CA Agency & Partnership

I. THE NATURE AND SCOPE OF AGENCY

A. In General (OL I.)

1. Agency is a fiduciary relationship that arises when one person, the principal, manifests assent to another person, the agent, that the agent shall act on the principal’s behalf and be subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.

2. Types of Relationshipsa. Master and Servant (Employer and Employee)

EXAMPLE:

Michael works as a dental hygienist for Dr. Ferry. The doctor sets Michael’s hours, provides all the equipment Michael needs to clean a patient’s teeth, and supervises his actions. Michael is Dr. Ferry’s employee and the doctor is the master/principal.

(1) Under the doctrine of respondeat superior: an employer is responsible for acts committed by the employee in the scope of their relationship

b. Employer and Independent Contractor

(1) The employer-independent contractor relationship differs because of the right of control: the principle is often not wrong.

EXAMPLE:

Michael grows bored with his job and tells the doctor he is leaving and wants a severance package. When the doctor refuses, Michael hires an attorney to negotiate with the doctor on his behalf. Michael tells the attorney how much he believes he is entitled to, but leaves the particulars of the negotiation to the attorney. Hence, the attorney is a nonservant agent and, therefore, an independent contractor.

3. Four Consequences of Agency:a. Duties aries between the agent and principal

b. agents cant bind the principal and act on their behalf

c. liability is on the principal for the agents actions which are in the scope of the agency

d. Knowledge of the agent is imputed to the principle

II. AGENCY: FORMATION

A. An agency relationship is formed: (OL II.A.) when the principle grants authority for the agent to act for them, express or implied

HYPOTHETICAL

Lee asks Kara to purchase his books for Business Associations for him. Kara says, “Sure.” Kara goes to the bookstore, where she sees that their Evidence textbook is finally in stock. Kara buys the Evidence book for Lee. Lee wants to thank Kara for going to the bookstore, so he guesses her school ID and password and registers her for a seminar once the waitlist opens. Which of these actions fall within an agency relationship?

Kara was an agent of lee, but that’s all

B. Capacity (OL II.C.)

1. Agent

a. minimum capacity

2. Principal

a. Any person who has capacity: to enter into a transaction

EXAMPLE: An incompetent may not act as a principal.

C. Proof of Agency (OL II.D.)

1. Agency relationship: question of fact, burden of proof lies with the person asserting the agency relationship

2. Relevant factors include:

a.

b.

HYPOTHETICAL

Pierre, upset that he just lost a ton of money at the gambling tables, calls his financial advisor and complains that his retirement fund is losing money and promptly hangs up. The advisor then calls his trader and tells him to sell Pierre’s IBM stock and buy energy futures. In this situation, what is the relationship created between Pierre and the advisor. The advisor and the trader?

D. Types of Principals (OL II.E.)

1. Disclosed, Undisclosed, and Partially Disclosed Principals

a. A principal is disclosed if, at the time of the transaction:

EXAMPLE:

A potential customer enters a car dealership that has a sign outside stating that it is “ABC Automotive of Manhasset” and is met by a salesperson who assists the customer. It is clear that the salesperson is an agent of the disclosed principal, “ABC Automotive.”

b. The principal is undisclosed:

E XAMPLE :

Donald Trump wants to purchase land to build a new casino in Atlantic City but is concerned that possible sellers would raise the price if they knew he was the buyer. Because of Donald Trump’s fear that it would likely be impossible to conceal his identity for too long, he instructs the agent to say nothing about a principal’s existence and to negotiate the deal as if the agent were the ultimate purchaser.

c. An unidentified principal is one:

E XAMPLE : The result is the same as in the example above except that because he is concerned that possible sellers would raise the price if they knew he was the buyer, he instructs his agent to make it clear that the agent is acting on behalf of a reputable businessman whose existence is disclosed but whose identity is not.

E. Types of Agents (OL II.F.)

1. General and Special Agents

a. General Agent

(1) A general agent: hired to do a large task

EXAMPLE:

A is hired by P to manage his department store; A will have numerous responsibilities in connection with that position and is given the authority to execute all of them.

b. Special Agent

(1) A special agent: hired to do a discrete task

EXAMPLE:

Home seller engages a real estate agent to sell his home but to perform no other tasks on his behalf; the agent is a special agent because his responsibility is to complete only one specific transaction.

F. The Relationship Between Principals and Agents (OL II.G.)

1. Employer-Employee Relationship

a. The master-employer has the right to control the details:

b. The servant-employee is an agent employed by an employer:

2. Independent Contractors

a. An independent contractor is a person who contracts with another to do something for him but who is not: subject to the physical control of the actor

b. Some independent contractors are now referred to as “non-employee agents” when the principal:

(1) An independent contractor may or may not be an agent:

HYPOTHETICAL

Jim and Pam hire Dwight to babysit their child in their home four days a week. They will pay him $400 a week. Dwight does some grocery

shopping and light housework. Is Dwight an employee or an independent contractor?

3. Some Factors to Consider:

a.. The child is involved

b. the fact that he is regularly paid

c.

III. POWER OF AGENT TO BIND PRINCIPALIntroduction

A. Authority of the Agent (OL III.A.)

1. Five Ways a Principal is Bound

a. actual authority

b. appartent authority

c. ratification

d. estoppel

e. inherent authority

2. Actual Authority

a. Express Authority

(1) Express authority arises when the principal: directly tells the agent what to do

EXAMPLE:

The principal who tells a person to “sell my house for me,” or “please bid on the Picasso at the auction,” gives a grant of authority.

b. Implied Authority

(1) Implied authority arises when, in a grant of express authority: actual authority that isn’t detailing instructions for the way someone completes a job

EXAMPLE:

When a principal directs a real estate broker-agent to sell his house, the broker has the implied authority to place a “For Sale” sign on the front lawn.

c. Both express and implied authority: binding

3. Apparent Authority

a. Apparent authority arises: depending on what the principal said or revealed to the third party

b. Some Things to Consider:

(1)

(2)

(3)

c. Under the doctrine of apparent authority, a principal is accountable:For a third party’s belief about an agent’s authority to act when the belief is reasonable and traceable to a manifestation by the principal

EXAMPLE: Paint example. Principal will be liable for the other color paint which Agent purchases, because Principal granted Agent apparent authority to buy paint, and the third party doesn’t know about the specific color authorization. Principal could have claim against Agent for exceeding authority.

