Agency & Partnerships Flashcards

1
Q

Consent

Liability in Contract and Actual Authority

A

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.

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2
Q

On Behalf of

Liability in Contract and Actual Authority

A

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.

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3
Q

Capacity

Liability in Contract - Creation of Agency Relaitionship

A

Principal Must Have Contractual Capacity

A principal must have contractual capacity (because the contract that results is between the principal and the third party). Thus, a minor’s appointment of an agent is voidable.

Agent Needs Only Minimal Capacity

While a principal needs contractual capacity, an agent doesn’t (the agent is just an intermediary). So a person may be an agent even though they have no contractual capacity.

Disqualification of Agents

An agent may be disqualified for representing both parties or failing to have a required license.

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4
Q

Formalities

Liability in Contract - Creation of Agency Relaitionship

A

Consent

Remember, consent of both parties is required.

Writing

Generally, agency law doesn’t require the appointment of an agent to be in writing. However, the Statute of Frauds may require one. In Georgia, if the Statute of Frauds requires a contract to be in writing, the agent’s authority to enter into the contract must also be in writing. This is called an equal dignities rule. Note that a contract to find a buyer (that is, a typical agreement with a real estate agent) does not fall within this rule.

Consideration Not Required

No consideration is necessary for the creation of an agency relationship (that is, one may agree to serve as an agent gratuitously and be saddled with the duties of an agent).

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5
Q

Modes of Creating Agency Relationship

Liability in Contract - Creation of Agency Relaitionship

A

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

By Act of Parties

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.

By Operation of Law—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).

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6
Q

Contract Liability - Actual Authority

Liability in Contract and Actual Authority

A

An agent has the power to bind a principal to a contract the agent enters on the principal’s behalf only if the agent acted with authority. There are 3 types of authority: actual, apparent, and ratified. When deciding whether a principal will be bound on an agent’s contract, it should first be determined whether the agent had actual authority. If they did not, look to see whether apparent authority was present. Ratified authority comes into play only if the principal grants authority after the contract is made.

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7
Q

Creation of Actual Authority

Liability in Contract and Actual Authority

A

Actual authority is authority that the agent reasonably believes they possess based on the principal’s dealings with them. Put differently, if the principal’s words or conduct would lead a reasonable person in the agent’s position to believe that the agent has authority to act on the principal’s behalf, the agent has actual authority to bind the principal. Actual authority may be express or implied.

Express

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). For example, this might look like a principal expressly telling an agent to act on the principal’s behalf. This authority is effective even if it was granted mistakenly or because of misrepresentation.

  • All or Nothing: When determining whether an agent acted with authority in entering a contract for a principal, note that this is an all or nothing issue—they had authority or not.

Implied

Implied authority is authority the agent reasonably believes they have as a result of the principal’s words or actions. It’s when the principal’s conduct leads the agent to believe the agent has authority. It includes authority:

  • 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

Note: The notion that title or position conveys authority can also be used to establish actual authority to the extent that the agent reasonably believes that they have authority to act based on the title or position given to them by the principal.

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8
Q

Termination of Actual Authority

Liability in Contract and Actual Authority

A

If you have determined that a principal granted an agent express or implied authority to enter a contract for the principal, before finalizing your conclusion that the principal will be bound, you need to ensure that the authority was not terminated before the contract was made.

How Termination May Occur

Termination or revocation of actual authority occurs by:

  • 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 (for example, an agent acquires an adverse interest such as by joining a competitor)
  • 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)

Irrevocable Agencies

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.

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9
Q

Delegation

Liability in Contract and Actual Authority

A

Delegation of authority is possible if the principal consents. Consent may be express or implied from the circumstances.

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10
Q

Apparent Authority

Contract Liability - Substitutes for Actual Authority

A

Basic Theory

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). Put differently, if the principal’s words or conduct would lead a reasonable person in the third party’s position to believe that the agent has authority to act on the principal’s behalf, the agent has apparent authority to bind the principal. This is based on estoppel principles.

  • Compare–Actual vs. Apparent Authority: Actual authority is based on the principal’s manifestations (words or conduct) and how they affect the reasonable agent. Apparent authority is based on the principal’s manifestations (words or conduct) and how they affect the reasonable third party. So the reasonable belief must be created by the principal, not by the agent alone. Remember, apparent authority can exist even when actual authority does not!

Types of Apparent Authority

  • When Agent Exceeds Actual Authority: There are situations where the agent exceeds their authority, yet the principal is still bound.
  • —Prior Act: If 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.
  • —Power of Position: Apparent authority may be established through an agent’s title or position. Indeed, 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.
  • When Agent Has No Actual Authority: Generally, if an agent did not have any actual authority when they entered a contract for a principal, the principal will not be bound by the agent’s acts. However, there are certain situations in which the principal may be bound.
  • —Lingering Apparent Authority: Remember, apparent authority can exist even when actual authority doesn’t. Similarly, apparent authority can linger after actual authority ends.
  • Notice May Be Necessary: 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 the third parties receive either actual or constructive notice of the termination.
  • Writing Manifesting Authority: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 the principal recovers the written authority.
  • —Unilateral Agent Representations: Generally, a principal won’t 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. This is because apparent authority is based on the principal’s manifestations to a third party. Thus, generally apparent authority can’t be created by the mere representations of an agent or other actor.
  • Exception—Impostors: If the principal negligently permits an impostor to be in a position to appear to have agency authority, the principal may be liable for the impostor’s actions based on estoppel principles.
  • Inherent Authority (Inherent Agency Power): 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. Examples of inherent authority include:
  • —Respondeat Superior: Under the doctrine of respondeat superior, the principal is held liable for the torts 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.

Improper Disposition of Goods

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

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11
Q

Ratification

Contract Liability - Substitutes for Actual Authority

A

Effect of Ratification

An agency relationship is created by ratification when 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. In other words, even if the “agent” had no authority at the time of entering into the contract, the “principal” will still be bound by the “agent’s” actions if the “principal” ratifies the contract. Ratification effectively serves as a substitute for before-the-transaction authority. It gives the transaction retroactive 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. Upon ratification, the “agent” is relieved of liability for breach of duty.

How to Ratify

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.

Requirements for Ratification

For ratification to occur, the “principal” must:

  • 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 or ratify and disavow a misrepresentation the “agent” made) AND
  • Have capacity (be competent and of legal age) both at the time of ratification and at the time of the original contract (because ratification is retroactive)

Note: Ratification is a unilateral act of the “principal” and requires no consideration.

Intervening Rights

Since ratification is retroactive, we must protect the intervening rights of a bona fide purchaser (“BFP”).

What May Be Ratified and by Whom

Generally, a “principal” may ratify anything unless: (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. Note that an undisclosed “principal” (one whose existence and identity is withheld from the third party) may not ratify. Only disclosed (existence and identity of the principal are known to the third party) or partially disclosed (existence of the principal is known, but the principal’s identity is withheld) “principals” may do so. Note: A purported “agent” may not treat the contract as their own.

