Agency Partnerships LLCs Flashcards
1
Q
What are the 3 hallmarks of an agency relationhip?
A
1) Fiduciary relationship (on behalf of)
2) resulting from manifestation of consent by P & A
3) where the agent acts under the control of the principal
2
Q
Who must consent to forming an agency relationship?
How can consent be given?
A
The principal and the agent
Consent can be given expressly or by implication from the parties conduct
3
Q
What is meant by the “on behalf of” requirement of agency?
A
The agent must be acting on behalf of the principal and not some third party or themselves. Acting as a fiduciary for the principal
4
Q
What is meant by the “control” requirement of agency?
A
Agent must be under the control of the principal, but the leash can be loose on the details. Degree of control can be low (e.g. specifying ends and leaving the means to the agent)
5
Q
Does an agency relationship have to satisfy all of the formalties of a contract?
A
No
6
Q
What level of capacity is required of a principal? an agent?
A
Prncipal must have the capacity necessary to contract (so minors and incompetents can’t engage an agent)
Agent only has to have minimal capacity which is an even lower bar than contractual capacity (can be a minor or incompetent)
7
Q
Is a writing required to create an agency relationship?
A
No, unless the agent will enter into contracts subject to the SoF (“Equal Dignities Rule”) or the agency contract itself is subject to Sof
8
Q
Is consideration required to form an agency relationship?
A
NO NO NO
9
Q
What are the methods of creating an agency relationship?
A
By act of the parties (actual authority, apparent authority, ratification)
OR
Operation of law including:
estoppel- reliance on the principal’s communication (similar to apparent auth)
Statute
10
Q
What are the agent’s duties to the principal?
A
~FIDUCIARY DUTIES~
1) Duty of Care
2) Duty of Loyalty
3) Duty to obey lawful instructions
4) Duty of reasonable care (including to disclose all relevant info)
11
Q
What is required of an agent under the duty of care?
A
Reasonable care is the baseline but is adjusted upward for any special skills. What is reasonable is partially a function if if agent is paid (less effort requried if unpaid)]
12
Q
What is required of an agent under the duty of loyalty?
A
DoL includes:
absolute loyalty to principal within the subject matter of the agency -can’t act to benefit anyone other than the principal
13
Q
What is the remedy of a DoL violation by an agent where the agent profits?
A
The principal can sue for damages caused by the breach and disgorgement of profits
14
Q
What is required of an agent under the duty of obedience? What remedy is available?
A
Must obey all legal instructions - similar to DoL.
Principal can sue agetn for any loss that the principal suffers from the disobedience
15
Q
What kind of remedies can a principal seek for a breach of fiduciary duty?
A
Can seek damages, can seek disgorgement of profits (even if no damages sustained), can seek constructive trust (to get fruits of unjust enrichment back) or any other kind of remedy you can dream up - court has wide discretion
16
Q
What is a sub agent?
Is an agent liable for acts of the subagent?
To whom does the subagent owe fiduciary duties
A
Person appointed by an agent to perform certain acts that the agent is supposed to perform for their principal.Not to be confused with a co-agent which is another agent of the principal.
Yes, agent is absolutely liable for acts of sub agent
If the principal authorized agent to engage subagent, subagent owes duties directly to principal. If agent was not authorized to engage subagent, subagent owes fiduciary duties to agent only
17
Q
What are the principal’s duties to an agent?
A
NOT FIDUCIARY, but in addition to any contractual duties, owes a duty to…
- reasonably compensate (if contract silent)
- reimburse for expenses
- indemnify the agent
- cooperate with agent/not interfere with perf of duties
18
Q
Does a principal owe a duty to reasonably compnste a sub agent?
A
No, EVEN IF the agent had authority to hire a subagent
19
Q
What remedies can an agent seek for a principal’s violation of duties owed to agent?
A
Contract remedies
20
Q
What is the duty owed by the principal in a regular real estate contract to their real estate agent?
A
Agent is entitled to compensation when they deliver a willing/able buyer and if the seller/principal refuses an offer that was within the terms agreed to between seller/principal and real estate agent, the seller/principal will be breaching a duty owed to the agent and seller will owe agent the agreed compensation
21
Q
When can an agent bind their principal?
A
Actual authority (express or implied), apparent authority, or ratification
22
Q
Is it possible to be partially authorized to enter into a contract?
A
Step 1: Start with Principal’s manifestation (words or conduct)
Step 2: If the principal’s words or conduct would lead a reasonable person in the agent’s position to believe they had authority, they have actual authority
Can be given expressly (orally or writing) Express authority is effective even if given mistakenly or because of misrep.
