Agency & Partnerships

Question 1

Agency

Answer 1

Agency is a fiduciary relationship resulting from mutual consent by two parties, where one person acts on behalf of and subject to the control of another.

The parties involved are the principal, who consents for the other to act on their behalf, and the Agent, who consents to act on behalf of the principal.

Question 2

Actual Authority

Answer 2

(express authority) arises from the manifestations (words or conduct) of a principal to an agent that the agent has power to deal with others as a representative of the principle.

Question 3

An agent has actual authority if:

Answer 3

a reasonable person in the agent’s position would believe that the principal had authorized him to act

Question 4

Actual authority may be expressed or implied from:

Answer 4

the words used, customs, or relations between the parties.

A common type of implied actual authority is incidental authority to do acts reasonably necessary to accomplish an authorized transaction.

PRO TIP: Look at the agent’s mindset to determine whether express/actual authority is based on the agent’s reasonable interpretation of the principal’s words or conduct.

Question 5

Apparent Authority

Answer 5

Apparent authority arises from a manifestation of a principal to a third party (directly or indirectly) that another person is authorized to act as an agent for the principal.

Question 6

An agent has apparent authority in relation to a third party if:

Answer 6

the words or conduct of the principal would lead a reasonable person in the third party’s position to believe the principle had authorized the agent to so act.

Question 7

Apparent authority arises when:

Answer 7

a person represents that someone else is his agent when that is not the case, or, more commonly, creates or permits the creation of the impression that broad authority exists when it in fact does not

(The theory is that if a third person relies on the representation or appearance of authority, that person may hold the putative (supposed/believed) principal liable for the action of the putative agent.)

Question 8

To establish apparent authority, the third party must show that:

Answer 8

(1) it was reasonable for him to believe that the agent was authorized to act

(2) based on what the principal said or on the impression that principal created

Question 9

what if the principal is undisclosed?

Answer 9

This comes into play when an agent is dealing with a third party on behalf of a principal under circumstances in which the third party may not know that the agent is acting on behalf of someone else.

Question 10

A principal is disclosed if:

Answer 10

the third party knows, or has reason to know from the information on hand, the identity of the principal at the time the transaction is entered into.

(So, when a transaction is entered into on behalf of a disclosed principal, the principal becomes a party to that contract and the agent does NOT become a party to such a contract and is not liable. Why? Because the fucking principal runs the show!)

Question 11

An agent cannot be liable to a third party if:

Answer 11

1) he had authority to act and

(2) the principal is disclosed.

Question 12

Partially disclosed principal

Answer 12

A principal whose identity is unknown, but the third party is on notice that the agent is in fact acting on behalf of a principal.

(Generally, the partially disclosed principal becomes immediately bound to any authorized contracts entered into by the agent. However, the agent also becomes bound to the third party unless there is an agreement by the third party to look solely to the partially disclosed principal.)

Question 13

An agent may be liable to a third party if the third party:

Answer 13

(1) knows the agent is acting on behalf of a principal and

(2) does not know the identity of the third party.

Question 14

Undisclosed principal

Answer 14

A principal is undisclosed if the third party is not aware that the agent is acting on behalf of anyone when in fact the agent is acting on behalf of the principal.

Basically, the third party is dealing with the agent as though the agent is the sole party in interest. In this situation the agent is personally liable to the third person on any contracts negotiated by him since the third party believes he is dealing directly and solely with the agent as the real party in interest.

Also, an undisclosed principal is also liable on the contract to the third party if the agent was acting within the scope of actual authority.

Question 15

An agent is usually liable to a third party if:

Answer 15

the principal is completely undisclosed.

Question 16

RATIFICATION

Answer 16

Even if an agent acted without authority, a principal will be held liable if the agent purported to act on the principal’s behalf, and the principal (1) accepts the results (i.e., receives benefits) of the act with an intent to ratify and (2) with full knowledge of all the material terms or circumstances.

Question 17

Principal’s liability for an agent’s TORTS

Answer 17

The principal can be held vicariously liable for torts committed by an agent if

(1) there is a valid principal-agent relationship and

(2) the tort was committed within the scope of that relationship.

Question 18

Determining the scope of agency

Answer 18

The tort must be committed as part of the agent’s job duties.

The tort must occur during work hours, not during a “frolic” (an independent journey outside the scope of agency).

A “detour” (a brief departure from assigned tasks) is still within the scope of agency.

The agent’s conduct must be intended to benefit the principal, even partially.

Question 19

Generally, an agent’s actions are NOT within the scope of employment if they are:

Answer 19

Different from authorized acts.

Far beyond authorized time or space limits.

Too little actuated by a purpose to serve the principal.