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12
Q

Adoption

Contract Liability - Substitutes for Actual Authority

A
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13
Q

Principal and Agent Relationship

Contract Liability - Substitutes for Actual Authority

A

Agent’s Duties to the Principal

An agent (even an unpaid one) is a fiduciary of their principal. So, in addition to any express contractual duties that the agent owes the principal, fiduciary duties of loyalty, obedience to lawful instructions, and reasonable care under the circumstances (including a duty to disclose all relevant information) are owed.

  • Duty of Loyalty: The agent owes a duty of undivided loyalty to the principal, meaning, the agent must put the principal’s interests above their own. This duty includes the following obligations:
  1. 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.
  2. An agent must act solely for the benefit of the principal and not to benefit themselves or a third party.
  3. An agent must refrain from dealing with their principal as an adverse party or from acting on behalf of an adverse party.
  4. An agent may not compete with their principal concerning the subject matter of the agency.
  5. An agent may not use the principal’s property (including confidential information) for the agent’s own purposes or a third party’s purposes.
  • Duty of Care: 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).
  • Duty of Obedience: 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.

Principal’s Duties to the Agent

A principal’s duties to an agent are not fiduciary in nature, as fiduciary responsibilities run only from the agent to the principal. Nevertheless, a principal has several obligations to an agent. The principal owes the agent all of the duties imposed by their contract, reasonable compensation, and reimbursement for expenses. So, for example, if an agent incurs expenses or suffers other losses in carrying out the principal’s instructions, the principal has a duty to indemnify the agent. The principal also generally should cooperate with the agent and not unreasonably interfere with the agent’s performance.

Remedies

A wide range of remedies are available to the principal and agent in event of a breach by either party.

  • Principal’s Remedies for Agent’s Breach of Duties: 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 (an equitable remedy whereby a “trust” is imposed to transfer property gained through unjust enrichment back to the intended party, meaning, from the wrongdoing agent to the principal), and withholding of compensation for intentional torts or intentional breaches of fiduciary duty. The principal may recover the actual profits or properties held by the agent whether or not the agent’s profit has caused the principal any loss. The principal may also terminate the agency prior to any termination date in a contract. 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 do whatever it wants to “do justice” in the situation.
  • Agent’s Remedies: A compensated agent has the usual contract remedies against the principal (but has a duty to mitigate damages).

Subagents and Coagents

A subagent is a person appointed by an agent to perform functions that the agent has consented to perform on behalf of the agent’s principal. Remember that 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 delegate their own power to that person. Employees of a single organization are presumed to be coagents, not subagents (for example, manager and store clerk are coagents).

  • Liability of Agent: An agent has absolute liability to the principal for breaches by a subagent.
  • Duties: 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.

Real Estate Brokers’ Contracts

In a typical real estate broker’s contract, the broker is entitled to compensation when there is a buyer ready, willing, and able to purchase the property. If the seller/principal refuses a buyer’s offer that was within the terms agreed by the broker/agent and the seller/ principal, the seller/principal will be found to be breaching the duty not to interfere with the agent’s duties and will owe the agent their agreed compensation.

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14
Q

Third Party vs. Principal

Contract Liability - Substitutes for Actual Authority

A

A principal will be liable to the third party on a contract entered into by their agent if the agent had valid authority (actual, apparent, or through ratification) to act. If the agent did not have authority to enter the contract and the principal has not ratified the contract, the principal cannot be held liable on the contract.

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15
Q

Third-Party Liability to Principal and Agent

Contract Liability - Substitutes for Actual Authority

A

Disclosed Principal Situations

When the principal’s existence and identity are disclosed to the third party (a “disclosed principal” situation), only the principal, not the agent, may enforce the contract and hold the third party liable.

Partially Disclosed and Undisclosed Principal Situations

When the principal is partially disclosed or undisclosed, either the principal or agent may enforce the contract and hold the third party liable.

  • A principal is partially disclosed if the third party knows the agent was dealing on behalf of a principal but does not know exactly who the principal is (that is, the principal is unidentified).
  • A principal is undisclosed if the agent doesn’t reveal that they are contracting on behalf of a principal.

Note that if the agent enforces the contract against the third party, the principal is entitled to all of the rights and benefits thereunder. Also remember that a third party is almost always liable to the principal (the exception is when there’s an undisclosed principal and the agent has special skills).

  • When Principal May Not Enforce Contract: The principal may not enforce the contract if 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.
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16
Q

Third Party vs. Agent

Contract Liability - Substitutes for Actual Authority

A

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 cannot be held personally liable on the contract (the agent is just a “go-between”). However, an exception applies (that is, the agent may be held personally liable) if the existence and identity of the principal are not disclosed.

Disclosed Principal

Although in 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.

  • Agent Breaches Warranty of Authority: Even if the principal’s existence and identity are fully disclosed, if the agent didn’t have authority to enter into the contract (so the principal will not be liable), the agent can be held liable to 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.

Partially Disclosed and Undisclosed Principals

If the principal is partially disclosed (that is, unidentified) or their existence is fully undisclosed, either the principal or the agent can be held liable on the contract if the agent had authority to enter the contract. 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.

Remember that the type of principal (disclosed, partially disclosed, or undisclosed) is relevant only when you are considering whether the agent is liable. 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.

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17
Q

In General

Liability in Tort

A

A principal may be vicariously liable for the torts of their agent under 2 theories:
1. respondeat superior and
2. apparent authority.

Vicarious liability means that joint and several liability for the agent’s tort will be imputed to the principal. The underlying policy here is that vicarious liability may be imputed in certain circumstances to protect an “innocent” third party. The derivative nature of this liability means that if the agent isn’t liable, the principal generally can’t be held liable; however, an agent’s immunity from a lawsuit doesn’t necessarily bar recovery from the principal. Note that in addition to vicarious liability, a principal may be directly liable for their own negligence in hiring, retaining, or supervising the agent. A principal may also be directly liable 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.

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18
Q

Employer-Empoyee Relationship

Liability in Tort: Respondeat Superior

A

A principal’s liability for torts committed by their agent is not determined in the same manner as determining the principal’s liability for a contract. A principal can be liable for the torts of an agent under the doctrine of respondeat superior (“let the master answer”). 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. So the first step in determining a principal’s tort liability is to determine whether there is an employer-employee relationship between the tortfeasor and the principal. If the tort was committed by an employee acting within the scope of employment, then the employer and employee are jointly and severally liable to the injured party.

Independent Contractor or Employee?

The difference between an employee and an independent contractor is that the principal/employer retains the right to control the manner in which an employee performs their work (even if such control is never exercised). A principal does not reserve/have a right to control the manner in which work is performed by an independent contractor. In other words, if the principal has the right to tell the agent how to achieve the results the principal desires, the agent is an employee; if the principal does not have the right to tell the agent how to achieve the results sought, the agent probably is an independent contractor.

