BE 2014 Flashcards
3 Formations/Types of Businesses
- Partnership
- Corporation
- Limited Liability
Formation of an Agency Relationship
An agency is created when a principal and agent mutually agree that the agent will act on behalf of the principal and subject to the principal’s control. A fiduciary relationship results from manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act. The existence of an agency = A question of fact.
a. Agent owes the principal a fiduciary duty
b. Principal is liable in tort and K
c. Principal ←→ Agent ←→3rd Party
Requirements to Create an Agency Relationship
a. There must be a mutual agreement
i. There may be a K but it is not necessary
ii. No consideration is needed
b. The agent must be acting on behalf of the principal and
c. The agent must act subject to the principal’s control
* KEY: As long as all of these requirements are present an agency exists regardless of what the parties intentions or understanding is.
Courts Look At These 3 Things within a Relationship when Determining if an Agency Relationship Exists:
(1) The relationship of the principal and agent
(2) The relationship of master & servant
(3) The relationship of employer or proprietor and independent contractor
Gorton v. Doty (Football coach and librarian case)
Creditor/Debtor Relationship & Agency
An agreement may result in the creation of an agency although the parties did not call it an agency and did not intend the legal consequences to follow.
o Can be proved by circumstantial evidence
o Principal must have consented
A creditor (Cargill) who assumes control of his debtor’s business may become liable as principal for the acts of the debtor (Warran) in connection with the business.
o Just because a creditor has veto power does not = a principal
o The point at which the creditor becomes a principal is that at which he assumes de facto control over conduct of his debtor.
• Not just some control
Look at the type of control:
• Positive Control (Not just limiting)
• Day-to-Day Control: What should you do & what should not be done (Here: Cargill was constantly sending employees to check out what was going on and give guidance to what Warren should be doing).
- Note on Creditors – Banks who loan money give limits – it is in the bank’s interest to make money on lending money. (In the previous case, Cargill’s interest was to gain customers & grain, not to make money off the loan/money lent).
A principal will be liable to third parties if …. (List six different forms)
His agent has authority to effectuate the K.
Authority comes as:
(1) Express Actual,
(2) Implied Actual,
(3) Inherent
(4) Apparent,
(5) Ratification
(6) Estoppel
Express Actual Authority
A principal has expressed authority to the agent in spoken or written words the power to perform certain acts on the principal’s behalf.
- The scope express authority can be limited
TEST: Whether a reasonable person in the agent’s position would interpret the principal’s communication to encompass a particular act.
- Example: “I hereby authorize you to borrow money to pay my taxes on my property”
NOTE: The power to borrow money or execute and deliver PN must be granted in express terms of flow as a necessary and inevitable consequence from the nature of the agency actually created (Williams v. Dugan)
Implied Actual Authority
Not expressly granted but the principal’s words or conduct “reasonably interpreted” cause the agent to believe that he has authority.
- Focus on whether the agent believes he has power
- Example: If you hire someone to do a job for you but you can’t describe every task, the agent might assume he has been authorized to do more than you have expressly authorized him to do.
Apparent Authority
Usually some type of secret agreement. Corp. rules state something that is in contradiction w/what occurred. Secret instructions can easily destroy actual authority.
- Focus on whether the third party reasonably believes the agent had authority to act on behalf o the principal.
- Apparent authority cuts out secret agreements between the principal and the agent.
- Obviously if someone has actual authority they also have apparent authority
- Allows third party to back out but does not allow the principal to back out.
NOTE: If the principal wants to hold the third party to the K, they must have that party ratify the K. When the K is ratified, it relates back to the K that was originally signed. (You don’t have to notify the K, just have them sign and move on as if that was always the agreement or K).
Implied Authority Test:
Look at what is going on between the principal and the agent. Ask whether the agent reasonably believes she/he had actual authority based upon the relationship between the agent and the principal.
ESCO v. Harvard (Examples)
o Gary’s actions were in line w/the mission and the company’s desire for him to take a more active role in his dept.
o Received a written evaluation stating he was doing a good job & should be more proactive
o Gary thought had authority
o Counter: Understood this was an iffy proposition so he did not get the PO signed off by the president (as memo specified). (Gary thought this was only a formality because President always signed)
Apparent Authority TEST
Would a third party reasonably believe that the agent had authority?
Manifestation + Reasonable Belief by 3rd Party = Apparent Authority
(1) There must be a manifestation from the principal to the third party that the agent is an agent (Example: Simply give the “agent” an office, business cards, etc.)
