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I.

Business Associations Outline Effross - Fall 2010

Agency

a. Generally

i. Created by (1)

entity
entity

(3)

mutual consent undertakes to act on behalf of another person or entity

mutual consent

mutual consent undertakes to act on behalf of another person or entity
undertakes to act on behalf of another person or entity
undertakes to act on behalf of another person or entity

undertakes to act on behalf of another person or entity

either formal or informal, express or implied that (2)

, (4)

one person or

subject to the principal‟s control

.

ii. Restatement of Agency (Third) §1.01: Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal‟s behalf and subject to the principal‟s control, and the agent manifests assent or otherwise consents to such an act.

iii. Manifestation of Consent

1. Manifestation by the principal

2. Consent by the agent

3. Explanation: Manifestation attributable to the principal must somehow reach the agent, otherwise he has nothing to which to consent. BUT the principal may initially be unaware of the manifestation.

4. Objective: Look to the outward manifestations; would a reasonable person think there was consent (words or actions).

a. Even if they disclaim the agency titles, there can be an agency relationship if the elements are present.

iv. Consent and control

1. Control need not be total or continuous or control the way the agent physically performs; at minimum the P must have right to control the goal of the relationship.

2. Four distinct roles of consent to control within agency:

a. Establish agency relationship

b. Element of “servant” status

c. Control as a consequence

d. Substitute method for establishing agency status

v. Relationship to contract law: Contractual obligations can differ from agency relationship. I.e., a

“gratuitous agent” exists when person acts without receiving consideration, because that is not required in agency.

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1. Contract overlays agency relationship

a. Can stipulate payment or limited duration

b. Limited impact; can change rights and duties but cannot abrogate powers that agency status confers on each party. When contract is violated, injured party can sue for damages but the exercise of power cannot be undone.

c. Difference between agent and “independent contractor”: “In any relationship created by contract, the parties contemplate a benefit to be realized through the other party‟s performance.”

vi. Formalities: Normally need not be in writing, but some jurisdictions use the “equal dignities” rule:

1. Statutory

2. Pertains to transactions that must be in writing in order to be enforceable

3. Provides that an agent can bind a principal to such transactions only if the agency relationship is documented in a writing signed by the principal.

b. Ending the Agency Relationship

i. Through express will of either the P or A: either party may communicate to the other that the relationship is over (revocation). This is sometimes called renunciation when exercised by the agent.

1. Judged by an objective standard

ii. Through the expiration of a specified term: When P and A specify the relationship will last for a particular period of time; it automatically terminates at that point unless they agree to renewal. This may be inferred from conduct.

iii. Through the accomplishment of the agency’s purpose: If the manifestations creating the relationship indicated a specific objective, achieving that objective ends the agency.

1. Sometimes the A will continue to exert effort for the P even after the task is complete; P‟s

acceptance/acknowledgment of such efforts may manifest consent for the agency to continue.

iv. By the occurrence of an event or condition: Sometimes the manifestations indicate a particular event will end the agency (also applies where manifestations call for agency to end if a particular event does not occur).

v. By the destruction of or the end of the principal’s legal interest in the property: If A‟s role is predicated on some property and it is no longer practically/legally available to the A, the agency ends.

vi. By the death, bankruptcy, or mental incapacity of the A or P: Traditionally, any of these

terminates the relationship. Under R.3d, this is different, as it proposes to “follow the lead set by statutes of broad applicability.” (See: Kleinberger §5.3.1)

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vii.

By the expiration of a reasonable time: Where no specific term set, relationship ends after a

reasonable time has passed. Depends on a number of factors (manifestations, extent/nature of communications after agency created, particular objective, past dealings, custom in the locality with regard to agency relationships of same or similar type).

c. Power versus right in termination

i. P and A always have the power to end the relationship; whether they have the right do so depends on (1) contractual overlays, and (2) concepts of detrimental reliance and good faith.

ii. Role of contract: can (1) set specific duration, (2) provide for it to continue indefinitely, (3) define “cause” sufficient to allow one or both to end the agency, (4) provide for agency to continue for so long as A meets certain requirements.

1. This does not affect the power to end the relationship.

iii. Implied terms

1. Rules on implying terms in an agency contract are the same as any other contract, except with respect to restricting the right of the parties to terminate the relationship.

2. Express terms can restrict right to terminate, but most courts will not easily imply such a term,

but are most likely to find an implied limit on termination when:

a. (1) agency relationship outside the employment context, (2) limitation is asserted against the principal, and (3) either the principal‟s manifestations are the source of the

implication OR the agent has reasonably incurred costs in undertaking the agency and needs time to earn back those costs.

iv. Non-contract limitations on the right to terminate

1. Gratuitous Agent: If the agency is gratuitous, agent‟s right to terminate is not limited by contract but principles akin to promissory estoppel impose some restrictions.

a. If a gratuitous agent (1) makes a promise or engages in other conduct that causes the P to refrain from making different arrangements, and (2) the gratuitous agent has reason to know the P would so rely then:

i. if alternative arrangements are still possible, A has a duty to end the agency only after giving notice to the P so he can make alternative arrangements

ii. if alternative arrangements are not possible, the A has a duty to continue to perform the agency as promised

b. Gratuitous agent always has the power to renounce, but may be liable for damages if A leaves P hanging in the wind.

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2. The Principal: Even if a P has a right to terminate the agency at will, P may not exercise that right in bad faith (usually arises when P seeks to “snatch some benefit away” from the A).

d. Agency vs. Other Beneficial Relationships

i. Existence and consequences of the issue

1. Agency vel non (“Agency or not”)

ii. Distinguishing agency from other similar relationships

1. Usually relates to one of the two fundamental agency characteristics: (1) P‟s right of control, or (2) fiduciary nature of the relationship.

a. Party receiving the benefits must have right to control at least the goals of the relationship; party providing the benefits must be acting “on behalf of” the person receiving the benefits. Beneficial relationship lacking either or both of these characteristics is not an agency.

2. Examples

a. Party providing benefits is not a fiduciary and is not subject to control: Like most ordinary contracts; arm‟s length relationship. Each has entered into contract to further its own interests. This was traditionally called an independent contractor, but under R.3d it is a “nonagent service provider” or “nonemployee agent.”

b. Party providing the benefits is subject to control but is not a fiduciary: One party may have substantial control over other‟s conduct, but is not “on behalf of” and the control is not general. (I.e., supplier of specially designed goods and its customer).

c. Party providing the benefit is a fiduciary but is not subject to control: Examples:

trustee is obliged to act solely for the benefit of the beneficiary but is not controlled by the beneficiary.

e. Agent‟s Duties to the Principal

i. Agency relationship is a fiduciary relationship (with respect to matters within the scope of the agency).

1. Requires agent to act loyally and carefully

2. Examples of loyally

a. Unapproved benefits: A is accountable to P for profits arising out of transactions he conducts on P‟s behalf

b. A must act solely for the benefit of the P and not for himself

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c. A must refrain from dealing with his P as an adverse party or from acting on behalf of an adverse party

d. A may not compete with his P concerning the subject matter of the agency

e. A may not use the P‟s property (including confidential information) for the A‟s own purposes or a third party‟s purposes

i. Does not apply to special skills the A develops while performing agency tasks

ii. Duty continues after the relationship ends

3. Examples of carefully

a. A has a duty to the P to act with the care, competence, and diligence normally exercised by agents in similar circumstances.

i. Good Conduct

b. If A claims to possess special skills or knowledge, has duty to act as normally exercised

by agents with such skills/knowledge.

4. Duty to Provide Information: A may also have duty to disclose information.

a. A must use reasonable efforts to give his P information which is relevant to affairs entrusted to him and which, as the A has noticed, P would desire to have and which can be communicated without violating a superior duty to a third person.

b. This is very different from the lack of any duty to volunteer information in an arm’s length transaction.

5. Duty to Act Within Authority: A may have the power to act beyond the scope of actual authority, but does not have the right to do so. A has duty to act only as authorized by P, so A is liable to P for any loss suffered by P when A acts without actual authority. Corollary: If A has reason to doubt scope of authority, has duty to inquire of the P of the actual scope except in emergencies.

6. Duty to Obey Instructions: P always has the power to instruct the A concerning subject matter of the agency, so A has a duty to obey instructions unless they call for the A to do something improper.

7. Duty of Care

a. What constitutes due care depends on (1) whether the A is gratuitous, and (2) any relevant agreement between the P and A.

b. Paid agents: due care is ordinary care; standard of ordinary negligence applies.

i. R.3d Duty of Care: Similar to negligence in tort law -- “subject to any agreement with the principal, an agent has a duty to the principal to act with the care,

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competence, and diligence normally exercised by agents in similar circumstances. Special skills or knowledge possessed by an agent are circumstances to be taken into account in determining whether the agent acted with due care and diligence.”

c. Gratuitous Agents: Older cases hold that standard of care is gross negligence, but R.3d makes no reference to whether the agent acts gratuitously or not. A comment suggests that ordinary care applies here as well, but the discussion refers to professionals with special skills. (R.3d, §8.08, comment e).

d. Agreements Affecting the Standard of Care: Agreement can determine the proper standard of care, but public policy limits the validity of some such agreements (such as

where it would act to avoid liability for fault).

8. P’s duties to an A are not fiduciary (Fiduciary responsibilities run only from the A to the P): P still has several obligations.

a. P must perform contractual commitments to the A

b. Must not unreasonably interfere with the A‟s work

c. Must generally act fairly and in good faith towards the A

d. If the A incurs expenses or suffers other losses in carrying out the P‟s instructions, P

has duty to indemnify the agent

9. Agent’s Legitimate Disloyalty: A may legitimately act against P‟s interests in the protection of the A‟s own interests or those of others. For the latter interest, may depend on the legitimacy of the other party‟s interest/importance of the interest, extent to which the other party reasonably expects the interest will be respected by the world in general (and by the P in particular, legitimacy of the P‟s interest, and extent to which the A might have protected the

other party‟s interests while using means less injurious/disloyal to the principal.

10. Reshaping the Duty of Loyalty by Consent: P and A have wide latitude to reshape the duty of loyalty; can limit or eliminate each of the specific duties listed above.

a. Three qualifications exist:

i. Duty of loyalty applies to the manner in which an A obtains agreement from the P (overall relationship remains fiduciary) so when seeking the agreement A must not act as an arm‟s-length bargainer.

ii. Limitation to fiduciary duty must be clearly stated and unequivocal; can be

implied but most are stated in writing. Ambiguities will be strictly construed against person owing the duty.

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iii. Common law disfavors “general provisions eliminating fiduciary duties.”

Historically, because fiduciary duties are meant to be broad to avoid loop holes. 11. Post-Agency Relationship Duties: Right to Compete

a. Once agency ends, so does absolute barrier to competition--subject to 3 limitations

i.

Prohibition against using former P’s confidential information

1.

Involves two different but complementary perspectives

 

a. Does the information warrant protection as a trade secret?

i. Has the P expended effort and incurred expense to obtain/create the information?

ii. Does the P derive economic advantage from the information not being generally known?

iii. Has the P used reasonable efforts to protect the

confidentiality of the information?

b. Does the information consist of facts or specialized techniques as distinguished from general expertise that an A might develop while

performing agency tasks?

ii.

Duty to “get out clean”

1. During relationship, A cannot disregard loyalty obligations to further post-

 

termination plans.

 

2. Duty has two major aspects

 

a. A has duty to not begin actual competition while still an agent. So,

during the relationship, A cannot have discussions with P‟s clients/etc. but CAN have discussions/agreements with parties other than customers, potential customers, and key fellow agents of the principal.

b. A may not actively deceive the P as to the A‟s reasons for terminating the relationship. Probably has no affirmative duty to provide reasons or even to respond to such questions.

 

3. Failure to get out clean may be liable to former P for (1) damages, and (2) disgorgement.

iii.