  • Right to Control–Factors to Consider: If it is not clear whether the principal has the right to control the method and manner of the work, consider:
  1. The degree of skill required on the job (where great skill is required, more likely to be independent contractor)
  2. Whose tools and facilities are used (if the principal supplies the tools and facilities used to perform the job, more likely to be employee)
  3. The period of employment (definite and/or short, more likely to be independent contractor; indefinite and/or long, more likely to be employee)
  4. The basis of compensation (if on time basis, more likely employee; if on job basis, more likely independent contractor)
  5. 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)
  6. Whether the person has a distinct business (person who has their own business or occupation is more likely to be an independent contractor)
  7. The characterization and understanding of the parties
  8. The customs of the locality regarding supervision of work
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19
Q

Scope of Employment

Liability in Tort: Respondeat Superior

A

Remember, an employer is not automatically liable for an employee’s torts. The employer is liable for the employee’s torts only if they were committed within the scope of the employee’s employment. There are 3 factors helpful in making this assessment:

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

Of the Kind—Same General Nature as Job

To be within the scope of employment, the employee’s conduct need not be actually authorized. Nor does prohibition by the principal necessarily remove the conduct from the scope of employment. If the nature of the employee’s conduct is similar or incidental to that which was authorized—a usual task—the conduct is probably within the scope of employment. However, serious criminal acts are normally considered to be outside the scope of employment.

On the Job—Frolic and Detour

Consider whether the employee’s conduct was within the time and place of the authorized employment. A detour or minor deviation from the employer’s direction is within the scope of employment, while a frolic or 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.

Motivation to Serve Employer

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

  • Passengers: The employee’s invitation to passengers, 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 by such passengers.
  • Unauthorized Instrumentalities: The employer is not liable for torts caused by the use of substantially different instrumentalities from those authorized (that is, those creating a greater risk of harm). For example, an employer allows its lawn care employees to use manual rakes. A homeowner is injured when the employee is using a gas-powered raking machine. The employer likely will not be held liable.
  • Trips with Two Purposes: If the employee makes a trip with two purposes (one of them being personal), it will still be within the scope of employment if any substantial purpose of the employer is being served.

Ratification

An employer may ratify an employee’s torts if the normal requisites of ratification are met. In tort ratification situations, pay particular attention to the requirement that the employer must have knowledge of all material facts.

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20
Q

Intentional Torts

Liability in Tort: Respondeat Superior

A

The general rule is that the employer is not liable for the intentional torts of an employee (for example, battery or assault). Intentional torts are not normally within the scope of employment.

Exceptions—Torts Within Scope of Employment

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

Also, a principal is liable for an agent’s misrepresentations (including intentional misrepresentation) if the agent had actual, apparent, or inherent authority to make statements concerning the subject matter involved.

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21
Q

Joint and Several Liability

Liability in Tort: Respondeat Superior

A

As mentioned, if vicarious liability is imposed, the employer and employee will be jointly and severally liable to the third party. This means the third party can sue the employee or employer alone or join them as defendants, but is entitled to only one total satisfaction.

Note that in Georgia, unlike most states, releasing the employee does not release the employer from their vicarious liability.

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22
Q

Liability for Acts of Borrowed Employees

Liability in Tort: Respondeat Superior

A

An employer may lend the services of an employee to another. If the employee commits a tort in the loaned role, who is liable—that is, who is the employer? 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.

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23
Q

Direct Liability

Liability in Tort: Respondeat Superior

A

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

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24
Q

Liability for Acts of Subservants

Liability in Tort: Respondeat Superior

A

The doctrine of respondeat superior also applies to duly authorized subservants. Authorization to hire subservants can be express or implied. Implied authorization can arise from: past practices, emergency situations, or a reasonable necessity to achieve an authorized result. However, the employer is generally not liable for the torts of a subservant engaged without authority.

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25
Q

Employer-Employee by Estoppel

Liability in Tort: Respondeat Superior

A

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.

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26
Q

Liability for Acts of Independent Contractors

Liability in Tort: Respondeat Superior

A

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

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27
Q

Apparent Authority

Liability in Tort

A

If respondeat superior does not apply, the principal may still be vicariously liable in certain circumstances if the agent acted with apparent authority. (See above for discussion of apparent authority.) This theory of liability is not commonly tested on the bar exam; most vicarious tort liability questions will focus on whether a principal is liable under respondeat superior. Still, it is wise to consider apparent authority as an alternate theory if respondeat superior does not apply.

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28
Q

Requirements

Liability in Tort: Apparent Authority

A

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
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.

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29
Q

Formation

A

In Georgia, a partnership is an association of two or more competent persons to carry on as co-owners a business for profit. This is the case whether or not they intend to form a partnership. Partnership law is based on the law of contract and agency.

Note, then, 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 an individual, partnership, corporation, or other association. Thus, Partnership A and Corporation B can agree to form Partnership C.

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30
Q

Partnership Not a Full Legal Entity

A

The debts of the partnership are the debts of the individual partners. However, title to land may be in the partnership name, and a partnership may sue or be sued in the partnership name.

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31
Q

Factors Indicating Partnership Existence

A

In the absence of a statement of partnership (discussed below), in determining the existence of a partnership, the express intent of the parties governs. If the parties’ intent is uncertain, courts consider the following rules:

Evidence Indicative of Partnership

  • The parties’ right to control the business may be enough to prove partnership even if control is never exercised (because owners usually have the right to control operations)
  • Title to property is held in joint tenancy or in common
  • The parties designate their relationship as a partnership
  • The amount of activity involved in the enterprise undertaken by the parties (the more activity, the more likely it is a partnership)
  • Sharing of gross returns

Note that a capital contribution is not required. Note also that the absence of an agreement to share losses is evidence that the parties did not intend to form a partnership.

Sharing of Profits Is Prima Facie Evidence of Partnership

In contrast to the factors above (which raise no presumption), a person receiving a share of profits is presumed to be a partner. In other words, the sharing of profits is prima facie evidence of a partnership unless the sharing is actually repayment of debt; payment of wages or other compensation to an employee; rent; an annuity to a surviving spouse or deceased partner; interest on a loan; or consideration for the sale of goodwill of a business or other property.

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32
Q

Applicability of Contract Rules

A

Capacity

Anyone who is capable of entering into a binding contract may be a partner. A would-be partner who lacks capacity is liable only to the extent of their capital contribution.

Formalities

  • General Rule—No Formalities: No formalities are required to form a partnership unless the contract falls within the Statute of Frauds (see below). The partnership agreement can be express or implied (that is, established solely through the conduct of the parties).
  • When Writing Necessary: A writing is required only if the partnership agreement cannot be performed within a year.

