Agency and Partnership

Question 1

Agency is ______

Answer 1

• a fiduciary relationship that arises when one person (the “principal” appoints another (the “agent”) to act on the principal’s behalf and the agent consents to act.
• The agent must also act subject to the principal’s control.

Question 2

Consent requirement for agency

Answer 2

• Consent of both the principal and the agent is necessary to form an agency relationship.
• Consent may be established expressly (through written or oral statements) or by implication from the parties’ conduct

Question 3

On Behalf Of requirement of agency

Answer 3

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.

Question 4

Control requirement of agency

Answer 4

The agent must act subject to the principal’s control, but the degree of control exercised by the principal doesn’t have to be significant.

Question 5

The requisite level of control for an agency relationship may be found simply by the fact that ____

Answer 5

the 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 6

Not all ____ are necessary to create an agency relationship

Answer 6

contractual formalities

Question 7

Principal Capacity Standard

Answer 7

• A principal must have contractual capacity.
• Thus, a minor’s appointment of an agent is voidable, and incompetents and most unincorporated organizations cannot be principals. (However, in many jurisdictions, partnerships and other organized business entities can be principals and appoint agents.)

Question 8

Agent Capacity Standard

Answer 8

• Agent Needs Only Minimal Capacity
• While a principal needs contractual capacity, an agent doesn’t. So a person may be an agent even though they have no contractual capacity (Exception: If the agent has literally no mental capacity, they cannot act for the principal.)

Question 9

Notice the different capacity requirements: A principal must have contractual capacity, but an agent need not.
Thus, a ____ can be an agent but not a principal.

Answer 9

minor

Question 10

An agent may be disqualified for ____

Answer 10

representing both parties or failing to have a required license.

Question 11

Formalities of agency relationship

Answer 11

• Consent of both parties is required.
• Writing (only if SOF requires, not required by agency law)
• (no consideration)

Question 12

When is a writing required for an agency relationship

Answer 12

• Generally, agency law does not require the appointment of an agent to be in writing.
  However, the Statute of Frauds may require one.
  –> Many states require agency agreements to be in writing when the agent is to enter into certain contracts within the Statute of Frauds (mostly land transactions), or when the agency agreement itself would fall within the Statute of Frauds. This is called the “equal dignities” rule.

Question 13

No _____ is necessary for the creation of an agency relationship.

Answer 13

consideration (one may agree to serve as an agent gratuitously and be saddled with the duties of an agent).

Question 14

Modes of Creating Agency Relationship

Answer 14

The agency relationship may be created by an act of the parties or by operation of law.

Question 15

Creating Agency Relationship - by Act of Parties

Answer 15

• Parties may create an agency by agreement between the principal and agent (that is, actual authority).
• Parties may also be bound in an agency relationship through holding out by the principal (that is, apparent authority), or ratification.

Question 16

Creating Agency Relationship - By Operation of Law

Answer 16

• Estoppel: An agency may be created through estoppel. Estoppel is virtually the same as apparent authority in that it
  requires third-party reliance on the principal’s communication.
• Statute: Statutes creating agencies are usually designed to accomplish a limited purpose (for example, statute appointing secretary of state as out-of-state motorist’s agent for service of process for damages arising from driving in-state).

Question 17

Agent’s Duties to the Principal (high level)

Answer 17

• Duty of Care
• Duty of Loyalty
• Duty of Obedience

Question 18

Type of relationship of agent-principal

Answer 18

An agent (even an unpaid one) is a fiduciary of their principal.

Question 19

Duty of Care

Answer 19

• An agent owes a duty to their principal to carry out their agency with
  reasonable care.
• The degree of care is a “sliding scale” depending on any special skills that the agent may have
  –> While a gratuitous and
  a compensated agent may owe the same duty of care, the measure of “reasonableness” may vary because compensation is a proper circumstance to consider (that is, courts will probably expect a gratuitous agent to put less effort into being careful than they would expect a paid agent to exercise).

Question 20

Duty of Loyalty

Answer 20

The agent owes a duty of undivided loyalty to the principal. This includes the following obligations:
- An agent may not use their position as agent to profit for themselves = If they do, they must account to the principal for any profits made while carrying out the principal’s instructions.
- An agent must act solely for the benefit of the principal and not to benefit themselves or a third party.
- An agent must refrain from dealing with their principal as an adverse party or from acting on behalf of an adverse party.
- An agent may not compete with their principal concerning the subject matter of the agency.
- An agent may not use the principal’s property (including confidential information) for the agent’s own purposes or a third party’s purposes.

Question 21

Duty of Obedience

Answer 21

An agent must obey all reasonable directions of their principal. If the agent disobeys a reasonable direction, the agent will be liable to the principal for any loss that the principal suffers.

Question 22

Principal’s Remedies for Agent’s Breach of Duties

Answer 22

• The principal’s remedies against the agent include contract actions (against compensated agents), tort actions, actions for secret profits, equitable actions for an accounting, imposition of a constructive trust, and withholding of compensation for intentional torts or intentional breaches of fiduciary duty.
• The principal may also terminate the agency prior to any termination date in a contract.

Question 23

The principal may recover the actual profits or properties held by the agent whether or not ____

Answer 23

the agent’s profit has caused the principal any loss.

Question 24

When it comes to breach of fiduciary duty, note that a wide range of equitable remedies are available to a court. In general, a court can ____

Answer 24

do whatever it wants to “do justice” in the situation.

Question 25

A subagent is ____

Answer 25

a person appointed by an agent to perform functions that the agent has consented to perform on behalf of the agent’s principal.

Question 26

Employees of a single organization are presumed to be ____, not _____.

Answer 26

coagents; subagents
-> For example, manager and store clerk are coagents).

Question 27

Not every person appointed by an agent is a subagent. An agent may also appoint a coagent (that is, another agent of the principal). In doing so, the agent does not _____.

Answer 27

delegate their own power to that person

Question 28

Liability of Agent for subagent

Answer 28

An agent has absolute liability to the principal for breaches by a subagent.

Question 29

Duties of agent for subagent

Answer 29

• If the principal authorized the agent to appoint the subagent, the subagent owes the principal the same duties as the agent owes the principal.
• If the agent was not authorized to appoint a subagent, the subagent does not owe duties to the principal but does owe duties to the agent

Question 30

Principal’s Duties to the Agent

Answer 30

• The principal owes the agent all of the duties imposed by their contract, reasonable compensation, and reimbursement for expenses.
• The principal also generally should cooperate with the agent and not unreasonably interfere with the agent’s performance.

Question 31

A principal’s duties to an agent are not ____ in nature.

Answer 31

fiduciary (fiduciary responsibilities run only from the agent to the principal)

Question 32

If the agency agreement is silent regarding compensation, the agent is _____.

Answer 32

entitled to reasonable compensation.

Question 33

A principal generally owes no duty to compensate a ____ even if ____.

Answer 33

subagent; the agent had authority to hire the subagent

Question 34

Agent’s Remedies for Breach by Principal

Answer 34

A compensated agent has the usual contract remedies against the principal (but has a duty to mitigate damages).

Question 35

In a typical real estate broker’s contract, the broker is entitled to
compensation when ____

Answer 35

there is a buyer ready, willing, and able to purchase the property.

Question 36

Types of Authority

Answer 36

1. Actual Authority (express or implied)
2. Apparent Authority
3. Ratification

Question 37

An agent has the power to bind a principal to a contract the agent enters on the principal’s behalf only if _____

Answer 37

the agent acted with authority.

Question 38

Actual Authority

Answer 38

Actual authority is authority that the agent reasonably believes they possess based on the principal’s dealings with them

Question 39

Types of actual authority

Answer 39

Express and implied

Question 40

Express actual authority

Answer 40

Express authority is that which is actually contained within the four corners of the agency agreement. So it’s authority that’s conveyed by the principal in words (oral or written).

Question 41

Express actual authority is effective even if ____

Answer 41

it was granted mistakenly or because of misrepresentation.

Question 42

When determining whether an agent acted with authority in entering a contract for a principal, note that this is an ____ issue

Answer 42

all or nothing (they had authority or not)

Ex: if you bout 110 widgets and the agreement said they could only buy 100 = we would not say that this contract was partially authorized or partially unauthorized

Question 43

Express Implied authority

Answer 43

Implied authority is authority the agent reasonably believes they have as a result of the principal’s words or actions.

Question 44

Implied actual authority includes authority that is:

Answer 44

• Incidental to express authority
• Arising out of custom known to the agent
• Resulting from prior acquiescence by the principal
• To take emergency measures
• To delegate authority in cases of ministerial acts, where circumstances require, where performance is impossible without delegation, or where delegation is customary
• To pay for and accept delivery of goods where there is authority to purchase
• To give general warranties as to fitness and quality and grant customary covenants in land sales, collect payment, and deliver where there is authority to sell AND
• To manage investments in accordance with the “prudent investor” standard

Question 45

The notion that ____ conveys implied authority can also be used to establish actual authority to the extent that ____.