Obligation to abide by any valid “noncompete” agreements

1. Law‟s strong pro-competition stances causes courts to closely scrutinize noncompetes.

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2. Must be reasonable with respect to (1) the geographic area foreclosed, and (2) duration of the foreclosure.

3. Some states may completely throw out overbroad noncompetes, others may redraw them to become reasonable.

f.

Liabilities

i. Tort Liability of Agent for Agent’s Actions

1. Being an A does not immunize the A from tort liability.

a. Tortfeasor is personally liable, regardless of whether the tort was committed on the

instructions from or to the benefit of a P.

2. But rights created by agency status can negate the very existence of a tort

a. An A acting within the scope of authority may exercise and benefit from its P‟s privileges. (I.e., P purchases the right to chop wood in a forest; the A may do so on behalf of the P)

b. Corollary: duties can also flow from P to A.

ii. Tort Liability of Principal for Agent’s Actions

1. Employee vs. Agent

a. R.3d: Does not define “master,” “servant,” or “independent contractor,” instead opting to define an employee as “an agent whose principal controls or has the right to control the

manner and means of the agent‟s performance of work,” and the employer is subject to vicarious liability for tort committed by his employee within the scope of employment.

b. Defining an employee: R.3d, §7.07 comment f provides a list of factors to consider,

with [e] favoring employee status and [n-e] against that status. No single factor is determinative, and language of agreement will not prevail over the reality of the relationship. Right to terminate is not dispositive; carries weight only to extent that it creates practical ability to control the A’s performance.

i. extent of control that the A and P have agreed the P may exercise over details of the work [e]

ii. whether the A is engaged in a distinct occupation or business [n-e]

iii. whether the type of work done by the A is customarily done under a P‟s direction [e] or without supervision [n-e]

iv. the skill required in the A‟s occupation [n-e if great skill] or [e if unskilled]

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v.

whether the A [e] or the P [n-e] supplies the tools and other instrumentalities required for the work and the place in which to perform it

vi.

the length of time during which the A is engaged by the P [the longer the time, the more the E]

vii.

whether the A is paid by the job [n-e] or by the time worked [e]

viii.

whether the A‟s work is part of the P‟s regular business [e]

ix.

whether the P and the A believe that they are creating an employment relationship [e]

x.

whether the P is or is not in business [E, but “business” means any ongoing enterprise including nonprofits]

2. Attribution: Agency law has rules for attributing an A‟s torts to the P, divided into two categories based on the nature of the A‟s conduct and the nature of the third party‟s injury:

a. A’s physical conduct causes physical harm to a third party’s person or property:

applicable doctrine is respondeat superior; only for employees.

b. A’s words cause harm to third party’s emotions, reputation, or pocketbook:

servant/nonservant distinction is rarely relevant, and attribution occurs according to the same rules of actual authority, apparent authority, and inherent agency power that apply to contractual matters.

3. Respondeat Superior

a. Defined: imposes strict, vicarious liability on a P when (1) an A‟s tort has caused physical injury to a person or property, (2) the tortfeasor A meets the criteria to be considered an employee, and (3) the tort occurred within the employee‟s scope of employment.

b. Effects: Renders P liable for the employee‟s misconduct regardless of whether the P (1) authorized the misconduct, (2) fordbade the misconduct, or (3) used all reasonable means to prevent the misconduct.

c. In theory the proper place to begin analysis is whether the tortfeasor is an agent vel non but in practice it comes down to whether he is an employee vel non.

d. Rationales for the rule:

i. Enterprise Liability: links risks to benefits and holds accountable the person for the risk-creating activity

ii. Risk spreading: employer should bear this risk because he can (1) anticipate risks inherent in the enterprise, (2) spread the risk through insurance, (3) take

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into account the cost of insurance in setting prices, (4) spread risk among those benefitting from the good/service.

iii. Risk avoidance: employer is well positioned to deter the harmful conduct

iv. Deep pocket: employer is probably better suited to pay the damages.

e. Scope of Employment:

i. R.3d: takes a less formulaic approach than R.2d: “An employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employer‟s control. An employee‟s act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer.”

ii. Scope is not limited to the proper or authorized conduct; conduct must be of the

same general nature as that actually authorized, or incidental to the conduct authorized.

1. Means an act can be within the scope even if (1) the employer has

expressly forbidden the act, (2) the act is tortious, or (3) the act constitutes a minor crime.

2. Scope of P‟s control will not necessarily extend to all acts that are within the scope of employment.

iii. Travel vs. Commuting (“Special Errand” Exception):

1. R.3d: “Travel required to perform work, such as travel from an employer‟s office to a job site or from one job site to another, is within the scope of employment but traveling to and from work is not.

a. Exception: if the employee undertakes an errand at the employer‟s request, the entire trip is part of the scope of employment, even if it happens while traveling to/from work.

b. Social events: Some cases hold that scope extends to driving home from a work-related social event if:

i. Attendance was required or part of the employee‟s job

ii. Employee became intoxicated at the social event and remained so while driving home; and

iii. Employee caused an accident while driving home drunk.

iv. Tangential Acts: Frolic and Detour

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1.

Even when scope includes travel on employer‟s behalf, does not include

when employee‟s act is part of an intended course of conduct not intended by the employer

a. mere deviation does not exceed scope (“detour”)

b. substantial deviation exceeds scope (“frolic”)

2. Detour vs. Frolic

a. At least one major case suggests it must be at least incidental to

the employee‟s duties in order to be a detour(Fiocco v. Carver, 137 N.E. 309 in Kleinberger@305).

b. Another suggests that a temporary deviation is OK but a temporary abandonment is not.

c. Keep these things in mind

i. Employees predictably engage in small deviations

ii. Deviations more likely to result in harm than those inherent in the servant‟s task are more likely to be frolics

iii. Cases decided under workers comp statutes typically tilt in favor of classifying activity as within the scope

3. Ending the Frolic:

a. Reentry has occurred once employee is fully back in employer‟s service

i. Again actuated at least in part by desire to serve master‟s interest

ii. Again within the authorized space and time limits

iii. Actually taking some action in the master‟s interests not necessitated by the frolic itself

b. Less clear when employee negligently causes harm while “on the way back” to employment

i. Employee does not reenter scope by deciding to return

ii. Does not have to return to the point the frolic began to reenter the scope

iii. R.3d: when frolic is a physical journey away from the workplace or a material departure from assigned route of travel, employee reenters employment when employee has

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taken action consistent with once again resuming work.

(R.3d, §7.07, comment e)

4. Personal/Business Multitasking: On-Site Frolics and Negligent Self- Distraction:

a. If employee undertakes personal matters at the same time as business tasks, the business task remains within the scope. BUT the employee‟s self-distraction may constitute negligence in performing the task.

f. Intentional Torts

i. When employee, acting within the scope of employment, commits an intentional tort causing physical harm, employer is vicariously liable.

1. Even an expressly criminal act can be within the scope.

ii. Purpose Test-R.3d: question is “whether the tortious act occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer.” R.3d, §7.07(2).

1. Example: Employee‟s intentionally violent conduct may be within scope when the conduct closely relates to a dispute that at least initially concerned the employer‟s interests (i.e., a bouncer at a bar).

iii. Incidental/Foreseeable Test: Some recent cases abandon the purpose test, and look at whether the tort was foreseeable or incidental.

1. R.3d is critical of this test

g. Scope of employment and seriously criminal behavior:

i. Many of the incidental/foreseeable cases bend concept of respondeat superior to

hold employer liable without fault to get at the deep pocket

ii. In most jurisdictions the purpose test remains key, so unlikely that employer will be liable for serious crime

1. R.3d: “Extreme quality

of

a serious crime may indicate that the employee

has launched upon an independent course of action” not intended by the employer. R.3d §7.07(2)

4. Liability for Physical Harm Beyond Respondeat Superior

a. Generally, P not vicariously liable for physical harm caused by torts of nonemployee A

b. Exceptions

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i.

Principal Owes Direct Duty to a Third Party: P owes direct duty of care to a

third party and relies on A for the necessary performance, A‟s conduct may result in liability

ii. Intentional Torts of Nonemployee Agents:

1. Some sources say P not liable unless (1) P intended or authorized the result or manner of performance, (2) the P owed a duty to the injured party to have the A‟s task performed with due care.

a. Exceptions: findings of control by P, P‟s ratification of wrongful act, breaching duty to customer; some simply hold that independent contractor status does not bar vicarious liability for intentional torts

c. Misrepresentation by an Agent or Apparent Agent

i. If (1) a person has actual or apparent authority to make statements concerning a particular subject, (2) the person makes a misstatement of fact concerning the subject, (3) a third party relies on the misstatement, and (4) the third party suffers physical harm as a result, then the actual or apparent principal is liable to the third party. (R.3d §§7.04 (actual authority) and 7.08 (apparent authority)).

iii. Duties and Obligations of the Principal to Third Parties

1. Agency Law Duties

a. Duty to Properly Select and Use Agents: P has duty to use reasonable care in choosing, informing, training, and supervising its agents. If a P breaches this duty and, as a foreseeable result the P‟s agent injures a third party, the P is liable.

b. Fact that A acts negligently does not necessarily establish that P breached the duty of care.

c. Nexus Requirement: Must be a nexus between the P‟s negligence in selecting/controlling the A, the A‟s work, and the harm suffered by the third party. **If the act was within the scope of employment, this is likely satisfied** (R.3d §7.05, comment c).

d. Standard of Care/Vulnerable Customers, etc.: Depending on the totality of circumstances, the care demanded of the P may be different (i.e., difference in selecting a person to be a janitor, as opposed to a teacher--because the teacher is charged with taking care of kids where they‟re vulnerable).

e. Relationship of Principal’s Direct Duty to Principal’s Vicarious Liability: Liability under direct duty is different than respondeat superior, but they can overlap.

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Principal Breached Duty

Principal Did Not Breach

of

Care

Duty of Care

A‟s Conduct (Negligent)

Employee vel non, P is liable on direct claim if nexus exists; also vicariously liable if A acting within scope

P

not liable on direct

claim, but vicariously liable if A acting within

scope

A‟s Conduct (Not Negligent)

P

liable on direct claim

P

not liable

only, employee vel non

 

iv. Contract Liability from the Agency Relationship

1. Contract between A and third party can impose liability on P, depending on the type of P that is present at the transaction

a. Disclosed: At time of transaction, the third party has notice that the A is acting for a P, and has notice of the P‟s identity. Can be disclosed even though third party has to reasonably infer the identity of the P from the information at hand.

b. Partially disclosed: At time of the transaction, the third party has notice that the A is or may be acting for a P, but the third party has no notice of the P‟s identity.

c. Undisclosed: At the time of the transaction, the third party has no notice that the A is acting for a P.

2. Liability of the A to the Third Party

a. Disclosed: If A contracts with third party on behalf of disclosed P, generally the A is not a party to the contract/not liable. (R.3d § 6.01(2))

b. Partially/UndisclosedIf A contracts with a third party on behalf of partially disclosed or undisclosed P, general rule is that A is a party to the contract and is liable to the third party (even if P is not liable to third party). (R.3d § 6.02(2), 6.03(2), 6.09).

i. Auctioneer’s Exception: When an auctioneer sells an item for an undisclosed P, no one expects to hold the auctioneer liable. (R.3d § 1.04, Reporter‟s Notes, section b).

c. Warranty of Authority: A purporting to act on behalf of a P makes implied warranty of authority; if the A lacks the power, A is liable to the third party for breach of the implied warranty (unless A conveyed that he was not making such a warranty or third party

knew that A had no authority). (R.3d § 6.10)

i. When applicable:

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1.

true A‟s who act outside their authority and to purported A‟s witho no

actual authority at all;

2. Regardless of whether the purported P is disclosed or partially disclosed; and

3. Even though the third party could have discovered the lack of authority by exercising reasonable care.

ii. Warranty does not apply:

1. Purported A disclaims having authority to bund or indicates that it doubts its own authority; or

2. Third party knows for some other reason that the purported A lacks

authority.

iii. If purported A acts without actual authority but manages to bind the purported P through (1) apparent authority, (2) inherent agency power, or (3) estoppel, the warranty of authority is not breached. That is because the third party has a good contract with the purported P; same if the purported P ratifies the contract.

iv. A may also be liable under theory that he tortuously misrepresented his authority.

