AGENCY & PARTNERSHIP Fall 1993 - Professor Beveridge I.

BASIC PRINCIPLES OF FIDUCIARY OBLIGATION.

1.

A fiduciary is a person who undertakes to act in the interest of another person. It is immaterial whether their is a contract involved or whether the undertaking is gratuitous. a.

Consent of the principal will only protect the fiduciary if he has in no way taken advantange of his position in procuring consent.

b.

It is a breach of duty for a fiduciary to use confidential information for his own purposes (even when the information is acquired accidentally and not in connection with his duties) or to communicate it to a third person who may so use it.

c.

3rd persons who participate in the breach of fidicuary duty may also be held liable.

2.

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."

3.

The agent acts in a representative capacity on behalf of the principal; the principal does not represent the agt.

A. 1.

BASIC PRINCIPALS IN OPERATION. Duty of Loyalty. a. 2 things required to establish breach of fid. duty: 1. breach of duty of loyalty (not good faith) 2. profit to D is required b.

2.

Duty of Candor (duty to disclose). a. The heavier weight of duty to disclose rests on the active manager in a partnership. b.

3.

Disclosure and informed consent cures a breach of duty of loyalty.

Partnership: an association of two or more persons to carry on as co-owners a business for profit.

Role of Restitution a. If a servant (agent) uses his position to acquire money, he is accountable to the master (principal), unless master (principal) consents to the servant's (agent's) retention of the value received. b.

This right to recover is subject to 2 qualifications: 1

1. 2. 4.

the sum must have been obtained in the course of the servant's employment, and there must exist a fiduciary relationship between employer and employee.

Confidential Information. a. constructive trust: (usual remedy for breach of a fiduciary relationship) arises where a person holding title to property is subject to an equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitted to retain it (equitable remedy designed to prevent unjust enrichment) b.

Advantages of a constructive trust: 1. fair to both parties 2. tailored to deter those who would place sensitive information at risk.

c.

Appropriate remedy where an employee has used his employer's confidential information for his own personal profit.

5.

Relationships of Trust & Confidence. a. Not all persons in whom one places confidence are treated by the law as fiduciaries. Only fiduciary if one has the authority to act on behalf of the other. 1. Note: a person c/b an fiduciary of 2 people w/conflicting interests. There must be disclosure to both sides and consent obtained from both sides.

6.

Purchase of Property. a. Purchase of partnership assets (horses) by partner absent disclosure to other partner of intent to do so is a breach of fiduciary duty. b.

Every partner must account to the partnership for any benefit and hold as trustee for it any profit derived by him w/o the consent of the other partners from any transaction connected with the formation, conduct, liquidation of the partnership or from any use by him of its profit.

c.

Partners shall render on demand true and full info. of all things affecting the partnership to any partner.

d.

A partner is a fiduciary under the UPA.

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II.

AGENCY RELATIONSHIPS.

A.

BASIS OF AGENCY RELATIONSHIPS. (The four factors of agency: 1. fiduciary obligation, 2. mutual consent, 3. representative capacity, 4. control.)

1.

a. b.

2.

Master: a principal who employs an agent to perform service in his affairs and who controls or has the right to control the physical conduct of the other in the performance of the service.

3.

Servant: an agent employed by a master to perform service in his affairs whose physical conduct in the performance of the service is controlled or is subject to the right to control by the master.

4.

Independent Contractor: a person who contracts with anohter to do something for him but who is not controlled by the other nor subject to the others right to control w/respect to his physical conduct in the performance of the undertaking. He may or may not be an agent.

6.

Agents are not Servants: unless the physical manner in which he performs his duty c/b directed by the principal.

Rule: An independent contractor can also be an agent. Limited agency: 1. general agent: agent auth. to conduct a series of transactions involving continuity of service. 2. special agent: agent auth. to conduct a single transaction or a series of transactions not involving continuity of service.

Reasons for these distinctions is liability of principle for harm caused by an agent. Principlal is not liable for injuries caused while agent is acting in scope of agency (if agent is not a servant) becuase principal has no control over the manner in which the agency conducts himself.) All servants are agents, but not all agents are servants. 7.

Agency by Estoppel. a. estoppel: applies when you know that you're being held out in a capacity that you don't have, you don't correct it, and someone acts in reliance on it. No actual agency because no consent. b. Agency by estoppel is to hold the principal liable. 1. Torts: agent also w/b liable for his own torts. 2. Contracts: a. if agent just enters into a rep on behalf of principal and principal doesn't know, only agent w/b liable. b. But if principal knows about it and doesn't stop it, principal c/b liable but can recover 3

c.

from agent. Four factors required for estoppel: 1. principal has represented or permitted itself to be represented as principal or agent as agent; 2. the P dealt with the alleged agent in reliance on the representation; and 3. the reliance was justifiable; and 4. there has been a change of position.

8.

Apparent Agency:

Texaco case.

C.

DUAL LOYALTIES, AMBIGUOUS PRINCIPALS AND SUBAGENCY.

1.

An agent can represent persons who have conflicting interests as long as there's disclosure and consent. Persons Who Act as Agents for More than one Party. 2. a. If there is no consent (express or implied) on the part of the principal that the agent can appoint a subagent, the principal is not liable for the acts of the subagent. b. A subagent is a person appointed by an agent empowered to do so, to perform functions undertaken by the agent for the principal, but for whose conduct the agent agrees with the principal to be primarily responsible. 1. Notice to an agent in the course of a transaction is notice to the principal. 2. Notice to a subagent is notice to the appointing agent, which is notice to the principal. c. Once appointed, an agent/subagent is to represent the principal until told or notified otherwise. d. A principal's revocation of an agency authorization terminates the agency only when the agent receives the notice of revocation. C.

DUTIES WITHIN THE RELATIONSHIP.

1.

Agent's Duties to Principal. Loyalty. a. Uniquely a fiduciary duty. Duty to keep the interest of the principal in mind when doing work for the principal. Care. b. Paid agent: duty 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 skills that he has. Gratuitous agent: duty to act with the care and skill which is required of persons not agents performing similar gratuitous undertakings for others. c.