Answer 45

title or position; the agent reasonably believes that they have authority to act based on the title or position given to them by the principal

Question 46

Termination or revocation of actual authority occurs by:

Answer 46

• The happening of an event specified in the agent’s and principal’s agreement as something that will terminate the agent’s authority
• Lapse of a reasonable time if a time for termination is not specified in the agreement
• A change in circumstances, including destruction of the subject matter of the authority, insolvency of the agent or principal, and a change in the law or business conditions
• Agent’s breach of fiduciary duty
• Either party’s unilateral termination (both parties have the power to terminate an agency unilaterally, although such termination may constitute a breach of contract) OR
• Operation of law (for example, death or loss of capacity of either party except where a durable power of
  attorney—written authority that says it will not terminate on the principal’s disability—is present. Termination in
  the case of a principal’s death is effective only when the
  agent has notice of it)

Question 47

Termination in the case of a principal’s death is effective only when ____

Answer 47

the agent has notice of it

Question 48

Irrevocable Agencies

Answer 48

• Neither an agency coupled with an interest nor a power given as security may be unilaterally terminated by the principal if the agency was given to protect the agent’s (or a third party’s) rights and it is supported by consideration.
  –> Neither will such agencies be terminated by operation of law.

Question 49

Apparent Authority - Basic Theory

Answer 49

Apparent authority exists when the principal “holds out” another as possessing authority and based on this holding out, a third party is reasonably led to believe that authority exists (even though as
between the agent and the principal, no such authority has been
granted).

Question 50

The policy of apparent authority is that it protects innocent third parties who rely on ____

Answer 50

the principal’s holding out of a person as their agent.

Question 51

Actual authority is based on the ____ manifestations (words or conduct) and how they affect the reasonable ____.

Apparent authority is based on the ____ manifestations (words or conduct) and how they affect the reasonable____.

Answer 51

principal’s; agent

principal’s; third party

Question 52

Types of Apparent Authority (generally)

Answer 52

• When Agent Exceeds Actual Authority (prior act, power of position)
• When Agent Has No Actual Authority (Imposters, Lingering apparent authority)
• Inherent Authority (Inherent Agency Power)

Question 53

When Agent Exceeds Actual Authority: Prior Act

Answer 53

Where the principal previously permitted the agent to exceed their express or implied authority and knows that the third party is aware of this, the principal is bound through apparent authority.

Question 54

When Agent Exceeds Actual Authority: Power of position

Answer 54

• It is somewhat common for a third party to argue that an agent’s title or position, which was given to them by the principal, created a reasonable belief in the third party that the agent was authorized to act for the principal in ways that are typical of someone who holds that title or position.
• So, when the agent is in a position that customarily carries with it certain responsibilities, the principal is liable for the agent’s acts that come within these customary responsibilities.

Question 55

When Agent Has No Actual Authority: Unilateral Agent Representations

Answer 55

• A principal generally will not be bound when the principal does nothing to hold the agent out as having authority and the only statement of authority comes from the purported agent’s claim they have authority.
• Apparent authority is based on the principal’s manifestations to a third party.
• Thus, apparent authority cannot be created by the mere representations of an agent or other actor.

Question 56

Even though Unilateral Agent Representations don’t create apparent authority they may where ___

Answer 56

the beneficiary is silent in the face of A’s statement.

Question 57

Apparent authority: Impostors

Answer 57

• Where the principal negligently permits an impostor to be in a position to appear to have agency authority, the principal will be held liable for the impostor’s actions undertaken with such authority.
• In other words, we’ll have an agency by estoppel–the principal will be estopped from denying the imposter was their agent.

Question 58

Lingering Apparent Authority

Answer 58

Apparent authority can exist even when actual authority does not. Similarly, apparent authority can linger after actual authority ends.

Question 59

Where an agent’s actual authority has terminated, he will have apparent authority to act on the principal’s behalf as to all third parties with whom the principal knows he dealt unless and until ____

Answer 59

the third parties receive either actual or constructive notice of the termination

Question 60

Where an agent’s actual authority has been terminated but third parties rely on a written authority of the agent, the agent’s apparent authority is not considered to be terminated—unless _____

Answer 60

the principal recovers the written authority.

Question 61

The majority view is that death or incompetency of the principal ___ automatically terminate the agent’s apparent authority.

Answer 61

does not

Question 62

Inherent Authority (Inherent Agency Power)

Answer 62

Inherent authority is derived solely from the agency relationship and results in the principal being bound even though the agent had no actual or apparent authority to perform the particular act. This occurs because courts wish to protect innocent third parties rather than a principal who gave some actual authority to the agent

Question 63

Examples of inherent authority include:

Answer 63

• Respondeat Superior: Under the doctrine of their employee committed within the scope of employment.
• Conduct Similar to that Authorized: Where an agent exceeds their actual authority (that is, violates orders), but the conduct is similar to acts authorized, the principal will be held liable

Question 64

The principal will be held liable for the disposition of their goods by an agent possessing them if ____

Answer 64

the agent was given some indicia of ownership, or if the goods disposed of were sold by an agent who is a dealer in the particular goods.

Question 65

An agency relationship is created by ratification when ____

Answer 65

an “agent” purports to act on behalf of a “principal” without any authority at all, but the “principal” subsequently validates the act and becomes bound.

Question 66

Ratification gives the transaction _____ effect unless the “principal” lacked contractual capacity at the time the “agent” entered into the unauthorized transaction (in which case the “principal” is deemed to have “adopted” the contract), or unless
retroactivity would interfere with intervening third-party rights.

Answer 66

retroactive

Question 67

Upon ratification, the “agent” is ____

Answer 67

relieved of liability for breach of
duty (see 2.1.1.d., supra) and their implied warranty of authority

Question 68

Methods of Ratifying

Answer 68

• Ratification may be express or implied through the conduct of
  the “principal.”
  –> The most common form of express ratification is oral or written affirmation of a contract (for example, a company resolution).
  –>The most common form of implied ratification is when the “principal” accepts the benefits of the contract.
  –> Other ratifying conduct would include silence if there is a duty to disaffirm or suing on the transaction.

Question 69

For ratification to occur, the “principal” must:

Answer 69

• Have knowledge of (or have reason to know) all material facts regarding the contract
• Accept the entire transaction (meaning the “principal” cannot merely ratify a portion of the transaction) AND
• Have capacity (be competent and of legal age)

Question 70

Ratification is a ____ act of the “principal” and requires no consideration. Note also that ratification cannot be used to alter the rights of ____

Answer 70

unilateral; intervening parties (ex can’t ratify if another transaction has been entered into)

Question 71

Generally, a “principal” may ratify anything unless:

Answer 71

(1) performance was illegal at the time of ratification,
(2) the third party has withdrawn, or
(3) there has been a material change in circumstances.

Question 72

Under the Second Restatement (traditional view), which is followed by most states, an ____ “principal” may not ratify.

Only ____ or unidentified (existence of the principal is known, but the principal’s identity is withheld) “principals” may do so.

Answer 72

undisclosed (one whose existence and identity is withheld from the third party)

disclosed (existence and identity of the principal are known to the third party)

Question 73

The modern view of the Third Restatement does not require the agent to purport to be acting on behalf of a “principal”; therefore, under the Third Restatement ____
“principal” may ratify.

Answer 73

any

Question 74

A principal will be liable to the third party on a contract entered into by their agent if _____

Answer 74

the agent had valid authority (actual, apparent, or through ratification) to act

Question 75

As a general rule, if the agent had actual authority or apparent authority to enter a contract for the principal, or if the principal ratified a previously unauthorized contract, the agent ____.

However, an exception applies if _____.

Answer 75

cannot be held personally liable on the contract

existence and identity of the principal are not disclosed

Question 76

Agent Liability: Disclosed Principal

Answer 76

If the principal’s existence and identity are disclosed to the third party (a “disclosed principal” situation) the general rule is that the principal will be liable on an authorized contract and the agent will not be, the agent will be liable if the parties to the contract intended the agent to be liable.

Question 77

Even if the principal’s existence and identity are fully disclosed, if the agent did not have authority to enter into the contract (so the principal will not be liable) the agent can be held liable to ____

Answer 77

the third party for damages for breaching an implied warranty that a principal with contractual capacity exists and that they, the agent, had authority to contract for the principal.

Question 78

Agent Liability: Unidentified and Undisclosed Principals

Answer 78

If the principal is unidentified or if the principal is undisclosed either the
principal or the agent can be held liable on the contract if the agent
had authority to enter the contract.
- The majority of courts permit a
third party to file suit against both the principal and agent but, upon objection of either defendant, the third party must elect prior to judgment which party they wish to hold liable.
- On the other hand, if the third party obtains a judgment against the agent without knowledge of the principal’s identity, they can later sue the principal when their identity is discovered if the judgment has not been satisfied.

Question 79

The type of principal (disclosed, unidentified, or undisclosed) is relevant only when you are considering whether the ___ is liable.

Answer 79

agent (Do not discuss the type of principal when analyzing the principal’s liability = Any type of principal will be bound as long as the agent had authority.).

