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I Formation of Firms Agency Relationships....................................................................4 II Contractual Dealings by Agents..................................................................................... 5 A. Firms liability in contract for acts of its agent..........................................................5 B. Firms rights under contracts entered into by its agents-disclosure of principal........5 C. Agents Liability for Contractual Dealings..................................................................7 a). Agents duty to fully disclose principal/Problems with D.B.A.................................7 b) Liability of Attorneys.............................................................................................. 7 c) Agents Implied Warranty of Authority...................................................................8 d) Election of Remedies ............................................................................................. 8 IV Actual Authority of Agents and Its Consequences........................................................9 A. Express Actual Authority........................................................................................... 9 B. Implied Actual Authority (Authorized Transactions!)...............................................10 C. Agents Duties of Care and Loyalty.........................................................................10 1. Introduction to the Fiduciary Duties of Agents and Servants...............................10 2. Duty of Care......................................................................................................... 11 3. Duty of Loyalty..................................................................................................... 11 a) In general.......................................................................................................... 11 b) Conflicts of Interest........................................................................................... 11 c) Duty to Account for Profits................................................................................ 12 d) Other Aspects of the Agents Duty of Loyalty...................................................12 e) Principals Remedies......................................................................................... 13 V. Power of Agents to Bind the Firm by Unauthorized Acts.............................................13 B. Apparent Authority (PR has done something to create liability)..............................13 C. Estoppel (PR has done something to create liability)..............................................14 D. Inherent Agency Power (PR has done nothing; AG is unauthorized).......................15 E. Liability for Representations by Agent.....................................................................16 VI. Firms Accountability for notification to/knowledge of the Agent..............................17 1. Knowledge of An Agent........................................................................................... 17 2. Prior or Casually Obtained Knowledge of an Agent..................................................18 3. Notification to an Agent........................................................................................... 18 4. Time from which notification or knowledge affects the principal.............................18 5. Adverse Agents........................................................................................................ 19 VII. Ratification of Unauthorized Transactions................................................................20 A. Affirmance............................................................................................................... 20 B. Knowledge of Agents: effect on ratification.............................................................21 X. Liability for Wrongful Acts of Servants (Respondeat Superior)...................................21 A. Introduction............................................................................................................. 21 B. Masters Liability for Acts of Servants......................................................................21 1. Liability for Acts of a Servant within the Scope of Employment...........................21 2. Masters RS Liability for Servants Abuse of Position Rest. 219(2).....................23 XI. Liability for Wrongful Acts of Independent Contractors.............................................23 Page 1 10-Feb-08 18:27:00 a2/p2
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Agency & Partnership Outline *** Agency *** I Formation of Firms Agency Relationships
1. Rest 1 Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other to so act. a. Mutual Consent b. One person will act on behalf of another, and i. E.g., restaurants in Houston Center are not agents of HC because they only comply with lease requirements in the way they operate the restaurants; they do not act on behalf of HC. c. That person will act subject to the other persons control d. Intent or awareness of the creation of an agency relations IS NOT required (the fiduciary relation which results from not is intended to result from) 2. Attributes of the agency relationship (MO says these attributes are required; MD says these attributes are factors only and not determinative) a. Rest 12 Agent has the power to alter the legal relations between the principal and 3rd persons and between the principal and himself. i. E.g., power to bind principal to contract, power to settle, VL for agents torts b. Rest 13 Agent is a fiduciary with respect to matters within the scope of his agency c. Rest 14 The principal has the right to control the conduct of the agent with respect to the matters entrusted to the agent. i. Control the result (ultimate outcome or objective) but not the minutia of achieving the result.
3. Rest 26 Creation of (Actual) Authority; General Rule: Except for the execution of instruments under seal or for the performance of transactions required by statute to be authorized in a particular way, authority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal's account.
a. The principals authorization of the agent need not be in any particular form. Written, spoken, or conduct, reasonably interpreted by the agent such that he believes the principal desires him to act on his behalf. Exceptions ( Equal Dignities Rule): i. For instruments under seal executed by agent (e.g., CL instruments required to bear the seal of the principal; principals authorization to agent must be granted in a sealed instrument) or ii. When a statute requires the principals authorization to be in a particular form (not a statute that requires the underlying transaction to be in a particular form) (e.g., statutory requirement when agent is executing a deed for the conveyance of land on behalf of the principal, the principal must authorize the agent in a written instrument that complies with same formalities as a deed). E.g., Power of attorney
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ii. Exceptions where A. Principal is excluded by form/terms of contract B. Principals existence is fraudulently concealed (related to iv below) Rest 304 C. Rest 306 There is a set-off or similar defense against the agent (protects the interest of the 3rd Party; 3rd party thinks hes dealing only with the
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b. Agent misrepresents not acting for a principal and i. Affirmative misrepresentation that agent is not acting for a principal ii. Cm. a. If AG knows (mere suspicion is not enough) 3P will not deal with PR and fails to disclose that he is acting for such PR, that could constitute a misrepresentation. Some facts have to show knowledge e.g., history between the parties, express statement by principal, express statement by 3 rd party c. 3P must show he would not have dealt with PR at time of contracting if he had known who PR was or known what the principal was going to do with land ( 304 il. 5) and d. PR/AG had notice that 3P would not deal with PR i. A mere suspicion by the undisclosed principal that the 3 rd party will not deal is not sufficient to constitute notice. (Kelly Asphalt) Some facts have to show knowledge to constitute notice e.g., history between the parties, express statement by principal, express statement by 3 rd party e. Affirmative misrepresentation v. failure to disclose both might satisfy the condition of induced to enter into it by a representation.
3. 4. 306(1) liability by 3P on a contract with an undisclosed principal can be offset by any claim the 3P has against the agent at time of making contract and until the principal becomes known 306(2) liability by 3P on a contract where agent only authorized to contract in principals name cannot be offset by a claim against the agent unless the agent took possession of the chattels he is disposing of with the 3P or the principal otherwise misled the 3P into extending credit to the agent.