4. Estoppel

a. Estoppel arises when: the principal does something wrong and is estopped from denying the existence of the agency relationship

(1) Manifestation to a third party: don’t need it

b. A third party may assert an estoppel claim by showing:(1) he entered intot he transaction because the principal intentionally caused

the belief or should have known he caused belief and didn’t’ take steps to prevent the belief

(2) third party reasonably relied to his detriment

(3)

EXAMPLE:

Landlord knows that tenant’s 14 year-old son acts as doorman some afternoons for tips. The landlord thinks it’s cute and does not say anything to the boy. Boy sells some furniture from the lobby to a passerby.

5. Liability of Undisclosed Principal (Inherent Agency)

a. Formerly called “inherent agency power,” this arises when an agent:Doesn’t tell the third party they are an agent.

b. Liability is imposed when the agent: Was acting in the scope of what agents reasonably do.

EXAM TIP:You will frequently see the initials P and A in agency questions.

EXAMPLE: If Principal hires Agent to employ a caterer for one day at a price not to exceed $50, and Agent hires Caterer for $60, Principal may be held liable, even if Caterer does not know that Principal exists.

HYPOTHETICAL

A general building contractor contacts the local business manager of a major glass manufacturer about the manufacture and installation of glass walls for a new office building. The manager informs the contractor that he has several panes from a canceled order sitting in a salvage yard available for a significant discount, but only if the contractor pays in cash. The contractor agrees but soon finds the glass is defective. If the contractor sues the manufacturer for damages, will the court find that the manager acted with authority to bind the manufacturer?

Actual authority? If manager typically sold glass he had implied authority so he has authority

HYPOTHETICAL

Carrie wants to return a pair of shoes to Samantha’s Swanky Shoe Store on Rodeo Drive. The salesperson, Charlotte, agrees to return the shoes for cash, even though the owner’s policy, which is printed on the receipt, is only to return shoes for credit. The owner, Samantha, calls Carrie later to tell her the mistake and notify her that her credit card will be charged again for the amount. Samantha offers her store credit. Is Samantha bound by Charlotte’s actions?

Maybe apparent authority if there is some reasonable assumption that salespersons have authority to grant refunds. Otherwise it isn’t enough and Carrie will probably lose.

B. Ratification (OL III.B.)

1. Ratification occurs when a principal: retroactively grants authority for his agent’s earlier unauthorized actions.

EXAMPLE: Kara bought Lee’s Evidence book for him, and after the fact he tells her thank you, but tries to renege when her credit card bill comes.

EXAMPLE:

Agent buys a building saying that he is Trump’s agent when he is not. Agent later goes to Trump and offers him a deal on the building, to which Trump agrees. Trump has ratified Agent’s actions, making it as if Agent was always working for Trump.

2. Rules about Ratification

a. the principal had to be in existence at the time of the agreement

b. express, conduct, or acceptance of benefits is reatification

c. Once an act has been ratified: it has the effect as if it were originally done by an agent with actual authority

3. Limitations on Ratificationa. Ratification is not effective if the ratification occurs after:

(1) manifestation of third party’s intent to withdraw before ratification

(2) a change in circumstances where it would be difficult to ratify for the third party

EXAMPLE: If Agent contracts to sell Principal’s house to Buyer without Principal’s authority, and the house is destroyed by fire, Principal’s later ratification of Agent’s act will not bind Buyer. (However, if Buyer still wishes to proceed, the changed circumstances will not prevent his doing so.)

b. A principal may not:

4. More Rules About Ratification:

a. can’t partially ratify an agreement or it counts as entire ratification

b. principal needs to know all of the terms of the deal or he cant ratify

EXAMPLE: Paul writes novels. Paul’s wife makes a deal with Paul’s publisher for him to write children’s books. The contract that his wife negotiates has some random foolish terms included in it. Before writing, Paul receives a check. If Paul cashes the check thinking it is for his next adult novel, he has no reason to know the terms of the deal. A principal can’t ratify a contract without knowing the specific terms of that deal.

5. Retroactive Effect of Ratificationa. Generally:

b. If the principal lacks capacity when the transaction took place:

EXAMPLE:

One who was a minor at the time of the transaction may ratify upon reaching the age of majority, but the ratification is effective only from the time of the ratification.

HYPOTHETICAL

Green, an attorney for Dallas, used his power of attorney to purchase

an annuity for the benefit of Flo, a nurse who had taken care of Dallas when all else had failed. The power of attorney explicitly did not authorize gifts. However, Dallas, with all her faculties intact, had orally approved the transaction. Will that oral directive act as a valid ratification?

IV. AGENCY: LIABILITY

A. Tort Liability (OL IV.A.)

1. Respondeat Superior

a. Respondeat superior is the doctrine that imposes vicarious liability:

on a principal for the torts of an agent committed in the course of agency

b. The liability of the employer: in addition to, not substituted for the liability of rhte agent

2. Scope of Employment

a. An employee acts within the scope of employment when performing tasks:engaging in a course of conduct subject to the employee’s control

b. An employee’s act is not within the scope of employment when it occurs:on an independent course of conduct not intended by the employee to serve any purpose of the employer

c. However, an employer may still be liable when an employee:

is disobeying employee orders

3. Intentional Torts

a. An employer may be held liable for his employee’s intentional torts: if it is committed during work that relates to the job

EXAMPLE: A bouncer may throw someone out of a club. Intentional tort, but within scope of employment, so owner will still be held liable.

