Agency and Partnership

Question 1

agency - definition; 3 important parts

Answer 1

Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other to so act.

1. Consent: consent from both principal and agent is necessary to form an agency relationship. Consent may be established expressly (written or oral statements), or by implication from the parties’ conduct.
2. On behalf of: this requirement is generally understood to mean that the agent must be acting primarily for the benefit of the principal, rather than for the benefit of the agent or some other party.
3. Control: the agent must act subject to the principal’s control, but the degree of control exercised by the principal does not have to be sig. Requisite level of control may be found by fact that principal has specified the task that the agent should perform, even if the principal hasn’t prescribed the details of how the task should be accomplished.

Question 2

do we need capacity, writing, and consideration for agency relationship?

Answer 2

principal needs capacity

no writing unless SOF

no consideration needed

Question 3

What are the duties that the agent owes to principal?

Answer 3

1. Fiduciary Duties: an agent is a fiduciary of the its principal, and owes corresponding fiduciary duties to its principal.
   a. Duty of care: agent owes a duty to her principal to carry out her agency with reasonable care (“sliding scale” depending on special skills that the agent may have)

b. Duty of loyalty: agent owes a duty of undivided loyalty to the principal. This includes the following obligations:
i. An agent must account to the principal for any profits made while carrying out the principal’s instructions
ii. An agent must act solely for the benefit of the principal and not to benefit himself or a third party
iii. An agent must refrain from dealing with his principal as an adverse party or from acting on behalf of an adverse party
iv. An agent may not compete with his principal concerning the subject of the agency
v. An agent may not use the principal’s property (including confidential information) for the agent’s own purposes or third party’s purposes.
vi. Breach of duty of loyalty: may sue for breach damages and for disgorgement of profits made as a result

c. Duty of Obedience: An agent must obey all reasonable directions from his principal. While the principal may be liable for the agent’s acts in violation of directions (apparent authority), the agent will be liable to principal for any loss that the principal suffers.

Question 4

actual agency: definition, types, and termination

Answer 4

actual authority is authority that the agent reasonably thinks she possesses based on the principal’s dealings with her. Actual authority may be express or implied.

Express actual authority - principal conveys in words - written or oral

Implied Actual Authority: authority implied from principal’s words, conduct or custom or from acquiescence by the principal to do acts necessary and incidental to the act that the principal.

Termination of Actual Authority: actual authority must exist when the agent enters into the contract. It will be terminated/revoked:

i. After a specified time or event, or after a reasonable time
ii. By a change of circumstances (e.g., the subject matter of the agency is destroyed)
iii. By a breach of the agent’s fiduciary duty
iv. By a unilateral act of either the principal or the agent
v. By death of incapacity of the principal or agent

Question 5

Apparent authority

Answer 5

If the principal’s words or conduct would lead a reasonable person in the third party’s position to believe that the agent has authority to act on the principal’s behalf, the agent has apparent authority to bind the principal.

• power of position
• unilateral agent reps
• lingering apparent authority

Question 6

ratification: definition, methods, requirements

Answer 6

Even if the agent had no authority at the time of entering into the contract, the principal will still be bound by the agent’s actions if the principal ratifies the contract. Ratification effectively serves as a substitute for before-the-transaction authority.

methods: express or implied

requirements:
i. Principal must have KNOWLEDGE of all material facts regarding the contract
ii. Principal must accept the ENTIRE transaction. Can’t ratify portion.
iii. Ratification cannot be used to ALTER the rights of intervening parties.

Question 7

rules for liability on contract: general rule, two exceptions

Answer 7

General rule: if actual authority, apparent authority, or ratification is present, the principal is liable on the contract and the agent is not.

Exception: if the principal is undisclosed (at the time of the agent’s transaction, the third party has no notice that the agent is acting for a principal) or partially disclosed (at the time of the agent’s transaction, the third party has notice that the agent is acting for a principal, but has no notice of the principal’s identity), the agent is also liable on the contract (the principal is still liable).