(R.3d § 6.10 comment a).

d. **If A becomes party to contract with third party & third party breaches, he may be liable

to the A** (R.3d § 6.03 comment e).

e. These rules are defaults; can be overridden by express or implied agreement between the A and the third party.

f. Agent’s Liability and Available Defenses:

i. Unless otherwise agreed, A‟s contractual liability is as a guarantor.

ii. A enjoys any of the P‟s defenses arising from the transactions, as well as any personal defenses or setoffs the A has against the third party (but may not assert defenses that are personal to the P).

3. Four Ways in Which A’s Action can Bind P to the Third Party

a. Actual Authority (also: express authority, authority, or authorized): Arises from the manifestation of a P to an A that the A has power to deal with others as a representative of the P. An A who agrees to act in accordance with that manifestation has actual authority to so act, and his actions without more bind the P. In other words, if the P’s

words/conduct would lead a reasonable person in the A’s position to believe the A has authority to act on the P’s behalf, the A has actual authority to bind the P.

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i. Elements: (1) objective manifestation by the P, (2) followed by the A‟s reasonable interpretation of that manifestation, (3) which leads the A to believe that it is authorized to act for the P. The P‟s manifestation may reach the A directly or indirectly, and a manifestation reaching A through intermediaries can still give rise to actual authority.

1. R.3d: “An A‟s understanding of the P‟s objectives is reasonable if it accords with the P‟s manifestations and the inferences that a reasonable

person in the A‟s position would draw from the circumstances creating the agency.” (R.3d § 2.02(3)).

a. R.3d also makes a connection between the A‟s interpretation and

his fiduciary duty to the P (§ 2.02(2)), so the A‟s interpretation must be in a reasonable manner to further purposes of the P that the A knows or should know, in light of the facts that the A knows or should know at the time of acting. So, A is not free to exploit gaps/ambiguities in the P‟s instructions, etc. **Facilitates agency creation process** (R.3d § 1.01, comment e).

ii. Manifestation can consist of inaction, if when reasonably interpreted creates the authority.

iii. P can countermand a manifestation; latter manifestation trumps the earlier one (so long as it reaches the A).

iv. Elements regarding actual authority have nothing to do with third parties, so an A can have it even though a third party does not know of it at the time of a given transaction.

v. May be express (i.e., oral/written statements with provisions indicating the authority) or implied (i.e., inferred from the principal‟s prior acts).

1. Common type of implied actual authority is incidental authority, which is the authority to do acts that are incidentally related to the authorized transaction.

2. R.3d, Ch. 2, Introductory Note & § 2.01, comment b

vi. Where agency relationship involves an “interface function” with third parties, the

P‟s manifestation to the A necessarily creates actual authority in the A. (i.e., hiring a cashier for a store).

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vii.

When A binds P in a contract with actual authority, the P is always bound and the

third party is almost always bound to the P.

b. Apparent Authority

i. Arises from the manifestation of a P to a third party that another person is authorized to act as an A for the P. I.e., if the P‟s words would lead a reasonable person in the third party‟s position to believe the A has authority to act on the P‟s

behalf, the A has apparent authority to bind the P. (R.3d §§ 2.03, 3.03). The

other person has apparent authority and an act by him within the scope of that apparent authority binds the P. (R.3d §§ 6.01-.02)

ii. Commonly arises when a P creates impression that A has broad authority, though that is not actually true.

iii. Third Party’s Interpretation: Reasonableness Requirement

1. Mere belief not enough; must be reasonable. This takes into account the same information that an A would consider for an actual authority analysis. NOTE: ASK PROF. EFFROSS; BUT IF A HAS FIDUCIARY DUTY TO INTERPRET, WOULDN’T THIS BE A DIMINISHED REQUIREMENT IN PRACTICE?

2. Third party has a duty of inquiry, for example, where the manifestations

are ambiguous or unusual.

iv. Conceptual difference: Actual authority flows from P to A; Apparent authority

flows from the P to a third party

1. Thus: apparent authority cannot be created by representations of purported A to a third party

2. Exception: Apparent agent can supply the “necessary peppercorn of manifestation” only if the apparent A (1) is actually authorized to act for the P, and (2) while actually authorized, accurately describes the extent of its authority--so such statement is attributed to the P. (R.3d does not address this as precisely as R.2d so be careful here; it only says that an agent‟s

own statements about nature or extent of A‟s authority to act on behalf of the P do not create apparent authority by themselves. R.3d § 6.11). NOTE TO SELF: SO WHAT DOES THIS MEAN? ASK PROF. EFFROSS.

v. Scope of apparent authority can be coterminous with the scope of actual authority. BUT the source of authority can affect the P‟s liability.

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vi.

Apparent authority can exist in the absence of an agency relationship.

1. R.3d § 2.03: “Apparent authority is the power held by an A or other actor

to affect a P‟s legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the P and that belief is traceable to the P‟s manifestations.” Id. at comment a: “The apparent authority definition in this section does not presuppose the

present or prior existence of an agency relationship

who appear to be agents but are not, as well as to agents who act beyond the scope of actual authority.

applies to actors

this

vii.

May be established through the A‟s title or position

viii.

Reliance: Whether third party must establish detrimental reliance is imprecise; under R.3d, the claimant‟s inference of authority must be traceable to P‟s manifestation. (R.3d § 2.03). R.3d does not require further reliance, but many jurisdictions do; in fact, many refer to it as agency by estoppel.

ix.

Case-by-case basis: claims must be analyzed separately, even when the parties are the same, because authority can vary among the different transactions.

x.

“Lingering” Apparent Authority: It is reasonable for third parties to assume

that an agent‟s actual authority is a continuing or ongoing condition. (R.3d § 3.11, comment c). Length of the lingering can depend on the circumstances.

xi.

Partially/Undisclosed P’s:

1. Undisclosed: A‟s for undisclosed P can never have apparent authority, because by definition the third party is unaware that the A is acting for a P at all.

2. Partially: Apparent authority is possible in theory but rare in practice, because the third party would need to allege manifestation attributable to some P but not the specific P.

xii.

Contracts: same results as actual authority.

c.

Estoppel

i. R.3d: § 2.05: “A person who has not made a manifestation that an actor has authority as an agent and who is not otherwise liable as a party to a transaction purportedly done by the actor on that person‟s account is subject to liability to a

18

third party who justifiably is induced to make a detrimental change in position because the transaction is believed to be on the person‟s account, if:

1. The person intentionally or carelessly caused such belief, or

2. Having notice of such belief and that it might induce others to change their positions, the person did not take reasonable steps to notify them of the facts.

ii. R.3d attempts to distinguish estoppel from apparent authority by applying

estoppel to apply only in the absence of a manifestation by the asserted P.

iii. Related to apparent authority; both focus on holding P responsible for a third party‟s belief that a person is authorized to act on P‟s behalf. (R.3d § 2.05).

1. Reliance: In order to assert estoppel, must prove detrimental reliance.

R.3d § 2.03 comment e.

iv. Applies when the P has not made any manifestations of authority to the third

party at all, but P still contributed to third party‟s belief or failed to dispel it.

1. Most often applies as consequence of failure to use reasonable care, either to prevent circumstances that foreseeably led to the belief, or to correct the belief once on notice of it. (R.3d § 2.05 comment c).

d. Ratification:

i. Elements: (1) there must have been some transaction or event involving an unauthorized act, (2) at the time of the unauthorized act, the purported P must have existed and must have had capacity to originally authorize the act, (3) and at the time of the attempted ratification the purported P must have knowledge of all material facts and the third party must not have indicated either to the P or A an intention to withdraw from the transaction. If these elements exist, a P ratifies by either making a manifestation that objectively indicates a choice to treat the unauthorized act as though it was authorized, or engage in conduct that is justifiable only if the purported P had made such a choice.

ii. Even if A did not have authority, P liable to a third party if (1) the A purports to act or on the P‟s behalf, and (2a) the P affirmatively treats the A‟s act as authorized, called express ratification, or (2b) the P engages in conduct that is justifiable only if the P is treating the A‟s act as authorized, called implied ratification. R.3d §§

4.01-.03.

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iii.

Does not occur unless the P, at the time of the ratification, is fully aware of all the material facts involved in the original transaction. R.3d § 4.06

iv.

Occurs as soon as the P objectively manifests his acceptance of the transaction, even if the ratification is not communicated to the third party/A/anyone else (R.3d § 4.01), so it‟s the same as if the P had originally authorized it (R.3d § 4.01(1),

4.02(1).

v.

Not effective if: third party withdraws before the ratification, or if it would be unfair to the third party as a result of changed circumstances (R.3d§ 4.05).

vi.

Clarifies situations with uncertain authority; makes it unnecessary to establish apparent authority/estoppel. Also eliminates P‟s potential claims against the A for acting without authority. R.3d § 4.01 comment B.

vii.

Cannot operate to prejudice the rights of persons not parties to the transaction but who acquired rights or other interests in the subject matter of the transaction before the ratification. R.3d § 4.02(2)(c).

viii.

Traditionally, by definition, this cannot include undisclosed P‟s because there is no notice that the A is acting on a P‟s behalf. R.3d changes this; allows ratification by an undisclosed P by stating that a person may ratify an act if the actor acted or purported to act as an A on the P’s behalf (so it does not have to appear to be an A to the third party). R.3d § 4.03.

ix.

Ratification typically involves contracts, but can include torts.

x.

P can also ratify by accepting/retaining benefits while knowing they derived from an unauthorized act; if the P accepts them without this knowledge, the third party may have an action in restitution or quantum meruit. Ratification allows for full benefit of bargain, while the latter entitles third party only to the value of the benefit actually conferred.

xi.

P can only ratify the entire transaction; does not get to pick and choose provisions. If the P makes a piecemeal affirmance, whether ratification occurs depends on whether the P manifested: (1) an intent to ratify and has sought to impose some exclusions/qualifications, in which entire transaction ratified and the exclusions are ineffective, or (2) an intent to be bound only if the exclusions are part of the transaction, in which case there is no ratification and neither party is bound, unless the third party manifests consent to the conditions.

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xii.

Definition of material facts: R.3d uses a briefer formulation than R.2d, but is

more vague: refers to material facts involved in the original act, and a comment explains that the point of materiality is the relevance of the fact to the P‟s consent to have legal relations affected by the A‟s act. R.3d § 4.06, comment c.

1. Under R.3d, fact finder may conclude that a purported P has assumed risk of ignorance and ratified when P had facts that would have led reasonable person to investigate further, but ratified without doing so.

2. P‟s ignorance ceases to be a factor if the third party has learned of and detrimentally relied on the P‟s affirmance. R.3d § 4.08.

4. Contract Liability of Third Party to P

a. Disclosed/Partially: When A makes contract for a disclosed/partially disclosed P, third party is liable to the P if the A acted with authority so long as the P is not excluded as a party by the form or terms of the contract. R.3d § 6.01(1), .02(1).

b. Undisclosed: Third party liable to the P if the A had authority so long as the P is not excluded by the form/terms of the contract, the existence of the P is not fraudulently concealed, and there is no set-off or similar defense against the A. R.3d § 6.03, 6.06,

6.11(4).

c. Fraudulent Concealment exception: When A acting for an undisclosed P falsely represents that he is acting solely for himself; R.3d allows third party to avoid contract if the P or A had notice that the third party would not have dealt with the P. R.3d §

6.11(4).

d. Undisclosed P cannot bind a third party if the P‟s role in the contract substantially changes the third party‟s rights or obligations. R.3d § 6.03 comment D.

e. Third Party can avoid an otherwise binding affirmance (ratification) in two situations:

i. Changed Circumstances: Third party avoids liability if the circumstances change so materially that holding the third party to the contract would be unfair; must inform the P, but does not have to be before the affirmance. R.3d § 4.05, Ill. 2

ii. Conflicting Arrangements: Third party can avoid ratification if the third party (1) learns that the purported A acted without authority, (2) relies on the apparent lack of authority, and (3) makes substitute, conflicting arrangements or takes some other action that will cause prejudice to the third party if the original transaction is

enforced. R.3d § 4.05(2). Third party must act before learning of the P‟s affirmance.

