Agency and Partnerships

Question 1

Creation of an agency relationship

Answer 1

Definition – Agency is a fiduciary relationship, where a person or entity (the agent) acts on behalf of another (the principal).
Elements – An agency relationship exists if there is:
1) Assent – a formal or informal agreement;
2) Benefit – the conduct primarily benefits the principal; AND
3) Control – the principal has the right to control the agent (control doesn’t need to be significant).
*The characterization of the relationship by the parties is irrelevant.

Question 2

Types of agency relationships

Answer 2

Universal Agent – has broad authority, authorized for ALL acts the principal can
perform.
− General Agent – has authority to conduct a series of transactions over a period of time.
− Special Agent – has limited authority either for a specific act/transaction OR a specified period of time.

Question 3

Termination of agency relationship (MEDI)

Answer 3

An agency relationship terminates by:
a) A manifestation by either party that the relationship is terminated;
b) Expiration of a specified term of authority;
c) Death of principal or agent (by operation of law);
OR
d) Incapacity of the principal or agent (by operation of law) – except if a durable power of
attorney exists

Question 4

Death of Principa

Answer 4

Common Law → agency is terminated regardless of whether the third-party has notice of principal’s death.
Some States → NOT terminated until the third-party has notice of the death.

Question 5

Agency contracts

Answer 5

Agency Contracts – Principal can terminate the agent at any time.
− BUT, principal may be liable for damages if agent is terminated prior to the expiration of a contract (unless the agent materially breached contract).

Question 6

Actual authority

Answer 6

A principal is bound to a contract entered into by its agent if the agent had actual authority.
Two Types – occurs if:
Express Authority → by principal’s explicit directions to the agent (either orally or in writing).

Implied Authority → either:
a) Action is necessary to carry out the agent’s express authorized duties;
b) Agent acted similarly in prior dealings with the principal; OR
c) It’s customary for an agent in that position (silence/acquiescence can give rise to a
reasonable belief of authority in the future).

An agent has actual authority when acting within their reasonable understanding of authority, even if

Question 7

Apparent authority

Answer 7

A principal is bound to a contract entered into by its agent if the agent had apparent
authority.
Apparent Authority exists when:
1) A third-party reasonably believes the agent has authority to act on behalf of the principal;
AND
2) That belief is traceable from the principal’s manifestations (principal holds the agent out as having authority).

Question 8

A principal holds an agent out as having authority if:

Answer 8

principal:
a) gives a position or title indicating authority;
b) previously held the agent out and did not publish a revocation; OR
c) cloaked the agent with the appearance of authority.
*Continues until the principal communicates termination to third-parties.

Question 9

Apparent authority is not applicable if:

Answer 9

Apparent Authority is NOT applicable if:
a) the third-party had knowledge that the agent did not have actual authority; OR
b) the transaction was not within the ordinary usages of business.

Question 10

Unidentified/partially disclosed principal

Answer 10

Apparent Authority CAN exist.

Question 11

Undisclosed principal

Answer 11

Apparent Authority CANNOT exist.

Question 12

Ratification

Answer 12

Makes the principal liable for an agent’s contract entered into without authority.
Ratification occurs when the Principal:
1) Has knowledge of all material facts or contract terms; AND
2) Assents (approves) to the same through words or conduct.

*Agent also remains liable if principal was not disclosed.
Rest. 2nd → Undisclosed principal CANNOT ratify.
Rest. 3rd → Undisclosed principal CAN ratify

Question 13

Agent’s contractual liability

Answer 13

Generally, an agent has NO liability if they:
1) Fully disclose the principal to a third-party; AND
2) Have actual or apparent authority.

Agent will be liable if both elements above are not met.

Agent may seek Indemnification from a principal if:
1) agent is liable; AND
2) his conduct was authorized.

Question 14

Employee v. independent contractor

Answer 14

Primary focus is whether the principal had the right to control the manner and method in which the job was performed.

Factors → courts analyze the following to determine if a person is an employee or independent contractor:
1) type of work;
2) pay (hourly vs. per project);
3) who supplied the equipment/tools;
4) degree of supervision;
5) degree of skill required;
6) if the work benefits the employer’s business;
7) extent of principal’s control over work details;
8) whether agent/contractor is engaged in a distinct business;
9) length of time employed/engaged;
10) characterization & belief of relationship; and
11) whether agent was hired for a business purpose.

Question 15

Respondeat superior doctrine

Answer 15

An employer is liable for an employee’s negligent acts if the employee was acting within the scope of the employment.

Employee acts within Scope of Employment when:
a) Performing work assigned by the employer; OR
b) Engaging in a course of conduct subject to the employer’s control.