Question 80

When the principal is disclosed, only the ____ may enforce the contract and hold the third party liable.

Answer 80

principal, not the agent,

Question 81

When the principal is unidentified or undisclosed, the ____ may enforce the contract and hold the third party liable.

Answer 81

principal or agent (if the agent enforces the contract against the third party, the principal is entitled to all of the rights and benefits thereunder).

Question 82

The principal may not enforce the contract against a third party if _____

Answer 82

there has been an affirmative fraudulent misrepresentation of the principal’s identity or if there is an unforeseen increased burden to the third party due to the fact that performance is due to the principal and not the agent.

Question 83

A principal may be vicariously liable for the torts of their agent under two theories:

Answer 83

(1) respondeat superior and
(2) apparent authority.

Question 84

Vicarious liability means that ____

Answer 84

joint and several liability for the agent’s tort will be imputed to the principal

Question 85

The derivative nature of this
liability (respondeat superior) means that if the agent isn’t liable, the principal generally can’t be held liable; however, an agent’s immunity from a lawsuit _____

Answer 85

does not necessarily bar recovery from the principal.

Question 86

Note that in addition to vicarious liability, a principal may be directly liable for ____

Answer 86

• Their own negligence in hiring, retaining, or supervising the agent
• For an agent’s tort if they gave the agent actual authority to commit the tort or ratified the tort, or in other circumstances involving independent contractors

Question 87

A principal can be liable for the torts of an agent under ___

Answer 87

the doctrine of respondeat superior (“let the master answer”)

Question 88

The first step in determining a principal’s tort liability is to determine whether _____. And why?

Answer 88

there an employer-employee relationship between the tortfeasor and the principal.

Why = Under the doctrine, an employer (formerly called a master) is liable for the torts of an employee (formerly called a servant) committed within the scope of the employment. A principal generally is not liable for
torts committed by an independent contractor.

Question 89

The difference between an employee and an independent contractor is that ____

Answer 89

the principal/employer retains the right to control the manner in which an employee performs their work.
-> A principal does not reserve/have a right to control the manner in which work is performed by an independent contractor.

Question 90

For respondeat superior If it is not clear whether the principal has the right to control the method and manner of the work, consider:

Answer 90

a) The degree of skill required on the job (where great skill is required, more likely to be independent contractor)
b) Whose tools and facilities are used (if the principal supplies the tools and facilities used to perform the job, more likely to be employee)
c) The period of employment (definite and/or short, more likely to be independent contractor; indefinite and/or long, more likely to be employee)
d) The basis of compensation (if on time basis, more likely employee; if on job basis, more likely independent
contractor)
e) The business purpose (if person hired to perform an act in furtherance of principal’s business, more likely employee; if nonbusiness purpose, such as mowing a lawn, more
likely independent contractor)
f) Whether the person has a distinct business (person who has their own business or occupation is more likely to be an independent contractor)
g) The characterization and understanding of the parties
h) The customs of the locality regarding supervision of work

Question 91

The employer is liable for the employee’s torts only if ___

Answer 91

they were committed within the scope of the employee’s employment.

Question 92

Three factors helpful in making the assessment if the employee was acting within the scope of their employment:

Answer 92

• Was the conduct “of the kind” that the agent was hired to perform?
• Did the tort occur “on the job” (that is, within the time and space limits of the employment)?
• Was the conduct actuated at least in part to benefit the principal

Question 93

To be within the scope of employment, the employee’s conduct need not be actually ____. Nor does ____ by the principal necessarily remove the conduct from the scope of employment.

If the nature of the employee’s conduct is ____ to that which was authorized, the conduct is probably within the scope of employment.

Answer 93

authorized; prohibition

similar or incidental

Question 94

Serious criminal acts are normally considered to be ____

Answer 94

outside the scope of employment.

Question 95

Frolic and Detour

Answer 95

Detour: small deviation from the employer’s direction is within the scope of employment
Frolic: major deviation requiring a substantial departure from employment is beyond the scope.
-> Once it is shown that the employee has left the scope of employment, there must be proof of return before the employer will be held liable for the employee’s tort.

Question 96

Finally, consider whether the employee’s conduct was actuated, at least in part, by a purpose to ____

Answer 96

serve the employer.

Question 97

The employee’s invitation to ____, unless expressly authorized by the employer, is generally held to be outside the scope of the employment relationship, and the employer would not be held liable for injuries sustained.

Answer 97

passengers

Question 98

The employer is not liable for torts caused by the use of _____ instrumentalities from those authorized

Answer 98

substantially different (that is, those creating a greater risk of harm).

Question 99

If the employee makes a trip with two purposes, it will be within the scope of employment if ____

Answer 99

any substantial purpose of the employer is being served.

Question 100

The general rule is that the employer is not liable for the ____ torts of an employee.

Answer 100

intentional (for example, battery or assault).

Question 101

Intentional torts will be viewed as within the scope of employment if the conduct is:

Answer 101

(1) a natural incident of the employee’s duties (as where force is authorized or the nature of the work gives rise to hostilities);
(2) where the employee is promoting the employer’s business or is motivated to serve the employer; or
(3) specifically authorized or ratified by the employer.

Question 102

A principal is liable for an agent’s misrepresentations (including intentional misrepresentation) if _____

Answer 102

the agent had actual, apparent, or inherent authority to make statements concerning the subject matter involved

Question 103

Liability for Acts of Borrowed Employees

Answer 103

The key issue is who has the primary right of control over the employee—the loaning principal or the borrowing
principal? That employer is liable.

Question 104

Every person is liable for their own torts. Thus, an employer is liable
for ____

Answer 104

their own negligence if they fail to properly train or supervise employees or independent contractors, or fail to check an employee’s or independent contractor’s criminal record or job history.

Question 105

The doctrine of respondeat superior also applies to duly authorized ____.

Answer 105

subservants

Question 106

Authorization to hire subservants can be ____

Answer 106

express or implied.
-> Implied authorization can arise from: past practices, emergency situations, or a reasonable necessity to achieve an authorized result.

Question 107

However, the employer is generally not liable for the torts of a subservant engaged ____

Answer 107

without authority.

Question 108

Employer-Employee by Estoppel

Answer 108

Where a principal creates the appearance of an employer-employee relationship upon which a third party relies, that principal will be estopped from denying the relationship and will be liable under the doctrine of respondeat superior.

Ex: A hospital advertises “Our doctors are the best,” but the doctors at the hospital are actually independent contractors. If one of the doctors negligently injures a patient, the hospital might well be estopped from denying the doctor was an employee.

Question 109

A principal will incur liability for the acts of an independent contractor where:

Answer 109

(1) inherently dangerous activities (such as blasting) are involved,
(2) nondelegable duties have been delegated, or
(3) the principal knowingly selected an incompetent independent contractor
(if the principal was merely negligent in selecting the independent contractor, the principal is liable only for their own negligence in selection, not for the contractor’s negligence).

Question 110

If respondeat superior does not apply, the principal may still be vicariously liable in certain circumstances if ____

Answer 110

the agent acted with apparent authority.

Question 111

A principal is vicariously liable where an agent appears to deal or communicate on behalf of the principal and the agent’s apparent
authority enables the agent to

Answer 111

(1) commit a tort or (2) conceal its
commission.
-> This means that for the principal to be liable, there must be a close link between the agent’s tortious conduct and the agent’s apparent authority.

Question 112

Summary: Is a principal liable to a third party on a contract entered into by an
agent?

Answer 112

a. Did the agent have actual or apparent authority at the time of the contract, or did the principal ratify the contract later?
b. If so, the principal is liable on the contract (but usually, the agent is not).

Question 113

Summary: Is an employer liable for a tort committed by an employee?

Answer 113

a. Was the tort committed by an employee in the scope of employment?
b. If so, the employer (master) and employee (servant) are jointly and severally liable to the third party.

Question 114

A partnership is ____

Answer 114

an association of two or more persons to carry on as co-owners a business for profit.
-> It’s formed as soon as that happens, regardless of whether the parties subjectively intend to form a partnership.

Question 115

Remember that there must be at least two persons involved in forming a partnership. A partnership may not exist with only one partner. But also remember that a “person” may be _____

Answer 115

an individual, trust, corporation, partnership, or
other entity.

Question 116

Since no formalities are required to form a partnership, it’s sometimes difficult to determine whether the relationship between parties is a partnership or something else. To determine whether a partnership exists, courts generally look to _____

Answer 116

the intent of the parties.
-> If they intended to carry on a business as co-owners, there is a partnership even if they did not subjectively intend to be partners.