Agent is not liable to 3rd parties for pecuniary harm that results from his failure to adequately perform his duties to his principal (only liable if physical harm 4

results). Obedience. d. Unless otherwise agreed, agent must obey all reasonable directions in regard to the manner of performing a service that he has contracted to perform. Termination of Agency Relationships. e. Agency law supercedes contract law - contract principles must yield to agency principle when an alleged violation of a fiduciary duty is at issue. (even though an employment K calls for 60 days notice of termination, agent may be dismissed immediately under agency law for breach of a fiduciary duty).

2.

f.

The election of the principal not to discharge the agent for a breach of duty does not of itself release the agent from liability for loss caused by the breach nor, if the agent commits subsequent breaches of duty, is the principal prevented from electing subsequently to treat the 1st breach as cause for discharge.

g.

Ordinarily, the law imputes to the principal an agent's acts and knowledge, done or acquired w/in the scope of the agent's authority. The principal is affected by the knowledge of an agent who acts adversely to the principal: 1. if the failure of the agent to act upon or to reveal the info. results in a violation of a contractual or relational duty of the principal to a person harmed thereby; 2. if the agent enterest into negotiations witin the scope of his powers and the person with whom he deals reasonably believes him to be authorized to conduct the transaction; or 3. if, before he has changed his position, the principal knowingly retains a benefit through the act of the agent which otherwise he would not have received.

Principal's Duties to Agent. Indemnification a. As long as the agent is doing what he is supposed to do he is entitled to indemnification. An agent may recover any expenses necessarily incurred in the transaction of his principal's business. 1. If agent violates a duty to the principal, he is not entitled to indemnification. 2. But principal is entitled to indemnification from agent if agent's breach results in phycial harm or property damage to a 3rd party. b.

When an agent hires a subagent, the agent is the employer. The principal is not responsible for the 5

wages of the subagent. 1. A subagent may have a right to indemnification, but not to compensation (from the principal). Termination. c. Even though an agent is an employee-at-will, he cannot be discharged for refusal to violate the law (= bad faith termination). d. e.

Decisions to terminate s/b made in good faith. Terminations not in good faith constitute a breach of contract. The Ingle Rule: agreement for repurchase of shares upon termination of employment does not give employee/shareholder right against discharge at will.

D.

POST ASSOCIATIONAL COMPETITION. (Things that happen after the termination of a principal/agent relationship.)

1.

Business competition is justifiable interference with employment contracts. Competitors always have a right to offer each other's employee's more favorable terms.

2.

Covenants not to compete are enforceable if carefully drawn to protect only the legitimate interests of the employer. They are unenforceable if they prevent a person from exploiting skills and experience that he has a right to exploit. a. Usual damages for a breach of covenant not to compete is an injunction, but liquidated damgages provisions are enforceable as well (P need not prove actual damages, too hard to prove.)

3.

In the absence of agreement otherwise, agents are free to compete once the agency terminates. Competition prior to termination, however, is actionable disloyalty.

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III. TRANSACTING THROUGH AGENTS. A.

BASES AND SCOPE OF AGENT'S AUTHORITY.

1.

Actual Authority: created by written or spoken words or other conduct of the principal which reasonably interpreted, causes the agent to believe the principal desires him so to act on the principal's behalf. a.

Express Actual Authority. (power of attorney - form of agency): 1. naked power of attorney: (one not coupled w/an interest) terminates upon the death of a principal and is revocable by a principal. An agent holding this power conveys title to prop. in the name of the principal. 2. power coupled with an interest: irrevocable by act of the principal and survives his death. An agent holding this power conveys title to prop. in his own name. (3. durable power of atty: statutory creation. a. survives incompetency b. but still terminates w/death. Termination by the principal is revocation; by the agent is renunciation. Principal's Liability for Contracts where the agent's authority was actual: the K is enforceable against the principal because he intended to be bound by it.

b. 2.

Implied Actual Authority. is given by a principal to an agent by principal's acquiesence.

Apparent Authority: created as to a 3rd person by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the 3rd person to believe that the principal consents to have the act done on his behalf by the person purporting to act for him. a.

b. b. c. d.

Must focus on the conduct of the principal in determining whether apparent authority exists. 1. Principal must have either affirmatively held the agent out as possessing the authority or have knowingly and voluntarily permitted the agent to act in the authorized manner. The 3rd person w/whom the agent contracts must reasonably believe that the agent has the authority to bind the principal to the K. Apparent authority gives rise to agency by estoppel. The principal is bound by the agent's acts done under apparent authority. A principal's acquiesence in a series of acts by the agent demonstrates authorization to perform similar 7

acts in the future. If a party deals with an agent w/o ascertaining both the fact and the scope of the agent's authority, he deals w/the agent at his own risk. Estoppel. a. Store liable for action of someone pretending to be an employee. b. The proprietor must exercise reasonable care and vigilence to protect the customer from losses through deception of apparent salesmen. c. Estoppel proven by establishing apparent authority. d. Equal Dignities Doctrine: An agent or employee of a corp. or ptnrshp may bind the entity to a lease of more than one year only if the agent is authorized, specifically and in writing, to execute a lease on behalf of the entity. Exceptions: 1. a corp. officer is not an agent w/in the meaning of the statute, and does not need written authorization. 2. A partner acting w/in the scope of partnership's usual business. e.

3.

4.

Inherent Agency Power: the power of the agent derived solely from the agency relationship (not from apparent authority or estoppel. a.

Liability is predicated on industry custom and practice (not customary to hire people and not pay them).

b.

Principal must have a reasonable belief that the agent was acting on behalf of the firm in regular firm business: 1. the partnership s/b bound for a breach of trust incident to that employment, even if similar professionals would regard the services as unusual.

c.

inherent agy power v. apparent authority: 1. in both cases there is no actual authority, but the principals are bound. 2. both focus on the 3rd party's belief as to the agent's authority.

d.

diff. between inherent agy power & apparent authority: inherent agy power does not depend on representations made by the principal.

B.

DISCLOSED AND UNDISCLOSED PRINCIPALS.