Legality of Purpose

A partnership will be void if the purpose of its existence is illegal.

Consent

Unless otherwise agreed, no one can become a partner without the express or implied consent of all partners.

Statement of Partnership

In Georgia, a partnership may file a statement of partnership that limits or expands the authority of the partners. The filing of a statement of partnership conclusively establishes the existence of a partnership, so if one has been filed, there’s no need to address the factors above. This statement is filed with the superior court clerk of any county and discloses what the partnership wants to make a matter of public record.

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33
Q

Partnership by Estoppel

A

If no partnership is formed, parties may still be liable as if they are partners to protect reasonable reliance by third parties.

Liability of Person Held Out as Partner

When a person by words or conduct represents themselves or permits another to represent them as a partner, they will be liable to third parties who extend credit to the actual or apparent partnership in reliance on the representation.

Liability of Person Who Holds Another Out as Partner

When a person holds another out as a partner, they thereby make that person their agent to bind them to third parties. (If there is a partnership, only those partners who know of or consent to this holding out will be bound.)

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34
Q

Classifications

Property Interests

A

Partnership Capital

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

Partnership Property

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

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35
Q

Partnership Property

Property Interests

A

There is no restriction as to what may be included in partnership property. In determining what comprises partnership property, the controlling factor is the partners’ intent to devote the property to partnership purposes. Georgia partnership law contains specific rebuttable presumptions regarding whether property is partnership property or the separate property of a partner.

Partnership

Property is presumed to be partnership property if it is:

  • Described as such in the partnership agreement or any recorded statement of partnership;
  • Acquired in the partnership’s name; or
  • Purchased with partnership funds.

Partner

Property is presumed to belong to a partner if it’s acquired in their name without partnership funds (even if it is used for partnership purposes).

Title

If real property is held other than in the partnership’s name, it will not be deemed partnership property to the prejudice of an innocent person (that is, if a third party detrimentally relies on the appearance that the real property is property of an individual partner, the property may be treated as that of the partner under an estoppel theory).

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36
Q

Rights in Partnership Property

Property Interests

A

Partnership’s Rights

The partnership’s rights are totally unrestricted, since it owns the property.

Partner’s Rights

In contrast to the above, a partner’s rights in partnership property are very limited. A partner’s ownership interest in any specific item of partnership property is that of a tenant in partnership. The incidents of this tenancy are:

  • Right of possession for partnership purposes only
  • Not assignable, mortgageable, subject to allowances to a surviving spouse or children or homestead laws, attachable, or subject to any individual claims on a partner
  • Right of ownership vests in surviving partners after death of partner
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37
Q

Partner’s Economic Interest in the Partnership

Property Interests

A

A partner also has an interest in the partnership, which is their share of profits and surplus (for example, a 25% stake). This interest is:

  1. Treated as personal property
  2. Assignable without dissolving the partnership (so, transferable just like any other financial asset, such as stock) AND
  3. Attachable

Note that assignment of this interest gives the assignee no rights with regard to the operation of the partnership. It merely entitles the assignee to receive profits to which the assigning partner would otherwise be entitled. A partner may not sell their partner status (that is, may not make another a partner) without the unanimous consent of the other partners.

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38
Q

Relations Among Partners

Relations with Third Parties

A

Georgia statutes supply default rules for relations among partners. But remember that partners can contract around these rules; thus, the partnership agreement usually governs in this area.

39
Q

Profits and Losses Split Equally

Relations with Third Parties

A

Absent an agreement to the contrary, each partner shares equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied. Each partner must contribute to the partnership losses according to their share of the profits. When one partner has been required to pay or satisfy more than their share of a partnership debt, they may require the other partners to contribute their pro rata shares.

40
Q

Equal Management Rights

Relations with Third Parties

A

All partners have equal rights in the management of the partnership business absent an agreement to the contrary.

41
Q

No Right to Compensation

Relations with Third Parties

A

General Rule

There is no right to remuneration/compensation for services rendered to the partnership absent an express or implied agreement to the contrary. However, a surviving partner is entitled to remuneration for services performed in winding up the partnership business.

Breach of Agreement to Work for Partnership

When 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.

42
Q

Right to Indemnification With Interest

Relations with Third Parties

A

A partnership must indemnify every partner with regard to payments made and personal liabilities reasonably incurred in the ordinary and proper conduct of business, or for the preservation of business or property.

43
Q

Duties

Relations with Third Parties

A

Each partner owes fiduciary duties to the partnership: a duty of care, a duty of loyalty, and a duty to render full information of all things affecting the partnership, whether or not a demand is made. Profits made in the course of the partnership belong to the partnership, and one partner will not be permitted to gain for themselves at the expense of the partnership.

44
Q

Inspection

Relations with Third Parties

A

Books and information must be kept at the principal place of business. Each partner has a right to inspect and copy the partnership books and can get a full accounting if it is just (that is, an equitable right to bring suit against the partnership to settle claims and liabilities arising out of the partnership; discussed further below).

45
Q

Admission of a New Partner

Relations with Third Parties

A

Admission of a new partner requires unanimous consent. An incoming partner is liable for prior obligations only to the extent of their capital contribution (that is, an incoming partner cannot be held personally liable for debts incurred by the partnership before they became a partner except to the extent of their agreed contribution, if any).

46
Q

Outgoing/Retiring Partner

Relations with Third Parties

A

A retiring partner remains liable for obligations arising while they were a partner unless there has been payment, release, or novation. A retiring partner also is liable for acts done after retirement until they have given notice of their withdrawal (personal notice to creditors of the partnership and publication notice—for example, in a newspaper that publishes legal notices in the area—for others).

47
Q

Legal Actions Between Partners

Relations with Third Parties

A

General Rule

As a general rule, a partner cannot sue or be sued by their partnership in an action at law; nor may one partner sue another partner on matters related to the partnership business. An exception to the general rule occurs when no complex accounting is required or when the subject of the litigation is independent of the partnership.

Separate Actions at Law

Despite the general rule, separate actions at law may be brought with respect to segregated transactions (that is, where the partnership has dealt with one partner as if they were a third person and it is clear that the transaction is not to be reflected in the general partnership account); tort actions against a negligent partner; and possibly tort actions where any employee of the partnership is a tortfeasor.

Actions for an Accounting

An action for an accounting is an equitable proceeding whereby the liabilities between each partner and the partnership are converted into liabilities between the partners individually. An action lies to recover the balance due any partner. Actions for an accounting generally arise upon final settlement of partnership affairs, but may also occur in actions for wrongful exclusion or to recover secret profits, in accord with the partnership agreement, or in any other circumstance a court feels is just and reasonable.

48
Q

Application of Agency Law

Relations with Third Parties

A

Every partner is an agent of the partnership for the purpose of its business. The act of every partner “for apparently carrying on in the usual way the business of the partnership” will bind the partnership and thereby bind the other partners. The partnership’s liability for the act of a partner may be in contract, in tort, or for breach of trust.