Question 117

Factors For Deciding Whether Partnership Exists = Factoss that raise a presumption of partnership status

Answer 117

• Sharing of Profits Raises Presumption of Partnership
• Right to Participate in Control

Question 118

The following factors may be additional evidence that a partnership has been formed. However, in contrast to the sharing of profits, these factors do not raise a presumption of partnership:

Answer 118

a) Title to property is held in joint tenancy or in common
b) The parties designate their relationship as a partnership
c) The venture undertaken by the parties requires extensive activity
d) Sharing of gross returns

Question 119

The most important factor in deciding whether an association rises to the level of a partnership is the sharing of profits. Sharing of profits raises a _____ unless the share was received as ____

Answer 119

presumption of partnership

payment of a debt, as wages or compensation for services rendered, as rent payment, as an annuity or other retirement benefit, as interest on a loan, or for the sale of goodwill of a business.

Question 120

If there is profit-sharing, and therefore a presumption of partner status, one can try to rebut that presumption with evidence suggesting ____

Answer 120

the lack of a co-ownership relationship, such as no
right to control or no sharing of losses (something that owners would typically share).

Question 121

Writing Requirements to forma partnership

Answer 121

No writing is required to form a partnership. However, because of the Statute of Frauds, if partners wish to have an enforceable agreement to remain partners for more than one year, they generally must execute a writing reflecting their agreement.

Question 122

Partnership By Estoppel

Answer 122

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 123

When a person by words or conduct represents himself as a partner or consents to being represented by another as a partner, he will
be liable to third parties who _____

Answer 123

extend credit to the actual or apparent partnership in reliance on the representation.

Question 124

Note that a person held out by another as a partner is not liable as a partner unless ___

Answer 124

they actually consent to the holding out—mere failure to deny a representation of partnership does not give rise to liability as a purported partner.

Question 125

When a person holds another out as a partner, he thereby ____

Answer 125

makes that person his agent to bind him to third parties. (If there is a partnership, only those partners who know of or consent to this holding out will be bound.)

Question 126

Partnership Agreement

Answer 126

• No agreement is required to form a partnership.
• Nevertheless, you should be on the lookout for the existence of a partnership agreement because partnership law allows the partners to contract around almost all of the statutory provisions. Look for an agreement first, and then fall back on the statutory default rules in the absence of an agreement.

Question 127

A partnership agreement may be _____

Answer 127

written, oral, or implied (for example, by conduct)

Question 128

Except with respect to partners’ personal liability for partnership obligations, a partnership is _____

Answer 128

a legal entity distinct from its partners. (Title to land may be in the partnership name. A partnership may sue or be sued in the partnership name.)

Question 129

Capacity to form partnership

Answer 129

Anyone who is capable of entering into a binding contract may be a partner.

Question 130

A would-be partner who lacks capacity is liable only to ____, but the partnership with such person is not ____.

Answer 130

the extent of his capital contribution; void (it will continue to exist until steps are taken to dissolve it).

Question 131

Legality of Purpose of Partnership

Answer 131

A partnership formed to achieve an illegal purpose is void, and the courts will not compel an accounting or a settlement of a void partnership’s affairs.

Question 132

Unless otherwise agreed, no one can become a partner without _____

Answer 132

the express or implied consent of all partners.

Question 133

Statement of Partnership Authority

Answer 133

A partnership may choose to file a statement of partnership authority with the secretary of state, which can give constructive knowledge of the extent of the partners’ authority with regard to the partnership.

Question 134

The ____ provides a default set of rules.

Answer 134

Revised Uniform Partnership Act (“R.U.P.A.”)

Question 135

Partners are free to agree—through a partnership
agreement—to abide by different rules for governing the relationships among themselves, and the R.U.P.A. will govern only those issues ____. Note, however, that certain R.U.P.A. provisions cannot be waived (for example, ____).

Answer 135

not provided for in the partnership agreement

the duty of loyalty, the right of a court to expel a partner

Question 136

Voting - Default Rules

Answer 136

• Unless otherwise agreed, all partners have equal rights in the management of the business and equal votes (that is, one partner, one vote = regardless of contribution)
• Decisions regarding matters within the ordinary course of the partnership business require a majority vote of the partners.
• Matters outside of the ordinary course of business require the unanimous consent of all partners.

Question 137

Salary or Other Compensation - Default Rules

Answer 137

A partner has no right to compensation for services rendered to the partnership (with the exception of a right to reasonable compensation for services rendered in winding up the partnership business).

On the other hand, if a partner has impliedly or expressly promised to devote time to the partnership business and fails to do so, they may be charged in an accounting for damages caused to the partnership.

Question 138

Partners’ Accounts

Answer 138

• Each partner is deemed to have an account that is credited with an amount equal to the partner’s contribution plus his share of any profits and debited with the partner’s share of any losses and partnership liabilities.
• Where a partner personally profits at the expense of the partnership, the partner must account to the partnership for those profits.
• Upon dissolution, a partner is entitled to settlement of their account.

Question 139

Indemnification and Other Repayment - Default Rules

Answer 139

• A partnership must indemnify every partner with regard to payments made and obligations reasonably incurred in carrying on the partnership business.
• If a partner makes a payment or advance on behalf of the partnership beyond the contribution the partner agreed to make, the payment or advance constitutes a loan that must be repaid with interest.

Question 140

Books and Information - Default Rules

Answer 140

• Books and information must be kept at the partnership’s chief executive office.
• Each partner has a right to inspect and copy the partnership books.
• Upon demand, each partner must render true and full information of all things affecting the partnership.

Question 141

Legal Actions By and Against Partners - Default Rules

Answer 141

• A partnership may sue or be sued in its own name; however, to reach a partner’s personal assets, there must be a judgment against the individual partner.
• A partnership may sue a partner for breach of the partnership agreement or of a duty owed to the partnership.
• A partner may sue the partnership or other partners to enforce a right created by partnership act or agreement, or a right otherwise belonging to the partner.

Question 142

SHARING PROFITS AND LOSSES - Default Rules

Answer 142

• Unless otherwise agreed, profits are shared equally among the partners (by number).
• Unless otherwise agreed, losses are shared in the same manner as profits (losses follow profits, but profits don’t follow losses)

Question 143

LIABILITY TO THIRD PARTIES - Default Rules

Answer 143

• The R.U.P.A. generally provides that each partner is an agent of the partnership for the purpose of its business.
• The authority of a partner to bind the partnership when dealing with third parties roughly follows agency law.

Question 144

Liability of the Partnership in Tort

Answer 144

With respect to the partnership’s liability in 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 the partnership or with authority of the partnership.

Question 145

Liability of the Partnership in Contract

Answer 145

With respect to the partnership’s liability in contract, a partnership is liable for all contracts entered into by a partner in the scope of partnership business or with actual or apparent authority of the partnership.

Question 146

Actual Authority - Partnerships

Answer 146

• Actual authority is the authority a partner reasonably believes they have based on the communications between the partnership and the partner.
• It can come from the partnership agreement or a vote of the partners.

Question 147

A statement of authority grants or limits a partner’s authority to enter into transactions on behalf of the partnership. The effect differs depending on whether the transaction involves a transfer of real property:

Answer 147

• Real Property: binding on third parties if the statement is also recorded in the county where the property is located (both grants and restrictions)
• Not Involving Real Property: grants of partner authority in the statement are binding on the partnership (unless the third party has actual knowledge that the partner lacked authority).
  –> Restrictions on partner authority in the statement, however, are not binding on third parties.

Question 148

RUPA - Apparent Authority Rules

Answer 148

The R.U.P.A. provides 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 or business of the kind carried out by the partnership (unless the third party is aware that the partner lacks actual authority to act).

Question 149

It is very important to remember that as agents of the partnership, partners have apparent authority to bind the partnership to any contract within the scope of the partnership business. If a contract is outside the scope of partnership business, the partnership generally will not be bound unless ____

Answer 149

the partner has actual authority

Question 150

A partnership will not be bound by a partner’s act if the partner lacked actual authority and the person with whom the partner dealt ____

Answer 150

either knew or received notification of such fact.

Question 151

Under the R.U.P.A., knowledge means ____ knowledge.

Answer 151

subjective (what the person actually knew)

Question 152

Under the R.U.P.A., a notification of limitation on authority is effective either when _____

Answer 152

it comes to the person’s attention or when it is duly delivered.

Question 153

Any partner may transfer property held in the name of the partnership. If partnership property is held in the name of one or more partners (who are identified as such) but the partnership is not named, transfer by ____. In either case, if the transferring partner lacked authority, the partnership may ____

Answer 153

the titleholders in their own names is effective

recover the property from the initial transferee but not from a subsequent bona fide purchaser.

Question 154

If the partnership’s interest is not indicated in the instrument transferring the property, the transfer may be made by _____. If the transferee gives value without notice of lack of authority, they _____

Answer 154

those in whose names the property is held

take free of the partnership interest.

Question 155

Liability of the Partners - General Partnership

Answer 155

A defining characteristic of the general partnership is that each partner is jointly and severally liable (so, one or more partners may be sued) for all obligations of the partnership, whether arising in tort or contract.

Question 156

But the plaintiff must first exhaust ____ before seeking to collect from an individual partner’s assets

Answer 156

partnership resources (or exhaustion is excused by agreement or court order or because the partnership is bankrupt).

Question 157

Extent of Liability - General Partnership

Answer 157

Each partner is personally and individually liable for the entire amount of partnership obligations.