1.

a. b.

disclosed principal: someone who is known to 3rd party @ time of transaction to be the one on whose behalf the transaction is entered into. partially disclosed: when 3rd person knows that there is a principal, but doesn't know who it is. 8

c. d.

undisclosed principal: 3rd party thinks that the agent is transacting on his own behalf. Rule: Person acting as an agent for a disclosed principal is not liable on K's w/3rd parties.

Rights of Undisclosed Principals under K. 2. A person who makes a contract w/an agent of an undisclosed principal, intended by the agent to be on account of his principal and w/in the power of such agent to bind his principal, is liable to the principal as if the principal himself had made the contract w/him, unless the contract expressly says that there are no undisclosed principals, unless his existence is fraudulently concealed or unless there is a set-off or a similar defense against the agent. 3.

a. b. c.

4.

An agent who contracts in his own name for an undisclosed principal does not cease to be a party because of his agency. There is no misrepresentation if the agent was never asked if he was someone's agent. The existence of undisclosed principal is no ground for avoidance of contractual obligations unless there is fraud or misrepresentation.

A person w/whom an agent contracts on account of an undisclosed principal can rescind the K if he was induced to enter into it by a representation that the agent was not acting for a principal and if, as the agent or principal had notice, he would not have dealt w/the principal.

Rights of 3rd Party Against Undisclosed Principal (Where the Agent Doesn't Perform). 5. Where anyone has been held out by the principal as his agent, there is a contract w/the principal by estoppel, however much the agent may have exceeded his authority. Where there has been no holding out, proof must be given of an agency in fact in order to make the principal liable. 6.

Undisclosed principal is not liable for the debts of his agent when it is not clear that the agent was acting on behalf of the undisclosed principal. a. Once principals pays in good faith, he cannot be made to pay again.

7.

An undisclosed principal who entrusts an agent w/the management of his business is subject to liability to 3rd persons w/whom the agent enters into transactions usual in such businesses and on the principal's account, although contrary to the directions of the principal. But a. this does not apply where the agy relationship was created only on those occasions when the agent contracted w/in his power.

8.

a.

*Minority Rule:

The 3rd party may ordinarily proceed 9

b.

against the agent, or the previously undisclosed principal, or both, until the performance is satisfied. Majority Rule: The election rule: an undisclosed principal is discharged if, w/knowledge of his identity, creditor recovers judgment against the agent. But the principal is not discharged if judgment is taken against the agent w/out knowledge of the principal's identity. (Election must be made prior to judgment if you know who the principal is.)

9.

No apparent authority if you have an undisclosed principal because apparent authority must be traced back to the acts of the principal.

10.

Inherent agency power is applicable to both disclosed and undisclosed principals.

C.

RATIFICATION, KNOWLEDGE AND NOTICE.

1.

ratification: c/b used as a substitute for authority. There is no question of ratification if the agent was expressly, impliedly or apparently authorized.

2.

The knowledge of an agent acting w/in the scope of his or her authority is chargeable to the principal, even if that knowledge is never actually communicated.

3.

Doctrine of ratification: a principal may affirm a prior action by an agent which did not bind the principal but was purportedly done on his or her account, with the ratification relating back to the time of the actual act. 1. For ratification of an unauthorized act to occur so as to bind the principal, he or she must have actual knowledge of the material facts being adopted at the time affirmance occurs. 2. Silence will not operate as ratification when the principal acts on incomplete or inaccurate knowledge (principal must hae actual knowledge of material facts in order for silence to be ratification). 3. There is ratification where a principal w/knowledge fails to object. 4. There is ratification if the principal repudiate's the agent's act yet receives the benefits of the act. 5. Tortious acts, like voidable transactions, can be ratified.

4.

Requirements and limits of ratifications: a. Requires that the act could have been authorized by the principal at the time it was done. b. Requires that the principal be competent at the time of affirmance. c. If the affirmance occurs when the situation has so materially changed that it w/b inequitable to subject the other party to liability thereon, the other party 10

has an election to avoid liability. D.

TRANSACTIONS BY CORPORATE OFFICERS.

1.

A corporation is only liable for the acts of its president if it is shown that they may reasonably be held to have been done in the furtherance of the business of the corporation while he was action w/in the scope of his employment. a. A corporate president has apparent authority to bind the corporation if the binding acts are done in relation to duties as president and done w/in the scope of employment.

2.

Officers may be personally liable on contracts entered into after a corporation forfeits its charter.

3.

An officer who enters into a contract while failing to disclose that he or she is acting on behalf of a corporation is personally liable on the contract unless the other party to the contract is aware of the officer's corporate agency.

4.

Likewise, an officer purporting to act on behalf of a notyet-formed corporation may be personally liable on contracts.

5.

Absent fraud on her part, a party doing business with a corporation is permitted to rely on the officer's status w/in the corporation as sufficient power to bind the corporation in the execution of mortgage instruments.

6.

A corporate officer never has apparent authority to put corporate checks to personal use.

7.

The board of directors of a corporation cannot delegate total control of the corporation to one officer. a. Neither can it delegate authority which is so broad that it enables the officer to bind the corporation to extraordinary commitments or significantly encumber the principal asset or function of the corporation.

8.

An officer of a nonprofit corporation cannot have apparent authority to encumber the principal function of the corporation and to divert the substantial earning capacity of the coproration to private benefit.

9.

Corporate directors are not the agents of shareholders because they are not subject to the shareholder's control (but they are their fiduciaries).

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IV.

VICARIOUS TORT LIABILITY. *** In K and non-physical torts, we are interested in actual or apparent authority, or inherent agency power. *** 1. 2.

In Vicarious Liability we re concerned with whether we're dealing w/an agent who's a a. servant or b. independent contractor physical torts: torts that cause physical harm through negligence or intentional acts.

A.

RESPONDEAT SUPERIOR.

1.

Independent Contractors and Employees. a. Difference between indep. contractors & employees: 1. degree of control (over the details of the work) 2. All servants are agents, but not all agents are servants. b.

A servant is: a person employed to perform services and whose physical conduct in the performance of the services is subject to the other's control or right to control.

c.