• If the principal allows an agent to occupy a position which, according to the ordinary habits of people in the local, trade, or profession carries a particular kind of authority then anyone dealing with the agent is justified in inferring that the agent has authority.
• May also be created by the appearance of authority by “prior acts”
(2) Third party must reasonably believe that the agent had authority to act on behalf of the principal. (Example: Secretary buys copy paper, probably okay).
ESCO v. Harvard (Example):
*KEY: The third party doesn’t know about the memo like Gary did so it cannot stand to prove that Gary was not in fact an agent.
Undisclosed Principal
Subjects the principal to liability for acts done on his account if they are in the usual or necessary in that line of business. (Even if the principal forbode the agent to incur such debts so long as the transactions are in the usual course of business engaged in by the agent).
Ratification:
A principal may ratify the conduct of an agent who acted w/o authority – unless allowing ratification would be unfair to the third party as a consequence of changed circumstances.
i. Where the principal retains the benefits or proceeds of its business relations with an agent w/knowledge of material facts, the principal is deemed to have ratified the methods employed by the agent in generating proceeds. ii. Even if the agent is w/o authority, the principal may be bound pursuant to the doctrine of ratification and estoppel. iii. Can be express or implied as long is there an “affirmance” of the K by the principal iv. The most common is when a principal has knowledge of a transaction, accepts its benefits, and fails to repudiate it. v. Principal’s ratification must be complete (not as part of the K) vi. Regardless of when ratification occurs, it is considered from original formation
- Ratification requires acceptance of results of the act w/ an intent to ratify & w/full knowledge of all material circumstances.
Estoppel:
A principal who misleads a third party into believing that an agent has authority to effect a particular transaction is liable w/respect to that transaction. If a principal allows a situation to happen in which people reasonably believe someone is an agent – then the principal may be estopped to deny the agency relationship.
– Example: Someone hears that an agency is representing them (you’re in Dallas and you hear someone in Lubbock is representing you) If you don’t take reasonable steps to correct, then agency by estoppel can occur. (However, if you never heard or were unaware, estoppel could not occur because you never knew about it to fix it).
Hoddison v. Koos Bros.:
When a party wants to impose liability upon a principal, on a K made by an alleged agent, the party must prove the agency relationship & the principal does not have to disprove it.
The Agent’s Liability to Third Parties:
- If the agent Ks with a 3rd party on behalf of a disclosed principal, the agent is not liable on the K absent a contrary agreement.
- Courts typically require clear proof of intent to bind the agent.
- When an agent Ks on partially disclosed or undisclosed principal the agent is normally liable on the K.
- If the agent lacks power to bind the principal, the 3rd party may sue the agent for breach of warranty of authority or misrepresentation of authority.
- To ensure a principal is liable when an agent signs, the agent must: Name the principal & use By followed by a signature line.
a. If there is no “By” but a signature line = Still leaves agent liable
b. “By” overrides personal liability even if a person lists “By” and “Personal”
The Third Party’s Liability to the Principal:
- Unless the K provides otherwise, if an agent is acting for a disclosed or partially disclosed principal & has authority, the 3rd party is bound as well as the principal.
- When the principal is undisclosed, and where the agent has authority, the 3rd party is bound to the K, unless:
a. The principal’s existence is fraudulently concealed or
b. The third party is induced to enter into the K by representation that the agent was acting for himself and the agent or principal has notice that the third party would not have dealt with the principal. - An undisclosed principal cannot require a third party to accept the principal’s performance instead of the agent’s if this substitution substantially changes the performance contemplated by the K.
Principal’s Liability in Tort:
A principal who is the master is responsible for the torts of servants acting w/in the scope of their employment.
a. Master/Employer: Principal who controls or has the right to control the physical conduct of the other in the performance of the service
b. Servant/Employee: Agent whom the principal controls (vs. independent contractor)
RULE: Principals are always responsible for their own misconduct and are liable for the torts of his agent if the agent acts under his direction and the principal intents the conduct or its consequences (THINK: It is unlikely any principal will give an agent authority to commit a tort so, likely no actual authority. Apparent, the third party is unlikely to get up off the street and note that the tort feasor was acting as an agent. Inherent, ratification, etc. works in K not in tort).
a. Principals are liable for agent’s tort if the agent is an employee of the principal
b. Employee/Employer are separate until
- Make the connection that there is an employee/employer relationship
- When the employee committed the tort, he was acting w/in the scope of his employment
3 Ways to make principal liable for the Agent’s tort (even when the agent is not an employee):
- Abnormally Dangerous Activities
- Peculiar Risk of Harm
- Apparent Authority in Tort Actions
Abnormally Dangerous Activities:
If the activity might very well result in injury even if conducted with all due skill and caution. When an activity is abnormally dangerous, it is important not only that people engaged in it use the highest practicable degree of skill and caution, but also – since even if they do so, accidents may result.
