Agency and Partnership Flashcards
(305 cards)
1
Q
Agency is ______
A
- 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.
2
Q
Consent requirement for agency
A
- Consent of both the principal and the agent is necessary to form an agency relationship.
- Consent may be established expressly (through written or oral statements) or by implication from the parties’ conduct
3
Q
On Behalf Of requirement of agency
A
This requirement is generally understood to mean that the agent must be acting primarily for the benefit of the principal, rather than for the benefit of the agent or some other party.
4
Q
Control requirement of agency
A
The agent must act subject to the principal’s control, but the degree of control exercised by the principal doesn’t have to be significant.
5
Q
The requisite level of control for an agency relationship may be found simply by the fact that ____
A
the principal has specified the task that the agent should perform, even if the principal hasn’t prescribed the details of how the task should be accomplished.
6
Q
Not all ____ are necessary to create an agency relationship
A
contractual formalities
7
Q
Principal Capacity Standard
A
- A principal must have contractual capacity.
- Thus, a minor’s appointment of an agent is voidable, and incompetents and most unincorporated organizations cannot be principals. (However, in many jurisdictions, partnerships and other organized business entities can be principals and appoint agents.)
8
Q
Agent Capacity Standard
A
- Agent Needs Only Minimal Capacity
- While a principal needs contractual capacity, an agent doesn’t. So a person may be an agent even though they have no contractual capacity (Exception: If the agent has literally no mental capacity, they cannot act for the principal.)
9
Q
Notice the different capacity requirements: A principal must have contractual capacity, but an agent need not.
Thus, a ____ can be an agent but not a principal.
A
minor
10
Q
An agent may be disqualified for ____
A
representing both parties or failing to have a required license.
11
Q
Formalities of agency relationship
A
- Consent of both parties is required.
- Writing (only if SOF requires, not required by agency law)
- (no consideration)
12
Q
When is a writing required for an agency relationship
A
- Generally, agency law does not require the appointment of an agent to be in writing.
However, the Statute of Frauds may require one.
–> 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. This is called the “equal dignities” rule.
13
Q
No _____ is necessary for the creation of an agency relationship.
A
consideration (one may agree to serve as an agent gratuitously and be saddled with the duties of an agent).
14
Q
Modes of Creating Agency Relationship
A
The agency relationship may be created by an act of the parties or by operation of law.
15
Q
Creating Agency Relationship - by Act of Parties
A
- Parties may create an agency by agreement between the principal and agent (that is, actual authority).
- Parties may also be bound in an agency relationship through holding out by the principal (that is, apparent authority), or ratification.
16
Q
Creating Agency Relationship - By Operation of Law
A
- Estoppel: An agency may be created through estoppel. Estoppel is virtually the same as apparent authority in that it
requires third-party reliance on the principal’s communication. - Statute: Statutes creating agencies are usually designed to accomplish a limited purpose (for example, statute appointing secretary of state as out-of-state motorist’s agent for service of process for damages arising from driving in-state).
17
Q
Agent’s Duties to the Principal (high level)
A
- Duty of Care
- Duty of Loyalty
- Duty of Obedience
18
Q
Type of relationship of agent-principal
A
An agent (even an unpaid one) is a fiduciary of their principal.
19
Q
Duty of Care
A
- An agent owes a duty to their principal to carry out their agency with
reasonable care. - The degree of care is a “sliding scale” depending on any special skills that the agent may have
–> 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 (that is, courts will probably expect a gratuitous agent to put less effort into being careful than they would expect a paid agent to exercise).
20
Q
Duty of Loyalty
A
The agent owes a duty of undivided loyalty to the principal. This includes the following obligations:
- An agent may not use their position as agent to profit for themselves = If they do, they must account to the principal for any profits made while carrying out the principal’s instructions.
- An agent must act solely for the benefit of the principal and not to benefit themselves or a third party.
- An agent must refrain from dealing with their principal as an adverse party or from acting on behalf of an adverse party.
- An agent may not compete with their principal concerning the subject matter of the agency.
- An agent may not use the principal’s property (including confidential information) for the agent’s own purposes or a third party’s purposes.
21
Q
Duty of Obedience
A
An agent must obey all reasonable directions of their principal. If the agent disobeys a reasonable direction, the agent will be liable to the principal for any loss that the principal suffers.
22
Q
Principal’s Remedies for Agent’s Breach of Duties
A
- The principal’s remedies against the agent include contract actions (against compensated agents), tort actions, actions for secret profits, equitable actions for an accounting, imposition of a constructive trust, and withholding of compensation for intentional torts or intentional breaches of fiduciary duty.
- The principal may also terminate the agency prior to any termination date in a contract.
23
Q
The principal may recover the actual profits or properties held by the agent whether or not ____
A
the agent’s profit has caused the principal any loss.
24
Q
When it comes to breach of fiduciary duty, note that a wide range of equitable remedies are available to a court. In general, a court can ____
A
do whatever it wants to “do justice” in the situation.
25
A subagent is ____
a person appointed by an agent to perform functions that the agent has consented to perform on behalf of the agent’s principal.
26
Employees of a single organization are presumed to be ____, not _____.
coagents; subagents
-> For example, manager and store clerk are coagents).
27
Not every person appointed by an agent is a subagent. An agent may also appoint a coagent (that is, another agent of the principal). In doing so, the agent does not _____.
delegate their own power to that person
28
Liability of Agent for subagent
An agent has absolute liability to the principal for breaches by a subagent.
29
Duties of agent for subagent
- If the principal authorized the agent to appoint the subagent, the subagent owes the principal the same duties as the agent owes the principal.
- If the agent was not authorized to appoint a subagent, the subagent does not owe duties to the principal but does owe duties to the agent
30
Principal’s Duties to the Agent
- The principal owes the agent all of the duties imposed by their contract, reasonable compensation, and reimbursement for expenses.
- The principal also generally should cooperate with the agent and not unreasonably interfere with the agent’s performance.
31
A principal’s duties to an agent are not ____ in nature.
fiduciary (fiduciary responsibilities run only from the agent to the principal)
32
If the agency agreement is silent regarding compensation, the agent is _____.
entitled to reasonable compensation.
33
A principal generally owes no duty to compensate a ____ even if ____.
subagent; the agent had authority to hire the subagent
34
Agent’s Remedies for Breach by Principal
A compensated agent has the usual contract remedies against the principal (but has a duty to mitigate damages).
35
In a typical real estate broker’s contract, the broker is entitled to
compensation when ____
there is a buyer ready, willing, and able to purchase the property.
36
Types of Authority
1. Actual Authority (express or implied)
2. Apparent Authority
3. Ratification
37
An agent has the power to bind a principal to a contract the agent enters on the principal’s behalf only if _____
the agent acted with authority.
38
Actual Authority
Actual authority is authority that the agent reasonably believes they possess based on the principal’s dealings with them
39
Types of actual authority
Express and implied
40
Express actual authority
Express authority is that which is actually contained within the four corners of the agency agreement. So it’s authority that’s conveyed by the principal in words (oral or written).
41
Express actual authority is effective even if ____
it was granted mistakenly or because of misrepresentation.
42
When determining whether an agent acted with authority in entering a contract for a principal, note that this is an ____ issue
all or nothing (they had authority or not)
Ex: if you bout 110 widgets and the agreement said they could only buy 100 = we would not say that this contract was partially authorized or partially unauthorized
43
Express Implied authority
Implied authority is authority the agent reasonably believes they have as a result of the principal’s words or actions.