5. Generally an undisclosed principal can substitute his performance for that of the agent unless doing so would substantially change the nature of the transaction from the perspective of the 3rd party. a. E.g., agent contracts to convey real property and contracts to give the agents warranty deed; principal steps in and says agent was acting for him and that the buyer will be getting the principals warranty deed b. E.g., attorney contracts to perform services; another attorney steps in and says the first attorney was acting as his agent and the other attorney is going to provide the services 6. An undisclosed principal can generally require the 3 rd party to render the contracted services to the principal instead of the agent unless the contract deals with personal services 310
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b) Liability of Attorneys
1. In general, an attorney is not personally liable for the obligations incurred on behalf of his fully disclosed principal (the client), unless there is a specific agreement otherwise. But, courts require attorneys to make clear to 3P that attorney will not be personally liable for the clients obligations. But a. Copp Court holds attorney liable for the 3P fee even though the attorney is an agent for a disclosed principal because the attorney did not make clear to 3P that firm would not be personally liable, there was a custom that 3P could expect the attorney to pay the bill whether or not the attorney is paid by the client, and 3P is looking primarily to the attorney for payment of fee (3P provider is primarily relying on the standing of the law firm and expecting payment from the firm, not the client). (modern trend)
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a. Knows means actual knowledge; not reason to know or should know. b. E.g., death terminates agency powers; AG contracting after PRs death will breach IWoA. c. 3P can recover actual damages as a result of the breach and any expectation damages (benefit-of-the-bargain damages) 2. Applicability of 329 to Disclosed, Partially Disclosed, Undisclosed principals a. If the principals identity was fully disclosed, agent gives IWoA. b. If the principals identity was partially disclosed, agent still gives IWoA; agent becomes a party to the contract if he is acting within his authority. Agent has potential liability either way, unless otherwise agreed. c. If the principals identity is undisclosed, agent does not give IWoA because he does not purport to act on behalf of another, but the agent is a party to the contract. 3. If agent acts in an unauthorized manner, as long as the agent has power to bind the principal (i.e., through apparent authority, estoppel, or inherent agency power), the agent is not liable to the third party for breach of the implied warranty of authority. a. But, whenever the agent binds the principal by acting in an unauthorized way, the agent is liable to the principal for any loss the principal incurs. By acting in an unauthorized way, the agent breaches his or her duty of obedience to the principal. Rest 401, an agent is liable to the principal for any loss caused by a breach of duty. Thus, whether the agent binds the principal through apparent authority, estoppel, or inherent agency power, the agent is subject to liability to the principal 4. SoL Accrual a. Does breach occur at time of agreement or when discover? 329 When discover the lack of authority or suffer damages or fails to gain the benefits. b. KS Law: Breach of IWA can be either a tort action or a contract action. Under tort action, date of discovery is when the action accrues.
d) Election of Remedies
1. Election of remedies The liability of an agent and an undisclosed principal is only in the alternative (one or the other). 3P must choose which entity will satisfy the liability; discharges the liability of the other entity. a. If had a partially disclosed principal, agent & principal are J&S liable as parties to the K. b. If had a fully disclosed principal and agent was a party, then agent and principal are J&S liable.
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i. express conveyance by written/oral words or conduct, reasonably interpreted by the agent, that causes the agent to believe the principal desires the agent to so act on the principals behalf except A. Execution of instruments under seal B. If the state statute requires the principals grant of authority to comply with a particular form.
b. Rest 33 General Principle of Interpretation: An agent is authorized to do, and to do only, what it is reasonable for him to infer that the principal desires him to do in the light of the principal's manifestations and the facts as he knows/should know at the time he acts.
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a. 35 Agent must have honest and reasonable belief based on manifestations of the principal that he had authority to do the act. b. Prior course dealing with the principal, knowledge of the principal about what needs to be done, acts and conduct of the parties, totality of the circumstances. c. Implied actual authority: Actual authority circumstantially proven which the principal actually intended the agent to possess and includes such powers as are practically necessary (incidental to it, usually accompany it or are reasonably necessary) to carry out the duties actually delegated.
2. 77 General Rule: The authority to appoint agents, subagents or subservants of the principal can be conferred in the same manner as authority to do other acts for the principal, and the interpretation of the manifestations of the principal is governed by the rules generally applicable to the interpretation of authority. 3. 78 Inference as to Authority to Delegate Authority: Unless otherwise agreed, authority to conduct a transaction does not include authority to delegate to another the performance of acts incidental thereto which involve discretion or the agent's special skill; such authority, however, includes authority to delegate to a subagent the performance of incidental mechanical and ministerial acts.
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2. Duty of Care
1. 377 under ordinary circumstances, the promise to act as an agent is interpreted as being a promise only to make reasonable efforts to accomplish the directed results 2. 379(1) Unless otherwise agreed, a paid agent has duty to act with standard care and skill and to use any special skill he has, if he has a special skill.
3. Rest 377 Contractual Duties: A person who makes a contract with another to perform services as an agent for him is subject to a duty to act in accordance with his promise. 4. Rest 379 Duty of Care and Skill: (1) Unless otherwise agreed, a paid agent is subject to a duty to the principal to act with standard care and with the skill which is standard in the locality for the kind of work which he is employed to perform and, in addition, to exercise any special skill that he has. (2) Unless otherwise agreed, a gratuitous agent is under a duty to the principal to act with the care and skill which is required of persons not agents performing similar gratuitous undertakings for others.
3. Duty of Loyalty
a) In general
1. 387 Agent is subject to duty to act solely for the principal in all matters connected with his agency. a. Agent cannot put agents own interests or those of a 3 rd party above the principals.
b. Rest 387 General Principle: Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency.
2. The Duty of Loyalty is a deterrent rule to prevent agents from profiting from transactions conducted for the principal (creates conflict of interest);
b) Conflicts of Interest
1. 389 Unless otherwise agreed, an agent can act as an adverse party to the principal only if the principal knows the agent is adverse; a. 389 Agent must disclose to the principal when the agent acts as an adverse party
i. Rest 389 Acting as Adverse Party Without Principal's Consent: Unless otherwise agreed, an agent is subject to a duty not to deal with his principal as an adverse party in a transaction connected with his agency without the principal's knowledge.
2. 390 When AG acting adversely, AG must fully disclose all relevant facts he knows or reasonably should know that would affect PRs judgment. a. Failure to so disclose is a breach of the duty of loyalty. PR can bring an action against the AG even if PR has suffered no harm and can recover any benefit accrued to AG.
i. Rest 390 Acting as Adverse Party with Principal's Consent: An agent who, to the knowledge of the principal, acts on his own account in a transaction in which he is employed has a duty to deal fairly with the principal and to disclose to him all facts
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ii. Rest 407 If an agent has received a benefit as a result of violating his duty of loyalty, the principal is entitled to recover from him what he has so received, its value, or its proceeds and also the amount of damage caused thereby.