Can implied if a reasonable person in the agent’s position would believe an action was authorization (including incidential to express authority, custom, prior acquiescence, emergency)
NO - all or nothing
23
Q
At what moment is it important for an agent to have authority for purposes of binding a principal to a contract?
A
A the moment the agent enters into the contract
24
Q
When is actual authority terminated?
A
~ When the agent has notice of the principal’s death
- when the authority expires under its own terms
- after a reasonable time or change in circumstances
- when agent breaches fiduciary duty or the agency is terminated
25
When is an actual authority of an agent irrevocable?
When it was given to protect the agent or a third party's rights and is supported by consideration. Can't be terminated unilaterally or by operation of law (e.g. at death)
26
When does an agent have apparent authority to bind the principal?
Step 1: Start with Principal's manifestation (words or conduct)
Step 2: If the principal's words or conduct would lead a reasonable third party to believe the agent had authority, there is apparent authority
IN OTHER WORDS… Would the principal's words or conduct lead a reasonable person to believe tha the agent has authority to bind the principal?
*But if the third party subjectively knew that the agent did not actually have authority, can't have apparent authority
27
What is the key analytical difference between actual and apparent authority?
Actual authority is based on the effect of the principal's manifestation on a reasonable agent.
Apparent authority is about the effect of the principal's manifestation on a reasonable third party
28
When is apparent authority often at issue ?
When the agent exceeds their actual authority
- Principal previously permitted an agent to exceed the scope of their actual auth and knows the TP is aware of this = apparent auth
- Principal gives the agent a powerful title/position = apparent auth
When the agent has no actual authority at all
- if principal does nothing and agent/someone else makes things up to fool TP = NO apparent auth
- if principal does nothing and is aware that agent is making things up to fool TP = apparent auth
- lingering apparent auth after actual auth ends
29
Which is more difficult to terminate - actual or apparent authority?
It is more difficult to terminate apparent authority - might need to give notice to third parties to destroy their reasonable belief of auth
30
Does death terminate apparent authority?
No
31
What is inherent authority?
It is a (less important) type of authority that binds a principal even if there is no actual or apparent authority. The court invents this where it would prefer to protect an innocent third party rather than a principal who gave the agent some authority. Examples are respondeat superior and conduct similar to the conduct authorized
32
When can an agent bind their principal via ratification?
------------
What are acts of ratification?
--------------
What are the 3 requirements of a ratifying act?
If the agent lacked actual or apparent authority at the time of the contracting, but the principal later validates the act, principal is bound.
----------
Principal can ratify expressly or impliedly (by accepting benefits, silence in face of duty to disaffirm, or suing on the contract)
------------
1) Principal must know or have reason to know of all material facts about the contract
2) must accept the ENTIRE transaction
3) principal must have capacity (competent and legal age)
33
What is meant by the statement that "Ratification cannot alter the rights of intervening third parties."?
If an agent acts without authority in selling X to A and principal separately sells X (without learning of the initia sale), Principal cannot later ratify the earlier sale because that would affect A's rights in X (an intervening third party).
The ship sails on ratification when a later third party's interest would be upset by the ratification.
34
```
What kinds of actions/contracts can a principal NOT later ratify?
---------
Which of the following can ratify…
- undisclosed principal
- disclosed principal
- unidentified principal
```
Principal cannot ratify if:
1) performance was illegal at the time of the ratification
2) the third party has withdrawn
3) there has been a material change in circumstances
--------
- Undisclosed principal (existence and identity withheld from TP) can NOT ratify
- Disclosed principal (existence and identity known to TP) CAN ratify
- unidentified principal (existence but not identity known to TP) CAN ratify
^This is because the agent has to purport to be acting on behalf of the principal - But all principals can ratify under the 3rd Restatement
35
If principal is disclosed, Is an agent personaly liable for a contract entered into for the principal?
"Disclosed Principal Situation" If actual authority, apparent authority, or ratification, then principal is liable and the agent is NOT liable
Agreement of the contracting parties trumps these defaults
36
If undisclosed or unidentified principal, Is an agent personaly liable for a contract entered into for the principal?
If agent had authority to bind principal, third party gets to choose if they want to hold EITHER the principal or agent liable on the contract
37
If agent enters into a contract without actual or apparent authority and no ratification such that the principal is not bound, what can the third party do?
Sue the agent for damages for breaching the implied "warranty of authority"
38
When the principal is disclosed to the third party and the agent has authority to bind principal, who can enforce the contract - principal or agent? What if principal is unidentified or undisclosed?