44
Implied actual authority includes authority that is:
- Incidental to express authority
- Arising out of custom known to the agent
- Resulting from prior acquiescence by the principal
- To take emergency measures
- To delegate authority in cases of ministerial acts, where circumstances require, where performance is impossible without delegation, or where delegation is customary
- To pay for and accept delivery of goods where there is authority to purchase
- To give general warranties as to fitness and quality and grant customary covenants in land sales, collect payment, and deliver where there is authority to sell AND
- To manage investments in accordance with the “prudent investor” standard
45
The notion that ____ conveys implied authority can also be used to establish actual authority to the extent that ____.
title or position; the agent reasonably believes that they have authority to act based on the title or position given to them by the principal
46
Termination or revocation of actual authority occurs by:
- The happening of an event specified in the agent’s and principal’s agreement as something that will terminate 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)
47
Termination in the case of a principal’s death is effective only when ____
the agent has notice of it
48
Irrevocable Agencies
- Neither an agency coupled with an interest nor a power given as security may be unilaterally terminated by the principal if the agency was given to protect the agent’s (or a third party’s) rights and it is supported by consideration.
--> Neither will such agencies be terminated by operation of law.
49
Apparent Authority - Basic Theory
Apparent authority exists when the principal “holds out” another as possessing authority and based on this holding out, a third party is reasonably led to believe that authority exists (even though as
between the agent and the principal, no such authority has been
granted).
50
The policy of apparent authority is that it protects innocent third parties who rely on ____
the principal’s holding out of a person as their agent.
51
Actual authority is based on the ____ manifestations (words or conduct) and how they affect the reasonable ____.
Apparent authority is based on the ____ manifestations (words or conduct) and how they affect the reasonable____.
principal’s; agent
principal’s; third party
52
Types of Apparent Authority (generally)
- When Agent Exceeds Actual Authority (prior act, power of position)
- When Agent Has No Actual Authority (Imposters, Lingering apparent authority)
- Inherent Authority (Inherent Agency Power)
53
When Agent Exceeds Actual Authority: Prior Act
Where the principal previously permitted the agent to exceed their express or implied authority and knows that the third party is aware of this, the principal is bound through apparent authority.
54
When Agent Exceeds Actual Authority: Power of position
- It is somewhat common for a third party to argue that an agent’s title or position, which was given to them by the principal, created a reasonable belief in the third party that the agent was authorized to act for the principal in ways that are typical of someone who holds that title or position.
- So, when the agent is in a position that customarily carries with it certain responsibilities, the principal is liable for the agent’s acts that come within these customary responsibilities.
55
When Agent Has No Actual Authority: Unilateral Agent Representations
- 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.
- Apparent authority is based on the principal’s manifestations to a third party.
- Thus, apparent authority cannot be created by the mere representations of an agent or other actor.
56
Even though Unilateral Agent Representations don't create apparent authority they may where ___
the beneficiary is silent in the face of A's statement.
57
Apparent authority: Impostors
- Where the principal negligently permits an impostor to be in a position to appear to have agency authority, the principal will be held liable for the impostor’s actions undertaken with such authority.
- In other words, we’ll have an agency by estoppel–the principal will be estopped from denying the imposter was their agent.
58
Lingering Apparent Authority
Apparent authority can exist even when actual authority does not. Similarly, apparent authority can linger after actual authority ends.
59
Where an agent’s actual authority has terminated, he will have apparent authority to act on the principal’s behalf as to all third parties with whom the principal knows he dealt unless and until ____
the third parties receive either actual or constructive notice of the termination
60
Where an agent’s actual authority has been terminated but third parties rely on a written authority of the agent, the agent’s apparent authority is not considered to be terminated—unless _____
the principal recovers the written authority.
61
The majority view is that death or incompetency of the principal ___ automatically terminate the agent’s apparent authority.
does not
62
Inherent Authority (Inherent Agency Power)
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
63
Examples of inherent authority include:
- Respondeat Superior: Under the doctrine of their employee committed within the scope of employment.
- Conduct Similar to that Authorized: Where an agent exceeds their actual authority (that is, violates orders), but the conduct is similar to acts authorized, the principal will be held liable
64
The principal will be held liable for the disposition of their goods by an agent possessing them if ____
the agent was given some indicia of ownership, or if the goods disposed of were sold by an agent who is a dealer in the particular goods.
65
An agency relationship is created by ratification when ____
an “agent” purports to act on behalf of a “principal” without any authority at all, but the “principal” subsequently validates the act and becomes bound.
66
Ratification gives the transaction _____ effect unless the “principal” lacked contractual capacity at the time the “agent” entered into the unauthorized transaction (in which case the “principal” is deemed to have “adopted” the contract), or unless
retroactivity would interfere with intervening third-party rights.
retroactive
67
Upon ratification, the “agent” is ____
relieved of liability for breach of
duty (see 2.1.1.d., supra) and their implied warranty of authority
68
Methods of Ratifying
- Ratification may be express or implied through the conduct of
the “principal.”
--> The most common form of express ratification is oral or written affirmation of a contract (for example, a company resolution).
-->The most common form of implied ratification is when the “principal” accepts the benefits of the contract.
--> Other ratifying conduct would include silence if there is a duty to disaffirm or suing on the transaction.
69
For ratification to occur, the “principal” must:
- Have knowledge of (or have reason to know) all material facts regarding the contract
- Accept the entire transaction (meaning the “principal” cannot merely ratify a portion of the transaction) AND
- Have capacity (be competent and of legal age)
70
Ratification is a ____ act of the “principal” and requires no consideration. Note also that ratification cannot be used to alter the rights of ____
unilateral; intervening parties (ex can't ratify if another transaction has been entered into)
71
Generally, a “principal” may ratify anything unless:
(1) performance was illegal at the time of ratification,
(2) the third party has withdrawn, or
(3) there has been a material change in circumstances.
72
Under the Second Restatement (traditional view), which is followed by most states, an ____ “principal” may not ratify.
Only ____ or unidentified (existence of the principal is known, but the principal’s identity is withheld) “principals” may do so.
undisclosed (one whose existence and identity is withheld from the third party)
disclosed (existence and identity of the principal are known to the third party)
73
The modern view of the Third Restatement does not require the agent to purport to be acting on behalf of a “principal”; therefore, under the Third Restatement ____
“principal” may ratify.
any
74
A principal will be liable to the third party on a contract entered into by their agent if _____
the agent had valid authority (actual, apparent, or through ratification) to act
75
As a general rule, if the agent had actual authority or apparent authority to enter a contract for the principal, or if the principal ratified a previously unauthorized contract, the agent ____.
However, an exception applies if _____.
cannot be held personally liable on the contract
existence and identity of the principal are not disclosed
76
Agent Liability: Disclosed Principal
If the principal’s existence and identity are disclosed to the third party (a “disclosed principal” situation) the general rule is that the principal will be liable on an authorized contract and the agent will not be, the agent will be liable if the parties to the contract intended the agent to be liable.
77
Even if the principal’s existence and identity are fully disclosed, if the agent did not have authority to enter into the contract (so the principal will not be liable) the agent can be held liable to ____
the third party for damages for breaching an implied warranty that a principal with contractual capacity exists and that they, the agent, had authority to contract for the principal.
78
Agent Liability: Unidentified and Undisclosed Principals
If the principal is unidentified or if the principal is undisclosed either the
principal or the agent can be held liable on the contract if the agent
had authority to enter the contract.
- The majority of courts permit a
third party to file suit against both the principal and agent but, upon objection of either defendant, the third party must elect prior to judgment which party they wish to hold liable.
- On the other hand, if the third party obtains a judgment against the agent without knowledge of the principal’s identity, they can later sue the principal when their identity is discovered if the judgment has not been satisfied.
79
The type of principal (disclosed, unidentified, or undisclosed) is relevant only when you are considering whether the ___ is liable.
agent (Do not discuss the type of principal when analyzing the principal’s liability = Any type of principal will be bound as long as the agent had authority.).
