?
No
Limited Liability Partnership (LLP): definition
General partnership where all partners have limited liability
LLP: formation
File statement of qualification w/ secretary of state, which includes 1) name and address of the partnership (name must end with “LLP” in some form); 2) executed by at least 2 partners; and 3) election of LLP status
LLP: what needs to be included in filing?
(1) name + address of partnership
(2) statement of election as an LLP
(3) deferred effective date, if any
Signed by at least 2 partners
Note: name has to end with LLP in some form
Is a partner in an LLP personal liable for debts of the business?
No
Limited Liability Company (LLC): definition
Owners (members) have limited liability + benefits of partnership tax treatment
LLC: formation
File certificate of organization w/ secretary of state
LLC: what needs to be included in filing?
(1) name of LLC
(2) address of LLC’s registered office
(3) name + address of registered agent
Note: name has to indicate LLC in some form
LLC: operating agreement
the key document–very flexible; can displace almost all statutory provisions
Management of LLC
Presumed to be member-managed; to make manager-managed, need to specify in operating agreement
Majority vote for approving ordinary course decisions
Unanimous vote for approving extraordinary decisions (e.g., amending operating agreement)
LLC: how are distributions calculated?
Based on contribution
Are members of LLC personally liable for debts of the business
No
Do members owe each other and/or the LLC fiduciary duties?
YES. Members owe BOTH the LLC and its members the fiduciary duties of loyalty and care
Can a member of an LLC transfer his ownership interests?
Yes––works like the rules for general partnership. Cannot transfer management rights (without consent of all members) but can transfer financial rights
When does dissolution occur for an LLC?
(i) stated event (in operating agreement)
(ii) consent of all members
(iii) passage of 90 days during which LLC has no members
Member can also apply for judicial dissolution
How are partnerships (GP; LP; LLP) and LLCs taxed?
Pass-through taxation (i.e., no entity-level tax)
What are the best biz orgs for closely held business?
LLP and LLC
––Both provide for pass-through taxation
––Both provide for limited liability for ALL owners
––Both allow entity to contract around most rules
––Both allow ALL owners to participate in management
The sharing of profits raises a PRESUMPTION of partnership, unless the share was received as…
i) payment of a debt
ii) payment of rent
iii) payment for services rendered
iv) interest on a loan
v) annuity/other retirement benefit
vi) for the sale of goodwill of a business
Aside from sharing of profits, which raises a presumption of partnership, what other evidence can courts look to when the intent of the parties is unclear? what is the effect of this evidence?
Courts also look to:
a) whether property is held in joint tenancy / TIC
b) whether the parties designated their relationship as a partnership
c) whether venture undertaken requires extensive activity
d) whether there is sharing of gross returns
These factors serve as some evidence of partnership, but do NOT operate as a presumption
How to determine whether property is partnership property
Property titled in partnership’s name and property title in the name of a partner (with an indication of the person’s capacity as a partner or the existence of a partnership) = Partnership Property
Property is PRESUMED to be partnership property if purchased with partnership funds
What rights does a partner have in partnership property?
Not a co-owner. No transferrable interest. Can only use for benefit of partnership.
Limitation on partner’s apparent authority: knowledge and notification
Where a 3P subjectively knows that a partner does not have authority to bind the partnership, the partnership will not be bound by an agreement between the partner and the 3P.
Where the partnership has delivered notice to the 3P that the partner does not have authority to bind the partnership, the partnership will not be bound by an agreement between the partner and the 3P, even if the 3P had not yet read the notice (delivery is sufficient)
Liability for incoming partner v. outgoing partner
Incoming: no liability
Outgoing: liability for obligations arising when he was partner, unless release/novation; can also be liable for acts after dissolution (but that liability can be cut off by filing notice of dissociation)
Apparent Authority of a Partner
Every partner has power to bind the partnership to a contract for apparently carrying on in the ordinary course the partnership business.
However, the partnership will not be bound if (1) the partner had no authority with regard to the matter and (2) the person whom the partner was dealing knew or had received notification that the partner lacked authority.
Agent’s warranty of authority
An agent makes a warranty that he has the authority he claims to have and is liable for any damages that arise from breach of warranty.