Question 8

What is a servant and what is an independent contractor

Answer 8

servant - agent employed by a master

Independent contractor: person who contracts with another to do something for him but who is not controlled by the other nor subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking.

Question 9

scope of employer liability

Answer 9

Master is liable for torts committed by a servant within the scope of the servant’s employment. Servant and master are jointly and severally liable.

Principal is not liable for torts committed by ind contractor in connection with his work.

Question 10

how to tell if employee or general contractor: general rule, 6 factors

Answer 10

In general, if a person is subject to the control of another as to the means to achieve a particular result, he is a servant. By contrast, if a person is subject to control of another as to his results only, he is an ind contractor.

Factors:
1. Skills required
Where great skill is required, more likely to be ind contractor

2. Tools and facilities
   If p supplies the told and facilities used to perform job, more likely to be employee
3. Period of employment
   Long/indefinite – more likely to be employee
4. Basis of compensation
   Comp is on basis of time, more likely to be employee
   Comp is on basis of job, more likely to be ind contractor
5. Business purpose
   If the person was hired to perform an act in furtherance of the principal’s business, more likely to be employee
6. Distinct business
   A person who has her own business or occupation is more likely to be an ind contractor

Question 11

scope of employment rule and 3 inquiries that are helpful

Answer 11

A master is not automatically liable for a servant’s torts. A master is only liable if the servant was acting within the scope of his employment. Three factors are helpful in making this assessment.

1. Was the conduct “of the kind” that the agent was hired to perform?
2. Did the tort occur “on the job” (within time and space limits of employment)?
   a. Minor deviation is usually within scope (detour) (Picking up something on the way back to work)
   b. Substantial deviation not within scope (frolic)
3. Was the conduct actuated at least in party to benefit the principal?

Question 12

Rule re respondeat superior and intentional torts; exceptions

Answer 12

An employer is not liable for intentional torts of an employee. Intentional torts are viewed outside scope of employment.

Exceptions: within scope if (1) natural from nature of the job, (2) motivated to serve employer, or (3) specifically authorized or ratified by employer.

Question 13

master direct liability

Answer 13

every person is liable for his own torts. Thus master is liable for his own negligence if he fails to properly train or supervise employees or fails to check an employee’s criminal record or job history.

Question 14

Partnership - how is it formed

Answer 14

A partnership is formed as soon as two or more persons associate to carry on as co-owners a business for profit, regardless of whether the parties subjectively intend to form a business partnership. No stated filing or other formalities are required.

Question 15

Factors in determining whether a partnership was formed

Answer 15

Most important: profit sharing: person receiving share of profits is presumed to be a partner unless the profits were received in payment: (1) of a debt, (2) as wages or other comp, (3) as rent, or (4) as interest on a loan.

Sharing of GROSS RETURNS (revenues of a business) NOT sharing profits

Right to participate in control of business

Loss sharing

Question 16

partnership by estoppel

Answer 16

if no partnership was formed in fact, parties may still be liable as if they were partners to protect reasonable reliance by third parties.

Question 17

what is the general rule re voting/management and what are the different voting requirements for different situations?

Answer 17

Unless otherwise agreed, all partners have equal rights in the management of the business and equal votes.

Decisions regarding matters within the ordinary course of the partnership business require majority vote of the partners.

Matters outside the ordinary course of business require the consent of all partners.

Question 18

is there a right to comp in partnership?

Answer 18

no

Question 19

how are profits and losses shared?

Answer 19

unless otherwise specified, equally. losses follow profit sharing arrangement but profits don’t follow losses.

Question 20

what is liability of partnership in tort and contract?

Answer 20

Tort: a partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner (or an employee) acting in the ordinary course of business of partnership or with authority of the partnership.

Contract: a partnership is liable for contracts entered into on its behalf by partners with actual or apparent authority.