To be liable the principal must have legal authority to control the agent. Factors to be considered: 1. Does the owner (principal) have power to terminate the station operator (agent) at will? 2. Is the owner (principal) concerned only w/the ultimate results, rather than the details of the station employee's (subagent's) work?

d.

Generally, principals are not liable for the physical torts of independent contractors. Exceptions: 1.

inherently hazardous activities (where the job itself is inherently hazardous, not because the independent contractor makes it that way).

2.

negligently failing to select a competent contractor (principal's own liability).

3.

apparent agency: Elements: a. Principal's consent to, or knowing acquiesence in, the agent's exercise of authority (on behalf of the principal); b. The 3rd person's knowledge of the facts and good faith (reasonable) belief that the agent possessed such authority; and c. 3rd person's detrimental reliance upon the agent's apparent authority. (Examples: the Texaco case, a case where there was an agency & it was terminated by no one told the 3rd party, hospital case where emergency room 12

physician reliance)

2.

4.

peculiar risk that is forseeable: principal is not liable for the torts of an independent contractor unless there is a peculiar risk that is forseeable. Exception does not apply unless there is is an actual agency (control) or an apparent agency (detrimental reliance). (pharmacy case)

5.

non-delegable duty to warn: i.e., drug store has duty to warn dr. re dangers of drugs; building owner has a duty to keep the premises safe, even though he hires someone else to make the repairs.

Scope of Employment. a. Servant must be acting in the scope of employment at the time of the negligent act in order for the employer to be liable (he must be on the job, doing what he was hired to do). 1. If its a frolic (not at all on the master's business), the master is not liable, until the duties of employment are resumed. 2. If its a detour (which does not have to be for the master's benefit, but must be a detour from the job), the master is liable. b.

3.

- agy by estoppel if detrimental

Conduct of a servant is w/in the scope of employ. if: 1. it is the kind he is employed to perform; 2. it occurs substantially w/in the authorized time; 3. it is actuated, at least in part, bya purpose to serve his master; and 4. if force is intentionally used by the servant against the other, the use of force is not unexpectable by the master.

Joint Enterprise & Family Purposes. a. Family Purpose Doctrine: Where the head of the family furnishes a motor vehicle for the general use of the family, and a family member is using the car w/the express or implied consent or permission of the owner, the negligence of the family member driver is imputed to the head of the family. To recover under this doctrine, the essential elements which must be proved are: a. that the D who is sought to be charged (under this doctrine) was the head of the family; b. that he furnised for car for the use and pleasure of his family; c. that the driver of the car was a member of his family and one for whose pleasure the car was furnished; and d. that the driver was, at the time of the accident, 13

using the car for the purpose of which it was furnished w/the authority, express or implied, of the head of the family. (all 4 elements must be proved to establish liability under this doctrine.) b.

Joint Venture: a one-purpose partnership (single activity or limited purpose). Elements of a joint venture: a. an agreement to enter into an undertaking in the objects of which the parties have a community interest and a common purpose in performance, and b. each of the parties must have equal voice in the manner of its performance and control of the agencies used therein. The absence of mutual interest in the profits or benefits is conclusive that a partnership or joint venture does not exist. Pooled labor and skill is insufficient to establish a joint venture.

B.

FRAUD AND NEGLIGENT MISREPRESENTATION.

1.

General Rule: a principal may not be bound by the false representations of his agent made w/out his knowledge, consent, or authority. An exception to this rule exists if an agent has apparent authority to make the representation.

2.

The ratification or affirmance by the principal of an unauthorized act done by an agent acting in excess of his power to bind the principal releases the agent from liability in damages to the principal for having violated a duty to him, except when the principal: a. is obliged to affirm the act in order to protect his own interests; or b. is caused to ratify by the misrepresentation or duress of the agnet.

3.

Principal liable to another for the misrepresentation of his agent or servant is not relieved from liability by the fact tht the servant or other agent acts entirely for his own purposes, unless the other has notice of this.

4.

If fraud can be attributed to the principal (by virtue of his agent), a merger clause (written disclaimer desinged to limit the apparent authority of an agent and to preclude a defense of fraud) will not save the him from liability. a. If the purchaser wants to affirm the K, he may do so and bring an action for damages in "deceit" against the agent and principal. b. Ways in which fraud of agent c/b attrib. to principal: 1. where principal knows of and encourages the fraudulent behavior (can't disclaim); 2. if the principal accepts the fruits of the fraud, 14

3.

w/knowledge of the misrepresentations by which the fraud was accomplised (ratification); where principal exercises an adequate amount of supervision over the agent.

5.

Tort: agent is usually liable for his actions; whereas in Contract: agent is not liable because he is not a party to the contract.

6.

A corporate officer cannot be held personally responsible for contractually incurred corporate obligations unless the officer fraudulently made misrepresentations which induced the P to enter into the contract. a. a prediction of future earnings cannot constitute fraud b. failure to volunteer a prediction cannot constitute fraud.

7.

Agent will not be personally liable for fraud of the principal unless it is shown that the agent had knowledge (i.e., agent knew principal would not make payments). Agents are not responsible for knowledge known only by the principal. a. A count of fraud must be proven by must be proven by "clear and convincing evidence." Plaintiff must prove: 1. a false representation, 2. made with knowledge by D of its falsity, 3. with the intent to deceive, and 4. resulting injury suffered by P based on their reasonable reliance on the misrepresenation (detrimental reliance - change in position - not required).

C.

OTHER INTENTIONAL TORTS.

1.

Eployer is liable for intentional torts that are unauthorized or unratified when the conduct is foreseeable activity that is fairly characteristic of the business.

2.

A principal who puts a servant or other agent in a position which enables the agent, while apparently acting w/in his authority, to commit a fraud upon 3rd persons, is subject to liability to such 3rd persons for the fraud.

D.

PUNITIVE DAMAGES.

1.

Standards required for punitive damages: a. willful and malicious conduct, or b. conduct that manifests a knowing and reckless indifference and disregard toward the rights of others.

2.

Employers may be vicariously liable for punitive damages under the complicity rule. The complicity rule limits vicarious punitive damages to those situations where wrongful acts were committed or specifically authorized by a 15

managerial agent or were committed by an unfit employee who was recklessly employed or retained. 3.