80
When the principal is disclosed, only the ____ may enforce the contract and hold the third party liable.
principal, not the agent,
81
When the principal is unidentified or undisclosed, the ____ may enforce the contract and hold the third party liable.
principal or agent (if the agent enforces the contract against the third party, the principal is entitled to all of the rights and benefits thereunder).
82
The principal may not enforce the contract against a third party if _____
there has been an affirmative fraudulent misrepresentation of the principal’s identity or if there is an unforeseen increased burden to the third party due to the fact that performance is due to the principal and not the agent.
83
A principal may be vicariously liable for the torts of their agent under two theories:
(1) respondeat superior and
(2) apparent authority.
84
Vicarious liability means that ____
joint and several liability for the agent’s tort will be imputed to the principal
85
The derivative nature of this
liability (respondeat superior) means that if the agent isn’t liable, the principal generally can’t be held liable; however, an agent’s immunity from a lawsuit _____
does not necessarily bar recovery from the principal.
86
Note that in addition to vicarious liability, a principal may be directly liable for ____
- Their own negligence in hiring, retaining, or supervising the agent
- For an agent’s tort if they gave the agent actual authority to commit the tort or ratified the tort, or in other circumstances involving independent contractors
87
A principal can be liable for the torts of an agent under ___
the doctrine of respondeat superior (“let the master answer”)
88
The first step in determining a principal’s tort liability is to determine whether _____. And why?
there an employer-employee relationship between the tortfeasor and the principal.
Why = 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.
89
The difference between an employee and an independent contractor is that ____
the principal/employer retains the right to control the manner in which an employee performs their work.
-> A principal does not reserve/have a right to control the manner in which work is performed by an independent contractor.
90
For respondeat superior If it is not clear whether the principal has the right to control the method and manner of the work, consider:
a) The degree of skill required on the job (where great skill is required, more likely to be independent contractor)
b) Whose tools and facilities are used (if the principal supplies the tools and facilities used to perform the job, more likely to be employee)
c) The period of employment (definite and/or short, more likely to be independent contractor; indefinite and/or long, more likely to be employee)
d) The basis of compensation (if on time basis, more likely employee; if on job basis, more likely independent
contractor)
e) The business purpose (if person hired to perform an act in furtherance of principal’s business, more likely employee; if nonbusiness purpose, such as mowing a lawn, more
likely independent contractor)
f) Whether the person has a distinct business (person who has their own business or occupation is more likely to be an independent contractor)
g) The characterization and understanding of the parties
h) The customs of the locality regarding supervision of work
91
The employer is liable for the employee’s torts only if ___
they were committed within the scope of the employee’s employment.
92
Three factors helpful in making the assessment if the employee was acting within the scope of their employment:
- Was the conduct “of the kind” that the agent was hired to perform?
- Did the tort occur “on the job” (that is, within the time and space limits of the employment)?
- Was the conduct actuated at least in part to benefit the principal
93
To be within the scope of employment, the employee’s conduct need not be actually ____. Nor does ____ by the principal necessarily remove the conduct from the scope of employment.
If the nature of the employee’s conduct is ____ to that which was authorized, the conduct is probably within the scope of employment.
authorized; prohibition
similar or incidental
94
Serious criminal acts are normally considered to be ____
outside the scope of employment.
95
Frolic and Detour
Detour: small deviation from the employer’s direction is within the scope of employment
Frolic: major deviation requiring a substantial departure from employment is beyond the scope.
-> Once it is shown that the employee has left the scope of employment, there must be proof of return before the employer will be held liable for the employee’s tort.
96
Finally, consider whether the employee’s conduct was actuated, at least in part, by a purpose to ____
serve the employer.
97
The employee’s invitation to ____, unless expressly authorized by the employer, is generally held to be outside the scope of the employment relationship, and the employer would not be held liable for injuries sustained.
passengers
98
The employer is not liable for torts caused by the use of _____ instrumentalities from those authorized
substantially different (that is, those creating a greater risk of harm).
99
If the employee makes a trip with two purposes, it will be within the scope of employment if ____
any substantial purpose of the employer is being served.
100
The general rule is that the employer is not liable for the ____ torts of an employee.
intentional (for example, battery or assault).
101
Intentional torts will be viewed as within the scope of employment if the conduct is:
(1) a natural incident of the employee’s duties (as where force is authorized or the nature of the work gives rise to hostilities);
(2) where the employee is promoting the employer’s business or is motivated to serve the employer; or
(3) specifically authorized or ratified by the employer.
102
A principal is liable for an agent’s misrepresentations (including intentional misrepresentation) if _____
the agent had actual, apparent, or inherent authority to make statements concerning the subject matter involved
103
Liability for Acts of Borrowed Employees
The key issue is who has the primary right of control over the employee—the loaning principal or the borrowing
principal? That employer is liable.
104
Every person is liable for their own torts. Thus, an employer is liable
for ____
their own negligence if they fail to properly train or supervise employees or independent contractors, or fail to check an employee’s or independent contractor’s criminal record or job history.
105
The doctrine of respondeat superior also applies to duly authorized ____.
subservants
106
Authorization to hire subservants can be ____
express or implied.
-> Implied authorization can arise from: past practices, emergency situations, or a reasonable necessity to achieve an authorized result.
107
However, the employer is generally not liable for the torts of a subservant engaged ____
without authority.
108
Employer-Employee by Estoppel
Where a principal creates the appearance of an employer-employee relationship upon which a third party relies, that principal will be estopped from denying the relationship and will be liable under the doctrine of respondeat superior.
Ex: A hospital advertises “Our doctors are the best,” but the doctors at the hospital are actually independent contractors. If one of the doctors negligently injures a patient, the hospital might well be estopped from denying the doctor was an employee.
109
A 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
(if the principal was merely negligent in selecting the independent contractor, the principal is liable only for their own negligence in selection, not for the contractor’s negligence).
110
If respondeat superior does not apply, the principal may still be vicariously liable in certain circumstances if ____
the agent acted with apparent authority.
111
A principal is vicariously liable where an agent appears to deal or communicate on behalf of the principal and the agent’s apparent
authority enables the agent to
(1) commit a tort or (2) conceal its
commission.
-> This means that for the principal to be liable, there must be a close link between the agent’s tortious conduct and the agent’s apparent authority.
112
Summary: Is a principal liable to a third party on a contract entered into by an
agent?
a. Did the agent have actual or apparent authority at the time of the contract, or did the principal ratify the contract later?
b. If so, the principal is liable on the contract (but usually, the agent is not).
113
Summary: Is an employer liable for a tort committed by an employee?
a. Was the tort committed by an employee in the scope of employment?
b. If so, the employer (master) and employee (servant) are jointly and severally liable to the third party.
114
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.
115
Remember that there must be at least two persons involved in forming a partnership. A partnership may not exist with only one partner. But also remember that a “person” may be _____
an individual, trust, corporation, partnership, or
other entity.
116
Since no formalities are required to form a partnership, it’s sometimes difficult to determine whether the relationship between parties is a partnership or something else. To determine whether a partnership exists, courts generally look to _____
the intent of the parties.
-> If they intended to carry on a business as co-owners, there is a partnership even if they did not subjectively intend to be partners.
117
Factors For Deciding Whether Partnership Exists = Factoss that raise a presumption of partnership status
- Sharing of Profits Raises Presumption of Partnership
- Right to Participate in Control
118
The following factors may be additional evidence that a partnership has been formed. However, in contrast to the sharing of profits, these factors do not raise a presumption of partnership:
a) Title to property is held in joint tenancy or in common
b) The parties designate their relationship as a partnership
c) The venture undertaken by the parties requires extensive activity
d) Sharing of gross returns
119
The most important factor in deciding whether an association rises to the level of a partnership is the sharing of profits. Sharing of profits raises a _____ unless the share was received as ____
presumption of partnership
payment of a debt, as wages or compensation for services rendered, as rent payment, as an annuity or other retirement benefit, as interest on a loan, or for the sale of goodwill of a business.