49
Q

Contracts

Relations with Third Parties

A

In applying agency law, remember that the partnership is the principal and the partner is the agent.

Actual Authority

A partnership will be bound by an act of a partner if the partner has actual authority. Actual authority is the authority a partner reasonably believes they have based on the communications between the partnership and the partner. Actual authority may be created by the partnership agreement, a majority vote of the partners, or a unanimous vote of the partners.

  • When Unanimous Vote Required: Unless the agreement provides otherwise, unanimous consent of the partners is required to authorize a submission to arbitration, make an assignment for the benefit of creditors, confess judgment, or dispose of the partnership’s goodwill. Generally, unanimous consent is also required to engage in business other than that contemplated by the partnership agreement.

Apparent Authority

Even without actual authority a partner can bind the partnership because of their apparent authority. Apparent authority arises when a principal leads a third party to believe that an agent has authority to bind the principal even though the agent has no actual authority. Statute provides that every partner has apparent authority to bind the partnership by any act apparently carrying on business of the partnership in the usual way (unless, of course, the partner had no authority to act for the partnership in that particular matter and the person with whom the partner was dealing knew or had received notification that the partner lacked authority).

Ratification or Adoption

Remember also that a partnership may be able to adopt or ratify a contract made by a partner even if the partner lacked authority to enter the contract.

50
Q

Real Property

Relations with Third Parties

A

Georgia law sets out the following rules regarding a partner’s apparent authority to convey real property.

Conveyance of Real Property

  • Title of Real Property in Partnership Name: If title is held in the partnership name, title may be conveyed in the partnership name by any one partner. However, if the partner lacked actual or apparent authority to convey title, the partnership may recover the property from the transferee (because the transferee should’ve checked on authority) unless the transferee has conveyed the property to a bona fide purchaser (because the purchaser would’ve had no reason to check).
  • Title of Real Property in Name of Fewer than All Partners: If title is held in the name of some (but not all) of the partners, conveyance by the titleholders in their own names is effective. However, if the titleholders lacked actual or apparent authority to convey title, the partnership may recover the property from the transferee unless the transferee or his assignee is a bona fide purchaser. Conveyance in the name of the partnership or the names of fewer than all the titleholders passes the equitable interest in the property if the conveyance was authorized.
  • Title in Name of All Partners: If title is held in the name of all the partners, only a conveyance by all of the partners passes the equitable interest in the property as well as legal title.

Other Transfers

  • Mortgages: Mortgages are governed by the transfer of title rules above.
  • Leases: Leaseholds are governed by contract rules. If the lease is within the scope of the business, one partner has apparent authority to execute it for the partnership.

Personal Property

Contract rules govern the sale and pledge of personal property.

Expanding and Limiting Authority

The statement of partnership may expand or curtail a partner’s authority to enter into transactions on behalf of the partnership. Partners are conclusively presumed to have the authority set forth in the statement. A properly filed limitation on a partner’s authority to transfer real property gives purchasers constructive knowledge of that lack of authority (but the same is not true for transfers of personal property).

51
Q

Partner’s Tort

Relations with Third Parties

A

The partnership is liable for any partner’s tort committed within the ordinary course of the partnership’s business. You should apply the regular tort analysis for a tort committed by a partnership employee (that is, look at whether the person was an employee and whether the tort was committed within the scope of their employment).

52
Q

Partner’s Liability for Partnership Obligations

Relations with Third Parties

A

The partnership is, of course, liable for partnership obligations. But what liability do the partners have for partnership obligations?

Types of Liability

A partner’s liability includes:
1. contract liability, if the contract is within the scope of the partnership business or expressly authorized, and
2. tort liability for partners’ and employees’ torts committed within the ordinary course of business.

General Rule: Joint and Several Liability

All partners are jointly and severally liable for all partnership obligations, whether arising in contract or tort. This means an action may be brought against any one or more of the partners for the entire amount of any obligation; however, a judgment is not personally binding on a partner unless they have been served.

Note that there is no exhaustion requirement in Georgia (in contrast to other states).

Extent of Liability

Each partner is personally and individually liable for the entire amount of partnership obligations. A partner who pays more than their fair share of an obligation is entitled to contribution from the other partners, and a partner who pays the whole obligation of the partnership is entitled to indemnification.

Exception—Limited Liability Partnership

A limited liability partnership (“LLP”) is just like a general partnership, but there is no vicarious liability.

Criminal Liability

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.

53
Q

Notice and Knowledge

Relations with Third Parties

A

When Notice Effective

“Notice” is an oral or written communication by a third person transmitted to one or more partners (or other proper person) with the intent that the partnership be informed of the message communicated.

When Knowledge Imputed

“Knowledge” is information that is or reasonably should be known by an individual partner.

  • Participant: If a partner is a participant in a transaction, knowledge will be imputed to the partnership if the partner acquired the information while a partner or, if acquired before becoming a partner, the information was “present to their mind” at the time they were acting for the partnership.
  • Nonparticipant: If the partner who has the information is not a participant in the transaction, knowledge will be imputed to the partnership if, under the circumstances, the partner reasonably could and should have communicated it to the participating partner. Fraud is an exception to this rule (see below).
54
Q

Breach of Trust

Relations with Third Parties

A

The partnership is liable if a partner misapplies the money or property of a third person received by them within the scope of their apparent authority. The partnership is also liable if the money or property was received in the ordinary course of business and misapplied while in the custody of the partnership.

55
Q

Fraud

Relations with Third Parties

A

Fraud on Third Party

  • Within the Scope of Partnership Business: If one partner, acting within the scope of partnership business, defrauds a third party, the partnership will be held liable.
  • Outside the Scope of Partnership Business: Generally, if the fraudulent act involves a transaction outside the scope of partnership business, the partnership will not be held liable.

Fraud on Partnership

If a partner seeks to defraud the partnership as part of a transaction with a third party and that party is aware of the fraud, the partnership is not liable to the third party.

56
Q

Dissolution

A

Dissolution is a change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business. Dissolution leads to a “winding up” period which then results in termination of the partnership.

57
Q

Act of the Partners

Dissolution: Causes of Dissolution

A

Dissolution may occur pursuant to the partnership agreement, by mutual assent of all partners, by the proper expulsion of a partner, or by the express will of any one partner.

Partnership Agreement—End of a Definite Term

Partner’s Express Will or Withdrawal

58
Q

Operation of Law

Dissolution: Causes of Dissolution

A

The partnership will be dissolved by operation of law in the event the partnership business becomes illegal or a partner dies.