ACTUAL AUTHORITY
created by partnership agreement OR requisite vote of partners

• statement of partnership filed with Secretary of State is binding on transactions re real property (constructive notice) (so third parties are both benefitted and burdened) BUT re all other transactions, grants of partnership authority in the statement are binding on partnership (unless third party has actual knowledge that partnership lacked authority) but do not burden third parties w/o actual notice of authority

APPARENT AUTHORITY
the partnership statute states that a partner is an agent of the partnership, and that a partner has apparent authority to bind the partnership to transactions within the ordinary course of the partnership’s business (unless the third party is aware that the partner lacks actual authority).
- may file statement of authority to limit partners’ authority to transfer real property

Question 21

What is the liability of partner in partnership? Rules re indemnification?

Answer 21

Each character is jointly and severally liable for all obligations of the partnership (whether arising in tort or contract). BUT, p must first exhaust partnership resources before seeking to collect from an individual partner’s assets (so the partners are essentially guarantors).

Where one partner pays a partnership obligation, he is entitled to indemnification from the partnership. He may also require the other partners to contribute their pro rata shares of the payment if the partnership is unable to indemnify.

Question 22

what are the duties owed by partner to partnership and each other?

Answer 22

Partners in general partnerships owe fiduciary duties of loyalty and care to each other and the partnership. (CAN LIMIT, CAN’T ELIMINATE THESE) They also owe a statutory duty of disclosure.

Duty of loyalty
This duty requires each partner
(1) to account to the partnership for any benefit derived by the partner in
conducting the partnership business,
using the partnership’s property, or
appropriating a partnership opportunity
(2) to refrain from dealing with the partnership in the conduct of its business as (or on behalf of) a party having an interest adverse to the partnership
(3) to refrain from competing with the partnership in the conduct of its business.

Duty of Care
Requires each partner to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

Duty of disclosure
This is a statutory duty rather than a fiduciary one (although some judicial opinions treat it as a fiduciary in nature). Partnership statute states that each partner and the partnership shall furnish to a partner:
(1) without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties
(2) on demand, any other information concerning the partnership’s business and affairs (except to the extent the demand or the info demanded in unreasonable or otherwise improper under the circumstances)

Question 23

3 rules for determining partnership property; partner interest in partnership property

Answer 23

1. It is partnership property if it is acquired in the partnership’s name or in a partner’s name where it is apparent from the doc that she is acting for a partnership
2. It is presumed to be partnership property if partnership funds are used
3. It is presumed to be a partner’s property if acquired in her name without partnership funds and there is no sign that she is acting for a partnership.

Partner can only use for partnership purposes

Question 24

what is a “partnership interest” and what does it include

Answer 24

A partner’s ownership interest in a partnership is called “partnership interest” (just like a shareholder’s ownership interest in a corp is called “stock). Partnership interest is personal property of partner. Partnership interest is comprised of (1) management rights (partner’s right to participate in management of the business, to obtain information about the partnership, and to be recognized as a “partner”) , AND (2) financial rights (partner’s right to receive profit distributions made by partnership). Financial rights can be unilaterally transferred but management rights cannot.

Question 25

What is dissociation and what are the events of dissociation

Answer 25

When partner disassociates from a partnership, the partner withdraws or “blows out” of the partnership.

a. Partner giving notice to partnership of his desire to withdraw (dissociation by “express will”)
b. A partner’s expulsion, death, or bankruptcy
c. An agreed upon event
d. Appointment of receiver for a partner

Question 26

what is wrongful dissociation?

Answer 26

a partner will be deemed to be wrongfully dissociated if the dissociation is in breach of an express term in partnership agreement. A dissociation is also wrongful in a term partnership if the partner withdraws, is expelled, or becomes bankrupt before the end of the term. A partner who wrongfully dissociates is liable to partnership for any damages caused by the dissociation.