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f. Binding the P via Actual Authority: Special Rules for Contracts Involving

Undisclosed P’s

i. When the P is undisclosed, the third party is sometimes entitled to (1) insist on rendering performance to the A, or (2) escape the contract entirely.

ii. Rendering performance to the A: Third party may insist upon this if the contract requires the third party to perform personal services, or if in some other way rendering performance to the P would significantly increase/change the third

party‟s burden. This is because the third party expected to render performance to the A.

iii. Escaping the Contract Entirely: Escape is possible if:

1. Contract so provides (i.e., it states it is inoperative if the A is representing someone); or

2. A special kind of fraud exists, which is difficult to prove:

a.

A

fraudulently represented that the A was not acting for the P;

b.

the third party would not have entered into the contract knowing the

P

was a party; and

c.

the A or undisclosed P knew or should have known that the third party would not have made the contract with the P. **Mere filure to

disclose the P‟s existence is always insufficient**

g. Liability of Agent to Principal

i. A is liable to his P for any loss suffered by the P where the A exceeds authority. R.3d § 8.09, and comment b.

ii. If the A breaches duty of loyalty, the P‟s remedies include not only damages but also disgorgement of any profits derived by the A from the disloyal transaction and rescission of any transaction between the P and the A if the breach infected

that transaction. These are considered equitable remedies, and do not require proof of damage.

iii. In many jurisdictions, breach of duty of loyalty can support a claim for punitive damages, and in others the statute of limitations does not start until the P knows/has reason to know of the breach.

h. Liability of Principal to Agent

i. P‟s duties to an A are not fiduciary in nature, but nevertheless a P has several obligations.

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ii.

Must perform contractual commitments

iii.

Must not unreasonably interfere with the A‟s work

iv.

Must generally act fairly and in good faith towards the A (R.3d §§ 8.13, 8.15 for all of these)

v.

If the A incurs expenses or suffers other losses in carrying out P‟s instructions, P has duty to indemnify the A. (R.3d § 8.14).

1. When in actual authority

2. Made to the P‟s benefit but without authority if

a. A acted in good faith and mistakenly believed it to be authorized, and

b. Under principles of restitution it would be unjust to not require

indemnity

3. Claims made by third parties entered into by the A, with authority, and on the P‟s behalf

4. Claims made by third parties for torts allegedly committed by the A, if:

a. The A‟s conduct was within the A‟s actual authority, and

b. The A was unaware that the conduct was tortious

vi.

No duty to indemnify exists for

1. Payments made or expenses incurred that are neither within the actual authority nor benefit the P

2. Losses resulting from A‟s negligence or from acts outside the A‟s actual authority

3. Losses resulting from the A‟s knowing commission of a tort or illegal act

vii.

To invoke P‟s duty to defend, A must (1) give P reasonable notice of the claim, (2) allow the P to manage the defense, and (3) cooperate with the P in the defense.

viii.

P‟s duty to indemnify is a default to rule that is subject to change by any valid contractual agreement.

ix.

P’s Duties in Tort (Physical Harm to the A)

1. Non-employees: P owes its non-employee agent whatever tort law duties the P owes to the rest of the world. Also, P has duty to warn its nonemployee agent of any risk involved in the A‟s tasks if the P knows or

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should know that (1) risk exists, and (2) the A is unlikely to be unaware of the risk.

2. Employees:

a. “Fellow Servant” Rule: Prevented servants from holding masters vicariously liable for the tortious conduct of a fellow servant.

b. Assumption of risk: At one time, this applied generally within tort

law; it barred servants from recovering for injuries arising form the ordinary dangers of their work, because it was said they assumed the risk (making recovering more difficult in more dangerous job settings).

c. Contributory negligence: At one time, barred recovery when the injured servant‟s own negligence helped cause the injury.

d. Today, workers comp statutes provide a no-fault compensation regime and preempt these common law rules.

3. Contract-based duties

a. Implied terms: law can supply a term (“implied in law”) and implied “in fact” from the (1) express terms of the agreement, (2) the parties‟ conduct before or after contract formation, and (3) other circumstances including usages of trade. No implication arises from the fact that an agency relationship exists or from the fact that the P promised to pay the A.

5. Partnership Illustrations of Agency Law

a. Every partner is an agent of the partnership (UPA §9(1), RUPA §301(1)

Power to Bind Through a Partner‟s

UPA Provision

RUPA Provision

Contractual Undertaking and Similar Acts

§ 9

301 (drawn closely from UPA § 9)

§

Wrongful Act

§ 13

305(a) (drawn closely from UPA § 13)

§

Breach of Trust

§ 14

305(b) (intended to encompass UPA § 14 claims)

§

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Knowledge, Notice

§ 3 (definition of knowledge)

§ 102 (modeled on UCC, Art. 1 definitions)

Effect of Publicly Filed Statements

N/A

Comprehensive System Providing Constructive Notice

b. Binding the Partnership in Contract - UPA § 9

i. UPA § 9 continues to be good law in many jurisdictions

ii. Agency Law Empowering rule: UPA §9(1) states that every partner is an agent of the partnership, but the rest of the section qualifies this.

iii. The “Apparent/Usual” Empowering Rule (Statutory Apparent Authority): UPA §9(1), clause 2: act of partner for apparently carrying on in the usual way the

business of the partnership

apparent authority by position. Person seeking to use this attribution rule must

show that: (1) at the time of the transaction, (2) it reasonably appeared to the

person that the partner‟s act was: for carrying on the business of the partnership, and for doing so in the usual way. CANNOT APPLY WHEN PARTNERSHIP IS UNDISCLOSED.

binds

the partnership--analogous to agency‟s

1. (Just like apparent authority) this can exceed actual authority

2. The partnership need not benefit; the A can be the one that takes the

benefit of the transaction.

iv. The “Flip Side” Constraining Rule: Not “Apparently/Usual” and No Actual Authority: Under UPA §9(2) a partner lacks the power to bind the partnership if

(1) the partner is not authorized by the other partners, and (2) the partner‟s act is not apparently for the carrying on of the business in the usual way.

1. Taken together with the Apparent/Usual Empowering clause, this means that:

a. A partner who has actual authority binds the partnership within the scope of that authority, regardless of what appears to the third party, and

b. A partner who lacks actual authority can bind the partnership only by satisfying the apparently/usual empowering rule

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v. The “No Authority” Constraining Rule: UPA § 9(4) and last lines of § 9(1) state the same rule; regardless of apparently/usual empowering rule, the partnership is not bound if (1) the partner acts without actual authority, and (2) at the time of the act the third party knows of the lack of authority.

vi. The “Unanimous Consent” Constraining Rule: Under UPA § 9(3), unless the other partners have abandoned the business, a partner needs either actual authority or unanimous consent from copartners to:

a. assign the partnership property in trust for creditors or on the assignee‟s promise to pay the debts of the partnership

b. dispose of the good will of the business

c. do any other act which would make it impossible to carry on the ordinary business of a partnership

d. confess a judgment

e. submit a partnership claim or liability to arbitration or reference

2. In these areas, a partner lacking the authority to bind the partnership also lacks the power to bind.

3. If a partner lacks actual authority, copartners‟ unanimous consent can

remedy the situation; if consent precedes the act the consent creates actual authority, but if after, the consent is ratification.

vii. The Import of the Partnership‟s Receipt of Benefits: Under contract/agency principles, partnership‟s acceptance of benefits from a transaction can bind the partnership to the transaction under ratification, quantum meruit, or unjust

enrichment.

c. Binding the Partnership in Contract--RUPA § 301

i. RUPA keeps the same basic principles as those in UPA §9(1) but is much shorter. It also differs from the UPA in six noteworthy ways:

1. Replaces UPA‟s “apparently/usual” formulation with the phrase “for apparently carrying on in the ordinary course.” but has no effect on meaning.

2. Delineates a partner‟s “apparently/ordinary” power by referring both to “the ordinary course [of] the partnership business” and to “business of the kind

carried on by the partnership.” This broadens the scope of statutory apparent authority.

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3. Eliminates as inflexible the “unanimous consent” constraining rule of UPA § 9(3), which removes an outdated barrier to agreements to arbitrate.

4. Eliminates as redundant UPA § 9(4), but has no effect on meaning.

5. Modifies the “no authority” constraining rule, so that it applies not only if the third party knew that the partner lacked actual authority, but also if the third party “had received a notification that the partner lacked authority,” altering the balance of risk between partners/third parties.

6. Establishes a system of recorded statements of authority, and limitations of authority, which can affect both the apparently/ordinary empowering rule and the no authority constraining rule; primary effect is on the power to transfer real property.

ii. Modifying the No Authority Constraining Rule

1. Under RUPA § 102(d), a person receives a notification when the notification (1) comes to the person‟s attention; or (2) is duly delivered at the person‟s place of business or at any other place held out by the

person as a place for receiving communications.

iii. Establishing a System of Recorded Statements That Can Significantly Affect the Operation of RUPA § 301

1. One of RUPA‟s big innovations is a system of public statements to establish what amounts to “constructive notice.”

2. Under RUPA § 303, providing for statements of partnership authority, such statement must be executed by at least two partners, must contain certain basic information, and may state the authority, or limitations on the

authority, of some or all of the partners to enter into other transactions on behalf of the partnership and any other matter.

3. Transfers of Real Property

a. § 303 notices help real property transfers because real property lawyers like having things in the public record to help establish chain of title, so statements pertaining to authority to transfer real property reflect the core of § 303.

b. If a statement limiting the authority of a partner to transfer real estate is properly filed, a person not a partner is deemed to know of the limitation. § 303(e)

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c. When real property is involved, proper filing means filing a

statement with the Secretary of State, PLUS having a “certified copy of a filed statement of partnership authority recorded in the office for recording transfers of that real property.” RUPA §

303(d)(2)

4. Other Transactions and Other Matters: The effect of an “other matter”

filing is more limited than in the real property context and the limitation tilts against the oartnership:

a. A grant of authority contained in a filed statement of partnership authority is conclusive in favor of a person who gives value without knowledge to the contrary, so long as and to the extent that a limitation on that authority is not then contained in another filed statement but has no effect in favor of the partnership, and

b. A person not a partner is not deemed to know of a limitation on the

authority of a partner merely because the limitation is contained in a filed statement.

5. Changing and Canceling Statements of Authority

a. May be canceled by filing a statement of cancellation (RUPA §§303(d)(1),(d)(2), and (g) assume such statements exist), and can be nullified by filing a statement containing a statement of limitation which contradicts the grant (RUPA §303(d)(1) and (2)).

b. Unless earlier canceled, a filed statement of partnership authority is canceled by operation of law five years after the date on which the

statement/most recent amendment was filed with the Secretary of State.

d. CASES

i. National Biscuit Co. v. Stroud (1959) (p. 53):

1. Facts: General partnership to sell groceries (two partners). One told Nabisco they would not need to deliver any more bread, but the other partner continued to order bread from Nabisco.

2. Holding: General partnership generally grants power to any partner to bind the partnership in any manner legitimate to the business; this is true both for sales and purchases. Thus, since Freeman (the other partner) was a

28

general partner, with no restrictions on his authority to act within the scope of the partnership business, had equal rights in the management and conduct of the business.

ii. Smith v. Dixon (1965) (pg. 19, handout 1)

1. Facts: W.R. Smith acted as the managing partner for a large family partnership; in this capacity he contracted to sell a parcel of land to appellee for $200,000 but appellants, the rest of the partnership, assert that he had no authority to do so; they claim that he was only authorized to sell for $225,000 or more.