59
Q

Decree of Equity Court

Dissolution: Causes of Dissolution

A

The partnership may be dissolved by decree of an equity court on request of a partner in cases of:

  1. Breach of the partnership agreement so that it is not reasonably practicable to carry on the business with the breaching partner
  2. Unprofitability
  3. Misconduct of a partner that prejudicially affects the carrying on of the business
  4. Incompetence of a partner
  5. Incapability of a partner OR
  6. Other circumstances that render a dissolution equitable
60
Q

General Rule

Authority of Partners to Transact Business After Dissolution

A

Absent an agreement to the contrary, dissolution terminates the authority of any partner to act as an agent for either the partnership or any other partner.

61
Q

Winding Up - Old Business

Authority of Partners to Transact Business After Dissolution

A

After dissolution, a partner who has not wrongfully dissolved has authority to wind up the partnership’s affairs. This includes only transactions designed to terminate business, that is, only “old business,” not “new business.”

  • The following are old business: (1) assigning claims; (2) selling partnership assets; (3) performing contracts made prior to dissolution; (4) collecting debts due; (5) compromising claims; (6) paying off creditors; and (7) distributing the remainder of the business.
  • The following are new business for which the partner will be individually liable: (1) extending time on a debt; (2) entering into new contracts; and (3) increasing any obligation of the partnership, even by one cent—except necessary contracts.
62
Q

Partner Who Wrongfully Disolves

Authority of Partners to Transact Business After Dissolution

A

A partner who wrongfully dissolves the partnership may not wind up the affairs of the partnership.

63
Q

Termination of Apparent Authority

Authority of Partners to Transact Business After Dissolution

A

Apparent authority may continue after dissolution, even if the partner is not winding up. To terminate the apparent authority of partners to bind the partnership after dissolution, proper notice of dissolution to creditors is required.

Proper Notice

Personal notice is required to prior creditors, meaning those who are creditors at the time of the dissolution and to those who have extended credit to the partnership in the past. (Why personal notice? These are prior creditors, so the partnership has their contact information.) Publication notice will suffice for other third parties dealing with the partnership or those who knew of the partnership before dissolution. Those who didn’t know of the partnership before dissolution aren’t entitled to any notice. (Why? There’s no reason to protect them since they aren’t likely to do business with a partner thinking the partnership is in existence, unlike the other mentioned groups.)

Failure of Notice

Failure to give notice binds partners personally to third parties who, while unaware of the dissolution, extended credit to the partnership. Invisible partners (those so inactive in partnership affairs that partnership credit was not based on the partner’s credit) may escape this liability; their liability will be limited to partnership assets.

64
Q

Liability on Post-Dissolution Debts

Authority of Partners to Transact Business After Dissolution

A

Partners have joint and several liability for the partnership’s post-dissolution debts.

No Right to Contribution

Except where dissolution is by a partner’s express will, death, or bankruptcy (when it may be hard to learn of dissolution), partners have no right to contribution for post-dissolution debts.

65
Q

Order of Distribution of Partnership Assets

Distribution of Partnership Assets After Dissolution

A

Partnership assets are reduced to cash and partnership liabilities are paid in the following order:

Outside creditors

Partners’ advances

Partners’ contributions to capital AND

Surplus or profits

Note that if the partnership assets are insufficient to pay partnership liabilities, the shortfall is a loss that must be divided among the partners.

66
Q

Creditors’ Rights

Distribution of Partnership Assets After Dissolution

A

Partnership creditors have priority on partnership assets. A partner’s separate creditors have priority on separate assets. That is, a partnership creditor has a right to be paid out of partnership assets ahead of any creditor of an individual partner, and a creditor of an individual partner has a right to be paid out of the partner’s personal assets ahead of any partnership creditor.

67
Q

Contribution

Distribution of Partnership Assets After Dissolution

A

If a partner is forced to pay more than their share of the partnership’s debts, they are entitled to contribution from the other partners to equalize the shares.

68
Q

When Possible

Continuing Partnership’s Business After Dissolution

A

The remaining partners have a right to continue the partnership business after dissolution if:

  1. The partners agree to continue the partnership (meaning all those who have not wrongfully dissolved must consent)
  2. A partner dissolves the partnership in contravention of the partnership agreement OR
  3. A partner is expelled according to the terms of the partnership agreement
69
Q

Creditors

Continuing Partnership’s Business After Dissolution

A

If partnership business continues, any creditors of the partnership automatically become creditors of the continuing partnership.

70
Q

Buyout

Continuing Partnership’s Business After Dissolution

A

If there is a continuation without a settlement of a withdrawing partner’s share, they may receive either the value of their share, plus interest from the date of dissolution, or a share of the profits attributable to the use of their property by the partnership for that period. However, a partner who wrongfully dissolved is liable for breach.

71
Q

Continuation Beyond Agreed Termination Point

Continuing Partnership’s Business After Dissolution

A

When a partnership continues beyond the agreed termination point without any express agreement, the rights and duties of the partners remain the same, as far as is consistent with a partnership at will.

72
Q

Creditors’ Rights

Continuing Partnership’s Business After Dissolution

A

When a partnership is dissolved by a change in personnel or property is transferred nonfraudulently to others, and the business continues, creditors of the existing partnership retain their rights as creditors of the partnership continuing the business.

73
Q

Formation

Limited Partnerships (LPs)

A

Definition

A limited partnership is composed of one or more general partners and one or more limited partners. It can be created only by filing the certificate of partnership discussed below. In a limited partnership, general partners are personally liable for partnership obligations like partners in a general partnership. However, limited partners usually are not liable for partnership debts beyond the capital that they agree to contribute. Georgia’s Revised Uniform Limited Partnership Act governs all domestic limited partnerships.
.Filing

  • Certificate of Limited Partnership: A certificate of limited partnership signed by all general partners and setting forth the name of the partnership, the names and addresses of the agent for service of process and of each general partner, and any other matters the general partners determine to include must be filed with the Secretary of State.
  • Records Office: A Georgia limited partnership must maintain an office in Georgia with records of the certificate, any partnership agreements, the partnership’s tax returns for the 3 most current years, and similar information. The partnership agreement or some other record must contain the amount and description of each partner’s contribution and special rights of partners regarding distributions, if any.
  • Agent for Service of Process: A limited partnership must maintain in the state an agent for the service of process.
  • One Who Erroneously Believes Herself to Be a Limited Partner: A person who erroneously believes that they are a limited partner can avoid general partner liability if, upon discovering the mistake, they file with the Secretary of State an appropriate certificate of limited partnership or certificate of amendment or withdraws from future equity participation by filing with the Secretary of State a certificate of withdrawal. However, they will be liable as a general partner to any third party who actually and in good faith believed they were a general partner if the transaction occurred prior to their filing an appropriate certificate or withdrawing from equity participation.

Name

The partnership name may not contain the name of a limited partner unless it is also the name of a general partner or the partnership business had been carried on under that name before the admission of that limited partner. The name must contain the words “Limited Partnership” or the abbreviation “L.P.” and may not be the same as, or deceptively similar to, the name of another limited partnership or corporation organized in the same state.

