MEE - Bar Exam Drills Flashcards
Partnership:
Partnership is created when two or more persons associated to carry on as co-owners a business for profit
Persons can include entities, like LLCs.
Sharing profits, not gross receipts, create a presumption of a partnership.
However, this presumption can be rebutted by a showing that the profits are being used to repay a debt or interest on a loan.
When a partnership is created, all partners are jointly and severally liable for the obligations of the partnership.
Courts will look at whether the persons intended to carry on business for profit, and look at factors like whether each had rights in the business or venture, whether they designated their relationship as such, whether they shared property as joint tenants or tenants in common, and whether the activity required extensive activity.
Courts will also look at whether each had a right to participate in the business or who had control.
Courts will also look at whether they agreed on losses and costs may indicate a partnership was formed.
LLC Liability for Acts:
An LLC can be liable for the acts of those with direction, oversight, and management authority based on agency principles.
Debts of LLCs:
The general rule is that the debts of one LLC are the debts of the LLC and a veil is erected around its members.
Actual Authority:
Actual authority exists when the agent-manager acts with authority he/she reasonably believes he/she possesses based on his/her communications with LLC, the principal, and such conduct is within the scope of the LLC’s ordinary course of business.
Actual authority can be express or implied.
Apparent Authority:
Apparent authority exists when the principal holds out the agent as his/her own, while exceeding his/her actual authority, and the agent acts in such a way that a third party reasonably believes the agent to be acting with such authority, the agent is acting within the ordinary course of the LLC business, and the third party lacks notice that the agent lacks such authority and is exceeding his/her actual authority.
(The issue is whether SubCo’s veil of limited liability should be pierced such that its sole member, Parent, should be held liable for the obligations of Sub.)
LLC’s Veil:
An LLC is like a corporation in that it has a legal fiction: the debts, obligations, and liabilities of the LLCs are those of the LLC and not its member.
Members are not personally liable for the LLC’s debts, unlike partners in general partnership.
But, like a corporation, an LLC’s veil of limited liability for its members can be pierced if three elements are present:
- (1) there is control by a member in his or her member capacity, not manager capacity
- (2) the member uses that control to abuse the veil of limited liability
- (3) piercing the veil of limited liability and holding the member accountable is necessary to prevent injustice
Ability to Investigate Pre-Agreement:
Courts are less likely to pierce the veil in contract cases, whereby parties had ability to investigate an LLC or corporation
Agent: (Actual Authority)
An agent is a person who is legally empowered to act on behalf of a corporation.
Actual authority is established when a principal vests in an agent to act on the principal’s behalf. The agent then binds the principal, if he/she enters into a contract with a third party, discloses the identity of the principal, and is within the scope of his/her agency.
Ratification:
A principal ratifies a contract when they are informed of all material terms of the contract, accept the entire contract, and reap the benefit of the contract.
A majority vote of the board of directors will bind a corporation to a deal that was made without proper authority.
Duty of Loyalty:
A director owes a duty of loyalty to the corporation, to act in the corporation’s best interest, and to not usurp opportunities for the corporation to make money.
If it seems as if the director has breached this duty, the director can argue and show evidence that they acted in the best interest of the company.
In order for the board to properly ratify an otherwise interested deal with a director, or other person who owes a duty of loyalty to the company, a quorum of the directors that have no interests in the deal must vote and approve the deal.
Dissolution of Corporation:
A shareholder may seek to dissolve a corporation by doing the following:
(1) give the board notice of why he/she would be suing for dissolution
(2) give the board 90 days to remedy the problem or to bring suit themselves in order to remedy the problem
The shareholder does not need to notify the board prior to bringing the suit to dissolve the corporation, if the notification would futile.
A ground for seeking the dissolution of a corporation is fraud on the part of the directors of the corporation.
Partnership - Assignment:
A partner in a partnership agreement may assign their rights to profits to any party without the consent of the other parties.
However, a partner may not assign their entire rights in the partnership unless:
(a) notice is given to all other partners
(b) other members consent to the assignment
Assignment is good up to the extent of the profits, and the person is entitled to that partner’s share of the profits, however, the partner’s purported assignment of rights greater than that, not effective.
Partnership - Property:
Property which is purchased by a partnership or contributed to a partnership by the partners is the property of the partnership alone.
Partners do not have the right to use the partnership property for their own personal benefit.
A partner who wrongfully uses partnership property must account to the partnership for that wrongful use.
Partnership - Reviewing Books:
A partnership can govern and limit the operations of the partnership through a partnership agreement.
However, when no such agreement exists then the partnership is governed by the UPA.
A partnership cannot limit or extinguish the right of all partners, and/or their agents, to review the books and records of the partnership upon request.