Employer who fails to take disciplinary action risks getting hit w/punitive damages.

4.

An award of punitive damages against the principal is clearly erroneous where there is no evidence to show that the principal knew of or ratified the conduct of the agent.

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V.

PARTNERSHIP RELATIONSHIPS.

General Partnerships. 1. A partnership is an association of 2 or more persons to carry on as co-owners a business for profit. 2.

A parnership is a residual legal category; if the persons in question have formed any association under any other statute of this state, they are not partners. a. No formality is required to form a partnership. Persons may be partners even if they did not intend to enter a partnership relationship.

3.

Each partner is an agent of the partnership for purposes of its business.

4.

All partners are jointly and severally liable for torts and breaches of trust committed by partners acting w/in the scope of their partnership authority.

5.

Partners are jointly liable for all other debts and obligations of the partnership.

6.

Individual partners liability on partnership obligations is not limited to the amount they have invested in the partnership.

7.

Partners owe each other fiduciary duties.

8.

Any partner may dissolve the partnership at any time, even if the dissolution breaches an agreement among partners.

9.

A partner's withdrawal dissolves the partership relation. But post-dissolution, the partnerships business may be continued by the remaining partners, or it may be wound up.

Limited Partnerships: some partners enjoy limited liability. 1. Limited partner's potential liability for partnership obligations is restricted to the amount that partner has invested. 2.

Ltd partnership must have at least one general partner whose liability is not limited. a. General partner c/b an corporation. 1. shareholders liability is limited to the amt they invest in the corporation.

3.

Governed by the ULPA or the RULPA.

4.

Limited liability aspects are available only if the parties comply w/the relevant statute's requirements, which include filing the ltd partnership's certificate with the proper state office.

17

5.

Limited partners have limited rights, which do not include the right to manage the business. a. Limited partners risk losing limited liability if they participate in management. There are 3 forms of business organizations we will discuss: 1. general partnerships. a. residual form of bus. org. (if you don't fit into any other form you are a partnership) b. no formality required for formation c. one drawback: easy to dissolve - automatically dissolves upon death of partner (its an agency relationship and all agency relationships cease upon death because they are based upon personal relationships). d. relationship of mutual fiduciary obligations (both/all partners act as reps of ea. other) 2. limited partnerships. 3. limited liability companies. A.

CHARACTERIZING THE PARTIES RELATIONSHIP.

1.

Formation of Partnership. a.

A written contract between parties creates a partnership if it contemplates an association of 2 or more persons to carry on as co-owners a business for profit. But written K not required for gen. ptnrshp.

b.

Receipt of a share of profits if prima facie evidence of partnership, unless such profits were received in payment: 1. as a debt; 2. as wages of an employee or rent to a landlord; 3. as an annuity to a widow or rep of a deceased partner; 4. as interest on a loan; 5. as consideration for the sale of good-will.

c.

Joint tenants are not partners even if they share in the profits (because joint tenants don't have the authority to bind each other).

d.

Partnership results from a contract, express or implied. It may be proved by: 1. production of some written instument, 2. by testimony as to some conversation, 3. by circumstantial evidence, or 4. by the receipt by the party of a share of profits.

e.

Partnerhip is formed, even if not intended, where the parties to the K have joint control of the operations.

f.

Persons who are not partners as to each other are not 18

partners as to 3rd persons. 2.

Partnership by Estoppel. a. Partnership by estoppel is established by proving 2 elements: 1. that the D represents himself to be a partner or consents to another's representation that he is a partner of one w/whom he is not a partner, and 2. that the person to whom the false representation is made relies on that representation to his detriment (detrimental reliance). b.

3.

4.

If you're held out as being a partner to someone and you know it, you are liable as a partner. If you're held out to the world (in a public manner), you are liable as a partnership even if not held out as such to that particular person.

Limited Partnerships. (UPA applies except where UPLA is specific) a. Ltd partnership must have at least one general partner. b.

To create a ltd. partnership, need at least 1. one general partner 2. one ltd partner 3. a filing (unlike a partnership, but like a corporation).

c.

When parties neglect to file the required paperwork for the formation of a ltd partnership, there is no ltd partnership as to the public, but there is a ltd partnership as between the parties. (reason is that the purposes of the filings is to protect 3rd persons, not the partners.)

d.

You can cure a failure to file by a late filing, but not as to people who thought you were a general partnership in good faith. (This is sort of a de facto limited partnership argument. also works for LLC's).

Partnership as Aggregate. a. Two competing theories: 1. partnerships as entity (RUPA): the partnership has a separate existence apart from the partners. a. partners are agents of the partnership; b. the partnership can hold title to property; c. partners do not have individual right to partnership property. d. admission of new partner or resig. of old one does not dissolve the partnership. 2. partnerships as aggragate (UPA): The partnership (whole) is the sum of its partners. If the partnership personnel changes, that partnership 19

ceases to exist and a new partnership is formed consisting of the remaining partners. a. partners are individually jointly or jointly and severally liable; b. each partner is a co-owner w/fellow partners of partnership property, although the rights of tenancy are closely defined. c. UPA's approach to dissolution. b.

Under the aggregate theory, in a general partnership, the partnership ceases when the membership of the partnership changes unless interest is transferred for collateral purposes only, and there is no intent to end the partnership. 1. When the 1st partnership ceases to exist because membership changes, the liabilites of the old partnership carry on to the new one. 2. A person admitted as a partner into an existing partnership is liable for all the obligations of the partnership arising before his admission as though he had been a partner when such obligations were incurred, except this liability shall be satisfied only out of partnership property. 3. When all partners transfer partnership assets into a corporation, the creditors of the dissolved partnership become the creditors of the corporation.

C.

PARTNERS AS AGENTS.

1.

