Agency + Partnerships

Question 1

F tells G, “Sell the car.” Does G have right to sell the car?

Answer 1

This is an agency question in a contract setting. Therefore, the agent needs actual authority to bind the principal at the time of the contract. Here, F has given express authority to G to sell the car. Otherwise, G could have authority if principal F’s conduct led G to believe he has authority but there’s no pattern of behavior here.

Question 2

Which of the following parties must have contractual capacity to enter into an agency relationship?

A - The principal.

B - The agent.

C - Both principal and agent.

Answer 2

A. Only the principal must have contractual capacity to enter into an agency relationship.

To create an agency relationship, the respective parties must have capacity, but the degree of capacity required for a principal differs from that required for an agent. Generally, any person (including entities) having capacity to contract may appoint an agent. Any person may be an agent, even if she has no contractual capacity herself.

Question 3

What is apparent authority?

Answer 3

Apparent authority is created where a principal holds another out as his agent to a third party. Apparent authority makes the principal a party to the contract—with contractual rights and liabilities.

Question 4

What elements are required to establish a principal’s liability under the doctrine of respondeat superior?

Answer 4

To establish a principal’s liability under the doctrine of respondeat superior, two basic elements must be established: (i) an employer-employee relationship, and (ii) conduct within the scope of employment. A principal may be vicariously liable in certain instances where her agent acted with apparent authority where respondeat superior does not apply. A principal is not liable for torts committed by an agent functioning as an independent contractor.

Question 5

What must a possessor of goods have to be able to transfer good title without authority?

Answer 5

For the possessor of goods to be able to transfer good title without authority, she must either have: (i) some indicia of ownership (e.g., title), or (ii) be a dealer in the goods. Although a dealer in goods will be a merchant, one may be a “merchant” without being a dealer in the goods at issue.

Question 6

In a few jurisdictions, where a general agent exceeds her actual authority (i.e., violates orders) but the act performed is similar to the act authorized, the principal will be held liable. This is an example of:

Answer 6

inherent authority

Question 7

There are situations where a person will purport to act on behalf of another without any type of authority. In such a situation, the principal may still be bound by the agent’s act if the principal subsequently ratifies the agent’s act.

What are the elements of ratification?

Answer 7

Principal can ratify an agent’s agreement if the principal expressly affirms the contract, accepts the benefit of it, or sues the third-party on it.

Question 8

Who can be bound to a contract when the principal’s identity is disclosed to the third party and the agent had authority to enter the contract?

Answer 8

The principal and, if the parties intended the agent to be a party to the contract, the agent.

Question 9

A principal gives his agent authority to enter a contract with a third party. The agent discloses to the third party that a principal exists, but does not disclose the principal’s identity. Who can be bound to the contract?

Answer 9

Where the third party knows of the principal’s existence but does not know his identity, both the authorized agent and the principal are liable on the contract.

Question 10

If a principal negligently selects an incompetent independent contractor, the principal will be liable to the injured third party for:

Answer 10

their own negligence in the selection of the independent contractor.

*A principal will be liable for the independent contractor’s negligence if the principal hired the incompetent contractor with knowledge of the contractor’s incompetence.

Question 11

What is a subagent?

Answer 11

A subagent is a person appointed by the agent to perform functions assigned to the agent by the principal. The agent will be held liable to the principal for breaches of the subagent.

Where the subagent has been appointed without authority, the subagent owes no duties to the principal. The agent alone will be responsible to the principal for performance of the agency duties and for any loss sustained because of the subagent’s conduct, with the agent’s only recourse being against the subagent. A subagent is not to be confused with a co-agent, who is another agent of the principal.

Question 12

Unless otherwise agreed, a principal owes an agent a duty of:

Answer 12

compensation

Question 13

T/F: A principal will not be bound by the agent’s acts where the principal sets limits on an agent’s authority, and a third party knows of the limits, but the agent exceeds the limits when dealing with the third party.

Answer 13

True.

Question 14

T/F: An employer usually is not liable for the intentional torts of her employee on the simple ground that an intentional tort is clearly outside the scope of employment.

Answer 14

True. But where the intentional tort occurs as a natural incident to the carrying out of the employer’s business, or if any benefit may be found running to the employer, courts tend to hold the employer liable. If an employee intentionally chooses a wrongful means to promote the employer’s business, the employer will be held liable for any torts that result.

Question 15

If an employer lends the services of her employee to another and the employee commits a tort while performing in his loaned role, who is liable?

Answer 15

In most situations, the employee remains under the right of control of the loaning employer, and thus the loaning employer is the only one liable for the employee’s torts. If the borrowing employer directs the actions of the employee, and so assumes the right of control of the employee, she will be liable for those actions if they are performed tortiously.

Question 16

An agent has the authority to sell personal property. What can they do during the sale?

Answer 16

An agent with authority to sell personal property may give general warranties for quality. Likewise, an agent with authority to sell real property may grant the customary covenants. Payment for property sold must be in cash; the agent may not accept a check or extend credit (unless implied consent in the form of custom, past practices between the parties, etc., can be found). An agent generally has the authority to deliver possession of the property upon receipt of payment.