120
If there is profit-sharing, and therefore a presumption of partner status, one can try to rebut that presumption with evidence suggesting ____
the lack of a co-ownership relationship, such as no
right to control or no sharing of losses (something that owners would typically share).
121
Writing Requirements to forma partnership
No writing is required to form a partnership. However, because of the Statute of Frauds, if partners wish to have an enforceable agreement to remain partners for more than one year, they generally must execute a writing reflecting their agreement.
122
Partnership By Estoppel
If no partnership was formed in fact, parties may still be liable as if they were partners to protect reasonable reliance by third parties.
123
When a person by words or conduct represents himself as a partner or consents to being represented by another as a partner, he will
be liable to third parties who _____
extend credit to the actual or apparent partnership in reliance on the representation.
124
Note that a person held out by another as a partner is not liable as a partner unless ___
they actually consent to the holding out—mere failure to deny a representation of partnership does not give rise to liability as a purported partner.
125
When a person holds another out as a partner, he thereby ____
makes that person his agent to bind him to third parties. (If there is a partnership, only those partners who know of or consent to this holding out will be bound.)
126
Partnership Agreement
- No agreement is required to form a partnership.
- Nevertheless, you should be on the lookout for the existence of a partnership agreement because partnership law allows the partners to contract around almost all of the statutory provisions. Look for an agreement first, and then fall back on the statutory default rules in the absence of an agreement.
127
A partnership agreement may be _____
written, oral, or implied (for example, by conduct)
128
Except with respect to partners’ personal liability for partnership obligations, a partnership is _____
a legal entity distinct from its partners. (Title to land may be in the partnership name. A partnership may sue or be sued in the partnership name.)
129
Capacity to form partnership
Anyone who is capable of entering into a binding contract may be a partner.
130
A would-be partner who lacks capacity is liable only to ____, but the partnership with such person is not ____.
the extent of his capital contribution; void (it will continue to exist until steps are taken to dissolve it).
131
Legality of Purpose of Partnership
A partnership formed to achieve an illegal purpose is void, and the courts will not compel an accounting or a settlement of a void partnership’s affairs.
132
Unless otherwise agreed, no one can become a partner without _____
the express or implied consent of all partners.
133
Statement of Partnership Authority
A partnership may choose to file a statement of partnership authority with the secretary of state, which can give constructive knowledge of the extent of the partners’ authority with regard to the partnership.
134
The ____ provides a default set of rules.
Revised Uniform Partnership Act (“R.U.P.A.”)
135
Partners are free to agree—through a partnership
agreement—to abide by different rules for governing the relationships among themselves, and the R.U.P.A. will govern only those issues ____. Note, however, that certain R.U.P.A. provisions cannot be waived (for example, ____).
not provided for in the partnership agreement
the duty of loyalty, the right of a court to expel a partner
136
Voting - Default Rules
- Unless otherwise agreed, all partners have equal rights in the management of the business and equal votes (that is, one partner, one vote = regardless of contribution)
- Decisions regarding matters within the ordinary course of the partnership business require a majority vote of the partners.
- Matters outside of the ordinary course of business require the unanimous consent of all partners.
137
Salary or Other Compensation - Default Rules
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).
On the other hand, if a partner has impliedly or expressly promised to devote time to the partnership business and fails to do so, they may be charged in an accounting for damages caused to the partnership.
138
Partners’ Accounts
- Each partner is deemed to have an account that is credited with an amount equal to the partner’s contribution plus his share of any profits and debited with the partner’s share of any losses and partnership liabilities.
- Where a partner personally profits at the expense of the partnership, the partner must account to the partnership for those profits.
- Upon dissolution, a partner is entitled to settlement of their account.
139
Indemnification and Other Repayment - Default Rules
- 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.
140
Books and Information - Default Rules
- Books and information must be kept at the partnership’s chief executive office.
- Each partner has a right to inspect and copy the partnership books.
- Upon demand, each partner must render true and full information of all things affecting the partnership.
141
Legal Actions By and Against Partners - Default Rules
- A partnership may sue or be sued in its own name; however, to reach a partner’s personal assets, there must be a judgment against the individual partner.
- A partnership may sue a partner for breach of the partnership agreement or of a duty owed to the partnership.
- A partner may sue the partnership or other partners to enforce a right created by partnership act or agreement, or a right otherwise belonging to the partner.
142
SHARING PROFITS AND LOSSES - Default Rules
- Unless otherwise agreed, profits are shared equally among the partners (by number).
- Unless otherwise agreed, losses are shared in the same manner as profits (losses follow profits, but profits don't follow losses)
143
LIABILITY TO THIRD PARTIES - Default Rules
- The R.U.P.A. generally provides that each partner is an agent of the partnership for the purpose of its business.
- The authority of a partner to bind the partnership when dealing with third parties roughly follows agency law.
144
Liability of the Partnership in Tort
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.
145
Liability of the Partnership in Contract
With respect to the partnership’s liability in contract, 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.
146
Actual Authority - Partnerships
- Actual authority is the authority a partner reasonably believes they have based on the communications between the partnership and the partner.
- It can come from the partnership agreement or a vote of the partners.
147
A statement of authority grants or limits a partner’s authority to enter into transactions on behalf of the partnership. The effect differs depending on whether the transaction involves a transfer of real property:
- Real Property: binding on third parties if the statement is also recorded in the county where the property is located (both grants and restrictions)
- Not Involving Real Property: grants of partner authority in the statement are binding on the partnership (unless the third party has actual knowledge that the partner lacked authority).
--> Restrictions on partner authority in the statement, however, are not binding on third parties.
148
RUPA - Apparent Authority Rules
The R.U.P.A. provides that a partner is an agent of the partnership, and that a partner has apparent authority to bind the partnership to transactions within the ordinary course of the partnership’s business or business of the kind carried out by the partnership (unless the third party is aware that the partner lacks actual authority to act).
149
It is very important to remember that as agents of the partnership, partners have apparent authority to bind the partnership to any contract within the scope of the partnership business. If a contract is outside the scope of partnership business, the partnership generally will not be bound unless ____
the partner has actual authority
150
A partnership will not be bound by a partner’s act if the partner lacked actual authority and the person with whom the partner dealt ____
either knew or received notification of such fact.
151
Under the R.U.P.A., knowledge means ____ knowledge.
subjective (what the person actually knew)
152
Under the R.U.P.A., a notification of limitation on authority is effective either when _____
it comes to the person’s attention or when it is duly delivered.
153
Any partner may transfer property held in the name of the partnership. If partnership property is held in the name of one or more partners (who are identified as such) but the partnership is not named, transfer by ____. In either case, if the transferring partner lacked authority, the partnership may ____
the titleholders in their own names is effective
recover the property from the initial transferee but not from a subsequent bona fide purchaser.
154
If the partnership’s interest is not indicated in the instrument transferring the property, the transfer may be made by _____. If the transferee gives value without notice of lack of authority, they _____
those in whose names the property is held
take free of the partnership interest.
155
Liability of the Partners - General Partnership
A defining characteristic of the general partnership is that each partner is jointly and severally liable (so, one or more partners may be sued) for all obligations of the partnership, whether arising in tort or contract.
156
But the plaintiff must first exhaust ____ before seeking to collect from an individual partner’s assets
partnership resources (or exhaustion is excused by agreement or court order or because the partnership is bankrupt).
157
Extent of Liability - General Partnership
Each partner is personally and individually liable for the entire amount of partnership obligations.
158
Where one partner pays the whole obligation of a partnership, they’re entitled to ____. They may also require the other partners to ____
indemnification from the partnership; contribute their pro rata shares of the payment if the partnership is unable to indemnify.