For something (like a promissory note) to become a partnership liability, the partner who consummated the transaction must have been acting under partnership authority (as an agent of the partnership), and the transaction must be in furtherance of usual partnership business. a. Partners cannot agree that neither will be liable for all debts of partnership because there would then be no general partner. Such a (non-recourse) provision is invalid, and partners w/b personally liable when no partnership assets exist to satisfy the debt. b. Bank cannot proceed against the individual partners until there is a showing that the property of the partnership had been exhausted. c. General partners are jointly liable for the debts and obligations of the partnership.

2.

Every partner is an agent of the partnership for purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carring on in the usual way the business of the partnership of which he is a member, binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person 20

w/whom he is dealing has knowledge of the fact that he has no such authority. 3.

An act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not bind the partnership unless authorized by the other partners.

4.

No act of a partner in contravention of a restriction on authority shall bind the partnership to persons having knowledge of the restriction.

5.

A professional corp is liable in the same manner as a partnership (liable for loss caused by any wrongful act or omission of any party acting within the ordinary course of business or acting with the authority of his co-partners). A note (commercial paper) issued by one partner is not a partnership obligation if it was not given for the purpose of carrying on the partnership in the usual way. What is usual depends on the nature of the business.

6.

D.

DISPUTES AND RIGHTS AMONG PARTNERS.

1.

In resolving disputes among partners courts look to the rights defined by the partners own agreement, and to the UPA. know these! a.

Any partner has the right to dissolve at will at anytime, even in contravention of an agreement.

b.

Default rules (apply only if the partners do not agree otherwise): 1.

Each partner s/b repaid his contribution, share equally in the profits of the surplus, and contribute toward the losses according to his share of the profits.

2.

Partnership must indemnify a partner for any payments he makes, and for any personal liability he reasonably incurs in the ordinary course of partnership business.

3.

Any partner who makes any payment in excess of his capital contribution shall be paid interest from the date of payment.

4.

A partner shall receive interest only from the date when repayment s/b made.

5.

All partners have equal rights in the mgmt and conduct of the partnership business.

6.

No partner shall receive a salary for acting in 21

partnership business, except for partner doing the winding up. All partners must consent to a new person becoming a partner.

8.

Any difference of opinion arising as to ordinary partnership matters may be decided by majority of the partners; but no act may bedone in contravention of an agreement w/o consent of all of the partners.

c.

Partnership books must be kept @ principal place of bus., and all partners at al times must have access to them and the right to inspect them.

d.

Each partner is accountable to the partnership as a fiduciary for any benefit or profits derived by him w/o the consent of the other partners from any transaction connected w/the formation, conduct or liquidation of the partnership or from any use by him of its property.

e.

A partner's property rights are (1) rights in specific partnership property, (2) interest in the partnership, and (3) right to participate in mgmt.

f.

Partner is a co-owner w/his partners of specific partnership property holding as a tenant in partnership (but can't sell his interest).

g.

2.

7.

1.

Unless otherwise agreed, a partner has an equal right to possess specific partnership property for partnership purposes.

2.

Partners' right is not assignable unless all of the partners' interest is assigned.

3.

Partnership property can only be attached by partnership creditors (not personal creditors of the partnership).

4.

Upon death of a partner, his specific partnership property vests in the surviving partners, execpt where deceased was last surviving partner in which case it vests in legal rep.

Partner can assign his right to receive $, but it doesn't make the assignee a partner or give him a right to participate in management.

Partners as Fiduciaries. a. Joint venture carries w/it a fiduciary duty of good faith and fair dealing, and the utmost of candor and disclosure to all concerned. The duty begins with the 22

opening of negotiations for the formation of the syndicate and continues until winding up. 1. Formation stage is the beginning of the fiduciary relationship and obligations. 2. When one partner assumes the role of the managing partner or leader, he has a more heightened duty of disclosure. b.

A duty of disclosure exists during the winding up of partnership affairs. The duty of good faith also includes the duty not to conceal.

c.

Distinction between dissolution, termination & windingup: 1. dissolution: can occur if a partner dies, withdraws, becomes insolvent, etc.. But this does not mean that the business is at an end; it just enters a new phase. 2 things may happen w/a dissolution: a. wind up and go out of business b. have firm business continued by another firm, so that there is not a formal winding up.

d.

General partners can purchase partnership property (pursuant to contractual agreement), but they still are required to disclose the true value of the partnership property prior to purchase to the limited partners. (concealment or failure to disclose defeats the sale) 1. Proper formula for damages: price paid - fmv.

e.

A partnership can contract away its right to expect a noncompetitive fiduciary relationship with any of its partners. 1. Not immoral as long as everyone knows about it.

3.

Claims to Compensation and Profits. a. Law partners can split fees anyway they want. In the absence of an express agreement, courts may consider course of dealings in determining how parties agreed to share profits. 1. Only a surviving partner is entitled to reasonable compensation for winding up. Other than that, no partner is entitled to compensation for acting in partnership business, which business continues until it is wound up. 2. Just because you are doing all of the work doesn't entitle you to a salary or a greater share of the profits. 3. Absent agreement between the parties to the contrary, the parties are to share equally in the profits and surplus remaining after all liabilities.

4.

Managing Partnership Business. 23

a.

The UPA is silent as to the skill and care a partner must exercise in running a partnership business.

b.

No duty is owed to former partner with respect to the management of the business under th UPA, fiduciary (law of trusts), contract or tort. 1. A partner is a fiduciary of his partners, not his former partners, because the w/drawal of a partner terminates the partership as to him. 2. There is no liability for dissolution where the dissolution is motivated by good faith judgement for the benefit of the corp..

c.

Rights of Limited Partner. (1) a ltd partner shall have the same rights as a general partner to: a. have ptnrshp books kept at principal place of bus. and inspect and copy them. b. have on demand true and full info. of all things affecting the partnership and a formal accounting. c. dissolution and winding up by court decree. (2) a ltd ptnr shall have the right to receive a share of the profits or other compensation by way of income, and to the return of his contribution.

d.

A ltd partner may become liable to partership creditors as a general partner if the ltd partner assumes control of the partnership. Factors to consider in determining whether lp's conduct amounts to control: 1. the purpose of the partnership; 2. the administrative activities undertaken; 3. the manner in which the entity actually functioned; 4. the nature & frequency of the lp's purported activities. (a few promotional activities does not amount to participating in mgmt or control.)

e.

