MEE Agency/Partnership

Question 1

What are the general requirements for forming an agency?

Answer 1

Agency is a fiduciary relationship that arises when one person (the “principal” appoints another (the “agent”) to act on the principal’s behalf and the agent consents to act. The agent must also act subject to the principal’s control. (Does not need to be significant control.)

Question 2

What happens if an agent disobeys a reasonable direction?

Answer 2

The agent will be liable to the principal for any loss that the principal suffers.

Question 3

How does compensation effect the agency relationship?

Answer 3

While a gratuitous and a compensated agent may owe the same duty of care, the measure of “reasonableness” may vary because compensation is a proper circumstance to consider.

Question 4

Does the agency relationship need to be in writing (Statute of Frauds)?

Answer 4

Generally, no. However, many states require agency agreements to be in writing when the agent is to enter into certain contracts within the Statute of Frauds (mostly land transactions), or when the agency agreement itself would fall within the Statute of Frauds.

Question 5

What is apparent authority? How does it effect the principal’s liability?

Answer 5

If the principal’s words or conduct would lead a reasonable person in the third party’s position to believe that the agent has authority to act on the principal’s behalf, the agent has apparent authority to bind the principal.

A principal generally will not be bound when the principal does nothing to hold the agent out as having authority and the only statement of authority comes from the purported agent’s claim they have authority.

Question 6

What is actual authority? How does it effect the principal’s liability?

Answer 6

If the principal’s words or conduct would lead a reasonable person in the agent’s position to believe that the agent has authority to act on the principal’s behalf, the agent has actual authority to bind the principal. Actual authority may be express or implied.

Principal liable if the agent has actual authority. (But also make sure to check for apparent authority.)

Question 7

How may termination of actual authority happen?

Answer 7

• The happening of an event specified in the agent’s and principal’s agreement as something that will ter‐
  minate the agent’s authority.
• Lapse of a reasonable time if a time for termination is not specified in the agreement.
• A change in circumstances, including destruction of the subject matter of the authority, insolvency of the agent or principal, and a change in the law or business conditions.
• Agent’s breach of fiduciary duty.
• Either party’s unilateral termination (both parties have the power to terminate an agency unilaterally,
  although such termination may constitute a breach of contract) OR
• Operation of law (for example, death or loss of capacity of either party except where a durable power of attorney—written authority that says it will not terminate on the principal’s disability—is present. Termination in the case of a principal’s death is effective only when the agent has notice of it)

Question 8

What is inherent authority?

Answer 8

Inherent authority is derived solely from the agency relationship and results in the principal being bound even though the agent had no actual or apparent authority to perform the particular act. This occurs because courts wish to protect innocent third parties rather than a principal who gave some actual authority to the agent. (Example: Conduct similar to that authorized.)

Question 9

What is an agent’s liability for a contract if they had no authority at all?

Answer 9

An agent who purports to make a contract on behalf of a principal, but who in fact has no authority to do so, is liable to the other party.

Question 10

What is the doctrine of “Respondeat Superior”?

Answer 10

A principal can be liable for the torts of an agent under the doctrine of respondeat superior (“let the master answer”). Under the doctrine, an employer (formerly called a master) is liable for the torts of an employee (formerly called a servant) committed within the scope of the employment.

A principal generally is not liable for torts committed by an independent contractor.

Question 11

How do you determine the difference between an Employee vs. Indipendent Contractor?

Answer 11

If the principal has the right to tell the agent how to achieve the results the principal desires, the agent is an employee; if the principal does not have the right to tell the agent how to achieve the results sought, the agent probably is an independent contractor.

Question 12

What are the three factors to help determine the scope of employment?

Answer 12

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

Question 13

When is a principal liable to an independent contractor?

Answer 13

Principal will incur liability for the acts of an independent contractor where:
(1) inherently dangerous activities(such as blasting) are involved,
(2) nondelegable duties have been delegated, or
(3) the principal knowingly selected an incompetent independent contractor.