Question 158

Where one partner pays the whole obligation of a partnership, they’re entitled to ____. They may also require the other partners to ____

Answer 158

indemnification from the partnership; contribute their pro rata shares of the payment if the partnership is unable to indemnify.

Question 159

Limiting Liability to Third Parties - Partnership

Answer 159

Partners cannot limit a third party’s rights without the third party’s consent. The agreement is effective, however, among the partners themselves.

Question 160

Liabilities of Admitted Partners

Answer 160

• A newly admitted partner is not personally liable for partnership obligations that arose before their admission.
• They can only lose the amount of their investment in the partnership.

Question 161

Liabilities of Dissociating Partners

Answer 161

• An outgoing or dissociated partner remains liable for obligations arising while they were a partner unless there has been payment, release, or novation.
• An outgoing partner can also be liable for acts done after dissociation.

Question 162

Criminal Liability for Partners

Answer 162

Partners will not be criminally liable for the crimes of other partners committed within the scope of the partnership business, unless the other partners participated in the commission of the crime either as principals or accessories.

Question 163

Under the R.U.P.A., a partner has notice of a fact when the partner:

Answer 163

(1) has actual knowledge of the fact,
(2) is notified of the fact, or
(3) has reason to know of the fact based on the surrounding circumstances.

Question 164

When Notification Effective - RUPA

Answer 164

Notification is effective not only if and when it comes to a partner’s attention, but also when it is delivered to a place of business held out by the partner as a place for receiving communications.

Question 165

A partner’s notice of a fact relating to the partnership is imputed to the partnership ____ unless ______.

Answer 165

immediately; the partner having notice is participating in a fraud against the partnership

Question 166

Each partner owes four fiduciary duties to the partnership:

Answer 166

• They owe duties of loyalty and care to each other and to the partnership.
• They also owe a statutory duty of disclosure as well as a duty of obedience.

Question 167

Duty of Loyalty - Partnerships

Answer 167

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; and
(3) to refrain from competing with the partnership in the conduct of its business.

Question 168

Duty of Care - Partnership

Answer 168

The duty of care requires each partner to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

Question 169

Duty of Disclosure - Partnership

Answer 169

A partner also has a duty to provide complete and accurate information concerning the partnership

Question 170

Under the statutory duty of disclosure the R.U.P.A. provides that each partner and the partnership shall furnish to a partner:

Answer 170

(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;
and
(2) on demand, any other information concerning the partnership’s business and affairs (except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances).

Question 171

Duty of Obedience - Partnership

Answer 171

The duty of obedience requires the partner to obey all reasonable directions of the partnership and not act outside the scope of his or her authority.

Question 172

A partnership agreement may not eliminate the duties of ____. The duty of ____ may be eliminated.

Answer 172

loyalty or care; disclosure

Question 173

Partnership Capital

Answer 173

Partnership capital is the property or money contributed by each partner for the purpose of carrying on the partnership’s business.

Question 174

Partnership Property

Answer 174

Partnership property, in its broadest sense, is everything the partnership owns, including both capital and property subsequently acquired in partnership transactions.

Question 175

Property Deemed to Be Partnership Property

Answer 175

Titled property is partnership property if it is acquired in the partnership’s name or in a partner’s name where it is apparent from the document that they are acting for a partnership (for example, it mentions a partnership or says they are a partner).

Question 176

Property Presumed to Be Partnership Property

Answer 176

Under the R.U.P.A., property is rebuttably presumed to be partnership property if it was purchased with partnership funds, regardless
of in whose name title is held. “Partnership funds” includes not only the partnership’s cash, but also the partnership’s credit.

Question 177

Property Presumed to Be Partner’s Separate Property

Answer 177

Under the R.U.P.A., property is rebuttably presumed to be a partner’s property if:
(1) it’s held in the name of one or more partners, (2) the instrument transferring title gives no sign that they’re acting for a partnership, and
(3) partnership funds were not used to acquire the
property.

Question 178

In cases not governed by the explicit R.U.P.A. provisions (for example, in cases of property that is not titled), in determining whether property is partnership property or the separate property of a partner, courts will probably continue to look to the following common law criteria, which tend to indicate that the property was intended to be partnership property:

Answer 178

• Acquisition of the property with partnership funds
• Use of the property by the partnership in conducting the partnership’s business
• Entry of the property in the partnership books as a partnership asset
• A close relationship between the property and the business operations of the partnership
• Improvement of the property with partnership funds
• Maintenance of the property with partnership fund

Question 179

The Partnership’s Rights in Partnership Property

Answer 179

The partnerships rights in partnership property are totally unrestricted (remember, the partnership owns the property!).

Question 180

The Partner’s Rights in Partnership Property

Answer 180

• A partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred. (The partnership is an entity; the partnership itself, not the partners, owns its property.)
• A partner can simply use partnership property for partnership purposes.

Question 181

A partner has no right to use partnership property other than ____

Answer 181

for the benefit of the partnership.

Question 182

The Partner’s Ownership Interest in the Partnership

Answer 182

• A partner’s ownership interest in a partnership is called his “partnership interest” (just like a shareholder’s ownership interest in a corporation is called “stock”).
• The partnership interest is the personal property of the partner.
• Although it is personal property, there are restrictions on what a partner can do with it.

Question 183

A partnership interest is comprised of

Answer 183

(1) management rights (that is, a partner’s right to participate in the management of the business, to obtain information about the partnership, and to be recognized as a “partner”); and
(2) financial rights (that is, the partner’s right to receive his share of any profit distributions made by the partnership).

Question 184

Transferability of Management Rights

Answer 184

Unless otherwise agreed, a partner cannot unilaterally transfer his management rights and thereby make the transferee a “partner.” The
default rule for the admission of a new partner is that it requires a unanimous vote of the existing partners.

Question 185

Transferability of Financial Rights

Answer 185

Unless otherwise agreed, a partner can unilaterally transfer his financial rights. The transferee merely has the right to receive profit distributions from the partnership that would have otherwise gone to the partner. The transferee is not a partner; the transferor is still a partner and retains all of the management rights of a partner.

Question 186

DISSOCIATION of a partnership

Answer 186

• Dissociation is a change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business.
• Dissociation of a partner does not necessarily cause a dissolution and winding up of the partnership business.

Question 187

A partner becomes dissociated from the partnership by:

Answer 187

(1) oral or written notice of the partner’s express will to withdraw;
(2) happening of an agreed event;
(3) valid expulsion of the partner;
(4) the partner’s bankruptcy or the appointment of a receiver for a partner;
(5) the partner’s death or incapacity to perform partnership duties;
(6) the decision of a court that the partner is incapable of performing a partner’s duties; or
(7) termination of a business entity that is a partner.

Question 188

A partner will be deemed to have wrongfully dissociated if ____

Answer 188

• The dissociation is in breach of an express term in the 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.

Question 189

A partner who wrongfully dissociates is liable to the partnership for _____

Answer 189

any damages caused by the dissociation.

Question 190

At-Will Partnership

Answer 190

An “at-will partnership” is one where the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking. It is the default form of partnership. (Most partnerships are at will.)

Question 191

Term Partnership

Answer 191

A “term partnership” is the converse—it is a partnership where the partners have agreed, explicitly or implicitly, to remain partners for a definite term or until the completion of a particular undertaking.

Question 192

When a partner dissociates from a partnership, one of two statutory avenues is implicated:

Answer 192

1. The first avenue provides that the partnership is dissolved and that its business must be wound up. This means that the partnership business will be liquidated (that is, “sold off”).
2. The second avenue provides that the partnership continues in existence with the dissociated partner becoming entitled to a buyout of their partnership interest.
   -> The nature of the event of dissociation dictates which of these avenues will be implicated.

Question 193

Consequences of Dissociation - For the Partner

Answer 193

• Upon a partner’s dissociation, their right to participate in management ceases.
• The partnership must purchase (buy out) their interest at either liquidation or going-concern value, and must indemnify them against known pre-dissociation liabilities, as well as against post-dissociation liabilities not incurred by the dissociating partner’s acts.
  –> However, a partner who wrongfully dissociates before the expiration of a partnership term or completion of a particular undertaking is
  not entitled to payment of the buyout price until the term expires or the undertaking is completed, unless they can establish that earlier
  payment will not cause undue hardship to the partnership business (+Interest must be paid on the buyout price from the date of dissociation to the date of payment)

Question 194

Dissolution and winding up are required only in

Answer 194

limited circumstances (for example, 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).

Question 195

In general, when a partner dissociates by express will in an at-will partnership, the partnership is _____

Answer 195

dissolved and its business must be wound up.

Question 196

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, _____

Answer 196

within 90 days after the dissociation, at least
one-half of the remaining partners agree to wind up the partnership.

Question 197

If a partner’s dissociation does not result in a dissolution and winding up, the partner is entitled to _____

Answer 197

receive a buyout of his partnership interest.

Question 198

If the dissociation is wrongful, any damages will be ______

Answer 198

offset against the buyout price.