2. Holding: Partnership is bound by the acts of a partner when he acts within the scope or apparent scope of his authority; to determine apparent scope, look at past transactions. Here, W.R. Smith had customarily been delegated the responsibility of handling the partnership‟s business affairs, so the contract stands.

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II.

Partnerships

a. General Partnerships

i.

Generally

1. Definition: Formed whenever there is an “association of two or more persons to carry on as co-

owners a business for profit (UPA § 6) [ partnership (RUPA § 202(a))].

whether

or not the persons intend to form a

a. See UPA§ 7, RUPA § 202(c) for rules for assisting in the determination of whether a partnership has been formed.

i. Most important: person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment of a debt as wages, or for other exceptions (UPA § 7(4), RUPA §

202(c)(3)).

b. Does not need to be publicly filed; just needs to fall within the definition (so a

partnership can be created even if the partners do not realize that they are forming such an enterprise).

i. Thus, the only intent that is relevant is the intent to do those things which constitute a partnership.

c. “Paradigmatic Partnership” is:

i. An unincorporated business intended to make a profit,

ii. That has two or more participants, who may be either individuals or entities,

iii. Each of whom “brings something to the party,” such as efforts, ideas, money, property, or some combination

iv. Each of whom co-owns the business,

v. Each of whom has a right to co-manage the business, and

vi. Each of whom shares in the profits of the business

d. UPA/RUPA both refer to a partnership as “an association” (UPA § 6(1), RUPA §

202(a)).

e. Profit sharing is not dispositive (other business forms may require profit sharing) -- in other words, it‟s necessary but not sufficient

f. Express agreements to share losses intensify the co-management/co-ownership inclinations, and in all jurisdictions such agreements are strong evidence of a

30

partnership. In some jurisdictions, such an agreement is actually a prerequisite to a finding of partnership. **THIS IS NOT THE MAJORITY RULE**

i. UPA/RUPA: do not mention loss sharing as a prerequisite, and both treat it as a consequence of partnership status (UPA § 18(a)/RUPA § 401(b))

g. Co-ownership is a key characteristic, but it is not defined in the UPA or RUPA and has different meanings. For partnership formation, they‟re agreeing to co-own the assets, and the co-right to benefit.

2. Aggregate vs. Entity?

a. UPA: generally adopts an aggregate view, rejecting notion that partnership is its own legal entity. (See, e.g., § 29).

i. BUT a partnership can own property (UPA§ 25(1)) because a partner is co-owner with his partners of specific partnership property holding as a tenant in partnership (“tenancy in partnership” form of ownership).

ii. Each partner has three property rights in the partnership (UPA § 24)

1. Rights in specific partnership property

2. Interest in the partnership

3. Right to participate in the management

iii. Management Prerogatives Disguised as Property Rights: Partner as the right to

(1) use the assets of the partnership in furtherance of the partnership‟s business (UPA § 25), and (2) the right to participate in the management of the partnership (UPA § 24).

iv. RUPA takes a more straightforward approach by stating:

1. A partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred, either voluntarily or involuntarily (RUPA § 501)

2. A partner may use or possess partnership property only on behalf of the partnership (RUPA § 401(g)

3. As for property rights, there is only the transferable interest, which is the partner‟s share of profits and losses and the partner‟s right to receive distributions. (RUPA § 502).

v. Partners thus

1. Have a right to possess partnership property for non-partnership purposes (UPA § 25(2)(a))

31

2.

May not assign his interest in partnership property (UPA § 25(2)(b))

3. Partner‟s right in partnership property is not subject to attachment or execution on a claim against the partner (UPA § 25(2)(c))

4. On the death of a partner, his right in partnership property vests in the

surviving partners ( UPA § 25(2)(e))

vi. Also allows for partnership to acquire real property in its name, somewhat

contrary to the aggregate theory (UPA § 8(3))

3. UPA & RUPA Flexibility: Default Rules and Agreements Among Partners

a. Rules of both UPA/RUPA an be divided into two categories:

i. Those that govern the relationship among the partners (inter se rules), and

ii. Those that govern the relationship between the partnership (and its partners) with outsiders (third party rules).

b. Inter se rules are “default rules,” applicable only in the absence of a contrary agreement among the partners; such agreements can be express/implied, written/oral.

i. Adopting a partnership agreement always requires unanimity, but amendment can be on a less-than-unanimous basis (e.g., majority vote of the partners). So, changes to default rules can require less than unanimity.

ii. Straying too far from the default rules may negate the partnership (i.e.,

eliminating profit sharing) and some cannot be eliminated (i.e., fiduciary duties).

1. Governed by case law for UPA, generally

2. RUPA devotes a lot to this: § 103 states that generally the partnership relations are governed by the agreement, but the general rule is subject to a list of specific exceptions that are mostly constraints on the partnership agreement‟s power to

a. reshape the fiduciary duties that partners owe each other and the partnership; and

b. limit the ability of partners to “dissociate” themselves from the partnership (RUPA § 103(b)).

c. Third party rules are mandatory rules that cannot be changed by agreements among partners, as third party consent is also necessary.

4. Partnership types

a. Partnership at will: each partner has the right to cause the partnership to come to an end, at any time and without having to state or have “cause.”

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b. Partnership for a term: Comes to an end at the end of the time period specified in the partners‟ agreement

c. Partnership for a particular undertaking: Comes to an end when the particular task or goal specified in the partners‟ agreement has been accomplished. **Under the law of most states, joint ventures are analogized to partnerships and therefore governed by partnership law**

5. Factors affecting characterization

a. Control: The more control an alleged partner exercises, the more likely it‟s a partnership; gets dicey when a mere employee provides the business full-time services (RIPA § 202(c)(3)(ii); UPA § 7(4)(b)).

b. Agreements to Share Losses: Creditors and debtors rarely agree to this, nor do any of the other relationships according to RUPA § 202(c) and UPA § 7(4) that involve profit sharing but aren‟t partnerships

c. Contributions of Property to the Business: If party has contributed property to the business, it favors partnership characterization (especially where it is in return for control/profit sharing/etc.)

i. Not a prerequisite, but does “cut against” the protected categories in RUPA § 202(c) and UPA § 7(4)

d. The Extent to Which the Profit Share Constitutes the Recipient‟s Only Remuneration from the Business: If profit share is just “icing on the cake,” courts are more inclined to one of the protected categories.

e. Parties‟ Own Characterization of Their Relationship: While parties‟ labels aren‟t dispositive, in close situations the courts will look at this. Probably more influential when

the dispute does not involve third parties.

6. Partnership Accounting

a. Finances are distinct from those of the individual partners

b. Partners‟ interests usually reflected in capital accounts; sets forth the partner‟s ownership interests

c. RUPA § 401 describes how these capital accounts are constructed and maintained

d. Capital account can be negative from time to time, but if its negative upon final settlement when the partnership is terminated, that partner must may the partnership

that amount (RUPA § 807(b)).

e. Not essential that partnership actually maintain a formal capital account.

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f. Settling Accounts When the Business is Liquidated

i. Agreement among the partners can govern this inter se matter; in the absence of such an agreement, UPA §§ 38, 40, 42 supply the default rules (which provision is used depends on whether the business is being continued/liquidated and on whether the dissolution was rightful/wrongful).

ii. When partnership is being liquidated following rightful dissolution, UPA default

rules provide a relatively simple approach for distributing assets/settling accounts

1. Property loaned/rented to the partnership returns to the contributing partner.

2. Assets belonging to the partnership are marshaled and liquidated (UPA § 38(1); from these

a. Outside creditors are paid off

b. Inside creditors are paid off

c. Partners are repaid their invested capital (i.e., the value of any property they have contributed to the partnership, plus any profits previously allocated to the partners and left in the business, less any returns of capital previously made); and

d. Any remaining funds are divided, as profit, according to the

partner‟s ordinary profit percentages (UPA § 40(b).

3. If the partnership lacks sufficient funds to pay off its creditors and repay capital contributions, partners must pay in according to their respective obligations to share losses. (IPA §§40(a)(II) and 40(d)).

4. Accounts must be settled among partners in cash (UPA § 38(1)), unless

there is an agreement to the contrary.

5. Function of Partners‟ Capital Accounts in Dissolution

a. Partners are paid the amounts owed in respect of capital (UPA

§40(b)(III)

b. Property contributed to the partnership increases that partner‟s capital account by an amount equal to the fair market value of the assert as of the time of contribution, as do profits allocated to partners from ongoing activities (UPA § 18(a)); profit distributions

and shared losses reduce the capital accounts.

iii. Settling Accounts Following Wrongful Dissolution

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1.

Same as if the dissolution were rightful, except that the wrongfully

dissolving partner‟s share may be decreased by the amount of damages due the other partners for breach of the partnership agreement. RUPA §§38(2)(c)(I) and (2)(a)(II). Also, wrongful dissolver has no right to wind up the partnership. UPA §37.

iv. Settling Accounts Among Partners When the Business is Continued: Rightful

Dissolution

1. Settling Accounts by Express Agreement: For partnership to continue after dissolution, there must be some agreement among the partnership. Such agreement can be made before or after dissolution--need not include the wrongful dissolver. Without such an agreement, the default mode is liquidation.

2. Agreement will normally govern how the partners will settle the accounts; any such agreement should at minimum address five topics:

a. transfer of rights and obligations of the dissolved partnership to the successor partnership

b. conversion of the continuing partners‟ rights in the dissolved partnership to rights in the successor partnership

c. compensation of the dissociated partner for that partner‟s rights in the dissolved partnership

d. the indemnification or (if possible) the release of the dissociated partner for debts of the dissolved partnership; and

e. the indemnification of the dissociated partner for debts of the

successor partnership

3. Possibility of a Tacit Agreement to Continue the Business: If a partner rightfully dissociates and fails to seek liquidation, a court may decide that the partner tacitly consented to a continuation of the business. This is not a preordained result.

4. Compensating the Dissociated Partner: An issue when a tacit agreement is found, or the express agreement neglects the compensation issue.

a. UPA § 42 provides a default rule; treats the value of the dissociated partner‟s interest as a loan to the successor partnership. The value is calculated at the date of dissolution, and as compensation for

35

that loan, the dissociated partner receives either interest on that value or a share of the profits attributable to the successor partnership‟s use of the dissociated right in the property of the dissolved partnership.

b. This default rule leaves open seven important questions:

i. How long may the successor partnership wait to cash out the dissociated partner? There may be an agreement for a pay- out deadline but, if not, the court will give the partnership some breathing room.

ii. Must the successor partnership make interim payments to the dissociated partner pending the cash-out? Nothing in cases penalizes partners for failing to make interim payments, but there is nothing requiring it either.

iii. When does the dissociated partner elect between the interest option and the profit-sharing option? Dissociated partner may wait until an accounting reveals both the value of the partnership at dissolution and the value of the dissociated partner‟s interest; can delay until he can determine which is more lucrative. This creates an incentive for the continuing partners to cash out the dissociated partner as soon as possible.

iv. May the dissociated partner change the election? No, but a representative of a deceased partner may lack the authority to make a binding decision until an accounting reveals the value.

v. How is the interest rate determined? Very little authority, but may be the legal rate for interest on judgments, legal rate for prejudgment interest, etc.

vi. How is the profit share calculated? Equals the ratio of the value of the dissociated partner‟s interest in the partnership at dissolution to the value of the entire partnership at dissolution.

vii. How long may the business continue before fully cashing out the dissociated partner? May proceed indefinitely but the dissociated partner can sue to collect.

v. Remuneration for Property Provided by Partners to the Partnership

1. Absent a contrary agreement, partners receive nothing extra for their

contribution (UPA § 18(d), RUPA § 401(d)).