159
Limiting Liability to Third Parties - Partnership
Partners cannot limit a third party’s rights without the third party’s consent. The agreement is effective, however, among the partners themselves.
160
Liabilities of Admitted Partners
- A newly admitted partner is not personally liable for partnership obligations that arose before their admission.
- They can only lose the amount of their investment in the partnership.
161
Liabilities of Dissociating Partners
- An outgoing or dissociated partner remains liable for obligations arising while they were a partner unless there has been payment, release, or novation.
- An outgoing partner can also be liable for acts done after dissociation.
162
Criminal Liability for Partners
Partners will not be criminally liable for the crimes of other partners committed within the scope of the partnership business, unless the other partners participated in the commission of the crime either as principals or accessories.
163
Under the R.U.P.A., a partner has notice of a fact when the partner:
(1) has actual knowledge of the fact,
(2) is notified of the fact, or
(3) has reason to know of the fact based on the surrounding circumstances.
164
When Notification Effective - RUPA
Notification is effective not only if and when it comes to a partner’s attention, but also when it is delivered to a place of business held out by the partner as a place for receiving communications.
165
A partner’s notice of a fact relating to the partnership is imputed to the partnership ____ unless ______.
immediately; the partner having notice is participating in a fraud against the partnership
166
Each partner owes four fiduciary duties to the partnership:
- They owe duties of loyalty and care to each other and to the partnership.
- They also owe a statutory duty of disclosure as well as a duty of obedience.
167
Duty of Loyalty - Partnerships
This duty requires each partner:
(1) to account to the partnership for any benefit derived by the partner in conducting the partnership business, using the partnership’s property, or appropriating a partnership opportunity;
(2) to refrain from dealing with the partnership in the conduct of its business as (or on behalf of) a party having an interest adverse to the partnership; and
(3) to refrain from competing with the partnership in the conduct of its business.
168
Duty of Care - Partnership
The duty of care requires each partner to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
169
Duty of Disclosure - Partnership
A partner also has a duty to provide complete and accurate information concerning the partnership
170
Under the statutory duty of disclosure the R.U.P.A. provides that each partner and the partnership shall furnish to a partner:
(1) without demand, any information concerning the partnership’s business and affairs reasonably
required for the proper exercise of the partner’s rights and duties;
and
(2) on demand, any other information concerning the partnership’s business and affairs (except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances).
171
Duty of Obedience - Partnership
The duty of obedience requires the partner to obey all reasonable directions of the partnership and not act outside the scope of his or her authority.
172
A partnership agreement may not eliminate the duties of ____. The duty of ____ may be eliminated.
loyalty or care; disclosure
173
Partnership Capital
Partnership capital is the property or money contributed by each partner for the purpose of carrying on the partnership’s business.
174
Partnership Property
Partnership property, in its broadest sense, is everything the partnership owns, including both capital and property subsequently acquired in partnership transactions.
175
Property Deemed to Be Partnership Property
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).
176
Property Presumed to Be Partnership Property
Under the R.U.P.A., 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.
177
Property Presumed to Be Partner’s Separate Property
Under the R.U.P.A., 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.
178
In cases not governed by the explicit R.U.P.A. provisions (for example, in cases of property that is not titled), in determining whether property is partnership property or the separate property of a partner, courts will probably continue to look to the following common law criteria, which tend to indicate that the property was intended to be partnership property:
- Acquisition of the property with partnership funds
- Use of the property by the partnership in conducting the partnership’s business
- Entry of the property in the partnership books as a partnership asset
- A close relationship between the property and the business operations of the partnership
- Improvement of the property with partnership funds
- Maintenance of the property with partnership fund
179
The Partnership’s Rights in Partnership Property
The partnerships rights in partnership property are totally unrestricted (remember, the partnership owns the property!).
180
The Partner’s Rights in Partnership Property
- A partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred. (The partnership is an entity; the partnership itself, not the partners, owns its property.)
- A partner can simply use partnership property for partnership purposes.
181
A partner has no right to use partnership property other than ____
for the benefit of the partnership.
182
The Partner’s Ownership Interest in the Partnership
- A partner’s ownership interest in a partnership is called his “partnership interest” (just like a shareholder’s ownership interest in a corporation is called “stock”).
- The partnership interest is the personal property of the partner.
- Although it is personal property, there are restrictions on what a partner can do with it.
183
A partnership interest is comprised of
(1) management rights (that is, a partner’s right to participate in the management of the business, to obtain information about the partnership, and to be recognized as a “partner”); and
(2) financial rights (that is, the partner’s right to receive his share of any profit distributions made by the partnership).
184
Transferability of Management Rights
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.
185
Transferability of Financial Rights
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. The transferee is not a partner; the transferor is still a partner and retains all of the management rights of a partner.
186
DISSOCIATION of a partnership
- Dissociation is a change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business.
- Dissociation of a partner does not necessarily cause a dissolution and winding up of the partnership business.
187
A partner becomes dissociated from the partnership by:
(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.
188
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.
189
A partner who wrongfully dissociates is liable to the partnership for _____
any damages caused by the dissociation.
190
At-Will Partnership
An “at-will partnership” is one where the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking. It is the default form of partnership. (Most partnerships are at will.)
191
Term Partnership
A “term partnership” is the converse—it is a partnership where the partners have agreed, explicitly or implicitly, to remain partners for a definite term or until the completion of a particular undertaking.
192
When a partner dissociates from a partnership, one of two statutory avenues is implicated:
1. The first avenue provides that the partnership is dissolved and that its business must be wound up. This means that the partnership business will be liquidated (that is, “sold off”).
2. The second avenue provides that the partnership continues in existence with the dissociated partner becoming entitled to a buyout of their partnership interest.
-> The nature of the event of dissociation dictates which of these avenues will be implicated.
193
Consequences of Dissociation - For the Partner
- Upon a partner’s dissociation, their right to participate in management ceases.
- The partnership must purchase (buy out) their interest at either liquidation or going-concern value, and must indemnify them against known pre-dissociation liabilities, as well as against post-dissociation liabilities not incurred by the dissociating partner’s acts.
--> However, a partner who wrongfully dissociates before the expiration of a partnership term or completion of a particular undertaking is
not entitled to payment of the buyout price until the term expires or the undertaking is completed, unless they can establish that earlier
payment will not cause undue hardship to the partnership business (+Interest must be paid on the buyout price from the date of dissociation to the date of payment)
194
Dissolution and winding up are required only in
limited circumstances (for example, event in agreement requiring winding up, business becomes illegal, issuance of a judicial decree, unanimous consent of the partners in a term partnership, expiration of a term partnership).
195
In general, when a partner dissociates by express will in an at-will partnership, the partnership is _____
dissolved and its business must be wound up.
196
In a term partnership, if one partner dissociates wrongfully, or if a dissociation occurs because of a partner’s death or bankruptcy, dissolution and winding up of the partnership are required only if, _____
within 90 days after the dissociation, at least
one-half of the remaining partners agree to wind up the partnership.
197
If a partner’s dissociation does not result in a dissolution and winding up, the partner is entitled to _____
receive a buyout of his partnership interest.
198
If the dissociation is wrongful, any damages will be ______
offset against the buyout price.
199
Generally, a dissociated partner remains liable for ____ partnership obligations (a creditor can agree to release the withdrawing partner, however, from ____).
pre-dissociation; specific obligations
200
A dissociated partner can be liable for post-dissociation partnership liabilities incurred within ____ after the dissociation (assuming that dissolution has not occurred) if:
two years
(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.
201
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)
-> The partnership can make the filing as well.