You can run the whole business w/o taking control. A limited partner can 1. be a contractor or agent or employee of the lp or of a gp, or be an officer; 2. consult w/ and advise gp w/respect to bus. of lp; 3. act as surety for ltd ptnrship or guaranteeing or assuming one or more specific obligations of the lp; 4. taking any action required by law to bring or pursue a derivative action in the right of the lp; 5. requesting or attending a meeting of partners; 6. proposing, approving, or disapproving one or more of the following matters: a. dissolution or winding up b. sale, exchange, lease, mortgage, pledge, or other transfer of all or substantially all of the assets of the lp; 24

c.

7. 8. f.

incurrence of indebtedness by the lp other than in the ordinary course of bus.; d. change in the nature of the bus.; e. admission or removal of a gp or lp; f. transaction involving a potential conflict of interest between a gp and the lp or ltd partners. g. an amendment to to part. agmt or cert. of ltd ptnrship. winding up the ltd ptnrship exercising any right or power permitted to lps.

A limited partner who allows his name to be used in the name of the ltd partnership is liable to creditors who extend credit to the ltd partnership w/o actual knowledge tht the ltd partner is not a gp.

5.

Creditors Claims. a. The purchase of a gp's interest as a result of a charging order does not divest him of the right to participate in management, or right to specific partnership property (just the right to profits). 1. A sale made pursuant to a charging order of a partner's interest in a partnership is not an assignment of interest in a partnership.

E.

DISSOLUTION AND WINDING UP.

1.

The Causes of Dissolution. a.

Dissolution: the change in the relation of the partners caused by any partner ceasing to be associated in the "carrying on" (as opposed to the winding up) of the business. Causes of dissolution are: 1. death of a partner 2. one partner filing for bankruptcy 3. one partner leaving

b.

If a partner causes the partnership to dissolve before the expiration of the stated term, the dissolution violates the partnership agreement.

c.

New partner coming in does not dissolve the partnership, but does require unanimous approval of the other partners.

d.

Partnership at will: no written agreement is entered into, no duration is specified, no specific undertaking is specified. 1. Dissolution does not automatically terminate the partnership. It continues until winding up is complete.

e.

Rights of partners who did not cause the dissolution 25

wrongfully: 1. The right to wind up partnership affairs. 2. Right to damages for breach of agreement against each partner who wrongfully caused dissolution. 3. Right to continue the partnership business using its name and using partnership property during the agreed term of the partnership, subject to payment to the wrongfully dissolving partner of his value in the partnership. Continuing partners must also indemnify the wrongfully dissolving partner against all present or future partnership liabilities. 2.

Implied Limits on the Right to Dissolve. a. Partnership-at-will may be dissolved at any time by the express will of any partner, providing that the dissolution is in good faith. If the dissolving partner acts in bad faith, he is liable to the other partners. b.

3.

A withdrawing lawyer must pay a fair charge for clients he takes, but the firm doesn't have to pay him for clients he left behind. 1. fair charge is calculated: by looking at time sheets through date of w/drawal, calculate time spent and multiply by hourse rate. Then add disbursements on behalf of the client. 2. You can secretly prepare to compete. Can take the brightest and best associates with them when they leave the firm. 3. OK to make preparations to leave, but must send clients joint letter from group.

Post Dissolution Liability. a. Partners are equally liable for all partnership liabilites so far as 3rd parties are concerned (but not between the parties if otherwise agreed). b.

A partner can still be liable, even after giving notice of dissolution, if liability is undertaken after dissolution and during winding up if its inherent in the winding up (i.e., completing unfinished bus. of the firm.).

c.

Apparent authority continues after actual authority terminates if notice of dissolution is not given. For undisclosed principal, if the partner is not known to the public as being a partner, liability is satisfied out of the partnership assets. 1. A secret partner is liable for debts arising when he was a partner, and for debts arising before he was a partner but only to the extent of his partnership interest.

26

d.

4.

Where a law firm allowed statute of lim. to run on a case on which dissolving ptnr did not even work, dissolving partner is still liable for partnership negligence because the dissolution doesn't terminate existing obligations and the client didn't consent to non-representation by the dissolving partner.

Goodwill. (an asset of partnership. If there is goodwill the withdrawing partner is entitled to payment for it unless the contract says otherwise or if the partner wrongfully dissolves.) a.

No goodwill where there is no continuity of place and name (even if there is continuity of product or service).

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VI.

LIMITED LIABILITY COMPANIES. Only 2 reasons for having them: 1. limited liability; 2. partnership taxation.

A.

ADVANTAGES OF LLC's. 1. limited liability of members to extent of contribution. 2. can manage w/o losing limited liability. 3. taxed as a partnership (not a separate taxable entity like a corp). Tax consequences flow through to the members.

B.

MANAGERS OF LLC's. 1. don't have to have managers, can just have members. 2. manager can keep info. confidential from members. 3. gives members option to be managers or just investors (like ltd ptnrship or corp.). 4. members & managers both have ltd liability. 5. member or mgr c/b liable for something done in addition to just "solely" being a member or manager (tortfeasor: if he personally participated in some way; also c/b liable in K if they undertake a contractual obligation, i.e., guaranteeing LLC's obligation (unlike ltd partner); also, under agency if mgr or member undertakes a contract for LLC w/o revealing that its an LLC).

C.

NAME. Name must contain the words "Limited Liability Company", or "LLC", so that people know that its an LLC.

D.

LIABILITY FOR BREACH OF FIDUCIARY DUTIES. 1. Manager not liable for failure to perform duties unless otherwise specified in the agreement. 2. Member or mgr transacting business w/co. has the same rights as a 3rd party creditor. 3. Indemnification: Seems like co. can indemnify mgr for his own breach. 4. Freedom of contract: intent to is allow agreement to waive fiduciary duties. 5. The Statute does not say whether or not there are fiduciary duties, but if you have them you are bound by whatever the agreement says. 6. People who are setting up the LLC's will put in as broad a waiver of fiduciary duties as they think they can get away with. 7. The act at least wants people to act in good faith. 8. Creditors can't enforce fiduciary duties anyway because there are none owed to them.