Question 16

Time place purpose test

Answer 16

To determine the scope of employment, courts analyze whether the conduct:
i) Is of the kind the employee is employed to perform;
ii) Occurs substantially within the authorized time and space limits; and
iii) Is motivated (in whole or part) to serve the employer.

Question 17

Respondeat superior: intentional torts

Answer 17

are generally outside the scope.

EXCEPTIONS:
a) Act was specifically authorized by employer;
b) Act was driven by a desire to serve employer; OR
c) Act was the result of naturally occurring friction from the type of employment.

Question 18

Not within the scope of employment

Answer 18

Conduct is NOT within the scope if it’s unrelated and not intended to serve any purpose of the employer.
− BUT see exception below.

Question 19

Liability for independant contractors

Answer 19

Generally, an employer/principal has NO liability for an Independent Contractor’s torts.

Exceptions:
1) Inherently Dangerous Activities.
2) Non-delegable duty owed by principal.
3) Estoppel – the principal holds out the contractor as his agent, third-party reasonably relied on contractor’s skill, and the third-party suffered harm.

Question 20

Duties owed by agent to the principal

Answer 20

1) Duty of Care → duty to use reasonable care when performing agent’s duties.
2) Duty of Loyalty → duty to act solely and loyally for the principal’s benefit.
3) Duty of Obedience → duty to obey all reasonable directions of the principal.

Question 21

UPA

Answer 21

Uniform Partnership Act

Question 22

RUPA

Answer 22

Revised Uniform Partnership Act

Question 23

ULPA

Answer 23

Uniform Limited Partnership Act

Question 24

RULPA

Answer 24

Revised Uniform Limited Partnership Act

Question 25

General partnership

Answer 25

is created when:
1) two or more persons;
2) as co-owners;
3) carry on a business for profit.

*Intent to form a partnership is NOT required.

A joint venture or sharing in gross profits DOES NOT automatically create a partnership.

Question 26

Creditor v. Partner

Answer 26

person who receives a share of the profits is presumed to be a partner UNLESS the payment is received in payment:
a) of a debt;
b) for wages as an employee or independent contractor;
c) of rent;
d) of an annuity or retirement benefit;
e) of interest/loan charges; OR
f) for the sale of goodwill of a business.

Question 27

Limited partnerships

Answer 27

is composed of limited partner(s) AND at least one general partner.

Formation – An LP is formed upon filing a Certificate of Limited Partnership with the Secretary of State, which must include:
1) name of Pship;
2) address of Pship’s principal office;
3) name & address of Pship’s registered agent;
4) name & address of each general partner;
5) whether the Pship is an LLLP; AND
6) signed by all general partners.

Question 28

Limited liability partnership

Answer 28

In an LLP, all partners have limited personal liability.

To Become an LLP:
1) It must be approved by the same vote necessary to amend the Pship Agreement; AND
2) A Statement of Qualification must be filed with the Secretary of State containing:
i. name and address of Pship;
ii. statement that the Pship elects to become an LLP; and
iii. a deferred effective date (if any).

Filing DOES NOT create a new partnership (if a GP or LP existed prior to filing).
− The Pship remains liable for any obligations before it became an LLP.

Question 29

Amending the partnership agreement

Answer 29

Unless agreed otherwise, the Pship agreement may be amended at any time with a unanimous vote.

Question 30

Authority to bind the partnership

Answer 30

A partner is an agent of the Pship, and generally has authority to bind the Pship for its business (including contracts).
− To bind the Pship, the partner MUST have authority.

Question 31

Express actual authority

Answer 31

A partner receives such authority from the partners.
− Differences among partners for Acts within the ordinary course of business → must be
approved by a majority of the partners.
− Acts outside the ordinary course of business → must be approved unanimously.
− If Pship Agreement is silent → a partner has authority for usual & customary matters

UNLESS he knows: (a) other partners might disagree, or (b) that consultation is appropriate.

Question 32

Ordinary course of business

Answer 32

normal and necessary for managing the business.

Question 33

Implied actual authority

Answer 33

A partner may take actions reasonably incidental or necessary to achieve the partner’s authorized duties.

Question 34

Apparent authority of partners

Answer 34

A partner has apparent authority for acts:
a) conducted within the ordinary course of the Pship business; OR
b) of the kind carried on by the Pship.

BUT, a partner’s act will NOT bind the Pship when the:
1) Partner lacked authority; AND
2) Third-party knew (or received notice) of a lack of authority.

*For acts outside the scope of business → need a manifestation by Pship that partner had authority in order to be binding.

Question 35

Authority to bind the partnership after dissolution

Answer 35

A partner’s authority is limited after dissolution.

Actual Authority → limited only to acts appropriate for winding up the business.