i. The people who authorize the activity consider the possibility of preventing some accidents by curtailing the activity or even eliminating it all together. (Example: Transporting nuclear waste). ii. Anderson was not an abnormally dangerous activity because there was an easy way to make not dangerous
Peculiar Risk of Harm:
The peculiar risk = Death from breathing the sandblasting unless special precautions are taken.
i. Casto thinks that this fits the Anderson case ii. If the company is aware of the harm, or learns of the harm, they might become liable (again, fits the Anderson case) iii. In Anderson, the court rationalizes that there is no liability because worker’s comp claims are meant to address workplace injury, and if you allowed lawyers to sue everyone would be connected to the tort whether they should be liable or not.
Apparent Authority in Tort Actions:
When someone acts and has no authority to act – it is outside the scope of the employee’s employment making the principal not liable. (There are some situations where it appears someone has authority).
Servants v. Independent Contractors
Multi factor test to look at the nature of the relationship between franchisee and franchisor court looked at the amount of control exercised by the latter over the former – if the employer’s right to control the activities of an ee extends to the manner in which a task is to be performed than the employee is not an ind. contractor
(1) What was the extent of control of the er over how the ee does business?
(2) Is the ee involved in a distinct operation (unskilled might suggest employee)
(3) Whether the er or the workman supplies the tools or instruments of the trade (pizza guy has his own car might suggest he is not an employee)
(4) Method of payment (Hourly suggests employee – getting money for each specific task suggests not an employee)
(5) Whether the action is part of the regular task of the er (Cannot provide delivery pizza if there is no delivery man)
If the action of an employee benefits both the employee and the 3rd party, is the act outside the scope of the employment?
No, as long as it’s furthering company policy it is still within the scope of employment.
Factors to be considered w/regard to the scope of employment:
(1) Time, place, and purpose of the act
(2) Its similarity to act which the servant is authorized to perform
(3) Whether the act is commonly performed by servants
(4) Whether the master would reasonably expect such act would be performed
a. Smith’s acts occurred while she was on duty in the store – interaction was to complete the sale of items from the store. All actions were customary of store clerks.
b. Did not use normal methods of conducting the sale (The fact that an ee commits an intentional tort does not require finding that the behavior was outside of the scope of their employment). No evidence to show that Conoco could have expected this behavior from Smith.
(5) The extent of departure of normal methods
Agent’s Duties to the Principal - The Restatement:
An agent is a fiduciary of the principal in the classic sense of the word. As such, he has an obligation to act in the principal’s best interest rather than his own. The law places three major duties on the agent (1) loyalty (2) care (3) obedience.
Agent’s Duty of Loyalty:
Flows from fiduciary nature of the relationship
i. Agent must account to the principal for all profits from the transaction that have not be promised to the agent by K
ii. Refrain from acting as or on behalf of the adverse party
iii. Refrain from competing w/the principal
iv. Refrain from using the principal’s property or confidential information for personal purposes or for a third party
v. Disclose relevant information to the principal
vi. Segregate the principal’s property and keep render accounts
vii. Act in accordance w/a general duty of good conduct
Tarnowski v. Resop: *All profits (or benefits) made by agent in the course of an agency belong to the principal, whether they are fruits of performance or the violation of an agent’s duty. (Doesn’t matter if the principal suffered no damage or even if the transaction was profitable). Principal is entitled to recover its value, or proceeds, and also amount of damages caused.
Agent’s Duty of Care:
Flows from the parties’ implicit assumption that the agent will carry out his duties w/ reasonable care
Agent’s Duty of Obedience:
Flows from the nature of the agency definition which specifies that the agent must be subject to the principal’s control
i. The agent must act only as authorized by the principal and must obey the principal’s instructions ii. Must also perform any contractual duties owed to the principal
151.001: Definitions: Partnership Agreement:
Means any agreement written or oral, of the partners concerning a partnership
152.002: Effect of Partnership Agreement; Non- waivable and Variable Provisions:
(a) A partnership agreement governs the relations of the partners and between he partners and the partnerships. To the extent that the partnership agreement does not otherwise provide, this chapter govern the partnership and partnerships
(b) Includes what is not covered under (a) in other words – what cannot be changed
General Formation of Parnterships
- A partnership is an “association of two or more persons to carry on as co-owners a business for profit.”
a. No special filing required, no need to be in writing (but it is typical to have one that addresses all the important issues – instead of leaving them to be addressed by statute. You could use the provisions of the statutes as a guide but … you might not like them)b. Partnership law is like contract law, it boils down to what the agreement is – The actual express agreement between or among the parties might be silent
i. Statutes fill the gap/are default provisions if the partnership leaves things silent
Tex. 152.203: Rights and Duties of Partner:
(c): A partner is not entitled to receive compensation for services performed for a partnership other than reasonable compensation for services rendered in winding up the business of the partnership
– Common Sense: You take compensation out of profits, which are not directly tied to how hard you work. If the agreement does not address the compensation of the partners, the code does.