If disclosed = Principal ONLY
If unidentified or undisclosed = Principal OR Agent (for the benefit of principal)
*but principal cannot enforce if there has been a fraudulent misrep of the principal's identity or unforeseen increased burden to the TP by the fact that performance is due to principal and not agent
39
What are the two theories of vicarious liability for holding a principal iable for the torts of an agent? What's the result?
When can a principal be directly liable a tort?
1) Respondeat superior
2) Apparent authority
The result is joint and several liability of principal and agent
Principal can be directly liable for their own negligence in hiring, retaining, or supervising the agent, OR if they gave actual authority to commit the tort or ratified it OR independent contractor w/nondelagable duty, untrahazardous activity, chose bad contractor
40
What does respondeat superior do?
--------
How can a principal be liable for actions of an independent contractor?
Imposes vicarious joint and several liability on employer for the torts of an employee committed in the scope of employment
-----------
Principal is directly liable (not vicarious) for contractors involved in inherently dangerous activities, duties that are nondelagable, or if they knowlingly selected an incompetent contractor
41
What's the difference in an employee and independent contractor? What's the important similarity?
Employer controls the manner an employee's work is performed - contractor gets to decide how the work is performed (look for who supplies the tools, time or goal basis of comp, labeling by the parties, centrality of function to the business) The analysis is what's important not the conclusion.
- They are both agents (just different types)
42
How do you determine if an employee was acting within their scope of employment when they committed a tort?
3 Questions to Determine Scope of Employment
1) Was the conduct "of the kind" the agent was hired to perform?
- prohibition by principal does not necessariy take out of scope of emp
2) Did the tort occur "on the job" (within time and space limits of employment)?
- detour = small deviation = employer liable
- frolic = major deviation = employer not liable
3) Was the conduct motivated at least in part by desire to benefit the principal?
43
Are intentional torts ever within the scope of the agent's employment?
General rule is intentional torts are outside of scope of employment
BUT intentional torts are in scope of employment if conduct is:
- natural incident of employee's duties (where force is authorized or work is hostile)
- where employee is promoting the employer's business/serving employer
- tort authorized or ratified by employer
44
If one employer loans an employee to another, which employer is liable for torts committed by that employee in the loaned role?
Whiever employer has primary right of control over the employee
45
Is the principal liable for torts committed by subagents?
If principal authorized the engagement of subagents, then yes. If the principal had not authorized the engagement of subagents, then no.
46
What is employer-employee by estoppel?
If a principal creates the impression that an agent is an employee and a third party relies on that impression, the principal is estopped from denying that relationship and is liable under respondeat superior
47
When is a principal vicariously liable for agents under an apparent authority theory?
Principal is vicariously liable where the agent appears to deal on behalf of the principal and that apparent authority enables the agent to either commit a tort or conceal its commission.
48
What are the elements that create a partnership?
1) An association of 2 or more persons (people or any type of entity)
2) to carry on as co-owners
3) a business for profit
*regardless of subjective intent
49
Does subjective intent to form a partnership matter?
No - what matters is the subjective intent to carry on as co-owners a business for profit.
Even if the parties sign a statement that they are NOT partners, it makes no difference
50
What factors are considered when deciding if a partnership exists? What are these factors trying to triangulate?
The factors are aimed at if 2 or more parties intended to carry on as co-owners a business for profit. Factors include:
- Most important factor: Sharing of profits raises presumption of partnership (presumption unless received under other circumstances)
- Right to participate in control of business (even if unexercised)
- Property held in joint tenancy/in common
- Parties label it as a partnership
- the venture undertaken by the parties requires extensive activity
51
What is special about the sharing of profits as a factor in determining if there is a partnership?
---------
Does sharing revenues get to a presumption of partnership?
Sharing of profits raises presumption of partnership unless the share was received as payment of a debt UNLESS the share of the profits was received as payment of a debt, wages/comp for services, rent, interest, or for sale of goodwill of a business - a real partner doesn't have a cap/timelin on when they stop getting profits.
Can rebut the presumption with evidence that there is in fact not co-ownership such as no right to control or no sharing in losses
--------
Splitting Revenues does not get the presumption of partnership
52
Is a writing required to create a partnership?
No unless the partners wish their partnership agreement to be binding for >1 year, then SoF requires it
53
When is a partnership by estoppel formed?
--------
Is there a duty to deny partnership with another who is held out by another as a partner?
---------
If P1 holds out A as their partner, can A bind P1? What about other partners of P1?
If the parties act as if they were partners (even though they did not meet the test), a partnership by estoppel is formed to protect reasonable reliance by third parties.