Apparent Authority → a partner has apparent authority to bind the Pship if the:
1) Partner’s acts would have normally bound the Pship; AND
2) Third-party did not have notice of dissolution

Question 36

Liability of general partners

Answer 36

Personal Liability → General partners are personally liable for ALL obligations of the Pship UNLESS: (a) otherwise agreed by claimant; or (b) provided by law.
− UPA (1997) → partners are jointly and severally liable.
− UPA (1914) → partners are jointly liable.

Question 37

Liability of incoming partners

Answer 37

Partners admitted into an existing partnership are NOT liable for obligations incurred prior to their admission.
− BUT, incoming partners risk losing their capital contributions to the Pship

Question 38

Judgement enforcement against a partner’s personal assets

Answer 38

A judgment against the Pship is NOT a judgment against the individual partner(s).
− BUT, a judgment may be sought against the Pship and individual partners in the same action.

Generally, a judgment creditor CANNOT levy execution of a judgment for a Pship debt against a partner unless:
1) The partner is found personally liable;
2) A judgment is rendered against the partner; AND
3) Pship assets are exhausted/insufficient to satisfy the judgment.

Question 39

Liability of limited partners

Answer 39

Limited partners are NOT personally liable for obligations of the LP.
Exceptions:
a) Liable for their own misconduct;
b) At risk of losing their capital contribution to the Pship; OR
c) May become personally liable if the partner participates in management (depends on the jurisdiction).

Question 40

Sharing of profits and losses

Answer 40

Unless otherwise agreed, profits are shared equally and losses are shared in the same ratio as profits.
− Any partner who pays more than his fair share in losses is entitled to contribution from the other partners.

Question 41

Right to management and control

Answer 41

Unless otherwise agreed, each partner has equal rights in the management and control of the business.
− A disagreement for ordinary Pship business need only be approved by a majority of the
partners.
− Acts outside the ordinary course of business MUST be approved unanimously.

Question 42

Liability of limited liability partners

Answer 42

Under RUPA, a partner in an LLP is NOT liable for partnership
obligations.
But a partner in an LLP is liable:
a) for their own misconduct;
b) when the partner signs a personal guarantee for an obligation; OR
c) for obligations incurred before the Pship became an LLP.

Question 43

Transfer of partnership ownership

Answer 43

A partner can only transfer:
1) his interest in the share of profits and losses; AND
2) the right to receive distributions.

Any other rights CANNOT be transferred, unless the partnership agreement provides otherwise.
− ALL partners MUST CONSENT for an assignee of a partnership interest to become a partner.

Question 44

Right to partnership property

Answer 44

All property acquired by a Pship (or with Pship assets) is owned by thePship, not the partners individually.
− Partners have an equal right to use property for Pship purposes.
− Personal use of Pship property requires the consent of the other partners.

Property acquired in the name of the partner is presumed to be separate property as long as:
1) no Pship assets are used to acquire it; AND
2) title to the property does not reference the Pship.

Judgment Solely Against a Partner → CANNOT be satisfied with Pship property because the partner has no ownership interest in Pship property.
− However, a creditor may seize the partner’s financial interest in the Pship.

Question 45

Advance of funds and reimbursement

Answer 45

Pship MUST reimburse a partner for an advance to the Pship beyond their capital contribution amount.
− For Reimbursement → (1) payment must be in proper course of Pship business, AND (2) partner must comply with duty of care & loyalty.

Question 46

Management and control in LP

Answer 46

General Partner → Has full management rights and control.
Limited Partner → Has NO say or control as to how the LP is run, and DOES NOT have the right to manage or control day-to-day business.
− Generally, they are passive and have voting rights only in extraordinary situations (i.e. sale of Pship or all its assets, amending Pship agreement, or admitting a new partner).

Question 47

LP’s right to inspect records

Answer 47

RULPA → Limited partners have the right to inspect and copy records the LP is legally required to keep.

Upon reasonable demand, a limited partner may obtain:
1) True and full info regarding the state of the business and financial condition;
2) LP’s tax returns; and
3) Any info that’s just and reasonable.

*These rights may be exercised for any purpose.

Question 48

Duty of care

Answer 48

A partner owes the fiduciary duty of care to the Pship and other partners.

Under RUPA, a partner only breaches the duty of care if he engages in:
a) Grossly negligent or reckless conduct;
b) Intentional misconduct; OR
c) A knowing violation of law.

*If a partner breaches, he may be held personally liable to the Pship for any losses.
A breach of the duty has been found in the following situations:
▪ Violating an agreement or policy of the Pship.
▪ Failing to thoroughly investigate facts before entering into contracts (if it’s gross negligence).
▪ Acting outside the scope of Pship business without the consent of the other partners.

Question 49

Duty of loyalty

Answer 49

A partner owes the fiduciary duty of loyalty to the Pship and other partners. This requires a partner to act in the best interests of the Pship.