74
Q

Admission of Additional Partners

Limited Partnerships (LPs)

A

A person may be admitted to the limited partnership as a general or limited partner as provided in the partnership agreement, or if the partnership agreement does not so provide, on the written consent of all partners.

75
Q

Liability of Limited Partners

Limited Partnerships (LPs)

A

General Rule

Limited partners generally are not liable for partnership obligations beyond their contributions. Exceptions are where the limited partner:
1. is also a general partner or
2. knowingly permits their name to be used improperly in the name of the partnership.

Note that Georgia law does not specifically impose liability on a limited partner for participating in the control of the business. However, a limited partner may be liable on estoppel grounds to third parties who are misled into believing, based on the limited partner’s participation in the business, that she is a general partner

Failure to File Certificate

If no certificate of limited partnership is filed, limited partners are jointly and severally liable (because then they have formed a general partnership). But a limited partner can avoid future liability by filing a certificate or by withdrawing from the limited partnership within a reasonable time after learning of the failure to file, and letting the Secretary of State know of their withdrawal. (Note that the partners cannot avoid liability that has already arisen.)

76
Q

Nature of Partner’s Contribution

Limited Partnerships (LPs)

A

The contribution of a partner may be in cash, property, or services rendered, or a promise to contribute such in the future. (A limited partner’s promise to contribute is not enforceable unless in a writing signed by the limited partner.) If a partner fails to make a noncash contribution, the partnership may require them to contribute its equivalent in cash. Note that a partner’s obligation to make a contribution may be compromised only by the consent of all of the partners. If all of the other partners consent to a compromise regarding contribution, even a previous creditor (that is, one who extends credit before the compromise) may not enforce the original obligation.

77
Q

Rights and Obligations of General and Limited Partners

Limited Partnerships (LPs)

A

Rights Specific to Limited Partners

A limited partner has the following rights:

  • To withdraw from the partnership (if the limited partnership agreement permits)
  • To vote on specific matters, but not to participate in control of the business
  • To obtain partnership information (including inspection of books and so on)
  • To bring a derivative action if the general partners refuse to do so or an attempt to cause them to do so would be futile

A derivative action may be maintained only by a person who is a partner at the time the action is commenced and:
1. who was a partner when the conduct giving rise to the action occurred; or
2. whose status as a partner devolved upon them 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.

Rights Specific to General Partners

A general partner of a limited partnership has all of the rights of a partner in a regular partnership, including the right to manage the partnership.

Rights of Both General and Limited Partners

General and limited partners have the following rights:

  • To share in profits and losses in proportions stated in the partnership agreement or, absent such provision, in proportion to the value of the partners’ contributions
  • To assign their interest in the partnership (but as in a general partnership, the assignee gains only the partner’s rights to distributions and is not entitled to exercise the rights of a partner)
  • To transact business with the partnership (for example, lend money to it)
  • To withdraw from the partnership (a general partner may withdraw at any time by providing written notice to the other partners, and, as noted above, a limited partner may withdraw in accordance with the partnership agreement)
  • To apply for dissolution when it is not reasonably practicable to carry on business
78
Q

Liability of General Partners

Limited Partnerships (LPs)

A

General Rule: Joint and Several Liability

A general partner of a limited partnership is subject to all of the liabilities of a partner in a general partnership, meaning joint and several liability for partnership obligations.

Exception: Limited Liability Limited Partnership

A limited partnership that makes an election to become a limited liability partnership is known as a limited liability limited partnership (“LLLP”). An LLLP is just like a limited partnership, except there is no vicarious liability for general partners.

Remember: LP (shields limited partners) + LLP (shields general partners) = LLLP (shields both limited and general partners).

79
Q

Dissolution and Distribution

Limited Partnerships (LPs)

A

Dissolution

A limited partnership may be dissolved by:
1. the occurrence of the time or event provided for in the partnership agreement;
2. written consent of all partners;
3. withdrawal of a general partner (unless otherwise provided for in the agreement or by consent of all partners); or
4. judicial dissolution.

Distribution of Assets on Winding Up

Assets are distributed in the following order:

  • To creditors, including partners who are ordinary creditors of the partnership
  • To general, limited, and former partners in satisfaction of liabilities for interim distributions and distributions due on withdrawal
  • To general and limited partners first for return of their contributions, and then for partnership profits and property in the proportions in which the partners share in distributions
80
Q

Limited Liability Partnerships (LLPs)

A

Georgia has adopted legislation that allows for the formation of limited liability partnerships (“LLPs”). In all respects other than formation, name, and liability, a Georgia LLP is treated like a general partnership and is governed by the same law.

81
Q

Formation

Limited Liability Partnerships (LLPs)

A

To form an LLP in Georgia, a partnership must file an election to operate as an LLP with the superior court clerk of any county where the partnership has an office. Subject to an agreement to the contrary, the election must be executed by a majority of the partners or by one or more partners authorized to execute an election. The election must state:

  1. The name of the partnership (which must include the words “limited liability partnership” or the abbreviation “L.L.P.” or “LLP” as the last words or letters of its name);
  2. The nature of the partnership’s business (note that some states limit LLPs to professional partnerships, but Georgia has no such limitation);
  3. That the partnership has duly elected to become an LLP; and
  4. Any other matters the partnership decides to include.

Note that while insurance is an additional requirement in some states, a Georgia LLP is not required to carry insurance against acts protected by the LLP statute.

82
Q

Liability

Limited Liability Partnerships (LLPs)

A

As noted earlier, in Georgia, a partner in an LLP is not personally liable (directly, indirectly, or by way of contribution) for the partnership’s obligations, whether arising in contract, tort, or otherwise. However, a partner remains personally liable for their own wrongful acts.

83
Q

Limited Liability Companies (LLCs)

A

Georgia’s Limited Liability Company Act provides for the creation of limited liability companies (“LLCs”). An LLC is a hybrid business organization that (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. There is no limit on the number of owners (members) as there would be in a Subchapter S corporation (a corporation that is taxed like a partnership under the tax code), and no one has to accept full personal liability for the organization’s debts, as would be required in a limited partnership. Although LLCs are governed by statute, LLC members may adopt operating agreements to control most aspects of the LLC’s business and management.

84
Q

Formation

Limited Liability Companies (LLCs)

A

Filing

In Georgia, an LLC is formed by filing articles of organization with the Secretary of State (along with required fees).

Name

The name of the LLC must contain the words “limited liability company” or the initials “LLC.”

Contents of Articles

The articles of organization of a Georgia LLC must include the name of the LLC. The articles may include:
1. that management is vested in one or more managers; and
2. any other provisions not inconsistent with law.

Annual Registration

An LLC must register annually with the Secretary of State to maintain its status. The annual registration must include:
1. the name of the LLC and where it was organized;
2. the address of its registered office in Georgia and the name of its registered agent at that office; and
3. the address of its principal place of business.