Question 14

When is a partnership liable for a contract?

Answer 14

A partnership is liable for all contracts entered into by a partner in the scope of partnership business or with actual or apparent authority of the partnership.

Question 15

How is a partnership formed?

Answer 15

A partnership is an association of two or more persons to carry on as co-owners a business for profit. It’s formed as soon as that happens, regardless of whether the parties subjectively intend to form a partnership.

Question 16

What is a partnership liable for in torts?

Answer 16

With respect to the partnership’s liability in tort, a partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner (or an employee) acting in the ordinary course of business of the partnership or with authority of the partnership.

Question 17

What are the four fiduciary duties owed in a partnership?

Answer 17

(1) Duty of Loyalty
(2) Duty of Care
(3) Duty of Disclosure (Statutory)
(4) Duty of Obedience.

Question 18

What property is DEEMED to be partnership property?

Answer 18

Titled property is partnership property if it is acquired in the partnership’s name or in a partner’s name where it is apparent from the document that they are acting for a partnership (for example, it mentions a partnership or says they are a partner).

Question 19

What property is PRESUMED to be partnership property?

Answer 19

Property is rebuttably presumed to be partnership property if it was purchased with partnership funds, regardless of in whose name title is held.

“Partnership funds” includes not only the partnership’s cash, but also the partnership’s credit.

Question 20

What property is PRESUMED to be partner’s seperate property?

Answer 20

Property is rebuttably presumed to be a partner’s property if:
(1) It’s held in the name of one or more partners,
(2) The instrument transferring title gives no sign that they’re acting for a partnership, and
(3) Partnership funds were not used to acquire the property.

Question 21

Does a partner have a right to compensation?

Answer 21

Unless otherwise agreed, a partner has no right to compensation for services rendered to the partnership (with the exception of a right to reasonable compensation for services rendered in winding up the partnership business).

Question 22

How are profits and losses shared between partners?

Answer 22

Unless otherwise agreed, profits are shared equally among the partners (by number). Unless otherwise agreed, losses are shared in the same manner as profits.

You can agree to share losses differently, but unless another provision for profits, profits are shared equally still.

Question 23

How does indemnification in partnerships work?

Answer 23

A partnership must indemnify every partner with regard to payments made and obligations reasonably incurred in carrying on the partnership business.

If a partner makes a payment or advance on behalf of the partnership beyond the contribution the partner agreed to make, the payment or advance constitutes a loan that must be repaid with interest.

Question 24

What is the priority of distribution for a partnership?

Answer 24

(1) First, the partnership must pay all creditors. Creditors include “outside creditors” (for example, trade creditors, lenders, suppliers) and “inside creditors” (for example, partners who loaned money).
(2) Second, the partnership must repay all capital contributions paid into the partnership by partners.
(3) Third, profits or losses, if any.

Question 25

After a creditor has gone after the partnership, may they then go after the partners?

Answer 25

Yes, the creditor (or plaintiff) must first exhaust partnership resources before seeking to collect from an individual partner’s assets. (So, the partners are essentially guarantors.)

Question 26

How does transfer of partner’s interest function? Management interest vs. financial interest?

Answer 26

Unless otherwise agreed, a partner cannot unilaterally transfer his management rights and thereby make the transferee a “partner”. The default rule for the admission of a new partner is that it requires a unanimous vote of the existing partners. (PICK YOUR PARTNER RULE).

Unless otherwise agreed, a partner can unilaterally transfer his financial rights. The transferee merely has the right to receive profit distributions from the partnership that would have otherwise gone to the partner.

Question 27

What is a charging order?

Answer 27

A charging order allows an entity to place a lien on and seize money owed to them by someone who is named as a member of a partnership, limited partnership (LP), or limited liability company (LLC). Under the charging order, they may put a lien on money distributed to the debtor through the business.

Question 28

How is a partnership at will terminated?

Answer 28

A partnership at will can be dissolved at any time by the express will (for example, notice of dissolution) of any partner without penalty.