E.

MECHANICS. 1. requires a filing (like ltd ptnrships & corps) of a certificate of formation. 2. when filing is complete the LLC has been formed. 3. certificate c/b signed by one or more (must have at least 2 members to form an LLC, but both do not have to sign certificate of formation). 28

4. 5. 6.

7. 8.

9. 10.

LLC must be formed under state of Delaware. foreign LLC: LLC formed under the laws of any state (other than Delaware) or under the laws of any foreign country or other foreign jurisdiction. Certificate must include: a. name b. address of registered office & name of agent for service of process c. if LLC is to have a specific date of dissolution, latest date on which it is to dissolve (if there is no date, 30 years from date of formation). d. any other matters (no reason to put anything else in here - put it in the agreement because this is being filed with the Sec. of State, and will become a part of the public record, and you don't want everyone to know all of your business). Can have LLC go for as long as you want, as long as it is stated in the agreement. If no date is in the agreement or members want to change the date of dissolution, can amend the certificate in accordance with the correct number of voting members. LLC agreement must be in writing or its not an agreement. If the certificate is not filed or is incorrectly filed: The LLCA makes no provision for this - but make de facto corp. argument: good faith effort to file court will extend limited liability. (ULPA makes provision for this - as long as they act in good faith.)

F.

DISTRIBUTION OF PROFITS. 1. In a partnership, profits are distributed per capita (equally, according to the # of individuals). But under an LLC, done pro rata (according to capital contribution), if agreement doesn't provide for any other method.

G.

FLEXIBLE BULLETPROOF. As oppsed to bulletproof - which absolutely does not allow you to lose your tax treatment, you can lose your tax treatment under this type of statute if you do certain things (i.e., pick wrong method of mgmt.). But the idea is not to penalize people who have acted in good faith, so argue de facto LLC.

H.

LLC AGREEMENT. 1. Statute contemplates that you're going to have one, and you should have one. 2. If you do have one, its where you put in all agreements among members to adopt some form other than the default provisions.

I.

LLC INTEREST. 29

1. 2.

H.

share profits and losses, and a right to receive distributions. (not same as a GP, which is ltd to right to receive profits and surplus) personal property; member has no interest in specific property (diff. from UPA, which says that property is held by each ptnr as tenant in common w/others).

REVENUE RULING RE: DELAWARE LLC's (Only). corp = double taxation; prtnrship = single taxation) Under the default provisions of the LLCA, a LLC is taxed as a partnership. So if you screw w/the default provisions you could end up being taxed as a corporation. 1. Corporate attributes, the presence of a majority of which will result in taxation as a corporation: a. continuity of life (under the default provision, there is no continuity of life if no right to continue the LLC is stated). b. centralized management (under the default provision, there is no centralized management because the mgmt is by the members unless otherwise agreed. If you vest mgmt in mgr - then you have centralized mgmt) c. free transferability of interests (under the default provision, there is no free transferability because unanimous consent is required to make an assignee a member.) d. limited liability (this is the only one of the 4 corporate characteristics the LLC possesses). 2.

Under the default provisions of the Delaware LLCA, LLC's w/b taxes as partnerships. If you tinker with the default provisions, you can screw up and have the LLC taxes as a corporation. You can amend the articles to correct this, but the amendment will not be retroactive.

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VII. LONG-TERM COMMERCIAL RELATIONSHIPS. 1.

Sellers do not owe consumers a fiduciary duty. Statutory and common law doctrines fashioned to protect consumers are sufficient to accomplish that purpose.

2.

But courts are finding a duty of good faith as equivalent of a fiduciary duty.

A.

LENDER-BORROWER RELATIONSHIPS. (fiduciary only if debtor becomes insolvent; or if creditor makes it impossible for debtor to deal with others).

1.

Duties Prior to Closing. Where the parties are under a duty to perform that is definate and certain, the courts will enforce a duty of good faith, including good faith negotiation, in order that a party not escape from the obligation he has contracted to perform. (breach of K)

2.

Subsequent Lender Decisions in Troubled Lending Relationships. a. LOAN ACCELERATION: 1. UCC 1-208: calls for a good faith belief, on part of the creditor, that the security is impaired in order to make the acceleration reasonable. It applies when a. a party in interest may accelerate at will (if other party does something it agreed not to do, i.e., lease w/o consent) or b. when he deems himself insecure. The following are unacceptable reasons for acceleration: a. default due to debtor's accident, mistake or creditors own fraudulent or inequitable conduct; b. situations where acceleration c/b unjust or oppressive. 1-208 applies to technical violations of an agreement as well as to insecurity acceleration. 2.

Demand Loan: lender has a good faith obligation to give notice or have a reasonable basis for acting appled to lender's demands for repayment of demand notes. 1-208 does not apply to demand notes (dont' have to show insecurity).

3.

Art.I good faith means honesty in fact in conduct or transaction. 1-208 is a subjective standard (how the creditor feels). There are 2 ways a debtor can establish lack of good faith: a. by proving that the creditor did not have 31

b.

4.

possession of the information that the creditor contends caused the acceleration. Establish that the creditor has possession of the information at the time the loan was made (so it can't honestly feel less secure now that when the loan was made)

A contracting party may seek to advance his own interests in good faith, while a fiduciary may not.

b.

MANAGEMENT CHANGE CLAUSES. 1. Fraud is the threat of an action that one does not intend to take. The only requirement for fraud is that the act be done wilfully and intentionally. It doesn't have to be malicious. a. Where a duty exists for disclosure, a deliberate suppression of material facts constitutes fraud. b. Where a promise regarding future action is made w/the intent that it will not be performed and is made to deceive a person, then it is actionable as a fraudulent representation.

c.

REFUSAL TO RENEW OR EXTEND LOAN. 1. The UCC implied duty of good faith and fair dealing will not be extended to commercial loan agreements. (to impose liability on a bank for every breach of contract would only serve to chill commercial transactions). However, gross recklessness or wanton negligence on behalf of a party to a contract may call for an application of the theory of tortious breach of K.

32