2. 392 Agent must disclose all material facts regarding the adverse representation.
a. Rest 392 Acting for Adverse Party with Principal's Consent: An agent who, to the knowledge of two principals, acts for both of them in a transaction between them, has a duty to act with fairness to each and to disclose to each all facts which he knows or should know would reasonably affect the judgment of each in permitting such dual agency, except as to a principal who has manifested that he knows such facts or does not care to know them.
3. 393 The agent must not compete with the principal whilst acting as agent, without principals consent. Doesnt matter if agent is doing so on his own time. Agent can compete after the agency relationship terminates.
a. Rest 393 Competition as to Subject Matter of Agency: Unless otherwise agreed, an agent is subject to a duty not to compete with the principal concerning the subject matter of his agency.
4. 395 AG must not use confidential information about PR for his own benefit or for anyone elses; this rule applies during and after termination of the agency relationship (continuing duty)
a. Rest 395 Using or Disclosing Confidential Information: Unless otherwise agreed, an agent is subject to a duty to the principal not to use or to communicate information confidentially given him by the principal or acquired by him during the course of or on account of his agency or in violation of his duties as agent, in competition with or to the injury of the principal, on his own account or on behalf of another, although such information does not relate to the transaction in which he is then employed, unless the information is a matter of general knowledge. b. Rest 396 Using Confidential Information After Termination of Agency: Unless otherwise agreed, after the termination of the agency, the agent: i. (a) has no duty not to compete with the principal;
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e) Principals Remedies
1. 401 Actual damages: Rest 401 Liability in Tort for Loss Caused: An agent is
subject to liability for loss caused to the principal by any breach of duty.
2. 403 Constructive Trust: Rest 403 Liability for Things Received in Violation of
Duty of Loyalty: If an agent receives anything as a result of his violation of a duty of loyalty to the principal, he is subject to a liability to deliver it, its value, or its proceeds, to the principal.
3. 404 Principal can recover the value of the use by the agent
a. Rest 404 Liability for Use of Principal's Assets: An agent who, in violation of duty to his principal, uses for his own purposes or those of a third person assets of the principal's business is subject to liability to the principal for the value of the use. If the use predominates in producing a profit he is subject to liability, at the principal's election, for such profit; he is not, however, liable for profits made by him merely by the use of time which he has contracted to devote to the principal unless he violates his duty not to act adversely or in competition with the principal. 4. Rest 407 Principal's Choice of Remedies: (1) If an agent has received a benefit as a result of violating his duty of loyalty, the principal is entitled to recover from him what he has so received, its value, or its proceeds, and also the amount of damage thereby caused; except that, if the violation consists of the wrongful disposal of the principal's property, the principal cannot recover its value and also what the agent received in exchange therefor. (2) A principal who has recovered damages from a third person because of an agent's violation of his duty of loyalty is entitled nevertheless to obtain from the agent any profit which the agent improperly received as a result of the transaction.
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3. Notification to an Agent
1. Notification to the agent results in notification to the principal if the agent has actual or apparent authority to receive the notification at the time the notification is given to the agent. a. 268 General Rule i. (1) Unless the notifier has notice that the agent has an interest adverse to the principal, a notification given to an agent is notice to the principal if it is given: A. (a) to an agent authorized to receive it; B. (b) to an agent apparently authorized to receive it; b. Knowledge 272, 276, Notification 268
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5. Adverse Agents
1. Whether PR is affected by AGs knowledge/notification to AG when AG is acting adversely to PR? 2. Knowledge: Lanchile v. CIGNA Exception to 272: Adverse Agent Exception a. 282 Agent Acting Adversely to Principal: (1) A principal is not affected by the knowledge of an agent in a transaction in which the agent secretly is acting adversely to the principal and entirely for his own or another's purposes, except as stated in Subsection (2). i. Policy: AG is not really acting for PR; we normally expect AG will convey information he has a duty to convey and so attribute knowledge to PR; if AG is acting adversely, he is not going to abide by that duty; hes gone off on a frolic so knowledge not attributable to PR. b. An agent is not acting adversely merely because he has a conflict of interest with the principal or because he is not acting primarily for his principal. 3. Sole Actor Doctrine 282(2)(b)&(c) Principal cannot claim the benefit of the agents services and at the same time disavow any knowledge the agent had about the transaction (really just (2)(c)). Policy: Estoppel. a. Exception to the adverse agent exception: 282 (2) The principal is affected by the knowledge of an agent who acts adversely to the principal: i. (b) if AG enters into negotiations within the scope of his powers and the person with whom he deals reasonably believes him to be authorized to conduct the transaction; or
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i. A disclosed or partially disclosed principal may ratify. b. p430, n4 In order to ratify, PR must have been able to undertake the transaction at the point the agent entered into and at the point of affirmance. If PR could not ratify at either point, then PR cannot ratify it at all (e.g., if principal
was a minor at time contract made)
c. Rest 91 p430, n3 A principal can rescind his affirmance when he is ignorant of any material fact at the time of affirmance .
i. 91 Knowledge of Principal at Time of Affirmance A. (1) If, at the time of affirmance, the purported PR is ignorant of material facts involved in the original transaction, and is unaware of his ignorance, he can thereafter avoid the effect of the affirmance. B. (2) Material facts are those which substantially affect the existence or extent of the obligations involved in the transaction, as distinguished from those which affect the values or inducements (e.g., AG sells PRs stock at a price lower than it was worthcannot rescind affirmance) involved in the transaction.
5. p430, n5 When a principal ratifies a transaction, he may create actual authority and/or apparent authority for future (similar) transactions .
Principal must tell AG & 3P that, although he ratified the particular transaction, it was unauthorized and he will not ratify further transactions.
c. (d) the servant purported to act or to speak on behalf of the principal and there was reliance upon apparent authority, or he was aided in accomplishing the tort by the existence of the agency relation. 3. Example: Sexual harassment is outside the scope of employment. Employer cannot be VL under 219(1). But 219(2)(d) provides a basis for VL where: a. Quid pro quo: supervisor makes threats of adverse employment action if employee does not go along and those threats are carried out. Actionable under 219(2)(d) 1st clause the servant purported to act or to speak on behalf of the principal and there was reliance upon apparent authority is always met because there is an adverse employment action which affects the employee (reliance) i. Employer has no defense for QPQ cases. b. Hostile Work Environment no adverse employment action; threats but not carried out; or just a hostile environment. Employer actionable under 219(2)(d) 2nd clause because the supervisor might have been aided in accomplishing the tort by the existence of the agency relation. Results in VL but employer has a defense i. The employer exercised reasonable care to prevent and correct promptly any sexually harassing behavior, and ii. The employee unreasonably failed to take advantage of any preventive or corrective opportunities provided by the employer or to avoid harm otherwise.