202
A partnership can be bound by an act of a dissociated partner undertaken within _____ after dissociation (assuming that dissolution has not occurred) if:
two years
(1) the act would have bound the partner-
ship before dissociation, and
(2) the other party to the transaction = (a) reasonably believed the dissociated partner was still a partner and (b) did not have notice of the dissociation.
203
The partnership can protect itself (from dissociated partner's ability to bind partnership) by ____
notifying creditors directly of the dissociation
(effective immediately) or by filing a public statement of dissociation (becomes effective 90 days after filing).
204
When dissolution and winding up occur:
partnership assets must be applied to the discharge of partnership liabilities.
- If the assets are insufficient, individual partners are required to contribute (“pay in”) in accordance with their loss shares.
- If there are excess assets, they are distributable to the partners in cash in accordance with their profit shares.
205
A partnership at will can be dissolved at ____
any time by the express will (for example, notice
of dissolution) of any partner without penalty.
206
The following events trigger dissolution under the R.U.P.A.:
a. In a partnership at will, notification by any partner of an express will to withdraw as a partner;
b. In a partnership for a definite term or particular undertaking: (1) expiration of the term or completion of the undertaking, (2) consent of all of the partners to dissolve, or (3) within 90 days
after a partner’s death, bankruptcy, or wrongful dissociation, at least half of the remaining partners wish to dissolve;
c. The happening of an event agreed to in the partnership agreement that requires winding up the partnership business;
d. The happening of an event that makes it unlawful for the partnership to continue;
e. Issuance of a judicial decree on application by a partner that (1) the economic purpose of the partnership is likely to be frustrated, (2) a partner has engaged in conduct making it not reasonably practicable to carry on the business, or (3) the
business cannot practicably be carried on in conformity with the partnership agreement;
f. Issuance of a judicial decree on application by a transferee of a partner’s interest that it is equitable to wind up the partnership (1) after the term expires or the undertaking is completed in a partnership for a definite term or particular undertaking, or (2) at any time in a partnership at will; and
g. The passage of 90 consecutive days during which the partnership does not have at least two partners.
207
Priority of Distribution - partnership dissolution
Each level of priority must be fully satisfied before beginning the next level:
a. 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).
b. Second, the partnership must repay all capital contributions paid into the partnership by partners.
c. Third, profits or losses, if any.
208
The partnership continues to exist after dissolution until _____
the partnership is wound up.
209
Who May Wind Up
- As a general rule, all living partners have a right to participate in the winding up of the partnership’s business except partners who have wrongfully dissolved the partnership and bankrupt partners.
- If all partners have died, the legal representative of the last surviving partner may wind up.
210
Apparent Authority—Partner’s Power to Bind
Partnership After Dissolution
- A partnership can be bound after dissolution by any act of a partner appropriate for winding up the partnership’s business.
- The partnership will also be liable for other acts if the party with whom a partner dealt did not have notice of the dissolution.
--> The partnership can protect itself by notifying creditors directly of the dissolution (effective immediately). In addition, any partner who has not wrongfully dissociated may file a statement of dissolution with the secretary of state; all persons are deemed to have notice of a dissolution 90 days after such a notice is filed.
211
Any time before the winding up of the partnership business is complete, the partners may decide to waive the dissolution and continue the partnership by ____
unanimous vote of the partners who have not wrongfully dissolved (Such waiver does not affect the rights of persons who have relied on the dissolution before receiving notice of the waiver)
212
OTHER UNINCORPORATED FORMS:
- LIMITED PARTNERSHIPS
- LIMITED LIABILITY PARTNERSHIPS
- LIMITED LIABILITY COMPANIES
213
LIMITED PARTNERSHIPS
A limited partnership (“LP”) is a partnership with at least one general partner and at least one limited partner.
- 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.
214
A limited partnership differs from a general partnership in that a limited partnership can be created only by ____
filing a certificate of formation with the state.
215
Like a modern partnership, a limited
partnership is an entity ____ from its partners and has a perpetual duration unless otherwise provided.
distinct
216
For an LP a certificate of limited partnership must be _____. The certificate must be signed by ____. The information required in the certificate is minimal.
filed with the secretary of state; all general partners.
217
The Certificate of Limited Partnership must include among other items:
(1) the name of the partnership,
(2) the names and addresses of the agent for service of process, and
(3) the names and addresses of each general partner.
218
A limited partnership must maintain in its state of organization an office with records of ____
the certificate, any partnership agreements, and the partnership’s tax returns for the three most recent years.
219
A limited partnership agreement or some other record must contain ____
the amount and description of each partner’s contribution, special rights
of partners regarding distributions, etc.
220
A limited partnership must maintain in the state an agent for ____
the service of process.
221
It is important to remember that a limited partnership is a creature of statute and thus can exist only on ____
compliance with the limited partnership statute.
222
The limited partnership name must contain ____
- the phrase “limited partnership” or the abbreviation “L.P.”
-> The policy here is to alert the public to the limited liability nature of the business.
-> The name may contain the name of any partner (general or limited).
223
The real detail on the operation and governance of a LP is typically found ___
in a partnership agreement (it can be written, oral, or implied)
224
LP - General Partners
- The LP is managed by the general partner(s).
- Each general partner has equal rights in the management and conduct of the LP’s activities.
--> Generally, any matter relating to the limited partnership’s ordinary business activities may be exclusively decided by the general partner or, if there is more than one general partner, by a majority of the general partners.
225
LP - Limited Partners
Limited partners usually have no management rights unless the partnership agreement grants them rights.
226
Participation in management does not cause a limited partner to ____
become personally liable for an obligation of the limited partnership (under older law, it did).
227
Unless otherwise agreed, the vote of all partners (general and limited) is necessary for certain ____ activities, including to:
extraordinary
(1) amend the partnership agreement;
(2) convert the partnership to a limited liability limited partnership;
(3) dispose of all or substantially all of the limited partnership’s property outside the usual and regular course of the partnership’s activities;
(4) admit a new partner;
or (5) compromise a partner’s obligation to make a contribution or to return an improper distribution.
228
The Uniform Limited Partnership Act’s (U.L.P.A.’s) provisions for distributions are very similar to the distribution provisions for ___.
Unless otherwise agreed, distributions from an LP are made on the basis of ____
corporations
the partners’ contributions (that is, in proportion to the value of each partners’ contribution) rather than the R.U.P.A’s default equal split for general partnerships.
229
Like a corporation, a limited partnership may not make a distribution if after making the distribution the limited partnership would be ____
unable to pay its debts as they become due or the limited partnership’s total assets would be less
than the sum of its total liabilities, including sums needed to satisfy superior preferential rights upon dissolution.
230
Right to Distributions - LP
A partner has no rights to distributions unless the partner makes a contribution to the partnership.
231
A contribution may be in the form of ____ to the partnership. A partner’s contribution obligation is not excused by ____ and may be compromised only on ____
any benefit (for example, money, property, services, and promises to make such contributions)
death or other disability; the consent of all partners.
232
If a partner fails to make an agreed-upon nonmonetary contribution (for example, the partner fails to provide promised property or services), the limited partnership has the option of
____
seeking cash in lieu of the agreed-upon contribution.
233
Liability for Improper Distributions - LP (General partner)
A general partner who consents to an improper distribution is personally liable to the limited partnership for the amount that the distribution exceeds what could properly have been distributed.
234
Liability for Improper Distributions - LP (Receiving partner)
- Any partner who receives an improper distribution knowing that it is improper may be forced to return the improper amount to the partnership.
- However, no personal liability for an improper distribution arises if the distribution appeared to have been proper based on reasonably prepared financial statements.
235
Right to Assign Partnership Interest - LP
As in a general partnership, a partner’s right to distributions is personal property that may be transferred, in whole or in part.
- Such a transfer gives the transferee only the right to receive the transferred distributions and to demand an accounting thereon.
