AGENCY AND PARTNERSHIP Flashcards
ISSUE: What type of business entity is Radiology Services? ANSWER: Radiology Services is a general partnership. Despite their intentions, Carol, Pat, and Jean never formed a limited liability company.
Under RUPA, as amended, a general partnership is formed whenever two or more persons associate (whether or not in writing) for the purpose of carrying on a business for profit. The association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership. Here, by agreeing to share profits and operate their radiology practice together, Carol, Jean, and Pat formed a general partnership, despite their intention to operate their business as a limited liability company. Furthermore, because the partnership was for neither a fixed term nor a specific undertaking, it was an “at-will” partnership.
A limited liability company is formed by the filing of a signed certificate of organization with the Secretary of State. Here, no certificate was signed or filed; thus, Carol, Jean, and Pat did not form a limited liability company.
[NOTE: Although some jurisdictions have recognized the “de facto” LLC doctrine where there has been a good-faith but failed attempt to form the LLC, this doctrine insulates members only from liability to third parties; it does not create an LLC as between the members themselves.]
ISSUE: Did Carol have the authority to purchase the imaging machine without the consent of Jean and Pat? ANSWER: Yes. Carol had the authority to purchase the imaging machine without the consent of Jean and Pat because it appears that Carol purchased the machine in the ordinary course of business and was unaware of Jean’s concerns about purchasing expensive imaging equipment.
Section 401(h) of RUPA, as amended, provides that “each partner has equal rights in the management and conduct of the partnership’s business.” This grant of authority to each partner is tempered by subsection 401(k), which provides: “A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the affirmative vote or consent of all the partners.”
As the comments to Section 401(h) note, the scope of a partner’s authority is governed by agency law principles. If the partnership agreement is silent on the scope of the agent-partner’s authority, a partner has actual authority to commit the partnership “to usual and customary matters, unless the partner has reason to know that (i) other partners might disagree, or (ii) for some other reason consultation with fellow partners is appropriate.” In light of this principle, a partner has authority to bind the partnership as to “usual and customary” dealings with third parties and need not seek the prior approval of the other partners unless the partner has reason to believe that the other partners might not approve or might expect to be consulted. Furthermore, under general agency law principles, a partner does not have actual authority to take “unusual or non-customary actions that will have a substantial effect on the partnership.”
Here, it appears that purchase of the equipment was in the ordinary course of business. The partners had purchased state-of-the-art imaging equipment when they started the practice, they had agreed to run the practice in a manner consistent with other area practices, and other practices had bought equipment like that which Carol purchased.
Further, although Jean had concerns about the practice purchasing expensive imaging machines, there is no indication that Carol was aware of Jean’s concerns when she made the purchase. The facts clearly state that Jean did not express her concerns to either Carol or Pat. Furthermore, the facts indicate that the three partners (including Jean) had agreed that the partnership would have imaging equipment that would allow it to be competitive with other similar practices in the community.
ISSUE: Did Jean’s statements to Carol constitute a withdrawal from Radiology Services? ANSWER: Yes. Jean’s oral statement to Carol, “I’m out of here,” resulted in Jean’s dissociation from the partnership.
Under RUPA, as amended, a partner is dissociated from a partnership when the partnership has notice of the partner’s will to withdraw as a partner. A partner can dissociate from the partnership at any time. The notice of the partner’s will to withdraw need not be in writing. The dissociation is rightful—that is, the dissociating partner has no obligations to the other partners—when the partnership is at will and the dissociation breaches no express provision in the partnership agreement. Under RUPA, as amended, “partnership at will” means a partnership in which the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking. A partner’s dissociation is wrongful in an at-will partnership only if it is in breach of an express provision of the partnership agreement.
Here, Jean’s statement to Carol that “I’m out of here and never coming back” constituted a dissociation, and it was not wrongful because there is no indication in this at-will partnership that her withdrawal breached any express provision in the partnership agreement.
ISSUE: Were Jean’s statements sufficient to entitle her to receive a buyout payment from Radiology Services for her interest in the practice? ANSWER: Yes. Because Carol and Pat agreed to continue the partnership, Jean’s dissociation did not result in the dissolution and winding up of the partnership. Instead, Jean is entitled to receive a buyout price for her partnership interest 120 days after she makes written demand for payment. Because her demand was not in writing, the partnership has no specified time in which to make payment.