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B. Exceptions to the Independent Contractor Rule employer will be VL liable for torts of a non-servant agent/independent contractor
1. Liability for acts of independent contractors. a. Once independent contractor status is established through the 220 factors, the principal is not liable unless it was a NDD or ostensible agency.
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Apparent Authority/Estoppel
1. Elements Ostensible Agency 267 (Texas). NOTE: Ostensible Agency applies only to tort actions; contract actions use the separate theories of apparent authority and estoppel) a. PR represents by its conduct or otherwise that a person is its AG or servant (employee). Generally an affirmative misrepresentation. b. PRs representation causes 3P to reasonably believe that person was AG/employee of PR. c. 3P justifiably relied on the appearance of agency. Must show 3P relied on the representation of PR that the actor was its AG or servant. i. For hospitals, the general rule is that if you are admitted without objection to the hospital, the court treats you as having relied on the appearance of agency. (covers conscious and unconscious patients sort of reads the reliance out of the rule) 2. Ostensible Agency v. RS a. RS focuses on the relationship between the employee (servant) and employer (principal). Third partys expectations have no relevance here. b. OA focuses on the relationship between the third party and the principal . Third partys expectations are key. 3. Ostensible agency applies in other settings powerful doctrine for when independent contractors are used a. Funeral home contracts for drivers to drive family to cemetery. b. Independent franchisee owners of hotels of national chain subject to national advertising. c. Independently owned services station where national advertising indicated you can trust your car to the man who wears the star.
ii. Termination of the agency relationship occurs when one party has notice that the other party manifests dissent to the continuance of the relationship.
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B. If the principal terminates the relationship, it is revocation. (1) It terminates all agency powers but not apparent authority of a general agent unless the third party has notice.
(a) Rest 124A Effect of Termination of Authority Upon Apparent Authority and Other Powers - The termination of authority does not thereby terminate apparent authority. All other powers of the agent resulting from the relation terminate except powers necessary for the protection of his interests or of those of the principal.
(2) It terminates all agency power, including apparent authority, of a special agent except in the cases mentioned in Rest 132 C. If the agent terminates the relationship, it is renunciation iii. The principal and the agent always retain the power to terminate the relationship. A. Rest 118 cm. a, b. Power is retained but if exercised wrongfully, it may result in breach of a contract between the agent and principal. The power is retained even if the contract says the relationship is irrevocable. Rest
118 Revocation or Renunciation: Authority terminates if the principal or the agent manifests to the other dissent to its continuance.
b. (2) By operation of law See next section c. (3) By intervening events p682, n7 i. When an intervening event that should cause the agent to realize he is no longer authorized. A. Rest 109 a change in the value of the subject matter or business conditions B. Rest 110 the loss/destruction of the subject matter of the agency C. Rest 116 a change in law of which the agent has notice that will make the act the subject of the agency illegal D. Rest 113, 114 the bankruptcy or substantial impairment of the assets of the agent or principal of which the agent has notice E. Rest 115 the outbreak of war of which the agent has notice 2. Zukaitas v. Aetna Casualty & Surety Co. Lingering Apparent Authority a. Distinction between general agent and special agent i. Notification to a general agent affects the principal when the agent has actual or apparent authority to receive the notification.
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4. Rest 133 Incapacity of Parties or Other Impossibility a. The apparent authority of an agent terminates upon the happening of an event which destroys the capacity of the principal to give the power, or an event which otherwise makes the authorized transaction impossible.
C. Irrevocable Agencies
1. Irrevocable Agency - Two Types a. Power coupled with an interest A power coupled with an interest in the subject matter of the power, not just an interest in the proceeds from the exercise of the power. (e.g., mortgage granted where mortgager transfers title to the property to the mortgagee and grants a power to sell the property in the event of default) i. Courts will stretch to classify possession only as power coupled with an interest. e.g., Fisher v. NY&MCFR&C Co if grantor delivers to the holder of the power the property securing the debt, it creates a power coupled with an interest. Page 29 10-Feb-08 18:27:00 a2/p2
2. Elements a. Association - Consensual agreement of the parties (an aggregation of persons) i. Pship can be formed in very informal manner, even accidentally. b. 2 or more persons person can be another business entity i. Defn: Persons UPA 2, RUPA 101.10 c. To carry on as co-owners shared control of the business
i. UPA 18(e). Rules Determining Rights and Duties of Partners: All partners have equal rights in the management and conduct of the partnership business. ii. RUPA 401(f). PARTNER'S RIGHTS AND DUTIES : Each partner has equal rights in the management and conduct of the partnership business.
d. A business an activity that rises to the level of being a business (e.g., not mere co-owners of land) UPA 2, RUPA 101.1 A business is a series of acts directed towards an end.
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5. Partnership UPA 6, RUPA 202(a) (fact intensive inquiry to determine if partnership formed; a. There must be an agreement to share profits (necessary prerequisite but not definitive; other non-partnership relationships also involve profit sharing; normally sufficient to submit the issue to the fact finder). Intent to share profits + shared control of the business will generally be enough to find a partnership (but not always P&M Cattle). Actual profits are not required. b. RUPA 202(c)(3) a person who receives a share of the profits of a business is presumed to be a partner in the business
Factors Profit sharing? (intent to share profits); necessary but not determinative; creates presumption of partnership 202(c)(3)-(4); distinguish partner profit sharing from compensation profit sharing Dalton Analyzed, found intent to share P&M Analyzed, agreed to share profits but not losses
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Analyzed, both operated biz Analyzed, both contributed ppty Yes; used the term partner
Not analyzed
6. Views of partnership a. Aggregate the partnership is not separate and distinct from the partners; the individual partners are the partnership; partnership is merely a way of describing the relationship among the partners (like a family and its members family describes the relationship of the persons) b. Entity the partnership is an entity separate and distinct from the partners. It is a separate legal person with its own rights & liability.
i. RUPA 201(a) PARTNERSHIP AS ENTITY : (a) A partnership is an entity distinct from its partners. ii. TBOC 152.056. PARTNERSHIP AS ENTITY: A partnership is an entity distinct from its partners.
c. Approach to analyzing partnership liability questions i. Conceptual analysis of partnerships - Determine entity v. aggregate, then analyze facts. ii. Functional approach emphasizes looking at issues on the merits and determines which view of partnership makes the most sense.