-------
No duty to deny - won't become a partner unless they consent/acquiesce to the holding out
---------
A can bind P1 (as P1's agent) and can bind only those partners of P1 that know of the holding out
54
What is the effect of a partnership agreement?
| What form can a partnership agreement take?
A partnership agreement overrides the statutory defaults of partnership law
The partnership agreement can take any form (oral, written, or implied from conduct)
55
Is a partnership a legal entity?
Yes - a partnership can own property, can sue or be sued in its own name
56
What capacity is required to be a partner?
-------
What is required to become a partner?
Must have the same capacity as is required to enter into a contract
A partner who lacks this capacity is liable only to the extent of their capital contribution (but even if no capacity, the partnership will continue to exist until steps are taken to dissolve it)
-------
Unless agreed otherwise, need consent of all partners
57
What is a statement of partnership authority?
It is a filing made with the secretary of state which can give constructive knowledge to the world of the extent of the partners' authority with regard to the partnership
58
What is the default voting regime of a partnership?
-----
What requires a vote and what % is required?
Default is equal voting rights - REGARDLESS of capital contributions/profit shares
-----
Matters within ordinary course of partnership business require a majority vote
Matters outside ordinary course of partnership business requires a unanimous vote
59
Is a partner entitled to payment for services rendered in furtherance of partnership purposes?
------
What happens if a partner expressly/impliedly promises to devote certain efforts to the partnership and fails to do so?
NO - no right to comp
--------
Then the partner can be charged in an account for damages caused to the partnership
60
What is a partner's "account"?
Each partner is deemed to have an account that is credited with their contributuon plus their share of profits less their share of losses.
At dissolution, partner is entitled to settlement of their account
61
What is the rule about indemnification in a partnership?
Each partner must indemnify every other partner for payments/obligations made/incurred while carrying out partnership business
62
If a partnership is sued, can a judgment agaisnt the partnership reach a partner's personal assets?
No - a judgment against a partnership cannot reach a partner's personal assets - need a judgment against the partner personally
63
What is the default profit/loss sharing arrangement in partnerships?
By default, equal sharing of profits REGARDLESS OF CONTRIBUTIONS
By default, losses are shared in the same way profits are shared.
64
The relationship of a partner to the partnership for purposes of liabilities to third parties is similar to principal-agent relationship where the partner is an agent of the partnership for the purpose of the partnership buisness
Yep
65
When is a partnership liable to a tort victim?
Partnership is liable for the tortious acts of a partner or employee acting in ordinary COB of partnership OR outside ordinary COB with the authority of the partnership
66
When is the partnership liable for contracts entered into by a partner?
Partnership is liable on contracts entered into by a partner if the partner had actual authority or apparent authority (in the scope of partnership business unless the third party actually knew partner lacked authority)
67
When does a partner have actual authority to bind the partnership?
What is the effect of a statement of partnership authority?
If the partnership does something (via partnership agreement or vote) that would make a reasonable partner believe they had authority to do something
OR authority is on file with sec of state in statement of partnership authority
--------
If dealing in real property and recorded in the sec of state AND county where the property is located, grants of auth and limitations on auth both operate
If not dealing in real property, filing with sec of state is all that is needed - grant of auth operate but limitations on auth are useless
68
If partner acts __________ of partnership, partner has ___ and partnership is bound.
If partner acts ________ of partnership, partnership is not bound unless the partner had actual authority
within ordinary COB; apparent authority
Outside ordinary COB
69
What is the extent of apparent authority for purposes of a partner binding a partnership?
A partner is an AGENT of the partnership
Partner has apparent authority for actions in the ordinary course/scope of the partnership's business as well as transactions that would apparently be necessary for carrying on a business of the kind.
But if the third party subjectively knew (or had notice) the partner lacked actual authority, there is no apparent authority
70
Who can transfer property of the partnership? What happens if a partner without power to transfer transfers?
Any partner with actual/apparent auth. If the transferring partner lacked auth, the partnership can recover the property from the initial transferee but not from a BFP
If title to property held by inidividual partners, transfer by them with actual/apparet auth is effective
71
What is a partner's exposure to partnership liabilities?
------
When is a judgment binding on a partner personally?
------
If a partner is personally forced to pay a partnership obligation, what are that partner's rights?
Each partner is jointly and severally liable for all obligations of the partnership, but P must exhaust partnership resources first before turning to individual partners.
---------
A judgment is personally binding on a partner only if the partner has been personally served and creditor has exhausted partnership assets
--------
The partner can seek indemnity from the partnership and failing that, can seek contribution from other partners
72
If partners agree among each other that one of them will not be liable for any of the partnership's obligations what effect is there?