2. Complexity exists because there are two ways by which a partner can provide property for the partnership‟s use:

a. Contribution: Transfers to partnership, no remuneration for use, property not returned to partner and the risk of depreciation/benefit of appreciation is for the partnership

b. Furnish property--use for either the duration of the partnership or

some other period, while retaining title to the property

c. Lease or loan--providing use of property for the duration of the

partnership for some period of time, retaining title and receiving rent, interest, or royalties as compensation.

3. Modes of Providing Property

a. UPA Approach: Contains no rules for distinguishing the modes (UPA §8(2) does contain rules for property purchased with partnership funds). Instead, depends on case law--which looks at the intent of the parties, to be determined objectively from the parties‟ manifestations, and in the absence of an express agreement, court is unlikely to find a lease or loan unless the partnership has made payments that can be construed as rent/etc. i. As for distinguishing contributed from furnished, following factors indicate contribution: use of the property in the partnership business (esp. if it‟s crucial to the business), the use of partnership funds in improving or maintaining the property, indications in the partnership‟s books that the property belongs to the partnership, and nonreceipt of rent or other compensation by the partner who provided the property.

37

b. RUPA Approach: Places considerable emphasis on title. First part of rule looks at the formalities of property acquisition (i.e., in whose name), and the other looks at the assets used to accomplish the acquisition (i.e., who paid for it). First facet is controlling (see:

RUPA § 204(a)(1) and (2)).

7. Transfer of Partner‟s Interest

a. Fundamental property of partnerships is that you get to “pick your partners,” as it‟s a

voluntary association; UPA and RUPA therefore limit the assignability of partnership interests and the ability of a judgment creditor of a partner to access the partner‟s rights in the partnership.

b. Assignability

i. Only a partner‟s economic rights are freely assignable (UPA §§25-28; RUPA

§§501-504).

ii. Partner may not assign/transfer to someone else the right to participate in management or the right to use partnership property for partnership purposes, unless an agreement among the partners allows for that. Such an agreement may be general, or apply to a specific assignment/transfer.

iii. This is sort of like adding a new member to the partnership, so cannot assign a complete partnership interest without an agreement with the copartners (UPA § 27(1)). Similarly, under UPA §18(g), without a contrary agreement, no person can become a member of a partnership without the consent of all the partners.

1. Under RUPA: “A person may become a partner only with the consent of all the partners” (RUPA §401(i)). The only transferable interest of a partner is the partner‟s share of the profits and losses, and the partner‟s rights to receive distributions. (RUPA § 502).

2. Transfer is permissible but does not, as against the other partners or the

partnership, entitle the transferee to participate in management or conduct of the business, require access to information, or to inspect the records. (RUPA §503(a)(1) and (3).

c. Rights of a Partner‟s Judgment Creditors--the Charging Order

i. Creditor may not attach/levy on the partnership‟s property for a claim against an individual partner, but they can do so for a claim against the partnership. (UPA §

25(2)(c)).

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ii. Partner‟s judgment creditor has no access or right to the partner‟s noneconomic rights; plus, under UPA/RUPA the sole remedy for a partner‟s judgment creditor is a charging order, which is like a lien on a partner‟s economic rights--it obligates the partnership to pay to the creditor any amounts that would otherwise be paid to the debtor partner. (UPA §28(1) and RUPA §504(b)).

1. Charging order also functions as a judgment lien; other partners can use their own funds to redeem the charged rights, and partnership funds may be used with the consent of all the partners whose interests are not so charged or sold. (UPA §28(2)(b); RUPA §504(c)(2) and (3)).

2. If the circumstances of the case require (UPA §28(1), RUPA §504(b)), the court may order the charged interest foreclosed and sold; in that event, the economic rights of the debtor partner are sold like any other property subject to a judgment lien.

8. Partners‟ Authority

a. Right to Be Involved in the Business

i. Each partner has the right to be involved in the business

ii. This right does not bring extra compensation because under UPA §18(f) and RUPA §401(h) working in the business does not increase a partner‟s remuneration.

b. The Right to Bind the Partnership

i. See Table, Kleinberger 274

ii. Deducing Extent of Actual Authority

1. Partnership agreement may define authority of each partner to bind the partnership; also possible to infer the default scope of a partner‟s actual authority from various statutory provisions.

2. UPA: Default scope implied through sum of §§9(1), 18(e), 18(b), and

18(h).

3. §9(1) deals primarily with partner‟s power to bind, it does contain clause relating to authority-- “Every partner is an agent of the partnership for the purpose of its business.” So, use agency law binding principles.

4. §§18(e) and (b) support this from a different angle: since all partners have equal rights, they all must have some authority to bind the partnership; (b)

39

suggests that acts “reasonably made in the ordinary and proper conduct of the partnership‟s business” qualify for indemnification.

5. RUPA: Similar to UPA (§301(1) mirrors UPA §9(1) and §401(f) mirrors UPA §18(e)), but its indemnification provision does not refer to reasonably; agency law “easily fills that gap.” (RUPA §104(a) and Comment). See also, RUPA §401(c) for indemnification.

6. An Implied but Important Limit: If a partner knows or has reason to

know that another partner would object to a proposed commitment, the first partner has no actual authority to commit the partnership (unless the agreement provides otherwise or partners already voted on the matter). (UPA §18(h) and RUPA §401(j); disputes among partners to be settled by a vote).

c. Right to Participate in Decision Making

i. Basic approach: when partners disagree, the default rules of RUPA and UPA call for:

1. the partners to resolve the disagreement by a vote (UPA §18(h) and RUPA §401(j);

2. each partner has one vote, regardless of how much each partner has contributed to the partnership and regardless of how much each partner works in the partnership‟s business (UPA §18(e) and (h); RUPA §401(f) and (j)); and

3. some disputes are resolved by majority vote, while others require unanimity (UPA §§18(h) and 9(3); RUPA §401(j)).

ii. Determining What Vote is Required-UPA

1. UPA §§9(3) and 18(g) list particular matters requiring unanimous consent:

Under §9(3), unless partnership agreement provides otherwise, following actions require unanimity: (1) assigning partnership‟s property in trust to creditors or in return for the assignee‟s promise to pay the partnership‟s debts; (2) disposing of the good will of the business; (3) doing any other act which would make it impossible to carry on the partnership‟s ordinary business; (4) confessing a judgment against the partnership; (5) submitting a claim by or against the partnership to arbitration. And, under

40

18(g), (6) no person can become a member of the partnership without the consent of all the partners.

2. UPA §18(h) provides general rule for disagreements not covered by UPA §§9(3) or 18(g): any difference arising as to ordinary matters can be decided by a majority of the partners, but no act in contravention of any agreement between the partners may be done rightfully without the consent of all the partners. Problem with this: omits situations that are not ordinary but are in contravention of a partnership agreement; some cases hold that decision to depart substantially from past practices does contravene agreement because of implied agreement, others just establish a rule for this omitted category.

iii. Determining what vote is required-RUPA

1. Simpler than UPA; unanimous consent cases has been winnowed down to the admission of a partner (RUPA §401(i)).

2. Omitted category has been expressly included as requiring unanimous

consent: “a difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all the partners.” RUPA §401(j).

iv. Boundary Between “Ordinary” and “Extraordinary”

1. Bright line between ordinary/extraordinary difficult to find, but a few generalizations are possible: substantial changes to the nature of the partnership‟s business are likely to require unanimity, as well as those substantially increasing the size of the business where that increase

requires a significant increase in the liability exposure of each partner, and changes in the standards for admitting new partners/expelling old ones.

v. Problem of Management Deadlock:

1. Cases hold that partner proposing the change loses

9. Partner‟s Power to Bind the Partnership

a. See Agency sections based on Kleinberger 311-324.

10. The Partnership Agreement

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a. RUPA makes clear that a partnership agreement may be oral, written, or implied (RUPA § 101(7).

b. Written may be necessary, however, when real estate is to be contributed as partnership property or the agreement includes a term of one year--in order to comply with the statute of frauds.

c. Advantages of a written agreement are so great that failing to advise client to enter into one may even constitute malpractice.

d. Agreements that Change Management Rights i. Some areas in which partners often vary default management rules: delegating to one partner/committee some or all decisions on business conduct; changing the “one partner/one vote” rule; changing the unanimous consent requirements; requiring supermajority votes for important decisions; creating a right to expel partners; requiring partners to seek approval before making certain kinds of commitments on behalf of the partnership; delegating to a management or executive committee the right to bind the partnership to any significant obligations.

ii. Limits on Inter Se Agreements that Restructure Management

1. UPA: Three constraints

a. No agreement among partners can totally remove fiduciary obligations

b. More fundamental the obligation involved, more likely it will face judicial scrutiny (i.e., fundamental=important justification, not overbroad, does not leave partners who lack access vulnerable to oppression)

c. Partner may have nonwaivable right to veto any fundamental

changes in the partnership agreement which would substantially prejudice the partner‟s interests; later cases suggest the contrary, at least where the partners are sophisticated

2. RUPA: Purports to collect in one place all the limits on the power of the partnership agreement; §103(a) provides that “except as otherwise provided in subsection (b), relations among the partners and between the partners and the partnership are governed by the partnership agreement.”

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(B) contains 10 restrictions, including that an agreement may not unreasonably restrict access to books and records.

3. Effect of Inter Se Agreements on Third Parties

a. Increasing Third Party‟s Ability to Hold the Partnership Liable:

Partner binding the partnership through actual authority means no need to rely on special rules that partnership law contains for binding the partnership to third parties

b. Undercutting a Third Party‟s Claim: The Agreement can limit actual authority granted to some partners.

11. Sharing of Profits and Losses

a. In the absence of an explicit agreement, see UPA §18(a) and RUPA §401(b) for how profits/losses are shared: they‟re shared equally (regardless of how much each individual partner contributed to the partnership).

b. Does not matter if the partners contributed unequal amounts (See Dunn v. Summerville).

c. Loss sharing arrangements among partners do not affect the personal liability of each partner for the debts of the partnership; if it‟s not an LLP, each partner is either jointly liable or jointly and severally liable regardless of the inter se situation. RUPA--always joint and several, varies in UPA.

i. BUT: Inter se agreement can govern what happens if a creditor collects a partnership debt from an individual partner but it lacks the funds to indemnify the partner; in that case, the agreement will determine how much each of the other partners must compensate that partner.

d. Profits can be divided a number of ways

i. May be shared on a flat basis

ii. Fixed weekly/monthly “salary”

iii. Percentage, recomputed each year based on average amount invested in the business

iv. In large partnerships, fixed percentage applied against say, 80 percent of the income

v. Agreement may be silent so each year the division can be agreed

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e. In cases where sharing of losses not discussed, courts might be sympathetic and take

that as evidence that no partnership was created; many cases, however, hold that loss sharing provision is not required which is consistent with UPA §§6-7 and RUPA §202.

f. Timing i. Neither UPA nor RUPA specifies how often profits are to be calculated/distributed, but UPA suggests a partnership must repay contributions and discharge liabilities before doing so. (UPA § 18(a)).

ii. In practice, what happens is that contributions are only repaid when a partner withdraws from a partnership or when the partnership business comes to an end.

iii. For when profits are actually distributed, UPA has no definition and RUPA only has a comment that says absent a contrary agreement, partner does not have a right to receive a current distribution of the profits credited to his account, the interim distribution of profits being a matter arising in the ordinary course of business to be decided by majority vote of the partners. (RUPA § 401, comment

3).

iv. In most partnerships, timing of interim distributions is a matter of either express or implied agreement, and most contemplate some annual distribution.

v. Partners in many operating partnerships make “draws” against their anticipated annual profit share, and at the end of the year they settle up if the partner over/underdraws.

vi. LOSSES: Neither UPA/RUPA specifies timing for loss sharing; typically they just keep track of the losses and it affects what each partner receives when the partnership ends.

12. Liability of Partnership and Partners

a. Generally-Liability of the Partnership

i. Partnership liable in contracts for which the partnership was entered into by a partner with actual or apparent authority (UPA § 9, RUPA § 301).

ii. For torts, agency principles are used so that a partnership is liable to third parties for “any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his co-partners.” (UPA §

13)

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iii.