EXAMPLE: Employee commits assault and purpose is totally unrelated to job.

B. Other Agents (OL IV.B.)

1. Independent Contractors

a. Doesn’t create liability for the principal. Usually not responsible for contractor torts

EXAMPLE: Principal hires Landscaper to plant his yard, but dictates what materials may be used to support a tree. Landscaper follows these instructions, and the tree subsequently falls on a passerby. Even though Landscaper is an independent contractor, this is the area where Principal exercised control, so Principal will still be responsible for that tort.

EXAMPLE: Principal hires Landscaper to plant his yard. Landscaper finds a coconut on the ground and proceeds to plays catch with a friend using it. While doing so, the coconut hits a passerby. As there was no control exercised by the Principal in this situation, there will be no liability on his part.

c. Exceptions:(1) where the principal exercises the same control as they would over an

employee and the tort arises within the context of that control

(2)

(3)

d. Inherently Dangerous Activities

EXAMPLE: Blasting or demolition work are inherently dangerous activities.

e. Nondelegable Duty

EXAMPLE: The duty of ordinary care owed by a landlord to a tenant for areas under the landlord’s exclusive control may not be satisfied merely by the careful selection of an independent contractor.

(1) Dangerous Disrepair(a) Where the employer’s premises are in a state of dangerous disrepair

and an independent contractor is employed to correct the situation:

f. Negligent Hiring(1) This is actually the negligence: of the principal

2. Apparent Agency

a. Apparent agency occurs when an independent contractor is hired:

b. Apparent agency requires:(1) manifestation by the principal

(2) reasonably reliance by the third party that the person that committed the tort was the agent-employee of the principal.

EXAMPLE: Doctors at hospitals are generally independent contractors or operate independently. Under traditional agency principals, the hospital would not be liable for the doctor’s torts. However, under apparent agency, the hospital might be liable if patients make a reasonable assumption that the doctor is an employee of the hospital.

HYPOTHETICAL

Kevin works as a stocker at the local A&P market. He erroneously believes a group of teenagers are attempting to steal some extremely expensive cuts of meat. After telling the teenagers to stop, he grabs the two teenagers and slams them into the glass meat case, causing

severe physical injury to both. Will A&P be liable for Kevin’s actions?

Kevin is an employee, so he is an agent of a&p. The issue is whether his actions fall in the scope of employment. In this situation his purpose was to stop a theft of goods from his employer. Because he was acting to serve his employer, A&P is responsible. It doesn’t matter if they allow or deny him the use of violence, they are on the hook.

V. DUTIES, RIGHTS AND REMEDIES OF PRINCIPAL, AGENT AND THIRD PARTIES

A. Duties of Principal to Agent (OL V.A.)

1. Absent an agreement to the contrary, the principal is obligated to his agent to:

a. duty of loyalty – no self dealing etc.

b. can’t take principal’s business opportunities until after disclosure and consent

c. duty of confidentiality

d. duty to account

e. duty not to compete with your principal. Duty of candor.

HYPOTHETICAL

A law firm partner asks you, an associate, to fly from Los Angeles to New York to meet with a client. On the way back, your American Airlines flight is delayed several hours. In order to get back in time for an afternoon hearing in court, you purchase a ticket on a United Airlines flight that is boarding. Is the law firm required to reimburse the associate for the extra plane ticket?

HYPOTHETICAL

The Great Star Steam Ship Line’s ship, the S.S. Shining Star, was hit by a tidal wave in the Pacific Ocean, causing a number of shipping containers owned by Mega-Mart Stores to fall off and be lost at sea. Mega-Mart brought suit for the loss of the merchandise, and Great Star, in turn, sought indemnification from Pearlstone Investments, the owner of the ship. Was Great Star’s action proper?

B. Duties of Agent to Principal (OL V.B.)

1. Duties begin:

a. However, the agent’s duty with respect to confidential information acquired during the relationship:

2. Duty of Care

a. Absent an agreement to the contrary, the agent is obligated to show a duty of care to the principal, with a duty to:

(1)

(2)

(3)

(4)

3. Duty of Loyalty

a. Self Dealing

(1)

(2)

b. Usurpation of Business Opportunity

(1) A business opportunity is an opportuntiy:

(2) Exception:

EXAMPLE: A new associate’s law firm sends that associate to look for new office space for the firm. The associate finds some great, undervalued space that would be great for the business his spouse is starting. If the associate arranges for his spouse to use the space for her new business, the associate has usurped a business opportunity.

4. Other Duties

a.

b.

c.

d.

5. Dual Agency Rule

a.

C. The Agent’s Duties and Obligations to Third Parties (OL V.C.)

1. Liability to a third party: depends on what type of principal. Disclosed, undisclosed, or identified

2. If the third party knows of the principal’s existence and identity at the time of the transaction: the agent will not have personal liability unless the contract specifies

3. If the principal is partially disclosed, or left unidentified: the agent is presumed to be a party to the contract

a. Exception: if the contract specifically states that the agent is not liable

4. The third party: can sue agent or principal

BAR EXAM APPLICATION

Question 1

Applicants might be asked to answer questions based upon facts similar to the following: At a meeting of the board of directors of Buildco, a corporation that operates a commercial warehouse, the board passed a resolution stating that the president of the corporation may not enter into any contract over $1 million without the express prior approval of the board of directors. Pres, the president of Buildco, attended the meeting. Two months later, Pres proposed to the board that Buildco purchase a forklift, an essential item for the business, from Beta. Although the board passed a resolution disapproving the proposed purchase, Pres, without the board’s knowledge, signed a contract as president of Buildco to purchase a forklift from Beta for $2,000. Beta had no knowledge of the board’s disapproval. After learning of the contract with Beta, the board repudiated it.Can Beta recover damages from Buildco?Applicants must consider whether there is actual or apparent authority, including a third party’s reasonable belief.