The partners cannot agree among themselves to limit the rights of third parties, so all of the partners can still be sued jointly and severally, BUT for contribution and indemnification purposes, the agreement is enforcable
73
Is a partner personally liable for partnership debts that existed before they became partners?
-------
If a partner leaves the partnership, are they still personally liable for the debts of the partnership?
No not personally liable for obligations that predated his joining - the partner can only lose the amount of their contribution to the partnership to liabilities that existed before their joining.
------
Yes, outgoing partner remains liable for obligations existing while they were a partner absent release/novation
74
What duties does a partner owe to the partnership?
To whom are fiduciary duties owed?
Can these be eliminated?
1) Duty of Loyalty
2) Duty of Care
3) Duty of disclosure
4) Duty of obedience
------
Fiduciary duties are owed to the partnership and to each partner individually
------
Only duty of disclosure can be eliminated
75
What is required by a partner's duty of loyalty?
Must account to the partneship for any benefit derived by the partner in conducting partnership business (or stealing opportunities)
Cannot deal adversely with the partnership or compete with the partnership
76
What is required by a partner's duty of care?
Can't behave grossly negligent or worse - ordinary negligence is not actionable for breach of fiduciary duty
77
What is the duty of disclosure owed by partner to the partnership?
A partner has a duty to provide complete and accurate information to the partnership. Disclosure must be made without demand if reasonably required for the exercise of partner's rights and duties and always on demand (if reasonable)
78
What is required by the duty of obedience owed by a partner to the partnership?
Partner must obey all reasonable directions of the partnership and not act outside the scope of his authority
79
What law governs the determination of if property is owed personally by a partner or is partnership property?
RUPA governs titled property (including real property)
| Common law governs untitled property
80
When is titled property property of the partnership and not some individual partner?
Under RUPA...
Property IS partnership property if it is acquired in the partnership's name or in a partner's name where it is apparent they are acting for the partnership
Property PRESUMED to be partnership property if it was purchased with partnership funds (regardless of in whose name it is held) - presumption rebuttable
Property presumed to be personal property of a partner if it is all of:
1) held in the name of one or more partners
2) instrument transferring title gives no indication they are acting for a partnership
3) partnership funds wre not used
81
When is untitled property property of the partnership and not some individual partner?
Common law governs and looks to the following factors:
- were partnership funds used?
- is the property used in conducting the business of the partnership?
- is the property on the books of the partnership?
- is the property improved/maintained using partnership funds?
82
Does a partner have any rights in partnership property?
No - partners are not co-owners in partnership property and have no transferrable interest in it. The property is owned by the entity.
A partner can only use the property for partnership purposes
83
What is the partner's ownership interest called?
What does it consist of?
Can a partnership interest be transferred?
A partnership interest
Consists of management rights and financial rights
The financial rights can be transferred unilaterally, but the management rights cannot be transferred unilaterally "pick your partner rule" (that would be like unilaterally admitting a new partner). If a partnership interest is purported to be transferred, only the financial rights are transferred (absent a unanimous vote) and the membership of the partnership is the same
84
What is dissociation?
| What are the methods of dissociation?
Withdrawal of a partner from the partnership - does not necessarily entail dissolution of the partnership
Any of the below will cause dissociation
1) oral/written ntoice of partner's express will to withdraw
2) happening of an agreed event
3) valid explusion
4) partner's bankruptcy, death, incapacity, termination
5) court decision that the partner is incapable of performing the partner's duties
85
What is special about a partner dissociating by giving their express notice of withdrawl?
That automatically triggers dissolution (as well as dissociation)
86
What is wrongful dissociation? What is the effect?
Can a partner always dissociate?
A dissociation that is in breach of an express term in the partnership agreement OR
if the partnership is for a set term, withdrawing/being expelled/bankrupt before the end of that term
If a partner wrongfully dissociates, they are liable to the partnership for any damages caused by the dissociation
Yes, a partner can always dissociate (but it may be wrongful and owe damages)
87
What are the two types of partnership with respect to expected duration?
At will partnership: No agreement to remain until a set date (statutory default)
Term partnership: Explicit/implicit agreement to remain until a certain term is up or an undertaking has been completed (e.g. partnership to construct a building)
88
What are the consequences for the partnership when a partner dissociates?
What are the consequences for the partner when a partner dissociates?
For the partnership, EITHER:
Route 1) partnership is dissolved and liquidated
Route 2) Partnership continues and the dissociated partner is bought out of their partnership interest
^nature of the event of dissociation determines which
-------------
The partner's right to participate in management ceases, and the partnership will buy out the partnership interest at liquidation or going concern value
BUT if a partner wrongfully dissociates before the end of a term partnership, they are not entitled to a buyout until the term expires (unless they can prove they can be bought out without undue hardship to the partnership). If a partner wrongfully dissociates, any damages caused can be offset from the buyout price
89
When is dissolution required?