i. Attorneys
1. Entity/aggregate view has particular relevance to attorneys R1.13 attorney for an organization is the attorney for the organization itself, not the constituents. 2. Can the partners in a partnership bring suit against the attorney for malpractice? a. Conceptual View i. If partnership is seen as an aggregate, the individual partners can sue the attorney. Page 32 10-Feb-08 18:27:00 a2/p2
b. RUPA 102(a) knowledge = actual knowledge only; cognitive awareness; different from UPA i. UPA 3-actual knowledge thereof, but also when he has knowledge of such other facts as in the circumstances shows bad faith; actual knowledge + reason to know or should know. c. RUPA 102(c) - A person notifies or gives a notification to another by taking steps reasonably required to inform the other person in ordinary course, whether or not the other person learns of it. An Act intended to convey information. d. RUPA 102(b) Notice of a fact i. A person has notice of a fact if the person: (A) knows of it; (B) has received a notification of it; or (C) has reason to know it exists from all of the facts known to the person at the time in question. ii. RUPA 102(f) - A partners knowledge, notice, or receipt of a notification of a fact relating to the partnership is effective immediately as knowledge by, notice to, or receipt of a notification by the partnership, except in the case of a fraud on the partnership committed by or with the consent of that partner. A. All partners are agents of the partnership; knowledge is attributable to the partnership when it concerns a matter regarding the partnership. B. Exception if partner is committing fraud or assisting fraud, it is not notice to partnership, even if the 3P is not aware that the partner is committing/assisting fraud. The knowledge of a partner who is acting adversely in the sense of fraud is not attributable to the partnership. Page 33 10-Feb-08 18:27:00 a2/p2
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7. The partner has no apparent authority to make the UPA 9(3) decisions; the partner must have been granted actual authority from all the partners to make such a decision; otherwise all partners have to consent. a. RUPA 301 does not contain this laundry list of actions BUT b. Comment 4. UPA 9(3) contains a list of 5 extraordinary acts that require unanimous consent of the partners before the partnership is bound. RUPA omits that section. That leaves it to the courts to decide the outer limits of the agency power of a partner. Most of the acts listed in UPA Section 9(3) probably remain outside the apparent authority of a partner under RUPA, such as disposing of the goodwill of the business, but elimination of a statutory rule will afford more flexibility in some situations specified in UPA Section 9(3) 8. UPA 9 v. RUPA 301 Differences a. 9 Actual knowledge (conscious awareness only) v. 301 knowledge (knew or should have known) or notice b. 9 Scope of ordinary course of business transactions: limited to the partnership itself v. 301 consideration of the way other businesses of the same kind conduct the business
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Agency & Partnership Outline X. Partnership Liability for Wrongful Acts of Partners (RS)
C. RS Liability of Partnerships & Partners (Creating PShip Liability in Tort)
1. Two basis issues a. When is a partnership VL for a partners wrongful conduct? b. If the partnership is VL, what is the form of the partners liability? 2. UPA 13. Partnership Bound by Partner's Wrongful Act. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the [actual] authority of his co-partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act. 3. UPA 14. Partnership Bound by Partner's Breach of Trust. a. The partnership is bound to make good the loss: i. Where one partner acting within the scope of his apparent authority receives money or property of a third person and misapplies it; and ii. Where the partnership in the course of its business receives money or property of a third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership. 4. UPA 15. Nature of Partner's Liability. a. All partners are liable: i. Jointly and severally for everything chargeable to the partnership under 13 and 14. A. Plaintiff can sue the partners and the partnership at the same time or separately; each is liable for the whole obligation. ii. Jointly for all other debts and obligations of the partnership ; but any partner may enter into a separate obligation to perform a partnership contract. A. Jointly liable means liable only collectively. Plaintiff must exhaust partnership assets before reaching partner assets. BUT the plaintiff must join the partnership and all the partners in the same suit . 5. RUPA 305. PARTNERSHIP LIABLE FOR PARTNERS ACTIONABLE CONDUCT. a. A partnership is liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course of business of the partnership or with [actual or apparent] authority of the partnership . b. If, in the course of the partnerships business or while acting with [actual] authority of the partnership, a partner receives or causes the partnership to receive money or property of a person not a partner, and the money or property is misapplied by a partner, the partnership is liable for the loss. 6. RUPA 306. PARTNERS LIABILITY.
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7. Correlation a. UPA 13 (excludes injury to other partner) RUPA 305(a) (includes injury to other partner) TBOC 152.303 (includes injury to other partner) b. UPA 14(a) (apparent authority only) RUPA 305(a) authority means actual or apparent authority TBOC 152.303 8. LLP note: a. An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner. This subsection applies notwithstanding anything inconsistent in the partnership agreement that existed immediately before the vote required to become a limited liability partnership under Section 1001(b). i. No liability based on status as partners; a partner is still liable for wrongs he personally commits (e.g., Pedestrian could sue partnership and the partner that hit him) ii. WARNING w.r.t. LLP: if a state has a full shield LLP statute, it operates like 306(c) no liability for tort & contract obligations of the partnership; partial shield LLP statutes only cut off liability for tort obligations
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(a) Partner cannot use partnership property for his own purposes or to satisfy his own liabilities. UPA 25(2) exceptions to UPA 25(1) tenants in partnership concept constrict use of partnership property to partnership purposes and not assignable without all partners assigning.
(2) Partners Interest is not assignable unless all partners are assigning their interests (3) Partners interest is not subject to attachment or execution, unless for a claim against the partnership.
b.