If Beta can recover from Buildco, does Buildco have a cause of action against Pres? Applicants must examine the relationship between an agent and principal, including an agent’s liability to a principal.

The president is an express agent because Buildco has provided him with express authority to act for the company, however here they didn’t not grant him the authority to enter into this transaction, so he is acting without authority. Still, Beta doesn’t know that, so they reasonably believe he has authority and so they can recover from buildco because that is apparent authority. Apparent authority applies where it is reasonable for the third party to believe the agent is acting on behalf of the principal

Buildco can recover from agent because they did not grant him the authority to buy the forklift. Even though he has express authority to enter into contracts <1mil, here they expressly told him not to take this action, so he was acting outside of the scope of his authority.l

BAR EXAM APPLICATION

Question 2

Applicants might be asked to consider a scenario similar to the following:Dealer agreed to deliver an SUV to Rich’s home following Rich’s purchase. Dealer does not usually deliver vehicles but, after Rich offered to pay $75 to the driver, Dealer agreed to have Sales, a full-time salesperson employed by Dealer, deliver the SUV to Rich’s house. At the end of a normal workday, Dealer gave Sales directions to Rich’s house and told him “Drive straight to Rich’s house, no detours. Drive carefully and no speeding. I don’t want any dents in that SUV.” On the way to Rich’s house, Sales stopped to visit Friend, who was in the middle of moving. Because the movers had not shown up, Friend offered Sales $200 to transport “a few loads” in the SUV and Sales agreed. This took several hours and Sales was running late. In his rush to Rich’s house, Sales negligently ran over Ped, who was crossing the street causing serious injuries. When Dealer learned that Sales had used the SUV to help Friend move, he demanded the $200 Friend had paid Sales.Can Ped recover from Dealer for Sales’s negligence?

Must Sales give Dealer the $200 he earned helping Friend move?Applicants must consider the issues of vicarious liability of a principal for an agent’s negligence and of the fiduciary duties agents owe to the principal.

ANSWER:

S was an agent with express authority to deliver. He was in the process of making delivery when he ran over the pedestrian. A principal is liable for the acts of his agent, even in negligence, so he is liable. Further, D asked for the proceeds. S doesn’tt have to give them over because he was acting outside the scope of his employmentby directly disobeying, but if he does give him the money, his actions are ratified, further strengthening the negligence action. S violated his duty of loyalty by straying from the path.

I. GENERAL PARTNERSHIPS

A. General (OL I.B.)

1. A general partnership is:An association of two or more persons to carry on as co-owners a business for profit

a. The definition of person includes:(1) corporation, association, other partnerships, other person

(2)

(3)

(4)

2. Formation

a. A general partnership is based on: an agreement between the partners – no filing requirement

3. Partnership v. Joint Venture

a. has a very specific purpose but the rules of partnership applies for the scope of that purpose

B. Tests for General Partnership (OL I.C.)

1. The key test: did the parties intend to enter into a relationship?

2. Things to Consider:

a. what they intended to do

b. sharing provits/losses, what they intend to do with those profits

c.

d.

e.

3. Sharing of Profits

a. The receipt of a share of profits: creates prima facia evidence that a partnership is intended

b. Exceptions:(1) landlord receiving a % of sales as part of rent

(2) payment/interest on a loan

(3)

EXAMPLE:

Bella and Edward agree to give Jacob 1/5 of the profits. Bella and Edward agree to pay Jacob $15 an hour.

4. Common Property

a.Can jointly own property without being partners

5. Partnership by Estoppel

a. Partnership by estoppel is found by: have to see what they said to the outside party

b. When a person, by words or conduct, represents himself to be a general

partner: he is liable to anyone that enters into a transaction with the partnership that reasonably relied on him

6. Agency Created by Holding Out

a. When a person has been represented to be a general partner: that person has the power to bind the partnership

II. RELATIONSHIP BETWEEN PARTNERS AND THIRD PARTIES

A. Powers (OL II.A.)

1. A general partner: both a principal and an agent of the general partnership

2. A general partner who acts for apparently carrying on in the ordinary course of the general partnership’s activities or activities of the kind carried out by the general partnership binds the general partnership, unless:

a. the general partner does not have the authority to act AND

b. the person with whom he’s dealing knows, or should know

3. Apparent Authority

a. Apparent authority:

4. Statement of Partnership Authority

a. Statement of general partnership authority:creates a presumption that third party’s know what the authority is, but if third party’s don’t know of the statement of authority they aren’t bound by it.

b. Knowledge of third parties:

HYPOTHETICAL

Paul was an equal partner in the Runny Faucet Bar and Grill, an unincorporated business located about two hours away from his home in Dutchess County. When the cost of driving to the business began to outstrip his share of profits, Paul decided to sell the establishment to the hotel from which the partnership rented the space. The other partners, who lived nearby, objected. Is Paul’s action binding?

Yes if this is in the ordinary course of business. If not, unanimous approval is required. Sale of a business is probably outside of the scope, and it is reasonable for the purchaser to know that this is an extraordinary transaction and it is unlikely that the sale is binding. Even if it isn’t, the hotel has a COA against paul

B. Liability (OL II.C.)

1. Nature of Liability

a. All general partners: jointly and severally liable for the debts of the partnership

b. An action may be brought: against the partners as individuals or together in separate actions or together

2. Extent of Liability

a. Each partner:

b. A partner is entitled to:

(1)

(2)

c. An incoming general partner: not personally liable for debts that happened prior to there admission to the partnership

III. RELATIONSHIP BETWEEN PARTNERS

A. Partnership Agreement (OL III.A.)

1. ability to make many arrangements about the rights/responsibilities among partners. Cali partnership act fills the gaps

2. The partnership agreement may not:

a. deny a partner rights to books/records, eliminate duty of loyalty, unreasonably reduce duty of care, vary a partner’s right to associate/withdraw from partnership, restrict a courts right, restrict a third party’s rights to collect from specific partners

b.

c.

d.

e.

f.