Question 20

Generally, there’s no vicarious liability for independent contractors’ torts unless:

Answer 20

The work involves ultra-hazardous activity.

Estoppel (when a principal holds out an independent contractor with the appearance of agency).

There’s a non-delegable duty, meaning a duty that the principal can’t delegate to others. Some examples of non-delegable duties can include duties related to safety regulations, public policy, inherently dangerous activities, or where the duty is closely related to the principal’s potential liability.

Negligent hiring or supervision of the independent contractor

Question 21

Two Theories of Liability of Principal for Agent’s Torts

Answer 21

Respondeat Superior

Apparent Authority

Question 22

PRO TIP: Generally, intentional torts fall outside the scope of agency, with exceptions:

Answer 22

If the conduct was specifically authorized by the principal

If the conduct was part of the nature of employment

If the conduct was motivated by a desire to serve the principal

Question 23

General Partnership

Answer 23

A general partnership is an association of two or more persons carrying on as co-owners of a business for profit.

Question 24

The Profit-Sharing Presumption

Answer 24

Sharing profits leads to a presumption of a general partnership.

This presumption can be rebutted with evidence indicating no intent to create a partnership. (no right to control, no sharing of losses)

Question 25

Exceptions to Profit-Sharing Presumption include profits received as payment:

Answer 25

Of a debt

For services as an independent contractor

Of wages or other compensation to an employee

Of rent

Of an annuity

Of interest on a loan

For the sale of the goodwill of a business or other property.

Question 26

No formalities are required for forming a:

Answer 26

general partnership

It can be formed through actions and circumstances.

Question 27

Rights and obligations among partners

Answer 27

Partners may alter the default rights and obligations of a partnership through an express agreement.

Question 28

If no specific terms exist in a partnership agreement, the default rules under RUPA control:

Answer 28

Each partner has an account credited with their contributions and shares of profits and debited with their shares of losses and liability.

Partners share profits and losses equally, unless the partnership agreement states otherwise.

The partnership must reimburse a partner for payments made and liabilities incurred in the ordinary course of business or for the preservation of its business or property.

The partnership must also reimburse a partner for an advance to the partnership beyond the amount of capital the partner agreed to contribute.

Each partner has equal rights in the management and conduct of the partnership business.

Each partner has one vote, and majority rules for ordinary business decisions.

Unanimous consent is required for acts outside of the ordinary course of business or amendments to the partnership agreement.

A partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business.

Each partner has the right to inspect and copy the partnership books.

Question 29

Incoming Partners (General)

Answer 29

Unanimous consent is required for new partners, unless an agreement says otherwise.

A new partner isn’t personally liable for obligations incurred before they became a partner. Their investment in the firm (capital contributions) is at risk for existing partnership debts.

Question 30

Liability of Outgoing/Dissociated Partners (General)

Answer 30

A dissociated partner remains liable for partnership obligations incurred before their dissociation.

Question 31

A dissociated partner is also liable for transactions entered into by the partnership within 2 years of departure, if: (general)

Answer 31

The other party does not have notice of the partner’s dissociation, and

The other party reasonably believes that the dissociated partner is still a partner.

Question 32

Limited Partnership Formalities

Answer 32

Must have at least one general partner and one limited partner

A limited partnership certificate must be filed with the Secretary of State. This certificate includes the partnership’s name, address of the agent for service of process, and the name and business address of each general partner.

Partners may contribute cash, property, or services to the partnership as their hazing process to become a partner.

If a partner does not fulfill the required contribution, the partnership may demand cash or other contributions.

Question 33

Profits and Losses (Limited Partnerships)

Answer 33

Profits and losses are determined by the partnership agreement.

If the agreement is silent, they are allocated proportionally based on the value of the partners’ individual contributions.

Question 34

Rights and Liabilities of General Partners (Limited Partnerships)

Answer 34

Right to manage the partnership.

Right to vote on any matter.

Personally liable for the debts and obligations of the limited partnership.

Question 35

Rights and Liabilities of Limited Partners

Answer 35

No right to manage the partnership.

Right to vote on specific matters.

Right to obtain partnership information (inspection of partnership records, obtaining partnership information from general partners)

Right to render derivative action

Not personally liable for the partnership’s debts and obligations, except in certain situations (if the **limited partner is also a general partner, if the limited partner participates in control of the business, or if the limited partner knowingly allows their name to be used in the partnership name)

Question 36

Can a partnership interest be assigned?

Answer 36

YES

A partnership interest is personal property and can be assigned in whole or in part by both general and limited partners.

Assignment does not dissolve the limited partnership or entitle the assignee to become or exercise any rights of a partner, but it does entitle the assignee to receive distributions that the assignor would be entitled to.