Under RUPA, a partner must:
1) Account for any property, profit, or benefit derived from Pship property or business (including refraining from appropriating Pship assets);
2) Not have an interest adverse to the Pship (a conflict of interest); AND
3) Not compete with the Pship (unless agreed otherwise).

If a partner breaches, he may be held personally liable to the Pship for any losses.

BUT, a partner is NOT liable if:
1) He fully discloses information; AND
2) Either:
a) the Pship agreement is amended; OR
b) all partners consent.

If reasonable, the Pship agreement MAY eliminate or alter a duty of loyalty.

Fiduciary duties apply during dissolution (except the duty not to compete).

Question 50

Partnership Opportunity (LAP)

Answer 50

is one that:
1) is closely related to the Pship’s existing or prospective line of business;
2) would competitively advantage the Pship;
AND
3) the Pship has the financial ability, knowledge, and experience to pursue.

Question 51

Duty to provide full information

Answer 51

UPA → Partners shall render (on demand by any partner) true and full information of all things affecting the Pship.
RUPA → Partners shall disclose (without demand) full information concerning the Pship’s business and affairs.

If a partner breaches this duty, he may be held personally liable to the Pship for any losses.

Question 52

Dissociation (withdrawal of a partner)

Answer 52

A partner may dissociate (withdraw) from the Pship at any time upon notice.

Question 53

Dissociation events

Answer 53

A partner becomes dissociated from the Pship upon:
a) The partner providing notice of their express will to withdraw;
b) The occurrence of an agreed upon event;
c) Expulsion pursuant to the Pship agreement;
d) Expulsion by unanimous vote if it’s (i) unlawful to carry on the business with that partner or (ii) he transferred all of his Pship interest (other than
for security purposes);
e) Judicial expulsion;
f) Bankruptcy;
g) Incapacity or death;
h) Appointment of a personal representative or receiver; OR
i) Termination of an entity partner (who is not an individual, pship, corporation, trust, or estate).

Question 54

Wrongful dissociation

Answer 54

Dissociation is deemed wrongful if:
a) It’s in breach of an express provision of the Pship agreement; OR
b) Before the completion of an agreed upon term or undertaking.
*A wrongfully dissociated partner CANNOT participate in management or the winding up process.

A partner may be liable to the Pship (and other partners) for damages caused by his wrongful dissociation.

Question 55

Dissolution of a general partnership

Answer 55

Dissolution Events – Unless agreed otherwise, dissolution occurs upon:
a) Notice of a partner’s express will to withdraw;
b) Occurrence of an agreed upon event;
c) The business becoming unlawful; OR
d) Judicial dissolution.

Dissolution of a Pship for a Definite Term occurs:
a) within 90-days after a partner’s dissociation by death or wrongful dissociation, if it’s the express will of at least half of the remaining partners to wind up (rightful dissociation constitutes the expression of the partner’s will to wind-up);
b) upon the express will of all partners to wind up; OR
c) upon the expiration of the term or completion of the Pship’s purpose.

Question 56

Does dissociation cause dissolution?

Answer 56

Under RUPA (2013):
− Dissolution may be rescinded by the affirmative vote or consent of ALL remaining
partners to continue the business.
− Buyout → In such instance, the dissociated partner is entitled to a buyout of their interest (value of interest = greater of liquidation or going concern value + interest).

*Apply RUPA (2013) unless instructed otherwise.

Under RUPA (1997):
− If wrongful dissociation → ALL remaining partners may waive their right to windup/
terminate the Pship, and instead choose to continue the Pship by buying out the dissociated partner’s interest.
− If rightful dissociation → The dissociated partner is allowed to vote on whether to waive winding-up and termination of the Pship.
Regardless, the other partners MAY choose to continue the business for a reasonable amount of time.

Under UPA (1914) → The Pship MUST be wound up and terminated (regardless if rightful or wrongful).
− But, all partners who did not wrongfully cause dissolution may choose to continue the business in the same name.

Question 57

Dissolution vs. Winding Up vs. Termination:

Answer 57

− Dissolution → Occurs upon the occurrence of any specified statutory event (see above).
− Winding Up → Is the period between dissolution and termination, in which assets are liquidated to satisfy creditors.
− Termination → Occurs when the winding up process is complete. The real end of the Pship, in which the Pship ceases to exist

Question 58

Distribution of partnership assets

Answer 58

During the winding up process, the Pship assets are converted to cash and distributed in the following order:
1) Outside creditors.
2) Inside creditors (partners who loaned money to the Pship).
3) Partner’s capital contributions.
4) Any remaining profits or surplus goes to the partners equally (unless agreed otherwise).
*If there are insufficient assets to satisfy creditors, the loss will be divided among the partners.