Normally, a partner’s dissociation in an at-will partnership results in its dissolution, and the business must be wound up. But such dissolution can be rescinded by the affirmative vote or consent of all remaining partners. The RUPA permits the partners to “waive the right to have the partnership’s business wound up and the partnership terminated”. Under RUPA, as amended, the dissociating partner is no longer considered a partner and does not participate in this decision to continue the partnership. The term “partner” does not include a partner who dissociated under Section 601.
When a partnership is continued and not dissolved, the dissociating partner is entitled to have her interest purchased for a buyout price equal to that partner’s interest in the value of the partnership, based on the greater of its liquidation or going-concern value (plus interest from the date of dissociation). Further, if the withdrawing partner makes a written demand for payment and no agreement is reached within 120 days after the demand, the partnership must pay in cash the amount it estimates to be the buyout price, including accrued interest.
Here, although Jean made clear her will to withdraw, the partnership was not dissolved because Carol and Pat agreed to continue the partnership. Thus, Jean would be entitled to receive payment of a buyout price. Although Jean made an oral statement demanding payment for her interest, her demand was not in writing. Thus, the partnership does not have a specific time in which to pay the buyout price. But if Jean makes her demand in writing, the partnership would have to reach an agreement with her on the buyout price within 120 days or, failing this, pay her in cash its estimate of the buyout price plus accrued interest.
ISSUE: May a partner properly withdraw from a partnership that has no definite term or specific undertaking? ANSWER: Yes. The man’s email to the woman constituted a withdrawal from the partnership and did not violate the partnership agreement.
A partner may withdraw from a partnership by giving notice at any time. A partner is “disassociated” from a partnership upon the partnership having notice of the partner’s express will to withdraw. A partner always has the power to withdraw by express will, even if such withdrawal is wrongful or in contravention of the partnership agreement (such as early withdrawal from a partnership with a definite term). While a partnership cannot eliminate the power of a partner to dissociate, it can eliminate the right to dissociate and make such dissociation wrongful.
Dissolution is caused without any violation of the partnership agreement when, among other circumstances, a partner withdraws from an at-will partnership. In the absence of a definite term or particular undertaking, a partnership is deemed to be at will. Here, the man’s email to the woman constituted a withdrawal from the partnership and did not violate the partnership agreement, given that there is no indication that the partners (who had been carrying on the business for many years) had agreed on a definite term or particular undertaking for their natural-foods store partnership. Thus, the man’s withdrawal from their at-will partnership was proper.
ISSUE: What is the legal effect of a partner’s withdrawal from an at-will partnership— both on the partnership and on the withdrawing partner’s duties? ANSWER: The man’s withdrawal from the partnership caused the partnership to be dissolved, but did not terminate the man’s duties to the woman during the winding-up process.
Dissolution of a partnership results in a change in the legal relation of the partners, but does not immediately terminate the partnership or the rights and powers of the partners. Upon dissolution, the partnership continues until the winding up of partnership affairs is completed. Thus, dissolution marks the point when the partners cease carrying on the partnership business together and begin a process of settling the partnership affairs. The partners’ rights, powers, and duties continue during the winding-up process that follows dissolution, during which the partnership liabilities are paid, the business is settled and closed, and the partnership assets are distributed. The partners’ legal relationship and the partnership terminate only when all of the partnership affairs are completely wound up.
Under the Uniform Partnership Act (1914), a partnership at will is dissolved by the express will of any partner, and any partner of the dissolved partnership has the right to have the partnership business wound up. A similar result follows under the Revised Uniform Partnership Act, which provides that a partner in a partnership at will can dissociate from the partnership by that partner’s express will, and upon dissociation the partnership is dissolved and its business must be wound up. Here, although the man’s withdrawal (or dissociation) caused their at-will partnership to be dissolved, the man continued to have duties to the woman and the partnership during the winding-up process. Because the man’s withdrawal (dissociation) from the partnership was not wrongful, he had the power and the right to participate in the winding up of the partnership business, and his actions during that period bound the partnership
ISSUE: What are the duties of a withdrawing partner during the winding up of a dissolved partnership with respect to business opportunities that came to the partner’s attention during the partnership? ANSWER: During the winding-up process, the man owed the woman a fiduciary duty to account to the partnership for any benefit derived from the appropriation of a partnership opportunity, as well as duties of good faith and fair dealing. The man’s purchase of the building for himself, without telling the woman, breached these duties.
During the winding-up process, partners who participate in the winding up of partnership business continue to have a fiduciary relationship to the partnership and the other partners. Except for the duty not to compete with the partnership, all of a partner’s fiduciary duties continue to apply during the winding up of the partnership business.