Dissolution and winding up is required only if:
- a partner in a partnership at will dissociates by express will (lot of leverage here)
- a partner in a term partnership dissociates wrongfully/by death/by bankruptcy AND vote of half of remaining partners w/i 90 days
- court order/unanimous vote, judicial decree
- 90 days pass and there's only one partner
90
What is the dissociating partner's liability after they have left?
Partner remains liable for PREdissociation partnership obligations
Partner is liable for POSTdissociation liabilities incurred within 2 years after dissociation if BOTH:
1) the other party reasonably believed the dissociated partner was still a partner AND
2) the other party did not have notice of the dissociation
*so a partner can protect themselves by notifying creditors (effective immediately) or by filing a public notice of dissociation (effective within 90 days)
91
Does a dissociating partner still have apparent authority such that they can bind the partnership?
Yes - a dissociating partner can have apparent authority for 2 years postdissociation if the act would have bound the partnership predissociation AND the other party reasonably believed the dissociated partner was still a partner and did not have notice of the dissociation
92
What is the flow of funds when a partnership is dissolved?
First partnership assets are distributed to creditors (3rd parties and partners who loaned $)
If those assets are insufficient, partners must contribute in accordance with their loss sharing responsibilities.
Next capital contributions are repaid (if not enough partnership $, the partners must contribute as if loss)
Next excess assets are distributed as if profits
93
What happens to the partnership after dissolution?
Who does the winding up?
The partnership continues to exist until the partnership is wound up.
All living partners who have not wrongfully dissociated have a right to participate in the winding up. If all partners have died, the legal rep of the last living partner may windup
94
What does apparent authority look like after dissolution?
Partners retain apparent authority after dissolution (during winding up) for any act that is appropriate for winding up the partnership (and other acts if the third party had no notice of the dissolution)
Partnership can protect itself by filing statement of dissolution (effective in 90 days) or direct notification (effective immediately)
95
What is a "waiver of dissolution"?
What effect does a waiver of dissolution have?
At any time before the winding up of the business is complete, the partners may decide to waive the dissolution and not wind up by unanimous vote of the partners who have not wrongfully dissolved.
Waiver of dissolution prevents the winding down of the business, but it does not affect the rights of third parties who have relied on the dissolution before receiving notice of the waiver
96
What is a limited partnership?
What law governs?
What is required to form an LP? What does an LP have to do to stay in the good graces of the state of inc?
What must be in the name of the LP?
~ a partnership (entity) with at least one GP and at least one LP
- Generally partnership law governs unless displaced by LP specific law
- Must file a certificate of formation with the sec of state that is signed by all GPs and certain minimal info.
- An LP must maintain an office in its state of organization that has records of the certificate, LP agreement, and tax returns; must have an agent for service of process in the state
"LP" or "limited partnership" must be in the name to alert the public as to the limited liability nature of the business
97
What is a prerequisite for all entities that have limited liability?
Must file some kind of certificate/articles/charter with the state
98
What formalities are required of a limited partnership agreement?
No formalities - can be oral, written, or implied
99
What are the management rights of the general partners? Limited partners?
General partners by default share management rights equally among themselves and ordinary business decisions made by majority vote
LPs don't have management rights unless the LPA grants them. Exercise of management rights does NOT cause LPs to become personally liable (as was the case under old law).
Unanimous vote of LPs and GPs required for extraordinary activities such as amending the LPA, outside ordinary COB asset sales, admit a partner, etc
100
What are the default financial rights of the general and limited partners?
What are limitations on a limited partnership's ability to make distributions?
GPs and LPs receive profits in proportion to their contributions - no partner has a right to any distribution without making a contribution absent consent of all partners (can be in any form of benefit to the partnership)
Distributions cannot be made if that would render the limited partnership unable to pay its debts as they come due or total assets exceed liabilities
101
A partner in a limited partnership fails to make their promised contribution. What are the limited partnership's options?
Can sue the partner and seek money damages (even if the partner had promised to perform services as their contribution)
102
A limited partnership makes an improper distribution (more than the partner should have received or more than the partnership could legally distribute). Who is liable?
Any general partner who consents to the distribution is personally liable for the improper distribution (but no personal liability if made in reliance on reasonable financial statements)
Any partner that receives an improper distribution knowing it is improper may be forced to return the improper amt to the partnership
103
Can partners in a limited partnership assign their interests?