c. (3) his right to participate in the management. - UPA 18(e) 2. RUPA a. 203, 501 The partnership owns partnership property (UPA 25(1) - partners own partnership property); entity theory partnership is separate from partners; no longer necessary to define the tenancy-in-partnership used under UPA. b. 401(g) Partners can only use partnership property for partnership purposes. (UPA 25(2)) c. 502 The only transferable interest of a partner is his interest in profits/losses of the partnership and distributions. (UPA 26)
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b. Assignment of a partners interest in the partnership does not automatically make the assignee a partner. UPA 18(g) No person can become a member of a partnership
without the consent of all the partners., 27(1), RUPA 503(3)
c. Assignment of a partners interest in the partnership does not give the assignee rights to that partners share of partnership property. UPA 27(1) merely entitles the assignee to the profits to which the assigning partner would otherwise be entitled. 25(2)(a)(b)(c) interest in partnership property is undivided; a partner has no interest which she can convey; cant be attached for personal debts; RUPA 501 d. An assignee cannot force the partnership to make managerial decisions favorable to it. UPA 27(1) assignee has no rights to interfere in management or administration of partnership; RUPA 503(a)(3); Bauer v. Blomfield partners owe assignee no fiduciary duty w.r.t. distribution; dissent says they should e. Rights of assignee i. Receive share of profits allocated to assigning partner ii. Sue if fraudulent action by the partners in making no distributions. iii. Petition for judicial dissolution, if it is a partnership at will (not for a definite term of for a specific undertaking); UPA 32(2)(b) (no equitable requirement under UPA)/RUPA 801(6) (court can order dissolution if it deems such action equitable) iv. Texas Rule: Assignees cannot seek judicial dissolution of partnership TBOC 11.314 (only a partner can seek judicial dissolution)
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N/A
No? (not in statute prior version allowed) No, TBOC 11.314 (partner or owner only)
b. Service Contributions: It is generally not appropriate to treat service contributions as a capital contribution. cm. 3, UPA 40. Partners must agree to treat the services as a capital contribution.
i. In the absence of an agreement to such effect, a partner contributing only personal services is ordinarily not entitled to any share of partnership capital pursuant to dissolution. Personal services may, however, qualify as capital contributions to a partnership where an express or implied agreement to such effect exists.
c. Loss Sharing Default rule - each partner shares the loss equally .
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2. Order of distributions a. UPA 40(b)The liabilities of the partnership shall rank in order of payment, as follows: i. Those owing to creditors other than partners, ii. Those owing to partners other than for capital and profits, (e.g., if a partner has also made a loan to the partnership, a partners agreed but unpaid salary, expenses incurred under 18(b) activities; fee due to partner for services in winding up partnership) iii. Those owing to partners in respect of capital, ($, equipment, property The partners are repaid the VALUE of their contributions, not necessarily what they actually contributed (e.g., dont necessarily get their property back). A. UPA 40(d) The partners shall contribute, as provided by 18 (a) the amount necessary to satisfy the liabilities; but if any, but not all, of the partners are insolvent, or, not being subject to process, refuse to contribute, the other partners shall contribute their share of the liabilities, and, in the relative proportions in which they share the profits, the additional amount necessary to pay the liabilities. B. UPA 40(b) lists the liabilities iv. Those owing to partners in respect of profits. (no profits because there was a loss)
v. UPA 40. Rules for Distribution. In settling accounts between the partners after dissolution, the following rules shall be observed, subject to any agreement to the contrary: A. The assets of the partnership are: (1) The partnership property, (2) The contributions of the partners necessary for the payment of all the liabilities specified in clause (b) of this paragraph. B. The liabilities of the partnership shall rank in order of payment, as follows: (1) Those owing to creditors other than partners, (2) Those owing to partners other than for capital and profits, (3) Those owing to partners in respect of capital, (4) Those owing to partners in respect of profits. C. The assets shall be applied in the order of their declaration in clause (a) of this paragraph to the satisfaction of the liabilities. D. The partners shall contribute, as provided by 18 (a) the amount necessary to satisfy the liabilities; but if any, but not all, of the partners are insolvent, or, not being subject to process, refuse to contribute, the other partners shall contribute their share of the liabilities, and, in the relative proportions in which they share the profits, the additional amount necessary to pay the liabilities.
3. Becker v. Killarney When one partner puts in only services and the other puts in only capital, the service partner should not have to contribute to the loss to allow the capital partner to be repaid at termination (fairness argument). Otherwise, capital contributions are favored over service contributions. Other courts disagree this approach is inconsistent with the UPA.
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4. If a partnership is an LLP, LPs have no obligation to contribute to obligations outstanding at termination, even to even out each others capital accounts. a. Under a full shield LLP statute, the partners have no obligation to contribute any funds to cover any tort or contract liabilities outstanding at termination. b. Under a partial shield LLP statute, the partners must contribute towards contract liabilities outstanding but not tort liabilities. (partial shield only protects against tort type actions, not contract type actions). 5. UPA does not expressly recognize capital accounts of partners in the equity portion of balance sheet; RUPA 401(a) does.
6. RUPA 401. PARTNERS RIGHTS AND DUTIES. (a) Each partner is deemed to have an account that is: (capital account) (1) credited with an amount equal to the money plus the value of any other property, net of the amount of any liabilities, the partner contributes to the partnership and the partners share of the partnership profits; and (2) charged with an amount equal to the money plus the value of any other property, net of the amount of any liabilities, distributed by the partnership to the partner and the partners share of the partnership losses. (b) Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partners share of the profits. (h) A partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership. 7. RUPA 807. SETTLEMENT OF ACCOUNTS AND CONTRIBUTIONS AMONG PARTNERS. (a) In winding up a partnerships business, the assets of the partnership, including the contributions of the partners required by this section, must be applied to discharge its obligations to creditors, including, to the extent permitted by law, partners who are creditors. Any surplus must be applied to pay in cash the net amount distributable to partners in accordance with their right to distributions under subsection (b). (b) Each partner is entitled to a settlement of all partnership accounts upon winding up the partnership business. In settling accounts among the partners, profits and losses that result from the liquidation of the partnership assets must be credited and charged to the partners accounts. The partnership shall make a distribution to a partner in an amount equal to any excess of the credits over the charges in the partners account. A partner shall contribute to the partnership an amount equal to any excess of the charges over the credits in the partners account but excluding from the calculation charges attributable to an obligation for which the partner is not personally liable under Section 306. (c) If a partner fails to contribute the full amount required under subsection (b), all of the other partners shall contribute, in the proportions in which those partners share partnership losses, the additional amount necessary to satisfy the partnership obligations for which they are personally liable under Section 306. A partner or partners legal representative may recover from the other partners any contributions the partner makes to the extent the amount contributed exceeds that partners share of the partnership obligations for which the partner is personally liable under Section 306. (d) After the settlement of accounts, each partner shall contribute, in the proportion in which the partner shares partnership losses, the amount necessary to satisfy partnership obligations that were not known at the time of the settlement and for which the partner is personally liable under Section 306. (e) The estate of a deceased partner is liable for the partners obligation to contribute to the partnership. (f) An assignee for the benefit of creditors of a partnership or a partner, or a person appointed by a court to represent creditors of a partnership or a partner, may enforce a partners obligation to contribute to the partnership.