Among the partner’s fiduciary duties is a duty to account to the partnership for any benefit derived by the partner from the appropriation of any partnership opportunities. The duty not to appropriate partnership opportunities continues during the winding-up process, although the scope of the partnership opportunities inevitably narrows. For example, a partner’s fiduciary duties in a dissolved partnership no longer extend to looking to the future of the business.
A partnership opportunity includes one that is closely related to the entity’s existing or prospective line of business, that would competitively advantage the partnership, and that the partnership has the financial ability, knowledge and experience to pursue. A partner who learns of a business opportunity during the term of a partnership may not appropriate that opportunity (without sharing with his co-partners) during the winding-up process or after the partnership term ends.
In addition, the partner must perform his duties during the winding up of the partnership business consistently with the contractual obligation of good faith and fair dealing. The obligations of good faith and fair dealing encompass a disclosure duty. For example, a dissociated partner may not use confidential partnership information after the dissociation. Here, the opportunity to purchase the building in which the store was located constituted a partnership opportunity. The partners’ prior interest in purchasing the building indicates that ownership of the building was an expectancy of the partnership, and there is no indication that the partnership lacked the financial resources to buy the building. Further, given the goodwill that the store had gained at its location, ownership of the building would likely be a partnership opportunity because owning and not having to lease the building would enhance the value of the partnership’s ongoing business. In fact, the man’s eagerness to purchase the building provides evidence that ownership of the building created value for the ongoing business of operating the natural-foods store at that location.
The man breached his fiduciary duty to the partnership and the woman by not informing the woman of the opportunity to purchase the building so that their partnership could have acquired the goodwill (customer loyalty) that attached to the building’s location. In addition, the man breached his duty of good faith and fair dealing by not informing the woman of this business opportunity. The man breached his duties to the partnership and the woman even though he did not begin negotiations for the building’s purchase and did not purchase the building until after withdrawing from the partnership. Courts have found a breach of fiduciary duties even when final negotiations and purchase of the partnership opportunity occur after
ISSUE: When an agent enters into a contract with a third party on behalf of a disclosed principal on terms that were not authorized by the principal, who is liable to the third party: the agent, the principal, or both? ANSWER: With respect to the chips, the woman (agent) is liable on the contract, but the inventor (principal) is not because the woman, notwithstanding her disclosure that she was acting as his agent, lacked actual or apparent authority to enter into the contract on behalf of the inventor with the chip manufacturer.
As a general matter, an agent binds a principal to a contract, whether or not the principal is disclosed to the third party, if the agent had either actual or apparent authority to enter into the contract. Without that authority, the agent alone is liable on the contract unless the principal becomes liable by subsequently ratifying the contract. An agent acting with authority is not liable on the contract if the principal’s identity is disclosed to the third party, but is liable if the principal’s identity is not disclosed or only partially disclosed, unless the contract provides otherwise. Applying these principles here, because the woman disclosed that she was acting for the inventor on the chip contract, but purchased different chips from those specified by the inventor, the inventor is not liable because the woman did not have authority to enter into the contract; the woman is also liable on the chip contract because she impliedly warranted that she had authority. Both the woman and the inventor are liable on the blue-lens contract. Although the woman did not disclose that she was acting for the inventor on the blue-lens contract, the inventor is liable on this contract because he had given the woman actual authority to buy the blue lenses on his behalf; the woman is also liable because she signed the contract in her own name. Finally, both the inventor and the woman are liable on the shutoff-switch contract that the woman entered into on behalf of the partially disclosed inventor, even though the switches were different from those authorized. The inventor became liable by ratifying the contract when he accepted the different switches, and the woman became liable by signing a contract on behalf of a partially disclosed principal.
When an agent enters into a contract with a third party on behalf of an undisclosed principal on terms authorized by the principal, who is liable to the third party if the principal later repudiates the contract: the agent, the principal, or both? ANSWER: Both the inventor and the woman are liable to the blue-lens manufacturer on the contract for blue lenses. The inventor is liable because the woman acted with actual authority; the woman is liable as a party to the contract because the principal was undisclosed.