Yes, but on the financial rights (not the management rights) - the transferor partner remains a partner and the transferee does not become a partner
But if a partner transfers their entire transferrable interst in the partnership (all of their financial rights), that is a ground for expulsion from the partnership
104
What is the liability of a GP of a limited partnership that is not a LLP?
What about newly joined GPs of a limited partership that is not an LLP??
GPs are personally jointly and severally liable for partnership obligations, but they can seek indemnification from the limited partnership for liabilities incurred in ordinary COB (to drain partnership assets first)
New GPs are not personally liable for liabilities that pre-existed their joining
105
What is the liability of an LP?
LPs have limited liability - liability capped at contributions - makes no difference if they also participte in management or if their name is used
106
Does limited liability ever eliminate a person's liability for their own torts?
No - no business entity's liability shield can shield a person from their own tort liability
107
What fiduciary duties are owed by a general partner to a limited partnership?
GP owes the same duties of care, loyalty, information, and obedience that partners in a regular general partnership owe. Duties owed to the partnership and the other partners. BUT a GP does not violate the duty of loyalty simply because the GP's conduct furthers his own personal interests
108
What fiduciary duties are owed by a limted partner to a limited partnership?
LP owes no fiduciary duties to the partnership or any other partner solely by reason of being an LP (so LPs can compete with the LP or have adverse interests to it unless the LPA provides otherwise)
109
What are the ancillary rights of partners in a limited partnership?
1) Right to transact business with the partnership
2) Right to seek court ordered dissolution if not reasonably practicable to carry on the business in conformity with the partnership agreement
3) Right to sue the limited partnership directly to enforce their rights
4) Right to bring a derivative action on behalf of the partnership if demand made and denied or demand futile
5) Right to informatiion
110
What is required to admit a new partner into a limited partnership?
Need consent of all partners
111
What is required for a limited partnership to convert into a different form or merge with another entity?
Need consent of all partners and a filing with the Sec of State
112
Can partners dissociate with a limited partnership? How?
How is an LP treated after dissocation?
LPs or GPs can dissociate in the same methods as an ordinary partnership. LP has no right to dissociate before the termination of the partnership. Wrongful dissociation rules are the same as for regular partnerships
An LP is treated as a transferee of a limited partner's transferrable interest after dissociation
113
When can a court order the dissolution of a limited partnership?
What are other methods triggering dissolution of a LP?
Can be judicially dissolved if a partner requests and court determines that it is no longer practicable to carry on the LP consistent with the LPA.
Sec of state can also dissolve for nonpayment of fees
Other events triggering dissolution include:
- occurrence of event specified in the LPA
- consent of all GPs and majority of the rights to receive distributions "majority in interest” of LPs
- dissociation of a GP + majority in interest vote
- 90 days of either no GP or no LP
114
What is the flow of funds for the winding up of a limited partnership?
What rules apply after dissolution and during winding up?
The funds go first to creditors (including partnes who loaned $). GPs make up any shortfall in proportion to their rights to receive distributions at the time the liability was incurred. If any GP has to contribute more than their share to make up for a shortfall by another GP, can seek contribution
The same rules as ordinary partnerships apply during winding up. GPs can bind for any activities necessary for the winding up and other acts under apparent authority if the other party did not know
115
What makes an LLP different from a LP and a regular partnership?
In an LLP, all partners have limited liability - losses are capped at the amount of their investment - there are no GPs and LPs
116
What is required to form an LLP?
| What vote is required to convert into an LLP?
File a statement of qualification with the secretary of state.
Must be executed by at least two partners and contain certain minimal information.
The name must end with LLP or RLLP (registered LLP)
The vote required is whatever is necessary to amend the partnership agreement (or if silent, unanimous consent)
117
If losses are capped for all members of an LLP, what does a partner do if the LLP does not have sufficient funds to indemnify them for obligations incurred on behalf of the LLP?
The partner does not have any right to seek contribution from the other partners, but the partner also does not have to contribute any personal funds.
118
What are the principal characteristics of an LLC?
LLC is a form of legal entity that is a hybrid between a partnership and a corp that…
- is taxed like a partnership
- offers its owners the limited liability of a corp
- can be run like a corp or a partnership
119
What is an LLC NOT?
| What are the owners of an LLC called?
an LLC is NOT a corporation (it's limited liability COMPANY)
| Owners of an LLC are called members
120
What is the governing document of an LLC?
| What statute provides the default rules?
Governing document is an operating agreement
| Default rules provided by the RULLCA (Revised Uniform Limited Liability Company Act)
121
How is an LLC formed?
by filing a certificate of organization with the Sec of State that contains:
- name of LLC (which must contain LLC)
- address of the registered office and registered agent
122
Can an LLC alter fiduciary duties?