Partnership liable in certain circumstances if a partner misapplies money or

property of third party (UPA §14; RUPA §305 generally follows these UPA provisions).

b. Generally-Liability of the Partners

i. Each partner in a general partnership has unlimited personal liability for the obligations of the partnership. (UPA§13-14 calls for joint and several liability for

what are basically tort obligations, and UPA § 15 calls for joint liability for all other obligations like contracts).

ii. RUPA eliminates the reference to joint liability; provides that partners are jointly and severally liable for all of the partnership‟s obligations (RUPA § 306(a)). 1. RUPA does allow for creditor to sue the partnership and one or more partners in a single action (RUPA § 307(b)), a judgment creditor is first required to exhaust partnership assets (with some exceptions) before proceeding directly against a partner‟s individual assets. (RUPA § 307(d)).

c. Three issues to consider

i. Exhaustion rule: In some UPA jurisdictions, as a matter of case law, a creditor of

a partnership may not pursue individual partners without first exhausting the

partnership‟s assets. In RUPA jurisdictions this applies through the statute (RUPA § 307(d)).

ii. Joint Liability and Joint and Several Liability: Distinctions relate not to the extent of liability, but rather the steps a creditor must take. Under both, each partner may be held individually responsible for the full amount of the partnership‟s debt. Under joint and several, the creditor may pursue any of the partners individually;

does not need to include all the partners as defendants in the same lawsuit (and release one partner without undermining the claims against the rest). When it is merely joint, creditor must sue all of them, and releasing one releases all.

iii. Relationship of Partners‟ Liability to Third Parties and Partners‟ Inter Se Loss

Sharing: Inter se loss sharing has no effect on a third party‟s claim against any particular partner. (i.e., a partner cannot claim that he only owes 60% because that is his percentage of the loss sharing).

d. Binding Partnership through a Partner‟s Wrongful Act (Actions of a Rogue Partner):

i. UPA § 13 and RUPA § 305(a) provide a rule for attributing certain wrongful acts

or omissions of a partner to the partnership.

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1. UPA § 13: Arises for any wrongful act or omission in the ordinary course of the business of the partnership with the actual authority of his copartners, and the partnership is liable therefor to the same extent as the partner so acting or omitting the act. ONLY FOR THIRD PARTY CLAIMANTS.

2. RUPA § 305(a): Arises for a wrongful act or omission or other actionable

conduct (tort liability), in the ordinary course of business of the partnership or with the actual authority of the partnership, with the partnership liable for loss or injury caused. ATTRIBUTION RULE ALSO AVAILABLE TO PARTNERS.

ii. Wrongful but Ordinary?

1. Proper question under both UPA and RUPA is not whether the specific wrongful act is “ordinary course” or authorized, but rather whether that type of act, if done rightfully, would be ordinary.

iii. UPA § 13 and RUPA § 305(a) Compared to Respondeat Superior

1. They‟re similar (but UPA does not cover no-fault torts)

2. Claimant need only show that

a. the second person (the partner or the servant/employee agent incurred tort liability)

b. the first and second person stand in a specified relationship to each other (partner/partnership or servant-master/employee-employer); and

c. the tort is sufficiently related to the first person‟s enterprise

(“ordinary course of” the partnership or “scope of employment”)

d. One major difference from respondeat superior: UPA/RUPA apply regardless of whether the tortfeasor was subject to the partnership‟s control (because that is more of an agency than a partnership requirement).

iv. Binding the Partnership Through a Partner‟s Breach of Trust (UPA § 14; RUPA §§305(a) and (b))

1. UPA: If partner misapplies a third party‟s money or property, loss is attributed to the partnership if either (1) the partner received the money or other property while “acting within the scope of his apparent authority,”

46

(UPA § 14(a)) or (2) the partnership received the money or other property “in the course of its business” and the partner misapplies the property “while it is in the custody of the partnership” (UPA § 14(b)).

2. RUPA: Replicates both prongs of UPA § 14, but has been edited to improve clarity for subsection b (RUPA § 305, comment). For RUPA, makes no mention of whether the misapplication has to occur while the partnership has custody.

v. Core Concern of UPA § 14-Defalcations by Professionals:

1. These are situations where professionals take advantage of their position (i.e., lawyer gets grieving widow to entrust investments from late husband‟s estate with him).

2. Older leading cases deny recovery because: mere fact of partner status does not constitute “holding out” that partner can accept funds, fund handling not within the course of partnership‟s business, or not within the ordinary course of business.

3. Some newer cases allow recovery because: apparent authority should be

determined from client‟s perspective rather than the professional, in modern professional practices handling funds may very well occur in the course of partnership‟s business, and when professionals are involved the need to protect the public and hold professionals to high standards is important. vi. Rouse v. Pollard (1941), p. 19a in handout 2: Old lady gave money to a law partner and he embezzled; other partners could not be held liable because it was not in the ordinary course of business for law partnerships to conduct such business, the other partners had no knowledge, etc.

e. Indemnification: Partnership must indemnify a partner for payments made and liabilities incurred in the ordinary course of the partnership business. (UPA § 18(b) and RUPA §

401(c)).

i. In an ongoing partnership, indemnification payment reduces the partnership‟s profits like any other payment, so its proportionally taken out of profit shares; on dissolution, this is paid out of the partnership assets like any other obligation so if there is insufficient money the partners must pay in. (UPA §§18(a), 40(b), 40(d); RUPA §§401(b), 807(b), 807(c))

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ii. This means that outside creditors can collect from any partner (under UPA and under RUPA if § 307(d) applies), but between the partners themselves each is only responsible for his share of the partnership obligation.

13. Management Duties

a. Duty to Furnish Services to the Partnership

i. Some older cases hold that such duty exists, but neither UPA nor RUPA

supports that.

1. Duty may be expressly provided by partnership agreement or implied by circumstances.

2. Partner in breach of that duty may be liable for the cost of hiring someone else to perform the services or for the reasonable value of the services withheld; if the withheld services are crucial to the business, copartners can request dissolution (UPA § 32(1)(d), RUPA § 801(5)(ii).

b. Duty of Care

i. Partners‟ standard of care is gross negligence (RUPA §404, comment 3;

generally recognized by courts in UPA jurisdictions).

ii. Only negligence for tort liability for the partnership‟s vicarious liability (RUPA § 305, UPA § 13)

iii. Partnership agreement may change the duty of care but, at least under RUPA, may not unreasonably reduce it (RUPA § 103(b)(4).

14. Partner‟s Fiduciary Duty of Loyalty

a. Duty of Loyalty

i. Cardozo‟s passage in Meinhard v. Salmon: “A trustee is held to something

stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.”

ii. Partner loyalty can be divided into two categories: (1) issues relating to the conduct or interests of the partnership‟s business, and (2) issues relating to differences of interests between or among partners.

iii. UPA/RUPA differences:

1. Duty of Loyalty: UPA=case law, RUPA=codified

2. Limits:

UPA=open-ended

category,

RUPA=codified

exclusive and exhaustive

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formulation

is

formation,

conduct, or liquidation of the partnership; RUPA §404(b)=encompasses self-dealing and competition, provides that dissolution ends the restriction on competition, and excludes formation activities from the duty of loyalty.

4. Information: UPA cases=consider partner‟s duty includes volunteering information; RUPA=does not include that duty

3. Scope:

UPA

§21(1)=any

transaction

connected

with

the

5. Good faith: UPA=does not mention good faith; RUPA §404(d)=partner

with the

shall discharge duties to partnership and others

obligation of good faith and fair dealing.

consistently

6. Self-interest: UPA silent, RUPA §404(e)=partner does not violate duty just

because conduct furthers the partner‟s own interest.

7. Modifying fiduciary duties: UPA=silent, RUPA § 103(b)=prohibits elimination and provides standards for attempted alterations

8. Most controversial part--RUPA §404(a)=only fiduciary duties a partner owes are loyalty and care set forth in (b) and (c)

iv. Partner versus Partnership Duty of Loyalty

1. Partner may not profit at the expense (direct or indirect) of the partnership. including competing, taking business opportunities from which it might have benefitted or needed, using partnership property for personal gain, or engaging in conflict-of-interest transactions. a. Under UPA these begin with formation and end at termination. b. Under RUPA these apply to the conduct of the partnership business and the noncompete ends when it dissolves, and the others remain until the partnership terminates.

2. Noncompetition: RUPA § 404(b)(3) requires each partner to refrain from competing with the partnership in the conduct of its business before its dissolution; UPA § 21(1) uses broad language and requires that illicit profits be disgorged.

3. Taking business opportunities: Partner cannot take such opportunities unless the copartners consent. Partner may avoid this requirement by submitting it to the rest of the partnership and a majority can accept/reject.

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4. Using partnership property for personal gain: UPA §25(2)(a) and RUPA § 401(g) prohibit a partner from using property for personal gain without copartner consent, but does not apply to minor usage like a phone.

5. Conflict of interest: Partner has conflict of interest when partner causes/allows partnership to do business with: himself, closely related family member, organization in which he has material financial interest. (RUPA § 404(b)(2)

6. Remedies: must disgorge profits gained through the disloyal act, not

necessary for the partnership to prove damages (but if it can, partnership may also bring a damage action v. Obligation of Good Faith and Fair Dealing: UPA does not have this, but RUPA requires partners to exercise good faith and fair dealing. (RUPA §404(d)). This is not a fiduciary duty but it can act as a safety net for improper actions that do not

fall under the RUPA‟s list of loyalty duties. Official Comment characterizes it as a contract concept but it is an ambiguous concept.

vi. Differences of Interest Between & Among Partners:

1. Partners cannot use tactics that are appropriate to arms length transactions but nothing wrong with legitimately pursuing self-interest when partners are on opposite sides of the negotiating table.

a. UPA cases allow this

b. RUPA § 404 comment 1: “Arguably, term fiduciary is inappropriate

when used to describe duties of a partner since partner may legitimately pursue self interest.”

2. So, in the inter se context, only excessive self-interest is wrongful.

Questions about this fall into two categories

a. Partner-to-Partner transactions (formation of partnership except for RUPA jurisdictions, renegotiation of profit shares, sale or purchase of current partner‟s interest in the partnership)

b. Partners‟ exercise of discretion vis-à-vis copartners (exercise of right created by the agreement to expel a partner without case, rightfully calling for the partnership to end when the end disadvantages one and advantages another). **Under default UPA rules, situation only exists in an at-will partnership, but comparable

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situation is where one partner wrongfully dissolves a term partnership. Under UPA §38(2)(b) the others then have the right to preserve the partnership assets and carry on the business until the end of the original term (if all the remaining partners agree. Under RUPA the situation always exists in an at-will with RUPA §808(1), and often in a partnership for a definite term or particular undertaking with RUPA §801(2)(i).