B. Contributions, Profits, and Losses (OL III.B.)

1. Partner’s Contributions and Shares

a. General Rule for Profits and Losses: Partner’s share equally in the profits. Losses follow the way they share profits

b. However, general partners may agree to share the profits other than equally:

EXAMPLE:

Bella, Edward, and Jacob are involved in a partnership and have no agreement as to profits and losses. By default, Bella, Edward, and Jacob will each take 1/3 of the profits and 1/3 of the losses.

2. Rights of a General Partner

a. Right to Compensation

(1) no, but can have right to salary

b. Right to Indemnity

(1) loss caused by partner committing acts on behalf of partnership can submit a claim to the partnership

c. Management and Control

(1) 1 partner 1 vote, cash contribution doesn’t matter

(2) Ordinary matters: decided by a majority vote, but sale or lease of all/substantially all assets are government by unanimous vote

(3) The consent of all general partners:

d. Property Rights of a General Partner

(1) Putting your personal property into the partnership removes your right tot hat property and it is the property of the partnership absent a contrary agreement

3. Rights in a Partnership

a. Two Kinds of Rights:(1) economic rights

(a) right to receive money/payouts

(b) freely transferrable

(2) voting rights

(a) not freely transferrable

(b)

HYPOTHETICAL

Patsy and Paul jointly operate the P&P Deli in Santa Monica together. When the deli runs into credit problems with their main meat supplier, Patsy agrees to pledge 1,000 shares of a company she owns as collateral. The supplier agrees to use the shares as collateral, but only if they are put in the name of the partnership. Several years later, and well after the liquidity crisis, Patsy sells her share of the deli and wants to sell her stock shares so that she can open a restaurant in Pasadena. Paul objects, claiming that the stock belongs to the partnership. Who owns the shares?

Absent specific partnership agreement, they were contributed to the partnership and have become partnership property. No partnership interst in the property.

b. Transfer of General Partnership Interest

(1) interest broken down into 2 pieces: economic interest and management interest

(2) A partner can freely transfer: his or her economic interest

(3) If economic rights are transferred: the partner still retains management/voting rights. Still has duties of the general parnter

(4) Such a transfer does not entitle the transferee, in the absence of a contrary agreement, to:(a)

(b)

(5) The only right of the transferee: Receive distributios from the transferor

c. Encumbrances(1) borrowing against a partnership interest works just like a sale. Bank can’t

become a partner, become a transferee holding an economic interest

C. Duties (OL III.C.)

1. Duty of Care a. use ordinary and prudent care in the performance of the partnership work.

These duties are owed both to the partnership and other partners

2. Duty of Loyalty

a. A general partner’s duty of loyalty consists of:

(1) Duty Not to Compete(a) A partner may not exploit a business opportunity:

1) that otherwise belongs to the partnership or

2) in which the partnership has an interest or expectation

(b) To take advantage, a partner must: fully disclose that to the partnership and get permission to pursue that opportunity

EXAMPLE: If a partner in a law firm receives a referral fee, the fee belongs to the partnership.

EXAMPLE: A law professor owns a restaurant or writes a novel. The professor has not breached a duty to compete.

(2) Duty to Account(a) to make financial records available for anything you’ve made or any

finances you’ve received

(3) Duty to Refrain from Adverse Dealings(a) can’t engage in activities that might hurt the partnership

3. Good Faith and Fair Dealing

a. may not be waived.

b. true even for rights they might otherwise have.

EXAMPLE: A partner has the right to disassociate, but cannot exercise such a right in order to self-deal and subsequently harm the partnership.

4. Duty to Keep Books and Right to Information

a.

D. Actions (OL III.D.)

1. Suits by Partnership Against Partners

a. the partnership can sue a partner or a partner can sue a partner

E. New Members (OL III.E.)

1. To become a partner: the other partner’s agree unanimously absent contrary partnership agreement

2. When a new member is admitted: not personallyliable for obligations incurred prior to their entry into the partnership

HYPOTHETICAL

Pauline became suspicious of how Patrick was handling the finances of their lace curtain distribution business. When Pauline asked to know if they were making money and where all the revenues went, Patrick handed Pauline a copy of the most recent bank statement. Was that an adequate accounting?

No you have a duty to keep complete and accurate books. This might be accurate but it isn’t complete

HYPOTHETICAL

Parker and Pike agreed to jointly lease and manage the Hotel Bentley for the term of 20 years. During that period of time, Pike entered into separate dealings for real estate contiguous to the hotel. Although the hotel was modestly profitable, Pike was able to generate huge profits on the other properties because of the significant traffic the hotel generated. Parker subsequently filed an action against Pike, saying his other businesses were improper. How would a court rule?

Duty to present partnership opportunities to the partnership first before taking them for himself. If they were partnership opportunities and he didn’t present them to the partnership, then in trouble.