Question 37

Withdrawal from the Limited Partnership

Answer 37

General partners can withdraw at any time by providing written notice to the other partners

Limited partners can withdraw with not less than six months prior written notice to each general partner.

Question 38

Partnership Property: Ownership

Answer 38

Property acquired by a partnership belongs to the partnership, not the individual partners.

Question 39

Partnership Property: Usage

Answer 39

Partners may only use or possess partnership property on behalf of the partnership.

Question 40

Partnership Property: Classification of Property

Answer 40

The method of acquisition helps to determine whether the property is partnership or personal property. Partnership funds used to acquire property make it partnership property, while personal funds used make it personal property.

Question 41

Partnership Property: Titled Property

Answer 41

According to RUPA, titled property is considered partnership property if it’s titled in the partnership’s name or in one or more partners’ names with an indication of their capacity as partners. Even without a title, property is presumed to be partnership property if purchased with partnership assets.

Question 42

Partnership Property: Untitled Property

Answer 42

For untitled real or personal property, courts look to various factors to classify it as either partnership or separate property. These factors include how the property was acquired, its use, its appearance on the partnership balance sheet, and whether partnership funds were used for its improvement or maintenance.

Question 43

Partnership Property: Transfer of Property

Answer 43

Individual partners can’t transfer partnership assets without the authority of the partnership. They also can’t use partnership property unless it benefits the partnership.

Question 44

Partnership Property: Partnership Interest

Answer 44

A partner’s share of the profits and surplus is considered personal property, which can be transferred to third parties without affecting partnership assets.

Question 45

Rights of Successors (Limited)

Answer 45

Upon the death or withdrawal of a partner, successors have the right to join the partnership

(1) if allowed by the partnership agreement or

(2) if all existing partners consent.

If the successor doesn’t join, they’re entitled to a share of compensation the deceased or withdrawn partner would have received.

Question 46

Rights of Assignees (Limited)

Answer 46

An assignee can become a limited partner if (1) there’s an agreement between the assignor and assignee, or

(2) if all partners consent. The assignee is entitled to the distributions and allocations of profits and losses to which the assignor was entitled. Upon assignment of their entire interest, the partner loses their rights as a partner.

Question 47

DISSOCIATION (Limited)

Answer 47

Dissociation refers to a partner no longer being associated with the partnership.

Dissociation does NOT necessarily cause dissolution or the ending of the partnership business.

A partner can dissociate at any time, either rightfully or wrongfully.

Question 48

A wrongful dissociation is:

Answer 48

one that breaches the partnership agreement.

A partner who wrongfully dissociates is liable to the partnership and the other partners for damages caused by the dissociation.

Question 49

Upon dissociation, the dissociated partner loses their:

Answer 49

right to participate in the management.

The partnership is required to buyout the dissociated partner’s interest and indemnify them against all known debts and liabilities.

REMEMBER: For two years after dissociation, the partnership is still bound by the acts of the dissociated partner if a third party reasonably believed the dissociated partner was still a partner and had no knowledge of the dissociation.

Question 50

Dissolution

Answer 50

Dissolution is the process that leads to the ending of the partnership… followed by winding up the business.

A partnership is dissolved, and its business must be wound up upon the occurrence of several events. For example, a partner’s express will to withdraw, the death or wrongful dissociation of a partner, the occurrence of a specified event in the partnership agreement, a change in law rendering the business unlawful, or a court order stating that the business can’t continue in conformity with the partnership agreement.

Question 51

The partnership continues after dissolution only for

Answer 51

the purpose of winding up the business. The partnership is terminated when the winding up of the business is completed.

Question 52

Winding Up a GENERAL PARTNERSHIP

Answer 52

This is the period between dissolution and termination in which the remaining partners liquidate partnership assets and satisfy partnership debts.

All partnership assets are reduced to cash and the partnership’s liabilities are paid to creditors, then partners’ accounts.

Question 53

Distributing assets during liquidation…. who gets stuff first?

Answer 53

Payment to Creditors: This includes both outside creditors and partners who have lent money to the partnership. These debts must be paid off first. This can include banks, vendors, suppliers, or any other party to whom the partnership owes money.

Return of Capital Contributions: Once the debts to creditors are paid, the next step is to return the capital contributions to the partners. This is essentially refunding the initial investment the partners made to start or operate the partnership.

Distribution of Profits: Finally, once the debts have been paid and capital contributions returned, any remaining funds (the beautiful fruits of one’s labor) are distributed among the partners. The distribution is generally in accordance with the partnership agreement, or if there isn’t an agreement specifying this, it is typically distributed equally among the partners or equal to the amount that each partner contributed.