As a general matter, an agent binds a principal to a contract, whether or not the principal is disclosed to the third party, if the agent had either actual or apparent authority to enter into the contract. Without that authority, the agent alone is liable on the contract unless the principal becomes liable by subsequently ratifying the contract. An agent acting with authority is not liable on the contract if the principal’s identity is disclosed to the third party, but is liable if the principal’s identity is not disclosed or only partially disclosed, unless the contract provides otherwise. Applying these principles here, because the woman disclosed that she was acting for the inventor on the chip contract, but purchased different chips from those specified by the inventor, the inventor is not liable because the woman did not have authority to enter into the contract; the woman is also liable on the chip contract because she impliedly warranted that she had authority. Both the woman and the inventor are liable on the blue-lens contract. Although the woman did not disclose that she was acting for the inventor on the blue-lens contract, the inventor is liable on this contract because he had given the woman actual authority to buy the blue lenses on his behalf; the woman is also liable because she signed the contract in her own name. Finally, both the inventor and the woman are liable on the shutoff-switch contract that the woman entered into on behalf of the partially disclosed inventor, even though the switches were different from those authorized. The inventor became liable by ratifying the contract when he accepted the different switches, and the woman became liable by signing a contract on behalf of a partially disclosed principal.
ISSUE: When an agent enters into a contract with a third party on behalf of a partially disclosed principal for goods different from those authorized by the principal, who is liable to the third party if the principal accepts the different goods: the agent, the principal, or both? ANSWER: Both the inventor and the woman are liable on the contract for the shutoff switches. The inventor is liable by ratifying the contract; the woman is liable because she acted on behalf of a partially disclosed principal, and there is no indication that the third party agreed to look solely to the partially disclosed principal for payment.
When a third party contracts with a person that the third party knows is acting in an agency capacity for another but the third party is unaware of the identity of the principal, the principal for whom the agent acts is called a “partially disclosed principal.” Here, the shutoff-switch manufacturer knew that the woman was acting as someone’s agent but there is nothing to indicate that the manufacturer was aware of the principal’s identity. Thus, the inventor is a “partially disclosed principal.” A partially disclosed principal can be liable on a contract entered into by an agent who had actual or apparent authority. Here, the woman acted without actual or apparent authority, so this cannot be the basis to hold the inventor liable on the contract.
On the other hand, even though the woman acted without actual or apparent authority, the inventor accepted the shutoff switches and used them in the production of the mowers. This amounts to a ratification of the contract between the woman and the switch manufacturer. Where the principal ratifies the act of an agent, the principal is liable on the contract just as if the agent had acted with actual authority. Ratification occurs if the principal’s conduct “justifies a reasonable assumption that” the principal consents to the act performed on the principal’s behalf. Here, the inventor’s use of the switches justifies a reasonable assumption of consent.
As for the woman, she is also liable on the contract. Unless the agent and the third party agree otherwise, an agent acting on behalf of a partially disclosed principal is a party to the contract if the agent acted with actual or apparent authority. Here, because of the inventor’s ratification of the contract, the woman is deemed to have acted with actual authority, and there is no indication that the manufacturer agreed to look solely to the partially disclosed principal for payment.
[NOTE: In addition, there is no requirement that the manufacturer “elect” either a remedy against the agent or a remedy against the principal where, as here, there is a partially disclosed principal. Thus, neither the inventor nor the woman can escape liability by making a demand on the manufacturer to make an election to take judgment against the other.]
ISSUE: Is LLP liable to the bank on the loan undertaken by a partner acting beyond his actual authority, but within the partnership’s ordinary course of business? ANSWER: Yes. LLP is liable to the bank on the loan because the man, as a partner of LLP, had apparent authority.
Even if a partner lacks actual authority, a limited liability partnership can be bound by the acts of a partner, “including the execution of an instrument in the partnership name,” if the partner was apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership. From the bank’s perspective, the man acting as a partner had apparent authority to incur the debt because borrowing $25,000 to pay for ordinary maintenance expenses of a multi-million-dollar apartment complex was entirely consistent with LLP’s ordinary business. This is evident from the facts that the partners anticipated the need for such loans when they formed the LLP, the LLP had previously borrowed from the bank for such maintenance expenses, and the bank had previously made similar loans to other apartment complexes.
Apparent authority did not exist, however, if the bank had actual knowledge that the man lacked authority. Under the RUPA (1997), a third party is bound by a limitation of authority only if that party knew or had notice that the partner lacked authority. Here, there are no facts suggesting that the bank had notice or knowledge of the limitation on authority. Knowledge is generally limited to actual knowledge, and “notice of a fact” arises from all the facts known to the person at the time in question. The bank asked the man if he had authority and the man, in response, gave the bank a copy of the partnership agreement containing no limits on his authority. The man did not give the bank a copy of the statement of partnership authority evidencing the man’s lack of actual authority. Nor did the bank have knowledge of this statement, which was never filed.