Tex. 152.051(b): Partnership Defined:
(a) .. (b) An association of two or more persons to carry on a business for profit as owners creates a partnership, regardless of whether:
(1) the persons intend to create a partnership; or
(2) the association is called a “partnership,” “joint venture,” or other name
(c) An association or organization is not a partnership if it was created under a statute other than …
4 Factors that Courts Look at to See if Partnership Exists:
- An agreement to share profits and losses
- A mutual right of control or management of the enterprise and
- A community of interest in the venture
- These are important but a partnership can exist w/o them and are not exclusive
** What really matters is whether the parties have created the kind of association defined by statute to equate to a partnership. (An agreement to share profits is by far the most important). This is determined on a case by case basis.
Texas Act 152.052: Rules for Determining if Partnership is Created (Factors)
(a) Factors indicating that persons have created a partnership include
(1) Receipt or right to receive a share of profits in the business
(2) Expression of intent to be partners (even though you can become a partner even if you do not intend to do so)
(3) Right to participate in control of the business (seems like the friends do have control – more than just veto power set negative controls)
(b) Following factors do not indicate ..
(1) The receipt or right to receive profits as payment of a debt.
(c) An agreement to share losses is not necessary to create a partnership (Intended to deal with the situation that no one enters into a partnership to lose money)
(e) Of interest or other charge on a loan, regardless of whether the amount varies w/the profits of the business – including a direct or indirect present or future ownership interest in collateral or rights to income, proceeds, or increase in value derived from collateral
* You can structure an agreement w/o becoming a partner by receiving profits
152.307: Extension of Credit in Reliance on False Representation:
(a) just because someone claims they are a partner, does not make them one – the person extending credit or relying on the representation is determined by applicable law other than this chapter & other partnership provisions, including the law of estoppel, agency, negligence, fraud, and unjust enrichment.
(b) The rights and duties of a person held liable under Sub.(a) also determined by law other than the law described in (a).
TX 152.501: Evidence of Withdrawal:
a) .. (b) An event of withdrawal of a partner occurs on (1) receipt by the partnership of notice of the partner’s express will to withdraw as a partner on
(A) the date on which the notice is received; or
(B) on a later date specified by notice;
152.301: Partner as an Agent:
Each partner is an agent of the partnership for the purpose of its business.
152.203: Rights and Duties of Partners
(a): Each partner has equal rights in the management and conduct of the business of a partnership.
152.209: Decision-Making Requirement
(a) A difference arising in a matter in the ordinary course of the partnership business may be decided by a maj. in interest of the partners (51%)
(b) An act outside of the ord. course of business of a partnership may be undertaken only w/ the consent of all parties.
151.001: Definitions (4) Majority in Interest:
With respect to all or a specified group of partners, means partners who own more than 50% of the current percentage or other interest in the profits of the partnership that is owned by all of the partners or the partners in the specified group as appropriate (If 50%, or no specified way of splitting, like here, you’ll need a gap filler).
Partnership Accounting (In General):
- Everyone contributes their specified amount, unless there is a unique agreement, when the business is sold each partner would be entitled to receive an amount equal to their capital investment, if available. Any excess of deficit would be shared in accordance w/ each partner’s share of gain and loss.
- The default partnership rule is that losses are apportioned among the partners in the same manner as profits. Thus if there is no agreement as to profits but not losses, losses follow profits. If there is no agreement at all – both profits and losses are split equally.
Draw:
Even if a firm has had profits and does have spare cash the partners are not automatically entitled to receive a cash payment. A draw is used to describe cash distributions to partners.
– The amount of the draw of each partner is determined by the majority vote of the partners and may be more or less than the profit.