Question 17

When is a partnership formed?

Answer 17

A partnership is formed as soon as 2+ persons associate to carry on as co-owners a business for profit. In the absence of a controlling statute, the partnership agreement may be either express or implied.

Question 18

T/F: Absent an agreement to the contrary, a partner is not entitled to remuneration except for reasonable compensation for services rendered in winding up the partnership’s business.

Answer 18

This is true even in cases where one partner is forced to assume more work than he anticipated and the other partner does nothing to further the affairs of the partnership.

Question 19

Under the Texas Business Organizations Code (“TBOC”), at what point may a creditor proceed directly against a partner on a partnership obligation?

Answer 19

Under the TBOC, a creditor cannot proceed against a partner on a partnership obligation unless the partnership is bankrupt, the creditor has first obtained a judgment against the partnership that remains unsatisfied for 90 days, or the creditor and the partnership have agreed that obtaining a judgment against the partnership is not required. Because all partners are jointly and severally liable for all obligations of the partnership, an action may be brought against any one or more of the partners or the partnership.

Question 20

Unless the certificate of formation or company agreement provides otherwise, what actions require the affirmative vote of all LLC members?

Answer 20

(i) amending the certificate of formation or company agreement;
(ii) issuing new membership interests in the LLC; and
(iii) changing the structure of the LLC from member-run to manager run, or vice versa

Question 21

What factors do courts consider to see if a partnership exists?

Answer 21

To determine whether a partnership exists, courts consider the following factors: (i) receipt of or the right to receive a share of profits; (ii) expression of an intent to be partners; (iii) participation or the right to participate in control of the business; (iv) sharing or agreeing to share losses or liability for claims by third parties against the business; and (v) contributing or agreeing to contribute money or other property to the business.

Question 22

A and B are partners. With B’s knowledge, C represents herself to Bank as a member of AB Partnership, even though she is not. Based on C’s representation, Bank lends C money. If C later defaults on the loan, who may be held liable?

Answer 22

B and C.

Under the doctrine of “partnership by estoppel,” B and C may be held liable. When a person, by words or conduct, represents herself or permits another to represent her as a partner, she will be liable to third parties who extend credit to the actual or apparent partnership. Furthermore, when a person, by words or conduct, holds another person out to be her partner, she thereby makes the alleged partner her agent with the power to bind her to third parties as if the other were, in fact, a partner.

Question 23

T/F: All partners are jointly and severally liable for all obligations of the partnership, whether they arise in contract or tort.

Answer 23

True. An action may be brought against any one or more of the partners or the partnership. Also, each partner is personally and individually liable for the entire amount of all partnership obligations.

But an incoming partner is not personally liable for any partnership obligation incurred before her admission to the partnership, although the incoming partner’s contributions to the partnership may be used to satisfy existing partnership obligations.

An outgoing partner remains liable on all obligations incurred by the partnership while a member of the partnership, unless she has been discharged from liability by the partnership creditor. Generally, even if a partner has withdrawn, she remains liable until she also has given notice of her withdrawal.

Question 24

A person who erroneously believes herself to be a limited partner can avoid being held liable as a general partner if, on ascertaining the mistake, she files a certificate of formation or amendment with the secretary of state, or ____________________:

Answer 24

Withdraws from future equity participation in the enterprise and files a certificate to that effect with the secretary of state.

Question 25

T/F: A limited partner is liable as a general partner if she participates in the control of the business and the person dealing with the limited partnership reasonably believes that the limited partner is a general partner.

Answer 25

True.

Question 26

T/F: Except as otherwise provided in the company agreement, a member or manager of an LLC is not liable for the debts, obligations, or liabilities of an LLC, including a judgment decree or order of a court.

Answer 26

There are exceptions to this rule. A member who receives a distribution that he knew caused the liabilities of the LLC to exceed the fair value of its assets is liable to return the distribution. Additionally, a member is obligated to make contributions of cash or property to the LLC as promised, unless the certificate of formation or company agreement provides to the contrary.

Question 27

T/F: Management of an LLC is presumed to be by one or more managers.

Answer 27

True.

Question 28

What is the duty of loyalty in a partnership?

Answer 28

The duty of loyalty requires that the partner: (i) account for any benefit derived by her use of partnership property; (ii) not deal with the partnership on behalf of a party who has an interest adverse to the partnership; and (iii) not compete with the partnership in a manner adverse to the partnership. The duty of care requires the partner to act with the degree of care an ordinarily prudent person would use in similar circumstances.

Question 29

What is a professional limited liability company (“PLLC”)?

Answer 29

Professionals may form a PLLC, which functions as an LLC (i.e., members are not personally liable for the PLLC’s obligations). With limited exceptions, a PLLC may not render more than one kind of professional service. Every member of a Texas PLLC must be licensed (in Texas or elsewhere). Thus, a member cannot freely transfer her interest to any person.