[NOTE: If an examinee concludes that borrowing $25,000 was not in the ordinary course of business, then the examinee must conclude that there was no apparent authority either.]
%] ISSUE: Is the woman personally liable to the bank on the loan it made to LLP? ANSWER: No. The woman is not personally liable to the bank on its claim under the loan agreement.
The woman is not personally liable to the bank on its claim under the loan agreement.
As a partner in LLP, the woman has limited liability for any partnership debts and thus is not liable to the bank. RUPA provides that a partner in a limited liability partnership is not liable for partnership obligations solely by reason of being or acting as a partner. The loan obligation arises out of contract, and thus the woman would not be liable for it unless there were some basis for asserting liability against her other than her being a partner.
Partners can become liable, however, for partnership obligations based on their own personal misconduct – the principles for piercing a corporate veil apply to limited liability partnerships. However, there is no indication of fraudulent or inequitable conduct by the woman that would justify liability for personal misconduct or piercing the entity veil.
[NOTE: Under some statutes, though not RUPA, partners in a limited liability partnership may also become liable for the negligence, wrongful acts or misconduct of any person under the partner’s direct supervision and control. Under this type of statute, the bank may argue that the woman failed to supervise the man when he entered into the loan without authority. There is nothing, however, to suggest that the man warranted supervision or that the woman was negligent for not supervising the man. Under RUPA, each partner has equal rights in the management and conduct of the partnership’s business. Thus, in a partnership, each partner is deemed to be the co-equal of the other partners, and no partner is under the control of the other partners.]
ISSUE: Did the man breach his fiduciary duties by entering into an unauthorized transaction and appropriating partnership assets for his own use? ANSWER: Yes. By improperly obtaining the bank loan and then misappropriating the loan proceeds, the man breached his fiduciary duty of loyalty and his duty of care.
Under RUPA, a partner owes to the partnership and the other partners the duties of loyalty and care. Partners are liable for damages to the partnership and co-partners for breach of these duties. Claims for breach of duties by partners in a limited liability partnership are not subject to the rule of limited liability applicable to claims by outside parties. Here, the man’s conduct breached his fiduciary duty of loyalty, as well as his broader duty of care.
The fiduciary duty of loyalty includes the obligation to refrain from appropriating partnership assets for personal use. A partner’s duty of loyalty includes the duty to account to the partnership for any property, profit, or benefit derived by the partner in the conduct of the partnership business. The man breached this duty by misappropriating the proceeds of the loan from the bank made to the partnership.
The duty of care, which is remediable in damages, includes a duty not to engage in intentional misconduct and knowing violations of law. The man breached this duty by not mentioning or providing the loan officer with the statement of partnership authority, which limited his ability to borrow more than $10,000 without the other partner’s consent.
ISSUE: If the man breached any fiduciary duties, does the woman and/or LLP have a claim against the man? ANSWER: Yes. The woman (or the partnership) can bring a direct action against the man for breaching his duties of loyalty and care. The woman can also bring an accounting action seeking to have the man pay damages to the partnership for his loyalty breach.
The duties of loyalty and care run to both the partnership and the other partners. Thus, the partnership can maintain an action against a partner for violating his fiduciary duties to the partnership and thus causing harm to the partnership. In addition, a partner can maintain an action against another partner, with or without an accounting, to enforce the partner’s rights under the partnership act, including an action for violations of duties.
Here, the woman can bring a direct action seeking to have the man make her whole for any losses to her caused by his misconduct that breached his duties of loyalty and care. She can also bring an accounting action to have the man account to the partnership for the money he took from the partnership. Although the partnership could seek damages for these breaches as well, in this two-person partnership it is unlikely that the man would agree to have the partnership sue him.
[NOTE: Some examinees might conclude that the woman can bring a direct action only for the man’s care breach, and the woman would have to pursue an accounting action with respect to the loyalty breach. Although this seems to have been the approach of RUPA (1997), this approach was abandoned in the 2013 revisions to ensure that partners can bring direct claims to protect their interests. Finally, some examinees might point out that derivative actions are not permitted on behalf of a partnership under RUPA or the UPA. This analysis does not affect the conclusion that the woman can bring a direct action against the man for breaching his duties of loyalty and care, given that both of these duties run to both the partnership and the other partners.]