152.202: Credits and Charges to Partner:
Each partner is credited with an amount equal to:
(1) the cash and value of property the partner contributes to the partnership
(2) the partner’s share of the partnership’s profits
(b) Each partner is charged with an amount equal to (a) (1) & (2) the share of the partner’s losses
(c) Each partner is credited w/an equal share of the partnership’s profits and is chargeable with a share of the partnership’s capital or operating losses in proportion to the partner’s share of the profits
(Example: If profits are split 60/40, the losses are split the same way)
Joint-Ventures:
- Voluntary relationship (not created by law)
a. Agreement is essential
i. Can be express or implied
b. Usually in relation to a specific venture
i. Even if it’s not something that can be completed immediately
ii. In other words, not general in operation or duration
c. Must share profits
i. Not several (i.e. joint and severally liable)
d. Must have equitable interest in profits themselves
e. Usually a management of property & authority to act for each other - Partnership rules typically govern
Partnership Liability to Third Parties (Generally)
- Partners are joint and severally liable for partnership obligations
- Partners are liable to:
a. Third parties in tort for wrongful acts or omissions of partners acting w/authority in the ordinary course of the partnership
b. Certain breaches of trust committed by partner
RULE: Texas Uniform Partnership Act:
Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution of the partnership name of any instrument for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partners acting has in fact no authority to act for the partnership in the particular matter, and the person w/ whom he is dealing has knowledge of the fact that he has no such authority.”
ASK: Is it carrying on in the usual way of business?
ASK: Is there an agreement tha says otherwise?
152.302: Binding Effect of Partners: (apparent authority)
(a) Unless a partner does not have authority to act for the partnership in a particular matter and the person with whom the partner is dealing knows that the partner lacks authority, an act of a partner, including the execution of the instrument in the partnership name, binds the partnership if the act is apparently for carrying on in the ordinary course:
(1) partnership business; or
(2) business of he kind carried on by the partnership
(b) an act of a partner that is not apparently for carrying on in the ordinary course a business described by Sub (a) binds the partnership only if authorized by other partners
(c) a conveyance of real property by a partner on behalf of the partnership binds the partnership if the property has been conveyed by the grantee or a person claiming through..
(Tort Liability) 152.303: Liability of Partnership for Conduct of Partner:
(a) A partnership is liable for loss or injury to a person, including a partner or for a penalty caused by or incurred as a result of a wrongful act or omission or other actionable conduct of a partner acting
(1) in ord. course of business of the partnership,
(2) w/authority of the partnership
(b) A partnership is liable for the loss of money or property of a person who is not a partner that is:
(1) received in the course of the partnership’s business; and
(2) misapplied by a partner while in the custody of the partnership
o Typically a question of fact unless the partner is not acting w/in the scope of employment, then it becomes a matter of law
Enforcing Partnership Liabilities Against Partners - Personal Liability?
Generally, the individual personal assets of all partners are subject to the claims of the partnership’s creditors (and obviously to their own personal creditors)
152.056: Partnership as Entity
A partnership is an entity distinct from its partners.
THINK: Partnership debt is owed by the partnership (Not the case)
152.304:Nature of Partner’s Liability:
(a) Except as provided in (b) or .801, all partners are JSL for all obligations of the partnership unless otherwise:
(1) Agreed by the claimant; or (2) provided by law
(b) A person who is admitted as a partner into an existing partnership does not have personal liability under (a) for the obligation of a partnership that …
• The theory of the act is that it is a debt or obligation of the partnership so you should go to the partnership and request payment. Typically, partnership pays.
152.305: Remedy
An action may be brought against a partnership and any and all of the partners in the same action or in separate actions.
• If you can’t get PJ over all of them, just sue those you can
• (i.e. = JSL)
152.306: Enforcement of Remedy
A judgment against a partnership is not by itself a judgment against a partner. A judgment may be entered against a partner who has been served w/process in a suit against he partnership.
(b) Except as provided in (c) a creditor may proceed against one or more partners or the property of the partners to satisfy a judgment based on a claim against the partnership only if a judgment:
(1) is also obtained against the partner; and
(2) based on the same claim
(A) is obtained against the partnership
(B) has not be reversed or vacated; and
(C) remains unsatisfied for 90 days after
(i) the date on which the judgment is entered or
(ii) the date on which the stay expires …
(c) Sub (b) does not prohibit a creditor from proceeding directly against one or more partners or the property of the partners w w/o first seeking satisfaction from partnership property if
(1) the partnership is a debtor in bankruptcy
(2) the creditor and the partnership agreed the creditor is not required to pay under (b)
152.101: Nature of Partnership Property
Partnership property is not property of the partners. A partner or a partner’s spouse does not have an interest in partnership property.