Yes, an LLC's operating agreement can eliminate the duty of loyalty and duty of care (but can't eliminate liability for intentional misconduct or good faith and fair dealing)
123
What are the two management structures for an LLC? Which is the statutory default
Statutory default is "member managed LLC" where all of the owners manage
OA can change it to a "manager managed LLC" where designated managers manage and regular owners do not
124
What are the voting rights? What % is required?
| Who has authority to bind the LLC?
Each member has equal voting rights by default. Ordinary business decisions require a majority. Extraordinary actions require unanimity (but OA can change)
-------
All members of an LLC have apparent authority to bind the LLC for actions within its scope of business (unless the other party knows the person lacks auth).
125
What are the default financial rights in an LLC?
Most states, profits and losses are allocated on the basis of contributions
126
What is the liability of members in an LLC?
| When can the LLC veil be pierced?
Members and managers are not personally liable for the LLC's obligations - can only lose the amount of their investment
LLC veil is pierced under similar circumstances as for corps except failure to follow corporate-esque formailities will not cause veil piercing here
127
Who owes fiduciary duties in an LLC? What are the fiduciary duties owed? To whom are they owed?
Those managing the LLC (either members in a member managed or managers in a manager managed) owe duties of care and loyalty to the LLC itself and to each individual member. Each member must also discharge their rights and duties in good faith and fair dealing
128
What is required by the Duty of Care in the LLC context?
Members (if member managed) or Managers (if manager managed), must act with the same care that a reasonable person would exercise under similar circumstances in a way that is reasonably believed to be in the best interest of the LLC. Business judgment protection is available (so no liability unless gross negligence or worse)
*Notice how members in a manager managed LLC do not owe DoC or DoL, but everyone always owes duty of GFFD
129
What is required by the Duty of Loyalty in the LLC context?
| Is there any way around the duty of loyalty?
Members (if member managed) or Managers (if manager managed), must give any benefit they derive from the LLC's activities to the LLC itself, cannot deal adversely with the LLC, and cannot compete with the LLC.
*Notice how members in a manager managed LLC do not owe DoC or DoL, but everyone always owes duty of GFFD
All members can authorize or ratify an action in breach of the duty of loyalty by unanimous vote
130
What is the rule for transferability of ownership intersts?
Can transfer financial rights unilaterally but not management rights.
An assignment of a member's interest in an LLC transfers only the member's right to receive distributions and managers rights are not transferred.
Management rights can only be transferred by the consent of all members or as provided in the OA, so to admit a new member, need unanimity or as provided in the OA
131
Can a member of an LLC dissociate?
Yes, in the same manner as a partnership. Can dissociate at any time, but wrongful dissociation trigger liability to the LLC for damages
132
What events cause the dissolution of an LLC?
1) event specified in the OA
2) consent of all the members
3) 90 days pass where the LLC has no members
4) judicial dissolution upon finding that the LLC's main activity is unlawful, it is impracticable to operate the LLC according to the OA, controlling members behave illegally/fraudulently, controlling members are acting in an oppressive way and will/are/have harmed the other members
5) fail to pay fees/annual report to the Sec of STate
133
What are members liability for expenses/debts/obligations of an LLC after dissolution?
Claims (including claims arising after dissolution), must claim against any assets that the LLC has left during the winding down.
If LLC has no assets left, member is liable to the extent of their claim on the LLC or the amt they have received in distribution (whichever is less). LLC can cut off the right to claim at all by notice to the claimant (120 day lag time) or published notice in the newspaper (5 year lag time)
134
How are partnerships and LLCs taxed?
On a passthrough basis
135
What are a member's rights to information in a member managed LLC?
In member managed, LLC and members must furnish info necessary to other member's rights any duties without request and must furnish all other info on request
In manager managed, managers must furnish info that members request for a purpose material to the member's interest
136
What are the two different ways that a member can sue an LLC?
Member can sue the LLC in a direct action to recover for injuries to them as memebrs OR bring a derivative action on behalf of the LLC if the make demand or demand is futile
137
Do members of a member managed LLC or managers of a manager managed LLC incur expenses/obligations/liabilities in their role, what can they do?
members in a member managed LLC and managers of a manager managed LLC have a right to be indemnified for debts/obligations/other liabiliteis incurred in the course of their activities as long as they complied with DoL and DoC
138
What interest in an LP, LLP, LLC, or partnership can be reached by creditors? What is this process called?
Only the interest that can be unilaterally transferred (the financial interest)- this is called "attachment"