Question 199

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

Answer 199

pre-dissociation; specific obligations

Question 200

A dissociated partner can be liable for post-dissociation partnership liabilities incurred within ____ after the dissociation (assuming that dissolution has not occurred) if:

Answer 200

two years

(1) when entering the transaction the other party reasonably believed the dissociated partner was still a partner, and
(2) did not have notice of the partner’s dissociation.

Question 201

A dissociated partner can protect themselves (meaning, cut short this period of liability) by _____.

Answer 201

notifying creditors directly of their dissociation (effective immediately) or by filing a public notice of dissociation (becomes effective 90 days after filing)
-> The partnership can make the filing as well.

Question 202

A partnership can be bound by an act of a dissociated partner undertaken within _____ after dissociation (assuming that dissolution has not occurred) if:

Answer 202

two years

(1) the act would have bound the partner-
ship before dissociation, and
(2) the other party to the transaction = (a) reasonably believed the dissociated partner was still a partner and (b) did not have notice of the dissociation.

Question 203

The partnership can protect itself (from dissociated partner’s ability to bind partnership) by ____

Answer 203

notifying creditors directly of the dissociation
(effective immediately) or by filing a public statement of dissociation (becomes effective 90 days after filing).

Question 204

When dissolution and winding up occur:

Answer 204

partnership assets must be applied to the discharge of partnership liabilities.
- If the assets are insufficient, individual partners are required to contribute (“pay in”) 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.

Question 205

A partnership at will can be dissolved at ____

Answer 205

any time by the express will (for example, notice
of dissolution) of any partner without penalty.

Question 206

The following events trigger dissolution under the R.U.P.A.:

Answer 206

a. In a partnership at will, notification by any partner of an express will to withdraw as a partner;
b. In a partnership for a definite term or particular undertaking: (1) expiration of the term or completion of the undertaking, (2) consent of all of the partners to dissolve, or (3) within 90 days
after a partner’s death, bankruptcy, or wrongful dissociation, at least half of the remaining partners wish to dissolve;
c. The happening of an event agreed to in the partnership agreement that requires winding up the partnership business;
d. The happening of an event that makes it unlawful for the partnership to continue;
e. Issuance of a judicial decree on application by a partner that (1) the economic purpose of the partnership is likely to be frustrated, (2) a partner has engaged in conduct making it not reasonably practicable to carry on the business, or (3) the
business cannot practicably be carried on in conformity with the partnership agreement;
f. Issuance of a judicial decree on application by a transferee of a partner’s interest that it is equitable to wind up the partnership (1) after the term expires or the undertaking is completed in a partnership for a definite term or particular undertaking, or (2) at any time in a partnership at will; and
g. The passage of 90 consecutive days during which the partnership does not have at least two partners.

Question 207

Priority of Distribution - partnership dissolution

Answer 207

Each level of priority must be fully satisfied before beginning the next level:
a. First, the partnership must pay all creditors. Creditors include “outside creditors” (for example, trade creditors, lenders, suppliers) and “inside creditors” (for example, partners who loaned money).
b. Second, the partnership must repay all capital contributions paid into the partnership by partners.
c. Third, profits or losses, if any.

Question 208

The partnership continues to exist after dissolution until _____

Answer 208

the partnership is wound up.

Question 209

Who May Wind Up

Answer 209

• As a general rule, all living partners have a right to participate in the winding up of the partnership’s business except partners who have wrongfully dissolved the partnership and bankrupt partners.
• If all partners have died, the legal representative of the last surviving partner may wind up.

Question 210

Apparent Authority—Partner’s Power to Bind
Partnership After Dissolution

Answer 210

• A partnership can be bound after dissolution by any act of a partner appropriate for winding up the partnership’s business.
• The partnership will also be liable for other acts if the party with whom a partner dealt did not have notice of the dissolution.
  –> The partnership can protect itself by notifying creditors directly of the dissolution (effective immediately). In addition, any partner who has not wrongfully dissociated may file a statement of dissolution with the secretary of state; all persons are deemed to have notice of a dissolution 90 days after such a notice is filed.

Question 211

Any time before the winding up of the partnership business is complete, the partners may decide to waive the dissolution and continue the partnership by ____

Answer 211

unanimous vote of the partners who have not wrongfully dissolved (Such waiver does not affect the rights of persons who have relied on the dissolution before receiving notice of the waiver)

Question 212

OTHER UNINCORPORATED FORMS:

Answer 212

• LIMITED PARTNERSHIPS
• LIMITED LIABILITY PARTNERSHIPS
• LIMITED LIABILITY COMPANIES

Question 213

LIMITED PARTNERSHIPS

Answer 213

A limited partnership (“LP”) is a partnership with at least one general partner and at least one limited partner.
- The general partner(s) is personally liable for partnership obligations, while the limited partner(s) generally does not have any liability beyond the liability to make agreed-upon contributions.

Question 214

A limited partnership differs from a general partnership in that a limited partnership can be created only by ____

Answer 214

filing a certificate of formation with the state.

Question 215

Like a modern partnership, a limited
partnership is an entity ____ from its partners and has a perpetual duration unless otherwise provided.

Answer 215

distinct

Question 216

For an LP a certificate of limited partnership must be _____. The certificate must be signed by ____. The information required in the certificate is minimal.

Answer 216

filed with the secretary of state; all general partners.

Question 217

The Certificate of Limited Partnership must include among other items:

Answer 217

(1) the name of the partnership,
(2) the names and addresses of the agent for service of process, and
(3) the names and addresses of each general partner.

Question 218

A limited partnership must maintain in its state of organization an office with records of ____

Answer 218

the certificate, any partnership agreements, and the partnership’s tax returns for the three most recent years.

Question 219

A limited partnership agreement or some other record must contain ____

Answer 219

the amount and description of each partner’s contribution, special rights
of partners regarding distributions, etc.

Question 220

A limited partnership must maintain in the state an agent for ____

Answer 220

the service of process.

Question 221

It is important to remember that a limited partnership is a creature of statute and thus can exist only on ____

Answer 221

compliance with the limited partnership statute.

Question 222

The limited partnership name must contain ____

Answer 222

• the phrase “limited partnership” or the abbreviation “L.P.”
  -> The policy here is to alert the public to the limited liability nature of the business.
  -> The name may contain the name of any partner (general or limited).

Question 223

The real detail on the operation and governance of a LP is typically found ___

Answer 223

in a partnership agreement (it can be written, oral, or implied)

Question 224

LP - General Partners

Answer 224

• The LP is managed by the general partner(s).
• Each general partner has equal rights in the management and conduct of the LP’s activities.
  –> Generally, any matter relating to the limited partnership’s ordinary business activities may be exclusively decided by the general partner or, if there is more than one general partner, by a majority of the general partners.

Question 225

LP - Limited Partners

Answer 225

Limited partners usually have no management rights unless the partnership agreement grants them rights.

Question 226

Participation in management does not cause a limited partner to ____

Answer 226

become personally liable for an obligation of the limited partnership (under older law, it did).

Question 227

Unless otherwise agreed, the vote of all partners (general and limited) is necessary for certain ____ activities, including to:

Answer 227

extraordinary

(1) amend the partnership agreement;
(2) convert the partnership to a limited liability limited partnership;
(3) dispose of all or substantially all of the limited partnership’s property outside the usual and regular course of the partnership’s activities;
(4) admit a new partner;
or (5) compromise a partner’s obligation to make a contribution or to return an improper distribution.

Question 228

The Uniform Limited Partnership Act’s (U.L.P.A.’s) provisions for distributions are very similar to the distribution provisions for ___.

Unless otherwise agreed, distributions from an LP are made on the basis of ____

Answer 228

corporations

the partners’ contributions (that is, in proportion to the value of each partners’ contribution) rather than the R.U.P.A’s default equal split for general partnerships.

Question 229

Like a corporation, a limited partnership may not make a distribution if after making the distribution the limited partnership would be ____

Answer 229

unable to pay its debts as they become due or the limited partnership’s total assets would be less
than the sum of its total liabilities, including sums needed to satisfy superior preferential rights upon dissolution.

Question 230

Right to Distributions - LP

Answer 230

A partner has no rights to distributions unless the partner makes a contribution to the partnership.

Question 231

A contribution may be in the form of ____ to the partnership. A partner’s contribution obligation is not excused by ____ and may be compromised only on ____

Answer 231

any benefit (for example, money, property, services, and promises to make such contributions)

death or other disability; the consent of all partners.

Question 232

If a partner fails to make an agreed-upon nonmonetary contribution (for example, the partner fails to provide promised property or services), the limited partnership has the option of
____

Answer 232

seeking cash in lieu of the agreed-upon contribution.

Question 233

Liability for Improper Distributions - LP (General partner)

Answer 233

A general partner who consents to an improper distribution is personally liable to the limited partnership for the amount that the distribution exceeds what could properly have been distributed.