IV. PARTNERSHIP PROPERTY

A. General Partnership Property (OL IV.A.)

1. Property Subsequently Acquired

a. property acquired by a general partnership does not belong to the partners individually even if acquired in the name of the individual

V. DISSOCIATION/WITHDRAWAL

Introduction

A. Dissociation of General Partner (OL V.A.)

1. Power to Dissociate

a. voluntarily or involuntarily (dying, creditor collecting on your interest)

2. Events of Dissociation

a. A general partner is dissociated upon the occurrence of the following events:(1) notice

(2) an event in the partnership agreement causes it

(3) explusion pursuant to the agreement

(4) expulsion with unanimous consent of other partners if

(a) unlawful to continue business

(b) transfer of all the partner’s interest

(c) if the partner is a corp and has disolved

(5) expelled by judicial order

(6) person is incapacitated or dies

(7)

3. Wrongful Dissociationa. A general partner’s dissociation is wrongful if it:

(1) breaches an express provision of the general partnership agreement OR

(2) if a partnership dissociates prior to the end or termination

b. A partner who wrongfully dissociates: is liable for any damages resulting from that dissociation

B. Effects of General Partner’s Dissociation (OL V.B.)

1. Effect on Partner’s Rights and Duties

a. Upon a general partner’s dissociation:(1) their right to participate in management terminates

(2) duty of loyalty ends, but confidentiality continues

2. Dissociated Partner’s Power to Bind Partnership

a. A general partner can still bind a partnership if:(1) the other party reasonably believes that the dissociated partner is still a general partner AND

(2) they didn’t have notice of the dissociation (for up to 2 years after dissociation)

3. Continuing Obligations of Dissociating Partner

a. For pre-dissociation debts: liable

b. For post-dissociation debts: not liable

(1) Exception

(a) if a creditor enters into a transaction w/partnership reasonably believing a dissociated partner is part of the partnership (up to 2 years)

(b) any payoff of the dissociated partner.

c. A dissociated partner may also seek indemnification or contribution for debts incurred.

C. Buyout of Dissociated Partner’s Interest (OL V.C.)

1. If a general partner is dissociated from an “at-will” general partnership:

2. The buyout price is: defined by the CCC. The amount is the value of the business at the date of dissociation. The price at which the GP could be sold for liquidation value OR the sale of a business as a going concern, minus any damages for wrongful dissociation

3. Timinga. For “at will” partnerships:

b. A general partner who wrongfully dissociates before the expiration of a definite term or completion of a particular undertaking is not entitled to payment of the buyout price until:

(1). Damages are deducted

(2). Not entitled to cashout until undertaking is complete.

EXCEPTION

If partner can show it won’t cause undue hardship to the partnership to pay off the guy early.

VI. DISSOLUTION AND WINDING UP

A. In General (OL VI.A.)

1. The dissolution of a general partnership is: the change in relationship of the partners and the ceasing of carrying on business as it was carried on. It is the beginning of the termination process, but doesn’t always end in termination

2. Winding up: where the partnership ceases to conduct business and focuses on settling affairs

3. Termination: the point after which the partnership is wound up and over

B. Dissolution (OL VI.B.)

1. Causes of Dissolution

a. Mandatory Dissolution

(1) A partnership is dissolved and its affairs must be wound up upon the occurrence of any of the following events:(a) in a partnership at will: when a majority of the partners vote for

dissolution

(b) in a partnership for a definite term: ends when the term or partnership is completed unless the majority of the partnership agrees to continue

(c) When a last general partner dissociates: the partnership can vote to continue by a majority or it will be dissolved

(d) other mandatory clauses in the partnership agreement

(e) any event that makes the partnership unlawful.

EXAMPLE:If general partners are partners in a liquor store business and the government institutes prohibition, the venture becomes illegal and the general partnership would be dissolved.

b. Permissive Dissolution

(1) A general partnership may be dissolved at any time:

(2) A partnership may also be dissolved:(a)

1) when a GP has made it impracticable to carry on the business or when it it is otherwise impracticable to carry on the business

2)

EXAMPLE: Habitual drunkenness, extravagance, or gambling of partners might support such a decree.

HYPOTHETICAL

Phil operated a small widget business by himself until he took Phoenix on as a 50% partner in order to gain the necessary capital for expansion. The two famously disagreed on just about everything, and Phil decided he wanted to end the business. Soon thereafter, Phoenix filed a court action, seeking a judicial sale, so that he could buy out Phil. The court denied Phoenix’s motion, saying that the goodwill of the business belonged to Phil, and ordered Phil to merely pay the cash value of Phoenix’s share. If Phoenix appeals, what result is likely?

Entitled to half of the value as a going concern, so his appeal will fail if this is a sale as a going concern, but it should consider the decrease in value to the business without phoenix

2. Effect of Dissolution on Authority of General Partner

a. Other General Partners(1) can only engage in acts appropriate for winding up the business

3. Continuance After Dissolution

a. can vote to continue but the vote must be unanimous

HYPOTHETICAL

Two partners run an online casino as BetHere general partnership. Congress passes legislation making the site unlawful for U.S. customers. Could the partners “cure” by revamping as a free gambling site that sold advertising?

Yes if the vote to continue unanimously because the illegality commences dissolution

C. Winding Up (OL VI.C.)

1. Right to Wind Upa. GP’s sole purpose is winding up the business

EXAMPLE: A cake bakery, in winding up, can fill all existing orders, sell inventory and equipment, collect amounts due and pay amounts due, but cannot take on new business.

D. Distribution of Assets (OL VI.D.)

1. Order of Distribution

a. The general partnership must apply its assets in the following order:

(1) outside creditors

(2) inside creditors (partners), surplus then distributed to general partnership in the way they have their right to receive distributions

2. Contributions

a. if not enough money, partners are personally liable to “contribute” enough for the business to pay off its debts

b. a partner can recover from any other partners if he has to make any excess contribution

c. required to contribute in the same percentage that profits/lossis are shared

HYPOTHETICAL

Paxton and Presley are equal partners in Fun-Time Video, having bought out their former third partner Pablo last year. Realizing that the video rental business is unlikely to be lucrative going forward, the two decide to shut down. At the time they shut down, the business owes $2,000 in rent; $2,000 for videos it had purchased in the past six months; $2,000 remaining on buying out Pablo; and $2,000 on a six-year-old business loan. The business has only $6,000 remaining. How will the debts be settled?