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Agency & Partnership Outline *** Limited Partnerships (LP) *** I Formation of Firms - LP
1. RULPA 101(7) Limited partnership: "Limited partnership" and "domestic limited
partnership" mean a partnership formed by two or more persons under the laws of this State and having one or more general partners and one or more limited partners.
a. Partnership with i. At least one general partner 403 rights to manage and control the business (rights of a partner in a GP); personal liability for business obligations (liability of a partner in a GP) ii. And at least one limited partner 302 voting rights granted in LP agreement; 303 no rights to manage and control the business A. but no personal liability (beyond investment amount) for the business obligations; RULPA 303(a). LIABILITY TO THIRD PARTIES: Except as provided in
subsection (d), a limited partner is not liable for the obligations of a limited partnership unless he is also a general partner or, in addition to the exercise of his [or her] rights and powers as a limited partner, he participates in the control of the business. However, if the limited partner participates in the control of the business, is liable only to persons who transact business with the limited partnership reasonably believing, based upon the limited partner's conduct, that the limited partner is a general partner.
iii. LP is often seen as a hybrid entity/aggregate. Agents of the partnership owe a fiduciary duty to both the partnership (collective interests of the partners) and the partners (interests of individual partners). However, the duty to the partnership itself takes precedence over the duty to the partners when there is a conflict between the interests of the partnership and the interests of the partners. This duty applies to GPships also. A. If the agent is accused of violating its fiduciary duty to either the partnership or the partners, it must produce evidence that it was acting in the best interests of the partners or the partnership. 2. Creation a. File a document with the appropriate state office; "certificate of limited partnership."
RULPA 201(a).
i. Texas: certificate of formation. TBOC 1.002(6), 3.001(a), 3.011(a). ii. Must be signed by all general partners. RULPA 204; TBOC 3.004(b)(1),
153.553(a)(1).
iii. Information required is very basic. See RULPA 201(a); TBOC 3.005, 3.011(c). b. Limited partnership is formed at the time the certificate is filed (or on a later date specified in the certificate). RULPA 201(b); TBOC 3.001(c), 4.051, 4.052. Note:
RULPA provides limited partnership is formed upon filing if "there has been substantial compliance with the requirements"
c. There is some fee. 3. Limited Partnership Agreement a. RULPA and Texas do not require a written agreement, but limited partnerships normally have a written limited partnership agreement. b. The limited partnership agreement is not filed with the state.
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c. Key point: erroneously belief at the time of contribution that he is becoming a limited partner. i. Objectively reasonable test for erroneous belief: honest & reasonable d. ULPA 11 focus is on promptness, how quickly the person renounces, after realizing the mistake i. policy protect 3Ps expectations in dealing with the entity; reduces the risk that there will be creditors that thought the person was a GP); ii. Unclear whether person has to renounce all profits, past and future, or just future; e. RULPA 304 (focus is on reliance by 3P on persons status, not how quickly withdraws) i. On ascertaining the mistake A. Causes certificate of LP to be executed and filed showing not a GP or (1) Requires the agreement of the voting partners and GP would have to sign & file it. B. Withdraws from future equity participation by filing a certificate of withdrawal with the State ii. Upon complying, limited liability for future obligations is established. iii. BUT person is liable to creditors who transact business with the enterprise before corrective action was taken, if the creditor actually believed in good faith that the person was a GP at the time of the transaction. f. TBOC 153.106 109 i. 153.106 Erroneous but good faith belief that the person is a limited partner and within a reasonable time after ascertaining the mistake the person takes corrective action A. cause certificate of formation to be filed by GP, B. withdraw from participation in future profits, C. file a written statement that shows person tried to get a cert of formation to be filed by the GP and claims status as an LP(1) gets partner 180 days to persuade the GP to file the certificate of formation; after that partner must withdraw or bring an action against GP to compel filing the certificate of limited partnership ii. 153.109 Person is liable as a GP to a 3P who transacts business with the partnership before corrective action is taken if A. The person knows or has notice that no certificate has been filed or it was filed inaccurately and B. 3P reasonably believes that based on the person who believes himself to be a LPs own conduct that the person was a GP at the time of the transaction and extended credit to the partnership in reasonable reliance on the contributor.
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Agency & Partnership Outline VIII. Management and Conduct of Firm Business - LP
1. Rights of General Partners
1. 1916 ULPA 9(1) a. A general partner shall have all the rights and powers b. and be subject to all the restrictions and liabilities of a partner in a partnership without limited partners, c. except that without the written consent or ratification of the specific act by all the limited partners, a general partner or all of the general partners have no authority to i. Do any act in contravention of the certificate, ii. Do any act which would make it impossible to carry on the ordinary business of the partnership, iii. Confess a judgment against the partnership, iv. Possess partnership property, or assign their rights in specific partnership property, for other than a partnership purpose, v. Admit a person as a general partner, vi. Admit a person as a limited partner, unless the right to do so is given in the certificate, vii. Continue the business with partnership property on the death, retirement or insanity of a general partner, unless the right to do so is given in the certificate. 2. RULPA 403 a. (a) Except as provided in this [Act] or in the partnership agreement, a general partner of a limited partnership has the rights and powers and is subject to the restrictions of a partner in a partnership without limited partners. b. (b) Except as provided in this [Act], a general partner of a limited partnership has the liabilities of a partner in a partnership without limited partners to persons other than the partnership and the other partners. Except as provided in this [Act] or in the partnership agreement, a general partner of a limited partnership has the liabilities of a partner in a partnership without limited partners to the partnership and to the other partners. c. Leaves out the enumerated list of disallowed acts from ULPA; must be specified in the partnership agreement.
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ii. Element 3: 3P must reasonably believe based on that LPs conduct that the LP was a GP. 3. ULPA 303 (2001). NO LIABILITY AS LIMITED PARTNER FOR LIMITED PSHIP OBLIGATIONS. a. An obligation of a limited partnership, whether arising in contract, tort, or otherwise, is not the obligation of a limited partner. A limited partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for an obligation of the limited partnership solely by reason of being a limited partner, even if the limited partner participates in the management and control of the limited partnership. i. Control rule has been eliminated; LPs can control at will without liability. The burden is on the 3P to verify with whom it is transacting. ii. The control rule is anachronism because parties are free to choose LLC, LLLP, LLP where partners can choose to participate and still have limited liability. iii. Texas still follows the control rule: TBOC 153.102, 153.103 4. EXAM: LP can become personally liable if a. Participate in the control of the business. b. LPs name is used as part of the name of the Lpship not under one of the exceptions (RULPA 303(d))
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c. d. e. f.