152.102: Classification as Partnership Property:
Guidelines to decide whether property = partnership property. (a) Property is partnership property if acquired in the name of:
(1) the partnership; or
(2) one or more of the partners, regardless of whether the name of the partnership is indicated, if the instrument transferring title to the property indicates: (A) the person’s capacity as a partner; or (B) the existence of a partnership
(b) Property is presumed to be partnership property if acquired w/partnership property, regardless of whether the property is acquired as provided by (a)
(c) Property is presumed to be the partner’s property if it is acquired in the name of one or more partner and the instrument transferring title does not indicate the person’s capacity as a partner or the existence of a partnership, and if the property is not acquired w/partnership property
(d) Property is acquired in the name of this partnership by a transfer to:
(1) The partnership in its name; or
(2) One or more partners in the partner’s capacity as partners in the partnership, if the name of the property is indicated in the instrument transferring title to the property
154.001: Nature of Partners and Partnership Interest:
(c) a partner is not a co-owner of partnership property
154.002: Transfer of Interest in Partnership Property Prohibited
A partner does not have an interest that can be transferred, voluntarily or involuntarily in partnership property.
152.202(c): Credits of and Charges to Partner: (In relation to creditors)
(c) Each partner is entitled to be credited w/an equal share of the partnership’s profits and is chargeable w/ a share of the partnerships capital..
152.201: Admission as a Partner: (In relation to creditors)
A person may become a partner only with the consent of all partners.
• (In other words, the argument is the creditor can not take control of the partnership w/o agreement of all partners)
1.002(68): “Partnership Interest”: (In relation to creditors):
Partners interest in a partnership. The term includes the partner’s share of profits and losses or similar items and the right to receive distributions. The term does not include a partners right to participate in management.
- Creditor only gets the interest which the debtor partner owes - which is to receive profits, not manage the parntership
152.308: Partner’s Partnership Interest Subject to Charging Order:
(a) On application by a judgment creditor of a partner or of any other owner of a partnership interest, a court having jurisdiction may charge the partnership interest of the judgment debtor to satisfy the judgment
(b) To the extent that the partnership interest is charged in the manner under (a), the judgment creditor has only the right to receive any distribution to which the judgment debtor would otherwise be entitled in respect of the partnership interest
(c) A charging order
constitutes a lien on the judgment debtor’s partnership interest. The charging order lien may not be foreclosed upon
(d) The entry of a charging order is the exclusive remedy by which a judgment creditor of a partner or of any other owner of a partnership interest may satisfy a judgment out of the judgment debtor’s partnership interest
152.402: General Effect of Transfer: A
A transfer of all or part of a partner’s partnership interest:
(1) is not an event of withdrawal
(2) Does not by itself cause a winding up of the partnership business
(3) Against the other partners or the partnership, does not entitle the transferee, during the continuance of the partnership, to participate in the management or conduct of the partnership business
THINK: (3) Creditor
152.202: Credits and Charges to a Partner:
Split the profits 50/50 (Here, their partnership agreement did not split it that way – First 5 years, 60/40 – thereafter 50/50) – the act shares losses the same that you do profits (In this case, the losses would have been 60/40 then 50/50; however their partnership agreement set it up that losses were split 50/50).
Texas 152.002(b)(2): Effect of partnership agreement; non waivable variable provisions:
A partnership agreement or the partners may not: eliminate the duty of loyalty under 152.205, except that the partners by agreement my identify specific types of activities or categories of activities that do not violate the duty of loyalty if the types or categories are not manifestly unreasonable;
• This also gets secret information of the partnership (i.e. if he wasn’t a partner, he wouldn’t have access to this information)
KEY: Okay to cut back on the duty of loyalty but it should not be totally eliminated
152.204: General Standards of Partners Conduct:
Partners owe partners and transferees …
(1) A duty of loyalty (defined in 152.205) (2) A duty of care (defined in 152.206)
(b) ..
(c) A partner does not violate a duty or obligation just because the partner’s conduct furthers his own interest
(d) A partner, in the partner’s capacity as a partner is not a trustee and not held to the standards of a trustee
• Do not cite trustee cases in partnership cases
152.501: Events of Withdrawal
(a) A person cease to be a partner on the occurrence of an event of withdrawal
(b) An event of withdrawal occurs on:
(1) receipt by the partnership notice of the partner’s express will to withdraw a partner on:
(A) The date on which the notice is received
(B) a later date specified by notice
(2) an event specified in the partnership agreement as causing the withdrawal;
o Okay under 152.002(b)(5)
(3) the partnership expulsion as provided by the partnership agreement
(4) the partner’s expulsion by vote of a majority in interest
(A)…
(5) the partner’s expulsion by judicial decree, on application by the partnership or another partner, if the judicial decree determines that partner … (Bad stuff)
(6) ..