Question 234

Liability for Improper Distributions - LP (Receiving partner)

Answer 234

• Any partner who receives an improper distribution knowing that it is improper may be forced to return the improper amount to the partnership.
• However, no personal liability for an improper distribution arises if the distribution appeared to have been proper based on reasonably prepared financial statements.

Question 235

Right to Assign Partnership Interest - LP

Answer 235

As in a general partnership, a partner’s right to distributions is personal property that may be transferred, in whole or in part.
- Such a transfer gives the transferee only the right to receive the transferred distributions and to demand an accounting thereon.
- The transfer does not make the transferee a partner or give the transferee any rights as a partner.
- Moreover, the transferring partner remains a partner, and the transfer does not constitute a dissociation or cause a dissolution.

Question 236

In an LP the transfer of a partner’s ____ in the partnership is a ground for expulsion.

Answer 236

entire transferable interest

Question 237

LP liability of general partner

Answer 237

General partners are jointly and severally liable for all obligations of the LP, just as they are in a general partnership.

Question 238

A general partner may also be a limited partner and have the rights of a limited partner, but such a dual capacity does not relieve the general partner of ____

Answer 238

his duties as a general partner.

Question 239

Incoming General Partners - LP

Answer 239

A person who becomes a general partner of an existing limited partnership is not personally liable for an obligation that the limited partnership incurred before he became a general partner.

Question 240

Limited Liability Limited Partnership

Answer 240

If the LP is a limited liability limited partnership, the general partners are not liable for liabilities
incurred by the individual partners; liability belongs to the partnership alone.

Question 241

LP liability of limited partner

Answer 241

• A limited partner is not personally liable for an obligation of the LP solely by reason of being a limited partner.
• Limited partners have limited liability, meaning that they can only lose the value of their investments.

Question 242

A limited partner (as well as a general partner) is always liable for ____.

Answer 242

her own torts (The limited liability shield of any business organization does not protect a person from liability for her own torts.)

Question 243

Fiduciary Duties in LP - General Partner

Answer 243

• A general partner owes the LP and the other partners the same fiduciary duties of loyalty and care that general partners owe in a general partnership.
• However, a general partner does not automatically violate the duty of loyalty merely because the general partner’s conduct furthers his own interests.

Question 244

Fiduciary Duties in LP - Limited Partner

Answer 244

• A limited partner owes no fiduciary duty to the partnership or any other partner solely by reason of being a limited partner.
  -> Thus, they’re free to compete with the partnership and have interests adverse to those of the partnership, unless the partnership agreement provides otherwise.

Question 245

Right to Transact Business with the Partnership - LP

Answer 245

Any partner may lend money to and transact other business with the limited partnership.

Question 246

Right to Dissolve - LP

Answer 246

Any partner may apply for a decree of dissolution of the limited partnership whenever it is not reasonably practicable to carry on the business in conformity with the partnership agreement.

Question 247

Direct Action Against Limited Partnership by Partner - LP

Answer 247

A partner may maintain a direct action against the limited partnership or another partner for legal or equitable relief to enforce her rights and interests.

Question 248

Derivative Action - LP

Answer 248

A partner may maintain a derivative action to enforce a right of a limited partnership if: the partner first makes a demand on the general partners to bring an action to enforce the right and the general partners do not bring the action within a reasonable time; or a demand would be futile.

Question 249

An LP derivative action may be maintained only by a person who is a partner at the time the action is commenced and:

Answer 249

(1) who was a partner when the conduct giving rise to the action occurred; or
(2) whose status as a partner devolved upon him by operation of law or pursuant to the terms of the partnership agreement from a person who was a partner at the time of the conduct.

Question 250

Right to Information - LP

Answer 250

A general partner’s right to information is similar to that of a partner in a general partnership = Each limited partner has the right to inspect and copy any partnership records required to be maintained

Question 251

Indemnification and Compensation of General Partners - LP

Answer 251

• Unless otherwise provided, a general partner is not entitled to remuneration for services performed for the partnership.
• However, the limited partnership must indemnify a general partner for liabilities that they incur in the ordinary course of the activities of the partnership.

Question 252

LP: Admission of Additional General and Limited Partners

Answer 252

A person may be admitted to the limited partnership as a general or limited partner as provided in the partnership agreement, as a result of a merger or conversion, or on the consent of all partners.

Question 253

LP: Conversion and Merger

Answer 253

A limited partnership may convert to or merge with another form of business entity upon the consent of all partners and filing of a certificate (of conversion or merger) with the secretary of state.

Question 254

LP: Dissociation

Answer 254

• The events that will cause dissociation of a partner in a general partnership will also cause dissociation of a partner (general or limited) in a limited partnership.
• A general partner’s right to dissociate is similar to the right of a partner to dissociate in a general partnership.

Question 255

In an LP a limited partner has no right to ____

Answer 255

dissociate before termination of the limited partnership.

Question 256

Effect of dissociation from LP on Limited Partner

Answer 256

After dissociation, a limited partner is treated as a transferee of the limited partner’s transferable interest.

Question 257

Effect of dissociation from LP on General Partner

Answer 257

The effects of dissociation of a general partner in a limited partnership are similar to the effects of dissociation of a partner in a general partnership

Question 258

A limited partnership may be judicially dissolved upon these events:

Answer 258

• application of a partner if it is no longer reasonably practicable to carry on the limited partnership in conformity with the limited partnership agreement
• A limited partnership may also be administratively dissolved by the secretary of state for failure to pay fees or file an annual report, but the partnership may apply for reinstatement by curing the defect within two years of the dissolution

Question 259

Otherwise (besides request for dissolution by partner/state), a limited partnership may be dissolved only upon the occurrence of one of
the following:

Answer 259

• The happening of an event specified in the partnership agreement
• The consent of all general partners and limited partners holding a majority of the right to receive distributions (“majority in interest”)
• After dissociation of a general partner, upon consent of partners owning a majority in interest if another general partner remains; if no general partner remains, after 90 days unless the partners admit a new general partner
• Ninety days after dissociation of the last limited partner, unless a new limited partner is admitted within the 90 days

Question 260

Winding up - LP

Answer 260

• A limited partnership continues after dissolution only for the purpose of winding up its activities.
• In winding up, the partnership must discharge liabilities, settle and close partnership activities, and marshal and distribute its assets.

Question 261

Power to Bind Partnership After Dissolution - LP

Answer 261

• After dissolution, a partnership will be bound by any acts of a general partner that are appropriate for winding up the partnership.
• The partnership can also be bound by acts of a general partner that are not appropriate for winding up if the acts would have bound the
  partnership before dissolution and the party with whom the general partner dealt did not have notice of the dissolution.

Question 262

Upon winding up a limited partnership, the assets are distributed in the following order:

Answer 262

(1) First, to creditors (including partners who made loans to the limited partnership)
(2) Second, any surplus must be paid in cash as a distribution

Question 263

LP Distribution Where Assets Are Insufficient to Satisfy Debts in winding up

Answer 263

• If limited partnership assets are insufficient to satisfy all obligations to creditors, each person who was a general partner when the obligation was incurred must contribute to the partnership to satisfy the obligation.
• The contribution due is in proportion to the right to receive distributions in effect when the obligation was incurred.
• If a person does not contribute the full amount
  required, the other persons required to contribute must pay the additional amount necessary to discharge the obligation, in proportion to the right to receive distributions in effect when the obligation was incurred.
• A person who pays an additional contribution may recover from any person whose failure to contribute necessitated the additional contribution, but may not recover more than the amount additionally contributed.

Question 264

LIMITED LIABILITY PARTNERSHIP

Answer 264

Differs from a general partnership and a limited partnership in that in an LLP all of the partners have limited liability (that is, no partner is personally liable for a partnership obligation beyond their contribution to the partnership)

Question 265

The major advantage of operating as an LLP is that partners are ____ for the LLP’s obligations. In general, you apply ____ rules to LLPs, with the exception of the material below.

Answer 265

not personally liable; general partnership

Question 266

To become an LLP, a partnership must file a ____ with the secretary of state. The statement must be executed by ____. The required minimal information includes:

Answer 266

statement of qualification; at least two partners

(1) the name and address of the partnership;
(2) a statement that the partnership elects to be an LLP; and
(3) a deferred effective date, if any.

Question 267

The partnership becomes an LLP at the time of ____, whichever is later.

Answer 267

the filing of the statement or on the date specified in the statement

Question 268

The name of a limited liability partnership must end with the words ____

Answer 268

“Registered Limited Liability Partnership” or “Limited Liability Partnership” or one of the abbreviations “L.L.P.,” “LLP,” “R.L.L.P.,” or “RLLP.”

Question 269

The terms and conditions on which a partnership becomes an LLP must be approved by ____

Answer 269

whatever vote is necessary to amend the partnership agreement or, if specified, the vote necessary to amend the contribution obligations of the partners.

If the partnership agreement is silent as to how it may be amended, all partners must approve the terms and conditions of the partnership becoming an LLP.

Question 270

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. As always, however, a partner remains personally liable for ____

Answer 270

their own wrongful acts.