Question 27

consequences of dissociation

Answer 27

when a partner dissociates from a partnership, one of three statutory avenues is implicated.

a. The first avenue provides that the partnership dissolved and that its business must be wound up – liquidated/sold off
b. The second avenue provides that the partnership continues in existence with the dissociated partner becoming entitled to a buyout of his partnership interest.
c. The nature of the event of dissociation dictates which avenue is implicated.

Question 28

dissolution of partnership - what is it and when is it required?

Answer 28

Dissolution and winding up are required only in limited circumstances (eg event in agreement requiring winding up, business becomes illegal, issuance of a judicial decree, unanimous consent of the partners in a term partnership, expiration of a term partnership). Two circumstances:
a. In general when a partner dissociates by express will in an at-will partnership, the partnership is dissolved and its business must be wound up.

b. In a term partnership, if one partner dissociates wrongfully or if a dissociation occurs because of a partner’s death or bankruptcy, dissolution and winding up of the partnership are required only if within 90 days after dissociation, one-half of the remaining partners agree to wind up the partnership.

Question 29

liability and apparent authority of dissociated partner

Answer 29

Generally, a dissociated partner remains liable for pre-dissociation partnership obligations (a creditor can agree to release the withdrawing partner, however, from specific obligations).

He may also be liable for post-dissociation partnership liabilities incurred within two years after the dissociation assuming that dissolution hasn’t occurred. He can protect himself by notifying creditors directly of his dissociation OR fiddling public statement of dissociation (becomes effective 90 days after filing).

a dissociated partner has apparent authority to bind the partnership for a period of time not exceeding two years after dissociation (assuming that dissolution has not occurred). The partnership protect itself by notifying creditors directly of the dissociation (effective immediately) or by filing a public statement of dissociation.

Question 30

dissolution distribution of funds

Who may wind up?

Answer 30

When dissolution and winding up occur, partnership assets must be applied to the discharge of partnership liabilities. IF the assets are insufficient, individual partners are required to contribute in accordance with their loss shares. IF there are excess assets, they are distributable to the partners in cash in accordance with their profit shares.
Priority:
(1) pay all creditors
(2) repay capital contributions
(3) profits and losses equally or as agreed if any

only partners who have not wrongfully disassociated

Question 31

what is a limited partnership and how do you form it

Answer 31

A partnership with at least one general partner and at least one limited partner. GP principles apply unless displaced by LP specific provisions.

Must file a certificate of limited partnership with the secretary of state. Info required in the certificate is minimal. Includes:
(1) name of the LP (must contain phrase limited partnership or LP or L.P.)
(2) name and address of the agent for service of process
(3) name and address of each general partners
FAIL TO file = GENERAL partnership

Question 32

voting rights of LP

Answer 32

The LP is managed by the general partners. Each general partner has equal rights in the management and conduct of LP’s activities. The vote of majority of general partners is necessary for ordinary business activities. Limited partners usually have no management rights unless the partnership agreement grants them rights.

That said, unless otherwise agreed, the vote of all partners (general and limited) is necessary for certain extraordinary activities, including an amendment of the partnership agreement, the admission of a new limited or general partner, and the sale of all or substantially all of LP’s property (if sale is outside ordinary course of LP’s activities).

Question 33

how are distributions made in LP

Answer 33

Unless otherwise agreed, distributions from an LP are made on the basis of the partners’ contributions (ie in proportion to the value of each parnters’ contribution).

Question 34

liability of general partners and limited partners in LP

fiduciary duties in LP

Answer 34

1. General partners: liable for obligations of LP
2. Limited partners: not personally liable for obligations of LP solely by reason of being a partner. They have limited liability, meaning that they can only lose the value of their investments.

ALWAYS LIABLE FOR OWN TORTS THOUGH

A general partners owes the LP and the other partners the same fiduciary duties of loyalty and care that GPs owe in a GP. LP doesn’t have any fiduciary duty to LP or partners by reason of being limited partner.