(7) If a partner dies, he leaves the partnership
o 152.002(b)(5): Cannot be eliminated
152.502: Effect of Event of Withdrawal on Partnership and Other Partners:
A partnership continues after withdrawal. The event of withdrawal affects the relationships among the withdrawn partner, the partner, the partnership and the continuing partners as provided by .503-.506.
152.503: Wrongful Withdrawal; Liability:
(a) can withdraw ..
(b) A partner’s withdraw is wrongful only if:
(1) breaches an express provision of the p’ship agreement
(2)…
(c) In addition to other liability of the partner to the partnership or the other partners, a wrongfully withdrawing partner is liable to the partnership and to the other partners for damages caused by the withdrawal.
• The partnership may sue for the partner’s wrongful withdraw.
• 152.604: Redemption if partnership has not wound up: If the partner wrongfully causes damages, he may set off against the redemption price payable to the withdrawn partner and all other amounts owed by the withdrawn partner to the partnership, whether currently due, including interest
Example: Suppose wrongful w/draw has caused $60k in damages and the withdrawing partner is owed $100 – the partnership can just pay $40k
152.504: Withdrawn Partner’s Power to Bind Partnership:
(a) The action of a withdrawn partner occurring not later than the first anniversary date of the person’s withdrawal binds the partnership if the transaction would bind the partnership before the person’s withdrawal and the other party to the transaction:
(1) does not have notice of the person’s withdrawal as partner;
(2) had done business with the partnership within one year preceding the date of withdrawal; and
(3) reasonably believed the withdrawn partner was a partner at the time of the transaction
(b) …
152.506: Liability of a withdrawn partner to a third party:
If a partner withdraws under a circumstance that is not winding up, they remain liable to another party as a partner in a transaction entered into by the partnership or a surviving partnership for 2 years after withdrawing if the other party to the transaction:
(1) Does not have notice of the partner’s withdrawal (2) Reasonably believed the withdrawn partner was a partner at the time of the transaction
11.051: Event Requiring Winding up of Domestic Entity:
Winding up of a domestic entity is required on:
(2) A voluntary decision to wind up the domestic entity
• 11.057: Supplemental Provisions for Domestic General Partnership (How to voluntarily wind up)
(5) A decree by a court requiring the winding up, dissolution, or termination of domestic entity, rendered under the code or law
• 11.314: Involuntary Winding Up and Termination of Partnership of LLC: Basis for judicial winding up (Requires lawsuit – which you want to avoid because it requires
Comparing the Partnership and the Corporation
- Unlike a partnership, a corporation has to be formally created, the parties must make a conscious decision whether to become a corporation.
- To form a corporation a certificate of incorporation must be filed w/the state in accordance w/specific criteria – must get the legislature’s permission
- Entity Status: A corp. is an entity distinct from its owners in all juris.
- Continuity of Existence: Corp. have perpetual existence until and unless it is dissolved (unless it explicitly chooses to have a limited duration).
i. For owners who are dissatisfied w/the corp. they may sell their shares and get out *return invested capital w/o consent of the board or other share holders) - Centralized Management: Unlike partnerships, the decision-making power in a corp. traditionally resides w/the board (who may or may not be shareholders). Shareholders elect directors but otherwise they vote only on fundamental transactions
- Limited Liability: Shareholders enjoy limited liability – losses are limited to the value of his investment (i.e. rarely do creditors have recourse against shareholders individually – usually just seize property of the corporation).
- Free Transferability of Ownership Interests: Shares are freely transferable (unlike a partnership where new partners may be admitted by unanimous consent only)
- Tax Status: Taxed as a separate legal person and pays its own taxes based on its own income for the year.
Specific Corporate Model (Every Lawyer Needs to Understand):
a. Shareholders own the corporation but they do not run it (they cannot), the receive profits from the corp in the form of dividends, & also elect people to the BOD
b. Board of Directors (typically a group of people – 3 to 10/15)
i. Elected by the shareholders
ii. The BOD has all the powers of the corp and supervise the corp’s activities
iii. Provides general guidelines and selects managers
iv. Typically a BOD will only meet once/four times a year
v. Director is not an employee
c. Management
i. Run the business on a day to day basis
3.001: Formation and Existence of Filing Entities:
(a) To form a filing entity, a cert. of formation needs to comply w/ 3.003, 3.004, and 3.005 & Ch. 4
(b) …
(c) The existence of a filing entity commences when the filing of the certificate of formation takes effect as provided in Ch. 4
(d) Unless the state terminates the filing entity, an acknowledgment of the filing of a certificate of formation issued by the filing officer is conclusive of (1) the formation/existence of the filing entity; (2)the satisfaction of all CP to the formation of the filing entity; and (3) the authority if the filing entity to conduct business in the state.