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Taxes
5. Purpose of LLC limited liability without the rigidity of a corporation and favorable tax treatment. 6. Entity/Aggregate theories are still applicable to analyzing legal issues with an LLC (Elf Atochem v. Malek, LLC). 7. Most states permit single-member LLCs. See TBOC 101.101(a); Del. LLCA 18101(6). a. LLC might be managed by its members (member-managed LLC), or by one or more managers (manager-managed LLC). See TBOC 1.002(51). b. Members and managers are not, by virtue of being members or managers, liable for the debts and obligations of the LLC. TBOC 101.114; Del. LLCA 18-303. 8. Creating a Limited Liability Company a. File a document with the appropriate state office. b. Fees TBOC 4.152, 4.154 c. Most common name: articles of organization." ULLCA (1995) 202(a). d. Texas: certificate of formation. TBOC 1.002(6), 3.001(a), 3.010. e. Information required in the certificate is very basic. See Del. LLCA 18-201(a); TBOC 3.005, 3.010. f. LLC is formed at the time the certificate is filed (or on a later date specified in the certificate). Del. LLCA 18-201(b); TBOC 3.001(c), 4.051, 4.052. g. There is no financial responsibility requirement. 9. Operating Agreement of LLC a. Delaware and Texas do not require a written agreement, but LLCs normally have a written operating agreement. b. Terminology: i. Most common: operating agreement. ii. Delaware: limited liability company agreement. Del. LLCA 18-101(7). iii. Texas: company agreement. TBOC 101.001(1). c. Operating agreement is not filed with the state. d. The typical operating agreement is very detailed, and spells out the rights and obligations of members and managers, such as: i. Each members share of profits and losses. ii. Rules regarding voting by members and managers. iii. Procedure for calling meetings of members and managers 10.Limited Liability Company Name a. Typically, state statutes require the LLC name to contain the words "limited liability company" or an abbreviation of those words. i. Del. LLCA 18-102(1): name must contain the words "Limited Liability Company" or the abbreviation "L.L.C." or the designation "LLC"
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c. There is an inference that a person intends to make a present contract with an existing person. d. Other members may be liable as GPs in a general partnership since the LLC has not been formed. Courts in equity might say that a simple investor in the venture is not liable because he was just an investor. There is no corrective provision, as there is for LPs, for persons who erroneously believe they are members in an LLC. 2. Lessons a. File correctly. b. No business until confirmation that your filing was successful. c. If do pursue business, make the contract clear about who will be parties and if there will be an substitution of parties. d. TBOC 4.051, 3.001(c) LLCs existence commences upon the filing of the cert of formation. 3. In the absence of intent to the contrary, a promoter becomes liable on contracts he signs for an unformed limited liability entity. Courts presume 3P intended to contract with the person who signs the contract. a. Unless the other party knows of the nonexistence of the LL entity and agrees to look solely to the LL entity. b. While LL entity remains unformed, the persons trying to form the entity are likely operating as a GPship and are J&S liable for all obligations created on behalf of the Pship.
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8. Two points a. Members are not agents of a manager managed LLC. b. Include managers and members list in the articles of organization so the public is on notice of who is authorized to act for the LLC. Specify LLC mgmt mode in the articles of org.
Default Rules - Ordinary Matters Extraordinar y Matters Fundamental Biz Trans/Act makes it impossible to carry out business Absolute majority of members 101.356(c) Amend certificate of formation
Member managed
Majority of members present at meeting where a quorum is present 101.355 Majority of the managers present at a meeting where a quorum is present; members do not have to approve 101.355
Manager managed
Approval by a majority of managers at a meeting with a quorum 101.355 and by an absolute majority members
Approval by a majority of managers at a meeting with a quorum 101.355 and unanimous approval of
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*** LLP & LLLP *** I Formation of Firms LLP & LLLP
1. TBOC 1.002(48). DEFINITIONS: "Limited liability partnership" means a partnership governed as an LLP under Title 4.
2. Registering an LLP requirements are hard and fast; substantial compliance is not sufficient a. 152.802 File an application with the secretary of state with required information i. 4.158 pay $200 filing fee per partner; renew annually ii. Failure to renew LLP status causes partnership to lose the limited liability shield. b. 152.803 proper name for the company; 5.063 name must include LLP in some form
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Agency & Partnership Outline IX. Managerial Discretion and Fiduciary Duties
A. Business Judgment Rule
1. The business judgment rule describes a standard of review that courts apply when they assess whether corporate directors/partnership managers have breached their duty of care. BJR does not apply to asses whether attorneys are liable for malpractice. Attorney liability is assessed by applying an objective standardthe attorney is not liable if they make a decision which a reasonably prudent attorney could make under the same or similar circumstances. 2. In contrast, when courts apply the BJR in the context of corporate directors or other managers, the courts do not ask what a reasonably prudent director or manager would have done. Instead, if the BJR applies, the court refuses to question the director or managers decision at all. Circumstances in which a court will not apply the BJR, include, e.g., the director or manager did not act in good faith or acted out of self interest. 3. Attorney a. Objective good faith: Attorney acts in good faith and in an honest belief that his advice and acts are well founded and in the best interest of the client is not answerable for a mere error in judgment or for a mistake on an unsettled point of law on which well informed lawyers my reasonably disagree. i. The attorney must have been acting as a reasonably prudent attorney in the same or similar circumstances. Did the attorney fail to act reasonably in interpreting the law? b. Wood v. McGrath even if an attorneys interpretation of unsettled law is reasonable, he can still be liable to the client if he fails to make adequate disclosure for the basis of his interpretation. 4. Regular Business a. Business judgment rule courts are reluctant to second guess the business decisions of corporate directors. Not sufficient to allege an imprudent decision; more than imprudence or mistake in judgment must be shown, even if results are unwise or inexpedient. b. Kamin v. Amex Co i. Court will second guess a manager, such as general partner or board when A. The person acts with self-interest, apart from any interest of the partnership B. The person acts with self-interest gross negligence in informing himself regarding the decision, mere negligence is not enough; RUPA 404(c) partner must refrain from grossly negligent, reckless or willful misconduct. C. The person is not acting in good faith for the best interest of the entity. Subjective standard: good faith means persons primary purpose must be profitable. Directors have acted or are about to act in bad faith for a dishonest purpose. Good faith and reflect legitimate business concerns. D. GPs actions amount to a gift or waste of partnership assets. No reasonable person could conclude the business is getting fair value for what it is being
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