Question 35

what is a limited liability partnership

What is needed for form

liability

Answer 35

An LLP is typically a general partnership where all of the partners have limited liability. Apply GP rules exceptions

• “Statement of qualification” with the secretary of state. Requires:
  a. Name and address of the partnership
  i. Must say registered limited liability partnership, RLLP, LLP etc
  b. Statement that the partnership elects to be an llp
  c. Deferred effective date if any

A partner in an LLP is not personally liable (directly, indirectly, or by way of contribution) for the obligations of the LLP, whether arising in tort, contract, or otherwise.
- Liable for wrongful acts though

Question 36

LLC - definition and formation

Answer 36

A. Definition
A hybrid between corporation and a partnership in which the owners (called “members”) have limited liability as well as the benefits of partnership tax treatment. LLC is separate entity distinct from its members.

B. Formation
Must file “articles of organization” with the secretary of state. The info requires in the certificate is minimal.
(1) name of the LLC
- Must include LLC or long form
(2) address of the LLC’s registered office
(3) name and address of its registered agent

Question 37

what is the agreement called for LLC?

Answer 37

Real detail on operation and governance on an LLC is typically found in operating agreement. The operating agreement can displace almost all stat provisions.

Question 38

management and operation for LLC

Answer 38

Management of LLC is presumed to be by all members. Other arrangements must be in operating agreement. A majority vote of members (in member-managed) or managers (in manager-managed) is required to approve ordinary business decisions. A unanimous vote of members (or managers if manager-managed) is required to approve extraordinary business decisions, including amending the operating agreement.

Question 39

liability of members in LLC

Answer 39

Members generally are not personally liable for LLC’s obligations. They can only lose amount of investments. They are liable for own torts.

Question 40

fiduciary duties - who owes? what is owed?

Answer 40

Fiduciary owed by a member if member-managed or a manager in manager-managed to the LLC and its members are the fiduciary duties of care and loyalty.
1. Duty of care: members or managers if manager-managed must act with care that a person in a like position would exercise under similar circumstances in a manner reasonably believed to be in the best interest of the LLC.

a. Business judgment rule protection is provided – members or managers in manager-managed cannot be held liable for negligent decisions (but are liable for gross negligence or worse).

2. Duty of loyalty: member or manager of manager-managed must
   a. Account to and hold for the LLC any benefit he derives from the LLC’s activities or from the appropriation of an LLC opportunity
   b. Refrain from dealing with the LLC as, or on behalf of, a person who has an adverse interest to the LLC – unless the transaction is fair to the LLC, and
   c. Refrain from competing with the LLC’s business. However, after disclosure of all material facts, all of the members may authorize or ratify a specific act by a member (or manager in manager-managed) that would otherwise violate the duty of loyalty.

Question 41

how do partners become partners and members become members?

Answer 41

unanimous consent

Question 42

LLC - dissociation, dissolution

when can member apply for judicial dissolution?

Answer 42

A person has the power to dissociate as a member of an LLC at any time, rightfully or wrongfully, by expressly withdrawing as a member. Generally, the events that will cause dissociation of a partner in a partnership will also cause dissociation of a member of an LLC. A wrongfully dissociating member may be liable to the LLC for damages.

An LLC will be dissolved when any of the following events occur:

(i) an event or circumstance that the operating agreement states causes dissolution
(ii) the consent of all members
(iii) the passage of 90 days during which the LLC has no members

judicial:

(i) conduct of all or substantially all of the LLC’s activities is unlawful
(ii) it is not reasonably practicable to carry on the company’s activities in conformity with the certificate of org and operating agreement
(iii) managers or those in control of LLC are acting or have acted or will act in a manner that is illegal or fraudulent OR have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the member applying for dissolution.

Question 43

how are partnerships and LLCs taxed

Answer 43

Partnerships and LLCs are taxed on “pass-through” basis. There is no entity-level tax; business income is passed-through to the owners and reported on the owners’ individual tax returns (regardless of whether that business income is actually distributed to the partners).