3.005:Certificate of Formation:
What must go in the certificate:
• Name of filing entity before formation
• Type of filing entity before formation
• Purpose of formation (which can be stated or include any lawful purpose)
• Period of duration, if the entity is not formed to exist perpetually and is intended to have a specific period of duration
• Street address of the initial registered office of the filing entity and the name of the initial registered agent
• The name and address of each:
o Organizer (unless formed under a merger/conversion)
o General Partner (if limited partnership)
o Trust Manager
o *Directors
5.054: Name of Corp., Foreign Corp, Professional Corp., or Foreign Professional Corp.: (
(a) The name must contain “company,” “corporation,” “incorporated,” or “limited,” or an abbreviation of those words (b) Nonprofit corps. do not have to comply with (c) Instead of (a) can be the phrase “professional corporation” or an abbreviation of the phrase.
5.053: Identical and Deceptively Similar Names Prohibited:
(a) A filing entity may not have a name, and a foreign filing entity may not register to transact business in the state under a name, that is the same as, or that is the secretary of state determines to be deceptively similar or similar to: (1) the name of another existing filing entity (2) the name of a foreign filing entity that is registered …
• If SOS says it is similar – don’t fight it.
• SOS is who makes this determination
5.201: Designation and Maintenance of Registered Agent and Registered Office:
(b) The registered agent must be an individual
(b)(2)(B)(3): Must maintain a business office at the same address as the entity’s registered office
(c)(1) Must be located at a street address where process may be personally served on the entity’s registered agent ..
• Fairly common for you (the attorney) to be the registered agent
• You understand the important documents that will be coming to the office
• Also good way to drum up business and if there’s action required, you’ll probably be chosen to help
(The Corp. Theory in Law) 21.401: Management by Board of Directors:
The BOD shall:
(1) Exercise or authorize the exercise of powers of the corp; and
(2) Direct the management of the business and affairs of the corp.
21.403: Number of Directors:
(a): May consist of one or more
• Most corp’s have a minimum of 3 directors, mainly to avoid tied votes
(b) If crop. In managed by BOD, the number shall be set by, or in the manner provided by, the cert. of formation, or bylaws of the corp., except that the number on the initial BOD must be set by crt. Of formation.
(c) Increase or decrease is provided by the cert. of formation or bylaws. A decrease cannot shorten the term of the incumbent director
(d) If the bylaws are silent as to the number, the number is the same as the number constituting the initial BOD as per the cert. of formation
1.002(16): Director
Means an individual who serves on the BOD of a foreign or domestic corp.
1.002(38) Individual:
Means a natural person
*Corp cannot be director of corp. but the corp. can be a partner
3.003: Duration:
A domestic entity exists perpetually unless otherwise provided in the governing documents of the entity. A domestic entity may be terminated in accordance w/this code or the Tax code.
• If one group owns 50% and the other owns less, it’s possible for majority owners to discriminate against minority
o KEY: If you say it expires after a certain amount of time, the minority knows they can get out.
o In a small corp. it’s almost impossible to sell stock
• As soon as there is an expiration provision, it’s like murphy’s law, if something can screw up, it will – clients will forget about this and continue operating the corp. after the charter has expired
o Opens up the possibility that it’s not a corp. but it is an association of two or more people conducting business (i.e. partnership) and the rules of personal liability substantially change
Limited: When you see the word in a biz org. context – you’re talking that the shareholders are limited (their liability), the shareholders put money into the corp., once they do so – it’s the corp. money not the shareholders. If the corp. owns debt that money is at risk to pay corp. debts but aside from the money they’ve paid for their shares of stock they are not liable (only the amt. put in).
3.001: Formation and Existence of Filing Entities:
(c) Existence commences when filing of cert. takes effect
• i.e. it does not exist until SOS files and sends acknowledgement
(d) The acknowledgement is conclusive evidence of the formation and existence of the corp. and the satisfaction of all CP
• Even if your form/cert doesn’t comply with the law, once you receive this acknowledgement it’s conclusive evidence that you’re in compliance
(d)(3): The authority of the filing entity to transact business in this state
• If clients are conducting before the cert. is filed it looks like they’re acting as a partnership once they’re in existence, it’s the corp. doing biz.