- The transfer does not make the transferee a partner or give the transferee any rights as a partner.
- Moreover, the transferring partner remains a partner, and the transfer does not constitute a dissociation or cause a dissolution.
236
In an LP the transfer of a partner’s ____ in the partnership is a ground for expulsion.
entire transferable interest
237
LP liability of general partner
General partners are jointly and severally liable for all obligations of the LP, just as they are in a general partnership.
238
A general partner may also be a limited partner and have the rights of a limited partner, but such a dual capacity does not relieve the general partner of ____
his duties as a general partner.
239
Incoming General Partners - LP
A person who becomes a general partner of an existing limited partnership is not personally liable for an obligation that the limited partnership incurred before he became a general partner.
240
Limited Liability Limited Partnership
If the LP is a limited liability limited partnership, the general partners are not liable for liabilities
incurred by the individual partners; liability belongs to the partnership alone.
241
LP liability of limited partner
- A limited partner is not personally liable for an obligation of the LP solely by reason of being a limited partner.
- Limited partners have limited liability, meaning that they can only lose the value of their investments.
242
A limited partner (as well as a general partner) is always liable for ____.
her own torts (The limited liability shield of any business organization does not protect a person from liability for her own torts.)
243
Fiduciary Duties in LP - General Partner
- A general partner owes the LP and the other partners the same fiduciary duties of loyalty and care that general partners owe in a general partnership.
- However, a general partner does not automatically violate the duty of loyalty merely because the general partner’s conduct furthers his own interests.
244
Fiduciary Duties in LP - Limited Partner
- A limited partner owes no fiduciary duty to the partnership or any other partner solely by reason of being a limited partner.
-> Thus, they’re free to compete with the partnership and have interests adverse to those of the partnership, unless the partnership agreement provides otherwise.
245
Right to Transact Business with the Partnership - LP
Any partner may lend money to and transact other business with the limited partnership.
246
Right to Dissolve - LP
Any partner may apply for a decree of dissolution of the limited partnership whenever it is not reasonably practicable to carry on the business in conformity with the partnership agreement.
247
Direct Action Against Limited Partnership by Partner - LP
A partner may maintain a direct action against the limited partnership or another partner for legal or equitable relief to enforce her rights and interests.
248
Derivative Action - LP
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; or a demand would be futile.
249
An LP 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.
250
Right to Information - LP
A general partner’s right to information is similar to that of a partner in a general partnership = Each limited partner has the right to inspect and copy any partnership records required to be maintained
251
Indemnification and Compensation of General Partners - LP
- Unless otherwise provided, a general partner is not entitled to remuneration for services performed for the partnership.
- However, the limited partnership must indemnify a general partner for liabilities that they incur in the ordinary course of the activities of the partnership.
252
LP: Admission of Additional General and Limited Partners
A person may be admitted to the limited partnership as a general or limited partner as provided in the partnership agreement, as a result of a merger or conversion, or on the consent of all partners.
253
LP: Conversion and Merger
A limited partnership may convert to or merge with another form of business entity upon the consent of all partners and filing of a certificate (of conversion or merger) with the secretary of state.
254
LP: Dissociation
- The events that will cause dissociation of a partner in a general partnership will also cause dissociation of a partner (general or limited) in a limited partnership.
- A general partner’s right to dissociate is similar to the right of a partner to dissociate in a general partnership.
255
In an LP a limited partner has no right to ____
dissociate before termination of the limited partnership.
256
Effect of dissociation from LP on Limited Partner
After dissociation, a limited partner is treated as a transferee of the limited partner’s transferable interest.
257
Effect of dissociation from LP on General Partner
The effects of dissociation of a general partner in a limited partnership are similar to the effects of dissociation of a partner in a general partnership
258
A limited partnership may be judicially dissolved upon these events:
- application of a partner if it is no longer reasonably practicable to carry on the limited partnership in conformity with the limited partnership agreement
- A limited partnership may also be administratively dissolved by the secretary of state for failure to pay fees or file an annual report, but the partnership may apply for reinstatement by curing the defect within two years of the dissolution
259
Otherwise (besides request for dissolution by partner/state), a limited partnership may be dissolved only upon the occurrence of one of
the following:
- 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
260
Winding up - LP
- A limited partnership continues after dissolution only for the purpose of winding up its activities.
- In winding up, the partnership must discharge liabilities, settle and close partnership activities, and marshal and distribute its assets.
261
Power to Bind Partnership After Dissolution - LP
- After dissolution, a partnership will be bound by any acts of a general partner that are appropriate for winding up the partnership.
- The partnership can also be bound by acts of a general partner that are not appropriate for winding up if the acts would have bound the
partnership before dissolution and the party with whom the general partner dealt did not have notice of the dissolution.
262
Upon winding up a limited partnership, the assets are distributed in the following order:
(1) First, to creditors (including partners who made loans to the limited partnership)
(2) Second, any surplus must be paid in cash as a distribution
263
LP Distribution Where Assets Are Insufficient to Satisfy Debts in winding up
- 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.
- If a person does not contribute the full amount
required, the other persons required to contribute must pay the additional amount necessary to discharge the obligation, in proportion to the right to receive distributions in effect when the obligation was incurred.
- A person who pays an additional contribution may recover from any person whose failure to contribute necessitated the additional contribution, but may not recover more than the amount additionally contributed.
264
LIMITED LIABILITY PARTNERSHIP
Differs from a general partnership and a limited partnership in that in an LLP all of the partners have limited liability (that is, no partner is personally liable for a partnership obligation beyond their contribution to the partnership)
265
The major advantage of operating as an LLP is that partners are ____ for the LLP’s obligations. In general, you apply ____ rules to LLPs, with the exception of the material below.
not personally liable; general partnership
266
To become an LLP, a partnership must file a ____ with the secretary of state. The statement must be executed by ____. The required minimal information includes:
statement of qualification; at least two partners
(1) the name and address of the partnership;
(2) a statement that the partnership elects to be an LLP; and
(3) a deferred effective date, if any.
267
The partnership becomes an LLP at the time of ____, whichever is later.
the filing of the statement or on the date specified in the statement
268
The name of a limited liability partnership must end with the words ____
“Registered Limited Liability Partnership” or “Limited Liability Partnership” or one of the abbreviations “L.L.P.,” “LLP,” “R.L.L.P.,” or “RLLP.”
269
The terms and conditions on which a partnership becomes an LLP must be approved by ____
whatever vote is necessary to amend the partnership agreement or, if specified, the vote necessary to amend the contribution obligations of the partners.
If the partnership agreement is silent as to how it may be amended, all partners must approve the terms and conditions of the partnership becoming an LLP.
270
A partner in an LLP is not personally liable (directly, indirectly, or by way of contribution) for the obligations of the LLP, whether arising in tort, contract, or otherwise. As always, however, a partner remains personally liable for ____
their own wrongful acts.
271
If partnership assets are insufficient to indemnify them for an obligation they incurred on behalf of the LLP, they ____
forfeit the right to receive contributions from other partners in exchange for being relieved of the obligation to contribute to their personal liability.
272
A limited liability company (“LLC”) is a hybrid business organization between a corporation and a partnership that:
(1) is taxed like a partnership (except for a single-member LLC),
(2) offers its owners (called members) the limited liability of shareholders of a corporation,
and
(3) can be run like either a corporation or a partnership.
-> This is not a corporation, nor is it a partnership. It is its own business form.
273
An LLC is treated as a ____ from its owners (called “members”)
separate legal entity distinct
274
The ____ provides a default set of rules for LLCs.
Revised Uniform Limited Liability Company Act of 2006 (“R.U.L.L.C.A.”)