Management

Management of the LLC is presumed to be by all members, but the operating agreement may provide for some other type of management (for example, by outside managers). Each member (or manager, if the LLC is manager-managed) has equal rights in the LLC’s management, and a majority vote of the members (or managers) is required to approve most decisions. Thus, consistent with general agency law principles, each member of a member-managed LLC has authority to bind the company to contracts apparently carrying on the ordinary business of the company, unless the member lacks actual authority to do so and the other party to the contract has notice that the member lacks such authority. In a manager-managed LLC, only the manager(s) has (have) such authority.

  • Member-Managed LLC: In a member-managed LLC, members owe to each other and the LLC duties of care and loyalty. They must also discharge their duties and exercise any rights consistently with the contractual obligation of good faith and fair dealing.
  • Members’ Duty of Loyalty: Under the duty of loyalty, a member must: (1) account to the LLC for any benefit they derive in connection with LLC business; (2) refrain from dealing adversely with the LLC (unless the transaction is fair to the LLC); and (3) refrain from competing in the LLC’s business. In Georgia, managers and managing members of LLCs are subject to rules regarding conflicting interest transactions similar to those for directors of corporations. (See Corporations outline.)
  • Members’ Duty of Care: Under the duty of care, members must act with the care that a person in a like position would exercise under similar circumstances, in a manner reasonably believed to be in the LLC’s best interests. Members who meet this standard will not be held liable for decisions that in hindsight turn out to be poor or erroneous. This is known as the business judgment rule.
  • Manager-Managed LLC: The duties of loyalty and care are different for managers and members in a manager-managed LLC. 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 loyalty and care discussed in e., above; and (2) only the members may authorize or ratify an act by a manager that would otherwise violate the duty of loyalty.

Operating Agreement May Alter Duties

The operating agreement may eliminate the duty of loyalty and alter the duty of care if doing so is not manifestly unreasonable. However, the articles of organization or operating agreement cannot eliminate or limit the liability of any member or manager for:
1. intentional misconduct or a knowing violation of law; or
2. any transaction for which the member or manager received a personal benefit in violation or breach of any provision of the operating agreement.

Similarly, the operating agreement may not eliminate the contractual obligation of good faith and fair dealing, but it may prescribe standards for measuring the performance of the obligation if doing so is not manifestly unreasonable.

Professional LLC (PLLC/PLC)

If a professional LLC is formed, members and managers must be licensed somewhere, but professional service providers must be licensed in Georgia.

Profits and Losses

Absent a provision in the articles or an operating agreement, distributions and profits and losses of an LLC are allocated equally among the members. Except as provided for in the articles of organization or a written operating agreement, a member or transferee does not have a right to demand or receive a distribution from the LLC in any form other than cash.

85
Q

Limited Liability for Members

Limited Liability Companies (LLCs)

A

As noted above, members in an LLC have limited liability (except for their own torts).

The bottom line is that in Georgia, in terms of personal liability, an LLP and an LLC provide equivalent protection.

86
Q

Rights to Information

Limited Liability Companies (LLCs)

A

A member may, at their own expense, inspect and copy any LLC record upon reasonable request during ordinary business hours. Upon reasonable demand, a member may also obtain:

  1. Information regarding the state of the business and financial condition of the LLC
  2. A copy of the LLC’s tax returns for each year
  3. Other information regarding the affairs of the LLC as is just and reasonable
87
Q

Transfers of Interest

Limited Liability Companies (LLCs)

A

An assignment of a member’s interest in an LLC transfers only the member’s right to receive distributions. Management rights are not transferred. One can become a member (that is, management rights can be transferred) only with the consent of all members or as provided in the operating agreement.

88
Q

Charge of Transferable Interest
(Attachment)

Limited Liability Companies (LLCs)

A

A judgment creditor of a member or transferee of a member may charge (attach) the transferable interest of the judgment debtor to satisfy the judgment.

89
Q

Members’ Actions Against the LLC

Limited Liability Companies (LLCs)

A

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 the following requirements are met:

  1. If the LLC is manager-managed, the managers have sole authority to cause the LLC to sue in its name
  2. The member made a written demand on the managers or members with authority that they take action
  3. Ninety days have passed since demand was made unless demand was earlier rejected or irreparable injury to the LLC would result from waiting 90 days
  4. The member is a member of the LLC at the time the action is commenced and was a member at the time of the transaction of which he complains, or their status as a member devolved upon them by operation of law by a person who was a member at the time of the transaction AND
  5. The member fairly and adequately represents the interests of the LLC
90
Q

Piercing the LLC Veil

Limited Liability Companies (LLCs)

A

Members and managers are not personally liable for the LLC’s obligations. 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.

91
Q

Indemnification

Limited Liability Companies (LLCs)

A

In Georgia, an LLC may (but is not required to) indemnify members and managers against claims and demands arising in connection with the LLC. The LLC may not indemnify those liabilities that cannot be limited or eliminated by the articles of organization or a written operating agreement (such as intentional misconduct, knowing violation of law, or prohibited personal benefit transactions).

92
Q

Dissociation

Limited Liability Companies (LLCs)

A

A member may withdraw from an LLC formed in Georgia only as provided in the articles of organization or an operating agreement. Generally, the events that will cause dissociation of a partner in a general or limited partnership (see above) will also cause dissociation of a member of an LLC.

93
Q

Dissolution

Limited Liability Companies (LLCs)

A

Events Causing Dissolution

An LLC will be dissolved when any of the following events occurs:
1. an event or circumstance that the articles of organization or operating agreement state causes dissolution;
2. the consent of all the members; or
3. the passage of 90 consecutive days during which the LLC has no members.

Judicial Dissolution

A court may grant an application for judicial dissolution if it is not reasonably practicable to carry on the company’s activities in conformity with the articles of organization or operating agreement.

Administrative Dissolution

The Secretary of State may dissolve an LLC administratively when the LLC fails to deliver its annual registration with required fees. 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.

Effect of Dissolution

An LLC that has been dissolved continues its existence but is not allowed to carry on any business except that which is appropriate to winding up its activities.

  • Barring Claims Against the LLC: A claim can be asserted against a dissolved LLC, even if the claim doesn’t arise until after dissolution, to the extent of the LLC’s undistributed assets. If the assets have been distributed to the members, a claim can be enforced against each member to the extent of the member’s proportionate share of the claim or to the extent of the assets distributed to them, whichever is less. Note that a member’s total liability for creditor claims may not exceed the total amount of assets distributed to them after dissolution. An LLC can cut short the time for bringing known claims by notifying claimants in writing of the dissolution and giving them a deadline of not less than six months from the date the claimants receive the notice in which to file their claim. The time for filing unknown claims can be limited by publishing and stating in the notice of the dissolution that a claim will be barred unless a proceeding to enforce it is commenced within two years after notice is published.