6000 will be allocated to rent, video, and loan, then the other 2 are liable for 1k each contribution for paying Pablo. If Pablo was around for the other debts, the other people could collect from Pablo

VII. LIMITED PARTNERSHIPS

A. Creation of Limited Partnerships (OL VII.B.)

1. General Characteristics

a. A limited partnership consists of:(1) 1 or more general partners that is personally liable

(2) 1 or more limited partners that shares in the profit but not in control or management of the business

b. Limited partners and the effect of the lack of involvement with management: if they get involved they risk liability

2. Formation

a. A limited partnership is formed by filing a certificate of limited partnership with the Secretary of State which must state:(1) requires name of partnership, address, agent

(a) name must contain LP or ltd or limited partnership

(2) governed by a limited partnership agreement

(3) general partners have an equal right in management

b. The partners must also enter into a limited partnership agreement: (1)

B. Management of Limited Partnerships (OL VII.D.)

1.

2. The consent of all partners is required to:

a. change partnership agreement

b. sell most/all assets

3.

HYPOTHETICAL

Four college classmates decide to form a consulting firm. The cost of starting the firm is $100,000, and each contributes in the following manner: Ali gives $30,000; Blair gives $10,000; Carlos gives $20,000; and Danielle gives $40,000. The agreement says that Blair and Carlos are to receive management fees of $50,000 per year as the general partners of the firm, but is otherwise silent as to the distribution of profits. How will profits be allocated?

each according to their contribution

C. Limited Partners (OL VII.F.)

1. Liabilities and Limitations

a. Control of the Business

(1) Generally, a limited partner is not liable: for partnership obligations beyond the amount that they contribute

(2) The limited partner will be held liable as a general partner only: if they act too much like a general partner

(3) A limited partner does not participate in the control of the business solely by:(a) being:

1)

2)

3)

(b)

(c)

(d)

(e)

b. Mistaken Status (1) must have reasonably believe based on LP’s conduct that at the time of

the transaction that they were a general partner. Someone that thinks they are a limited partner isn’t a general parntner if they withdraw from general partnership when they find out others think he is a gp and he was mistaken

(2) However: LP can be an employee, contractor, officer, director, shareholder of a corp where the corp is the general partner. Can consult with partnership, vote, and wind up or serve on a committee.

HYPOTHETICAL

Pascal is the general partner in a small import/export business he runs with his wife, Pauline. Pauline, whose family owns significant real estate throughout the state, holds a limited partnership stake

in the business. Over the years, Pauline has tended to the paperwork duties of the business, such as responding to correspondence, ordering supplies, and paying the bills. When Pascal is away on overseas trips to visit clients, Pauline tends to the partnership’s business. A trade creditor has since attempted to attach Pauline’s rights to the family property on the grounds that she is more than a mere limited partner. Will the creditor succeed? Would the outcome be different if Pascal and Pauline deposited their profits from both businesses into a joint checking account? If Pauline received a salary, would that change the outcome?

Here it is unclear whether the creditor knew she was a LP and the things she did may not have amounted to control. If creditor had notice she was LP he can’t reasonably believe she was Gp. Process doesn’t change if profits go to bank account or if she receives a salary

2. Rights and Powers

a. Control of Limited Partnership(1) LP doesn’t have right of control

b. New Limited Partners(1) A person becomes a limited partner:

(a) With consent of other partners or

(b) in accordance w/partnership agreement

3. Duties and Obligations

a. Fiduciary duty: doesn’t arise solely from being a LP

b. Good faith and fair dealing: still charged with this duty

D. General Partners (OL VII.G.)

1.

2. A general partner can obtain limited liability by: forming a corporation to be the partner and then acts as president of that partnership

E. Transfer of Partnership Interests (OL VII.H.)

1. Transferability of a limited partner’s interest: this is an economic interest so they can transfer it unless prohibited by agreement

2. the economic interest transfers, but the transferee does not become a new limited partner

3.

HYPOTHETICAL

Lee and Kara form a limited partnership to sell used law textbooks over the Internet. Lee is the general partner; Kara is the limited partner. Kara contributes $10,000 for her interest. The business fails, owing $22,000 to vendors and their landlord. Will both Lee and Kara be liable for the shortfall?

No just lee because lps are only liable up to the amount of their contribution.

F. Distributions (OL VII.I.)

1. Right to Distributions

a. Profits and losses are allocated: to the parties as provided in the partnership agreement

2. Limitations on Distributions

a. A limited partnership may also not make a distribution if, after the distribution:

(1) the partnership can’t pay their debts as they become due OR

(2) if partnership’s assets would be less than the liabilities

b. Liable for an improprer distribution you receive or distribute if you know it was improper.

G. Dissociation of Limited Partner (OL VII.J.)

1. A limited partner does not have a right to dissociate before the termination of the limited partnership.

2. A limited partner is dissociated upon the occurrence of the following events:a. saying they want to dissociate

b. agreed upon event

c. unanimous consent to expel the other partner

d. the person’s expulsion as a limited partner by unanimous consent of the other partners if:(1) the partnership is a dissolved llc

(2) the business is illegal

(3)

e. the person’s expulsion by judicial order because:

(1) they did something illegal

(2)

3. Effect of Dissociation

a. Upon a person’s dissociation: no further rights in the partnership and no right to receive payment. Doesn’t discharge the person from obligations incurred when they were a limited partner.

b. The right to receive payment accrues: end of partnerhship

H. Dissolution (OL VII.K.)

1. A limited partnership is dissolved and its activities wound up upon the occurrence of any of the following:

a. something in the agreement

b. consent of all GPs and majority of LPs

c. end of the term or undertaking

2. If there is no remaining general partner, dissolution occurs unless, within 90 days:

a. remaining lp’s get a new GP and

b. LP’s vote to continue

3. Dissolution will also occur: When the last LP leaves

I. Priority of Liabilities Upon Dissolution (OL VII.M.)

1. The priority of liabilities of a limited partnership is: outside creditors, then connected creditors, then surplus to partners in the same way they share distributions. If not sufficient, GP’s need to contribute