Question 29

What are the events of dissociation?

Answer 29

(1) Oral or written notice of the partner’s express will to withdraw;
(2) Happening of an agreed event;
(3) Valid expulsion of the partner;
(4) The partner’s bankruptcy or
the appointment of a receiver for a partner;
(5) The partner’s death or incapacity to perform partnership duties;
(6) The decision of a court that the partner is incapable of performing a partner’s duties; or
(7) Termination of a business entity that is a partner.

Question 30

What is a wrongful dissociation and what are the effects?

Answer 30

A partner will be deemed to have wrongfully dissociated if the dissociation is in breach of an express term in the partnership agreement. A dissociation is also wrongful in a term partnership if the partner withdraws, is expelled, or becomes bankrupt before the end of the term.

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

Question 31

How does liability work in a limited partnership?

Answer 31

The general partner(s) is personally liable for partnership obligations, while the limited partner(s) generally
does not have any liability beyond the liability to make agreed-upon contributions.

Question 32

How are creditors paid at the exhaustion of a limited partnership’s assets?

Answer 32

If limited partnership assets are insufficient to satisfy all obligations to creditors, each person who was a general partner when the obligation was incurred must contribute to the partnership to satisfy the obligation.

The contribution due is in proportion to the right to receive distributions in effect when the obligation was incurred.

Question 33

When a partner properly dissociates, what do they remain liable for?

Answer 33

A dissociated partner remains liable for pre-dissociation partnership obligations (a creditor can agree to release the withdrawing partner, however, from specific obligations).

A dissociated partner can be liable for post-dissociation partnership liabilities incurred within TWO YEARS after the dissociation (assuming that dissolution has not occurred) if:
(1) When entering the transaction the other party reasonably believed the dissociated partner was still a partner, and
(2) Did not have notice of the partner’s dissociation.

(Note: A dissociated partner can protect themselves (meaning, cut short this period of liability) by notifying creditors directly of their dissociation (effective immediately) or by filing a public notice of dissociation (becomes effective 90 days after filing)).

Question 34

How do you form a limited partnership?

Answer 34

A certificate of limited partnership must be filed with the secretary of state. The certificate must be signed by all general partners. The information required in the certificate is minimal. It includes, among other items:
(1) The name of the partnership,
(2) The name and address of the agent for service of process, and
(3) The names and
addresses of each general partner.

The limited partnership name must contain the phrase “limited partnership” or the abbreviation “L.P.” to alert the public.

Question 35

How do you remove a general partner from a limited partnership?

Answer 35

To remove a general partner from a limited partnership, you typically need to follow the terms outlined in the partnership agreement, which usually requires a vote by the limited partners, often with a majority interest, to remove the general partner “for cause”.

Question 36

How is a limited partnership dissolved?

Answer 36

• The happening of an event specified in the partnership agreement.
  *. The consent of all general partners and limited partners holding a majority of the right to receive distributions (“majority in interest”)
• After dissociation of a general partner, upon consent of partners owning a majority in interest if another general partner remains; if no general partner remains, after 90 days unless the partners admit a new general partner.
• Ninety days after dissociation of the last limited partner, unless a new limited partner is admitted within the 90 days.

Question 37

What is a derivative action in a limited partnership?

Answer 37

A partner may maintain a derivative action to enforce a right of a limited partnership if: the partner first makes a demand on the general partners to bring an action to enforce the right and the general partners do not bring the action within a reasonable time.

A derivative action may be maintained only by a
person who is a partner at the time the action is commenced and:
(1) who was a partner when the conduct giving rise to the action occurred; or
(2) whose status as a partner devolved upon him by operation of law or pursuant to the terms of the partnership agreement from a person who was a partner at the time of the conduct.

Question 38

What are the rights of partners in a limited partnership to dissociate or withdrawal?

Answer 38

A limited partner has no right to
dissociate before termination of the limited partnership. A general partner’s right to dissociate is similar to the right of a partner to dissociate in a general partnership.