275
An LLC is formed by filing a ____ with the secretary of state. The LLC must have at least ____.
certificate of organization (or, in some states, articles of organization)
one member
276
The information required in the certificate of an LLC is minimal. It must include the following:
a. The name of the LLC
b. The address of the LLC’s registered office AND
c. The name and address of its registered agent
277
The LLC’s name must include _____
an indication that it is an LLC. In general, the name should contain the words “limited liability company” or the abbreviation “LLC” or “L.L.C.”
278
The real detail on the operation and governance of an LLC is typically found in an ____
operating agreement (The operating agreement can displace almost all of the statutory provisions).
279
The LLC agreement may eliminate the duty of ____ and alter the duty of ____ if doing so is not manifestly unreasonable. Similarly, the operating agreement may not eliminate the ____, but it may prescribe standards for measuring the performance of the obligation if doing so is not manifestly unreasonable
loyalty; care (except to authorize intentional misconduct or knowing violations of law)
contractual obligation of good faith and fair dealing
280
Management of the LLC is presumed to be by ___
all members.
-> Other management arrangements can be made (for example, management by outside managers), but they must be specified in the operating agreement.
281
Each member (or manager, if the LLC is manager-man- aged) has ____ in the LLC’s management. A ____ vote of the members (or managers) is required to approve most (that is, ordinary business) decisions.
equal rights; majority
282
Consistent with general agency law principles, each member of a member-managed LLC has authority to bind the company to contracts _____, unless the member lacks actual authority to do so and the other party to the contract has notice that the member lacks such authority.
apparently carrying on the ordinary business of the company
283
A ____ vote of members (or managers if manager-managed) is required to approve extraordinary business decisions, including amending the operating agreement.
unanimous
284
Although the R.U.L.L.C.A. is silent on the allocation of profits and losses among members (for tax purposes), it does provide that if an LLC makes any distribution to its members, the distribution must be _____. In most states, however, unless otherwise agreed, profits and losses and distributions are allocated on the basis of ____
made to the members in equal shares unless the operating agreement provides otherwise.
contributions.
285
A member or transferee does not have a right
to demand or receive a distribution from the LLC in any form other than ____
money.
286
Liability - LLC
- Members and managers generally are not personally liable for the LLC’s obligations = They have limited liability and can lose only the amount of their investments.
- However, courts may pierce the LLC veil of limited liability to reach the members’ and managers’ personal assets to satisfy LLC obligations under circumstances similar to those under which courts would pierce the veil of a corporation.
--> Failure to observe corporate-type formalities (for example, having meetings, recording minutes, etc.) will not be a ground for piercing the LLC veil.
287
The fiduciary duties owed by a member (if member-managed) or a manager (if manager-managed) to the LLC and to its other members
are ____. They must also discharge their duties and exercise any rights consistently with the _____
the fiduciary duties of care and loyalty
contractual obligation of good faith and fair dealing.
288
Pursuant to the duty of loyalty in an LLC, a member (or manager if manager-managed) must:
(1) account to and hold for the LLC any benefit they derive from the LLC’s activities or from the appropriation of an LLC opportunity;
(2) refrain from dealing with the LLC as, or on behalf of, a person who has an adverse interest to the LLC (unless the transaction is fair to the LLC); and
(3) refrain from competing with the LLC’s business.
289
In an LLC after disclosure of all material facts, all of the members may ____ a specific act by a member (or manager if manager-managed) that would otherwise violate the duty of loyalty.
authorize or ratify
289
Although both members and managers
must discharge their duties and exercise their rights in accordance with the contractual obligation of good faith and fair dealing, (1) only
the managers are subject to the duties of ____; and (2) only the members may ____
loyalty and care; authorize or ratify an act by a manager that would otherwise violate the duty of loyalty.
290
TRANSFERABILITY OF OWNERSHIP INTERESTS in an LLC
Essentially, the partnership rule applies with respect to the transferability of ownership interests in an LLC—financial rights are unilaterally transferable, but management rights are not.
291
One can become a member of an LLC(that is, management rights can be transferred) only with ____
the consent of all members or as provided in the
operating agreement.
292
DISSOCIATION - LLC
A person has the power to dissociate as a member of an LLC at any time, rightfully or wrongfully, by expressly withdrawing as a member.
Generally, the events that cause dissociation of a partner in a partnership will also cause dissociation of a member of an LLC. A wrongfully dissociating member may be liable to the LLC for damages.
293
An LLC will be dissolved when any of the following events occurs:
(1) an event or circumstance that the operating agreement states causes dissolution;
(2) the consent of all the members; or
(3) the passage of 90 consecutive days during which the LLC has no members.
294
A member may also apply for judicial dissolution of the LLC. A court may grant an application for judicial dissolution if:
a. The conduct of all or substantially all of the LLC’s activities is unlawful.
b. It is not reasonably practicable to carry on the company’s activities in conformity with the certificate of organization and the operating agreement.
c. The controlling members have acted, are acting, or will act in a manner that is illegal or fraudulent.
d. The controlling members have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the member applying for dissolution.
295
The secretary of state may dissolve an LLC administratively when ___
the LLC fails to submit a required fee or annual report.
-> The LLC may apply for a reinstatement after correcting the problem. If reinstated,
the LLC may resume its activities as if the administrative dissolution had never taken place.
296
An LLC that has been dissolved continues its existence but is not allowed to carry on any business except that ____
which is appropriate to winding up its activities.
297
A claim can be asserted against a dissolved LLC, even if the claim does not arise until after dissolution, to the extent of _____.
If the assets have been distributed to the members, a claim can be enforced against each member to the
extent of ____.
the LLC’s undistributed assets
the member’s proportionate share of the claim or to the extent of the assets distributed to him, whichever is less
298
An LLC can cut short the time for bringing known claims by
- notifying claimants in writing of the dissolution and giving them a deadline of not less than 120 days in which to file their claim.
- The time for filing unknown claims can be limited to five years by publishing notice of the dissolution in a newspaper in the county where the LLC’s known place of business is located.
299
Partnerships and LLCs are taxed on a ____
“pass-through” basis.
300
RIGHTS TO INFORMATION - Member-Managed LLC
- In a member-managed LLC, a member has a right to inspect and copy any record concerning the LLC’s activities, financial condition, and so on, material to the member’s rights and duties.
- An LLC and its members must automatically furnish such information that they know
is material to the exercise of a member’s rights and duties, unless they reasonably believe the member already knows the information.
The LLC and its members must furnish other information on a member’s demand unless the demand is unreasonable or improper.
301
RIGHTS TO INFORMATION - Manager-Managed LLC
- In a manager-managed LLC, the managers have the same right to information and duty to furnish information as members in a member-managed LLC.
- The members have a right to inspect and copy any record regarding the LLC’s activities, financial condition, and so on, as is just and reasonable if:
(1) the member seeks the information for a purpose material to the member’s interest as a member;
(2) the member makes a demand to the LLC describing with reasonable particularity the information sought and the purpose for seeking the information; and
(3) the information sought is directly connected to the member’s purpose.
302
MEMBERS’ ACTIONS AGAINST THE LLC
- A member who has been injured personally by his LLC can bring a direct action against the LLC to recover.
- A member may also bring a derivative action on behalf of the LLC if they make a demand on the other members (or managers), unless demand would be futile (demand would be futile if a majority of the members/managers were involved in the alleged wrong)
--> A derivative action may be maintained only by a person who is a member at the time the action is commenced and who remains a member while the action continues.
303
Members of a member-managed LLC and managers of a manager-managed LLC have a right to be indemnified for ____, provided that they complied with ____, and they also have a right to be ____ for expenses they incur on the company’s behalf
debts, obligations, and other liabilities incurred in the course of their activities on behalf of the company
the duties of loyalty and care
reimbursed
304
A judgment creditor of a member or transferee of a member of an LLC may ____
charge (attach) the transferable interest of the judgment debtor to satisfy the judgment.