2. In winding up the limited partnership’s activities:

3. Any surplus remaining:

4. If the limited partnership’s assets are insufficient to satisfy all of its obligations:

VIII. LIMITED LIABILITY PARTNERSHIPS

A. General (OL VIII.A.)

1. LLPs are general partnerships for all purposes except liability.

2. When a general partnership registers as an LLP: there is a protection to partners with regard to limited liability. Not liable for their negligence to other partners

B. Formation (OL VIII.B.)

1. The name: Must say LLP

2. Only professionals can make LLPs. Accountants, lawyers, or architects.

IX. LIMITED LIABILITY COMPANIES

Introduction

A. General (OL IX.A.)

1. An LLC may be: member managed or manager managed

2. members can participate in management without risking personal liability

3. taxed like a partnership.

B. Formation (OL IX.B.)

1. To form an LLC: filed articles with sec of state

2. The articles of organization must state:

a. member or manager managed

b. agent and name

c. must say llc

C. Ownership and Governance of LLC Affairs (OL IX.C.)

1. Operating Agreement

a. may be written or oral

b. can deal with all of the rules, rights, and obligations of members.

2. Members and Managers

a. The responsibilities of the individuals: are different depending on if it is member or manager managed

b. Unless otherwise stated in the operating agreement: managers operate by majority vote

c.. A member may transfer his interest in the LLC only to the extent that it affects their rights to receive profits and losses

D. Rights, Duties, and Obligations of Members, Managers, and Officers (OL IX.D.)

1. Members

a.

b. Members in a member-managed LLC have: does have apparent authority to bind the company.

a. In a manager-managed LLC: don’t have apparent authority to bind the company.

2. Managers and Officers

a. Each manager is an agent of the LLC for purposes of its business or affairs and the act of any manager for apparently carrying on in the usual way the business or affairs of the LLC binds the LLC, unless:

(1) the manager doesn’t have actual authority to act for the LLC and the person dealing with the manager didn’t know or have reason to know.

(2)

b. Managers owe fiduciary duties to the LLC and to its: members in the same way partners owe to a partnership

(1) The fiduciary duties owed are: care and loyalty

c. These may only be modified: by the op agreement, but can’t be eliminated

E. Liability of Members, Managers, and Officers (OL IX.E.)

1. Members

a. Regardless of whether an LLC is member-managed or manager-managed: members are not personally liable for the debts/obligations of the LLC

b. A member is subject to liability upon:piercing

(1) This might occur: where there is fraud or injustice and the LLC hasn’t been run as a separate business.

c.

d. Situations where this occurs most often include: comingling of funds or undercapitalization

e. Members may: always agree to be personally to be personally obligated

(1) Liability also occurs where: there is an improper distribution from the LLC

2. Managers and Officers

a. No manager or officer of an LLC is personally liable for the obligations of the LLC solely by reason of being a manager or officer of the LLC unless: they do something wrong

b. Managers must apply the same duty of care as:

(1) an ordinarily prudent person in a like position

(2) in a way reasonably believed to be in the best interest of the llc

c. same obligations as a limited parter in a manager managed llc

F. Contributions (OL IX.F.)

1. same liabilities as LP

G. Dissociation (OL IX.G.)

1. members can withdraw any time

2. Apart from any restriction on the right to withdraw: provide notice of intent to the

LLC

3. A withdrawn member is not entitled to: any payment for your interest except when the company is wound up

4. When a member withdraws: they no longer hold any rights w/regards to distributions

5. If the withdrawal is in violation of the operating agreement: the LLC can offset any amounts you might be owed against damages caused by dissociation

H. Dissolution (OL IX.H.)

1. An LLC must be dissolved and its affairs wound up upon the occurrence of the earliest of:

a. majority vote

b. specified in AOI

c. when judge puts in degree

2. Judicial dissolution can take place:

a. not reasonably practical to carry on

b. abandonment

c. deadlocked managment

d. mismanagement/abuse

BAR EXAM APPLICATION

Question 1

Applicants might be asked a question that requires them to consider general partnership liability similar to the following: Grapeco, a general partnership, owns vineyards on Blackacre. The general partners of Grapeco are Joe, Peter, and Mike. One day, Joe strayed on to Whiteacre, the land adjacent to Blackacre, knocking down 50 valuable trees. Assume that there is no dispute over whether Joe has trespassed.Are Grapeco and the two other partners liable for damages as a result of Joe’s trespass?Issues that applicants must consider are partnership liability for the wrongful acts or omissions of partners, and partner liability for obligations of a partnership.

Yes if the action occurs in the course of his business, he is liable and the partnership is liable

BAR EXAM APPLICATION

Question 2

Applicants might be asked to answer a question based on facts similar to those in the following problem: Jane, Mary, and Jen, the general partners of Candyco, a general partnership, agreed to sell some stove cookers. Without the knowledge of the other partners, Jane entered into a contract with John to find a buyer for the stove cookers at a minimum price of $400,000, with John receiving a $60,000 commission. Jane signed the contract on behalf of Candyco. John knows that Jane is a partner in Candyco, but does not know that Candyco’s partnership agreement prohibits any partner from entering into a contract that will require a payment of $20,000 or more without the approval of the other partners.If John finds an acceptable buyer for the stove cookers, will Candyco be successful in asserting a defense if John brings an action to enforce his contract with Candyco, based on the provision in the partnership agreement requiring the approval of all partners for contracts in excess of $20,000?Issues that applicants must consider are the authority of a partner to bind a partnership, and the effect that express limitations of that authority have upon transactions with third parties.

The transaction is ok from seller pov because she had reasonablye belief in his authority to enter in to the transaction. Jo