Question 271

If partnership assets are insufficient to indemnify them for an obligation they incurred on behalf of the LLP, they ____

Answer 271

forfeit the right to receive contributions from other partners in exchange for being relieved of the obligation to contribute to their personal liability.

Question 272

A limited liability company (“LLC”) is a hybrid business organization between a corporation and a partnership that:

Answer 272

(1) is taxed like a partnership (except for a single-member LLC),
(2) offers its owners (called members) the limited liability of shareholders of a corporation,
and
(3) can be run like either a corporation or a partnership.
-> This is not a corporation, nor is it a partnership. It is its own business form.

Question 273

An LLC is treated as a ____ from its owners (called “members”)

Answer 273

separate legal entity distinct

Question 274

The ____ provides a default set of rules for LLCs.

Answer 274

Revised Uniform Limited Liability Company Act of 2006 (“R.U.L.L.C.A.”)

Question 275

An LLC is formed by filing a ____ with the secretary of state. The LLC must have at least ____.

Answer 275

certificate of organization (or, in some states, articles of organization)

one member

Question 276

The information required in the certificate of an LLC is minimal. It must include the following:

Answer 276

a. The name of the LLC
b. The address of the LLC’s registered office AND
c. The name and address of its registered agent

Question 277

The LLC’s name must include _____

Answer 277

an indication that it is an LLC. In general, the name should contain the words “limited liability company” or the abbreviation “LLC” or “L.L.C.”

Question 278

The real detail on the operation and governance of an LLC is typically found in an ____

Answer 278

operating agreement (The operating agreement can displace almost all of the statutory provisions).

Question 279

The LLC agreement may eliminate the duty of ____ and alter the duty of ____ if doing so is not manifestly unreasonable. Similarly, the operating agreement may not eliminate the ____, but it may prescribe standards for measuring the performance of the obligation if doing so is not manifestly unreasonable

Answer 279

loyalty; care (except to authorize intentional misconduct or knowing violations of law)

contractual obligation of good faith and fair dealing

Question 280

Management of the LLC is presumed to be by ___

Answer 280

all members.
-> Other management arrangements can be made (for example, management by outside managers), but they must be specified in the operating agreement.

Question 281

Each member (or manager, if the LLC is manager-man- aged) has ____ in the LLC’s management. A ____ vote of the members (or managers) is required to approve most (that is, ordinary business) decisions.

Answer 281

equal rights; majority

Question 282

Consistent with general agency law principles, each member of a member-managed LLC has authority to bind the company to contracts _____, unless the member lacks actual authority to do so and the other party to the contract has notice that the member lacks such authority.

Answer 282

apparently carrying on the ordinary business of the company

Question 283

A ____ vote of members (or managers if manager-managed) is required to approve extraordinary business decisions, including amending the operating agreement.

Answer 283

unanimous

Question 284

Although the R.U.L.L.C.A. is silent on the allocation of profits and losses among members (for tax purposes), it does provide that if an LLC makes any distribution to its members, the distribution must be _____. In most states, however, unless otherwise agreed, profits and losses and distributions are allocated on the basis of ____

Answer 284

made to the members in equal shares unless the operating agreement provides otherwise.

contributions.

Question 285

A member or transferee does not have a right
to demand or receive a distribution from the LLC in any form other than ____

Answer 285

money.

Question 286

Liability - LLC

Answer 286

• Members and managers generally are not personally liable for the LLC’s obligations = They have limited liability and can lose only the amount of their investments.
• However, courts may pierce the LLC veil of limited liability to reach the members’ and managers’ personal assets to satisfy LLC obligations under circumstances similar to those under which courts would pierce the veil of a corporation.
  –> Failure to observe corporate-type formalities (for example, having meetings, recording minutes, etc.) will not be a ground for piercing the LLC veil.

Question 287

The fiduciary duties owed by a member (if member-managed) or a manager (if manager-managed) to the LLC and to its other members
are ____. They must also discharge their duties and exercise any rights consistently with the _____

Answer 287

the fiduciary duties of care and loyalty

contractual obligation of good faith and fair dealing.

Question 288

Pursuant to the duty of loyalty in an LLC, a member (or manager if manager-managed) must:

Answer 288

(1) account to and hold for the LLC any benefit they derive from the LLC’s activities or from the appropriation of an LLC opportunity;
(2) 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
(3) refrain from competing with the LLC’s business.

Question 289

In an LLC after disclosure of all material facts, all of the members may ____ a specific act by a member (or manager if manager-managed) that would otherwise violate the duty of loyalty.

Answer 289

authorize or ratify

Question 289

Although both members and managers
must discharge their duties and exercise their rights in accordance with the contractual obligation of good faith and fair dealing, (1) only
the managers are subject to the duties of ____; and (2) only the members may ____

Answer 289

loyalty and care; authorize or ratify an act by a manager that would otherwise violate the duty of loyalty.

Question 290

TRANSFERABILITY OF OWNERSHIP INTERESTS in an LLC

Answer 290

Essentially, the partnership rule applies with respect to the transferability of ownership interests in an LLC—financial rights are unilaterally transferable, but management rights are not.

Question 291

One can become a member of an LLC(that is, management rights can be transferred) only with ____

Answer 291

the consent of all members or as provided in the
operating agreement.

Question 292

DISSOCIATION - LLC

Answer 292

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 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.

Question 293

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

Answer 293

(1) an event or circumstance that the operating agreement states causes dissolution;
(2) the consent of all the members; or
(3) the passage of 90 consecutive days during which the LLC has no members.

Question 294

A member may also apply for judicial dissolution of the LLC. A court may grant an application for judicial dissolution if:

Answer 294

a. The conduct of all or substantially all of the LLC’s activities is unlawful.
b. It is not reasonably practicable to carry on the company’s activities in conformity with the certificate of organization and the operating agreement.
c. The controlling members have acted, are acting, or will act in a manner that is illegal or fraudulent.
d. The controlling members 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 295

The secretary of state may dissolve an LLC administratively when ___

Answer 295

the LLC fails to submit a required fee or annual report.
-> The LLC may apply for a reinstatement after correcting the problem. If reinstated,
the LLC may resume its activities as if the administrative dissolution had never taken place.

Question 296

An LLC that has been dissolved continues its existence but is not allowed to carry on any business except that ____

Answer 296

which is appropriate to winding up its activities.

Question 297

A claim can be asserted against a dissolved LLC, even if the claim does not arise until after dissolution, to the extent of _____.

If the assets have been distributed to the members, a claim can be enforced against each member to the
extent of ____.

Answer 297

the LLC’s undistributed assets

the member’s proportionate share of the claim or to the extent of the assets distributed to him, whichever is less

Question 298

An LLC can cut short the time for bringing known claims by

Answer 298

• notifying claimants in writing of the dissolution and giving them a deadline of not less than 120 days in which to file their claim.
• The time for filing unknown claims can be limited to five years by publishing notice of the dissolution in a newspaper in the county where the LLC’s known place of business is located.

Question 299

Partnerships and LLCs are taxed on a ____

Answer 299

“pass-through” basis.

Question 300

RIGHTS TO INFORMATION - Member-Managed LLC

Answer 300

• In a member-managed LLC, a member has a right to inspect and copy any record concerning the LLC’s activities, financial condition, and so on, material to the member’s rights and duties.
• An LLC and its members must automatically furnish such information that they know
  is material to the exercise of a member’s rights and duties, unless they reasonably believe the member already knows the information.
  The LLC and its members must furnish other information on a member’s demand unless the demand is unreasonable or improper.

Question 301

RIGHTS TO INFORMATION - Manager-Managed LLC

Answer 301

• In a manager-managed LLC, the managers have the same right to information and duty to furnish information as members in a member-managed LLC.
• The members have a right to inspect and copy any record regarding the LLC’s activities, financial condition, and so on, as is just and reasonable if:
  (1) the member seeks the information for a purpose material to the member’s interest as a member;
  (2) the member makes a demand to the LLC describing with reasonable particularity the information sought and the purpose for seeking the information; and
  (3) the information sought is directly connected to the member’s purpose.

Question 302

MEMBERS’ ACTIONS AGAINST THE LLC

Answer 302

• A member who has been injured personally by his LLC can bring a direct action against the LLC to recover.
• A member may also bring a derivative action on behalf of the LLC if they make a demand on the other members (or managers), unless demand would be futile (demand would be futile if a majority of the members/managers were involved in the alleged wrong)
  –> A derivative action may be maintained only by a person who is a member at the time the action is commenced and who remains a member while the action continues.

Question 303

Members of a member-managed LLC and managers of a manager-managed LLC have a right to be indemnified for ____, provided that they complied with ____, and they also have a right to be ____ for expenses they incur on the company’s behalf

Answer 303

debts, obligations, and other liabilities incurred in the course of their activities on behalf of the company

the duties of loyalty and care

reimbursed

Question 304

A judgment creditor of a member or transferee of a member of an LLC may ____

Answer 304

charge (attach) the transferable interest of the judgment debtor to satisfy the judgment.