3. UPA and RUPA differ in approaching this issue

a. UPA §21: pertains to partner‟s duty to the partnership so UPA rules in rules for interpartner duties come from case law

b. RUPA § 404: pertains only to duty to the partnership, but because the RUPA says this is exhaustive, partner-to-partner duties come from other nonfiduciary source, i.e., § 403 (detailing partner‟s rights and duties with respect to information), and § 404(d) (covering the obligation of good faith and fair dealing).

c. Result: When partners‟ interests are potentially/actually adverse,

partner is obliged to (1) provide full disclosure, and (2) engage in “fair dealing”

i. Full disclosure: Partner selling or buying partnership interest to/from another partner has an affirmative duty to disclose any material information that (1) relates to the value of the interest or the partnership itself; and (2) could not be learned by examining the partnership books. ii. Fair dealing: Partner-to-Partner transactions: Process and substance aspects. For process, partners obliged to deal with each other in a candid and noncoercive manner and must avoid arms-length appropriate behavior. Substantively, cases show that partners must provide a fair price, BUT, if the partner made full disclosure and still got an unfair price, the supplement thinks the courts would not overturn because of freedom of contract. Partners exercising discretion vis-à- vis copartners: While partner must give express will to end the partnership (UPA §31(1)(b); RUPA § 801(1) and (2)(i),

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there is no fiduciary duty to consult with them before so doing. Substantive fair dealing does require partners who are expelling others to not end partnership or expel a partner for the malicious purpose of depriving a partner of benefits if he had a right to expect them, they would have naturally accrued to him but for the exercise of discretion, or the exercise of discretion transfers the benefits to the partner or partners exercising the discretion. To succeed on this claim, claimant partner must show conduct amounting to expropriation or unjust enrichment. d. Remedies:

i. UPA-court has broad range of remedies, such as damages, disgorgement, and recission. ii. RUPA-because partner-to-partner duties are not fiduciary, courts must use punitive damages and combine other common law concepts. 15. Impact of Agreements on Partner Fiduciary Duty

a. Limits on a partnership agreement‟s ability to modify the fiduciary duties

i. This is ambiguous. UPA §21(1) says that all duties can give way with the consent of the other partners, and §18(h) says that the agreement can provide that less- than-unanimous consent constitutes the consent of the other partners. ii. Under RUPA § 103(b)(3)(ii), all partners or a percentage specified in the agreement may authorize or ratify (after full disclosure of all material facts) a specific act that would otherwise violate the duty of loyalty. (i) says some activities may be specified as not violating the duty so long as they‟re not unreasonable. §103(b)(5) says the agreement may prescribe standards by which the good faith/fair dealing obligation is to be measured so long as they‟re not manifestly unreasonable. Under no circumstances can it eliminate the duty of loyalty or the obligation of good faith/fair dealing (also stated in UPA cases). iii. What constitutes elimination of duty by agreement is unclear; seems like some degree will be allowed (agreements allowing competition or self-dealing by a managing partner) but others (waiving process fair dealing in partner-to-partner transactions) will not.

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b. Ambiguous, Oral, and Implied Agreements

i. Under both UPA/RUPA, agreements purporting to waive/alter duties are strictly construed. Probably also for good faith/fair dealing obligations under RUPA. ii. No requirement that waivers be in writing, but can be difficult to prove oral waiver; may be inferred by conduct but can be difficult because courts require clear & convincing evidence.

16. Enforcing Inter Se Obligations

a. Action for an accounting: Partnership law provides equitable action for an accounting to avoid complexity during litigation, and under UPA case law, this is generally a condition precedent to bringing a claim for damages arising out of the partnership‟s affairs/business.

i. RUPA §405(b) has a different approach: partner may maintain an action against the partnership or a partner for legal/equitable relief with or without an accounting

in order to:

1. enforce the partner‟s rights under the partnership agreement; or

2. enforce the partner‟s rights under the RUPA; or

3. enforce the rights and otherwise protect the interests of the partner, including the rights/interests arising independently of the partnership relationship.

b. Partner standing to sue fellow partner for damage to partnership:

i. UPA: while it might appear that only the partnership (or a partner acting through

a derivative claim) can sue a partner, the UPA typically uses an accounting to sort this out.

17. Cases

a. Meinhard v. Salmon (p. 76): “coadventurers,” the managing one failed to notify the other of an opportunity and took the benefit for himself. Court held that he had a fiduciary duty to notify.

b. Beasley v. Cadwalader, Wickersham & Taft (handout): Lawyer joined a firm‟s Palm Beach office but the partnership later decided to close that branch. Court decided that there must have been a good faith offer to continue working at the other offices, but that was not the case because (1) he was terminated not transferred, (2) was unreasonable to ask him to move to DC or NY after practicing in South Florida for two decades, so he was wrongfully expelled. So, managing committee had power to open/close branches

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ii.

but because the agreement did not grant power to expel, they were in the wrong. Finally, plaintiff‟s lawsuit did not constitute voluntary withdrawal from the partnership because so long as suit for dissolution is not frivolous, does not constitute voluntary withdrawal.

Dissolution 1. UPA: §29 defines it as the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business

a. Does not mean ending the business (that is “winding up” or “liquidation”, instead refers to changing of the partners); § 30: partnership not terminated with dissolution and continues until the winding up of partnership affairs is completed

b. Some dissolution acts are rightful (i.e., the termination of a definite term or particular purpose partnership, the express will of any partner in an at-will partnership, the express will of all of the partners who have not assigned their interests or had them subject to a charging order, and the expulsion of any partner in accordance with the agreement). Wrongful when the partner decides to withdraw where circumstances do

not permit it (i.e., prematurely in a term partnership).

c. Four dissolutions that are neither rightful nor wrongful: (1) any event which makes it unlawful for the partnership to be carried on or for the members to carry it on in partnership, (2) the death of any partner, (3) the bankruptcy of any partner or the partnership, and (4) a decree of court under § 32.

d. Protections for the Dissociated partner

i. §§ 33-34 end the actual authority (though not the power) of the continuing partners to bind the dissolved partnership on obligations related to new business.

ii. § 35 limits the power of the continuing partners to bind the dissolved partnership

iii. § 36 provides for the dissociated partner, under certain circumstances, to be discharged from personal liability

iv. § 15 imposes personal liability on the dissociated partner only for the debts of the

dissolved partnership (and not of any successor partnership).

e. Some at-will dissolutions can be wrongful if (1) implied agreement for a particular term, or (2) partners have an implied agreement to not injure each other through breach of fiduciary duty.

i. Vangel v. Vangel: Court noted that agreement did not mention term but the borrowing arrangement implied that it was for a particular undertaking.

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ii. Page v. Page: leading case on implying fiduciary duty limit; if it is proved that the dissolving partner acted in bad faith and violated fiduciary duties by attempting to appropriate to his own use the new prosperity of the partnership

f. UPA § 32 provides several bases for a court to “decree a dissolution:

i. § 32(1)(d): application by or for a partner when another partner willfully or persistently commits a breach of the partnership agreement, or otherwise conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him.

ii. § 32(1)(e): partner can apply for dissolution when the business of the partnership can only be carries on at a loss

iii. § 31(2): purchaser of a partner‟s interest can petition for dissolution (a) after the termination of the specified term or particular undertaking, and (b) at any time if the partnership was a partnership at will when the interest was assigned or when the charging order was issued.

2. Continuation Agreements (fair treatment for the withdrawing interest is primary goal)

a. Many questions to be asked

i.

Which types of dissolution will trigger the clause? Death, retirement, etc.

ii.

What happens to the withdrawing interest?

iii.

Is the disposition of the withdrawing interest to be optional or mandatory? In other words, may the remaining partners elect to liquidate the partnership?

iv.

How much is the withdrawing interest to receive? Independent appraiser? Fixed sum? Book value?

v.

Should the withdrawing partner‟s share be subject to a minority or marketability

discount? Former decreases value because it lacks control, while marketability decreases because of the established lack of an established market in a closely held business.

vi.

Is the payment to be in a lump sum or over time?

vii.

How will the partnership raise the cash to meet the required payments?

viii.

May the withdrawing interest compete with the partnership?

ix.

Should the withdrawing interest have the power to inspect books?

3. RUPA: Allows for partner to leave partnership without dissolution (dissociation).

a. § 601: death, withdrawal, bankruptcy, or expulsion of a partner is dissociation.

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b. § 602: distinction between rightful and wrongful remains but § 602(b) has an expanded list of wrongful dissociation events.

c. Switching Provision: Partnership continues despite dissociation, and may continue indefinitely with the dissociated partner becoming entitled to the value of his partnership interest in cash under article 7 (§§ 701-705), or dissolved and wound up under article 8 (§§ 801-807).

d. Dissolution and winding up only required in the limited circumstances set forth in § 801:

i. In at-will partnership, any partner who dissociates by his express will may compel dissolution ii. In a term partnership, if one partner dissociates wrongfully (or if a dissociation occurs because of a partner‟s death or otherwise under § 601(6)-(10), dissolution and winding up of the partnership occurs only if, within 90 days after the dissociation, ½ of the remaining partners agree to wind up the partnership.

iii. Once an event requiring dissolution and winding up occurs, partnership is bound

to do so unless all of the partners (including any dissociated partner other than those wrongfully dissociated) agree otherwise (§ 802).

e. If a partner dissociates but the business continues, he is entitled to receive a buyout price (§ 701(a)), which is defined in § 701(b). If the dissociation was wrongful then damages may be reflected in that price (§ 701(h)). Deferred payment must be secured and bear interest. Unlike UPA, no “loss of goodwill” penalty when valuing a wrongfully dissociating partner‟s interest.

f. Does not continue UPA § 42 election that permitted former partner that did not wind up to take a share of post-dissolution profits. Under RUPA § 701(b), dissociated partner only entitled to interest on the amount to be paid from the date of dissociation to the date of payment.

g. Dissociated partner has apparent authority to bind partnership for a period of time (§ 702) and may be liable for post-dissociation partnership liabilities incurred within 2 years after the dissociation (§ 703). Either the dissociated partner or the partnership may file a public notice to limit this apparent authority and thus limit potential liability (§704).

h. After dissolution, the partnership continues for the purpose of winding up (§ 802(a)), and the apparent authority of partners continues (§ 804), but any partner who has not wrongfully dissociated may file a public statement to give notice that the partnership is winding up (§ 805).

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i. § 807: partnership assets applied to discharge of liabilities and if the assets are insufficient, the partners must pay in to return the balance to zero.

j. 10 events upon which a partner is dissociated, divided into four categories

i.

Notice: The partnership‟s having notice of the partner‟s express will to withdraw

ii.

as a partner or on a later date specified by the partner (RUPA § 601(1)). Notice is defined by § 102(b) Specified Event: An event specified in the partnership agreement as causing dissociation (§ 601(2)).

iii.

Expulsion

1. As provided in the partnership agreement (§ 601(3))

2. By unanimous vote of the other partners; if

a. it is unlawful to carry on the business with the to-be-expelled partner (§ 601(4)(i))

b. the partner being expelled no longer has an economic stake in the business because there has been a transfer of all or substantially all of that partner‟s transferable interest in the partnership (§

601(4)(ii))

c. the partner being expelled is a corporation or partnership which has

lost its right to take on new business ( § 601(4)(iii))

3. By court order if the partner being expelled has engaged in seriously

wrongful conduct (§ 601(5))

iv.

Ability to Participate: Partner‟s ability to participate in the partnership affairs comes to an end or his economic stake comes to an end (§§ 601(6)-(10))

1. the partner becoming a debtor in bankruptcy or taking other non- bankruptcy actions which indicate insolvency (§ 601(6))

2. if the partner is an individual, his ability to participate is coming to an end either by

a. death, or

b. mental incompetency as indicated either by

i. the appointment of a guardian or general conservator, or

ii. a judicial determination that the partner has otherwise

become incapable of performing the partner‟s duties under the agreement (§ 601(7))

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3.

if the partner is a trust or estate, its economic stake in the partnership

coming to an end by the distribution of the partner‟s entire transferable interest in the partnership (§§ 601(8)-(9))

4. termination of a partner who is not an individual, partnership, corporation, trust, or estate (§ 601(10))

k. Rightful versus Wrongful Dissociation under RUPA (§ 602(b))

i. Wrongful only if:

1. it is in breach of an express provision of the agreement; or

2. in the case of a partnership for a definite term or particular undertaking, before the expiration of the term or the completion of the undertaking:

a. the partner withdraws by express will unless it follows within 90 days after another partner‟s dissociation by death or otherwise under § 601(6)-(10) or wrongful dissociation under this subsection

b. the partner is expelled by judicial determination under § 601(5)

c. the partner is dissociated by becoming a debtor in bankruptcy

d. in the case of a partner who is not an individual, trust other than a business trust, or estate, the partner is expelled or otherwise dissociated because it willfully dissolved or terminated

ii. Consequences of wrongful dissociation:

1. wrongful dissociated partner is liable to the partnership and to the other

partners for damages caused by the dissociation (§ 602(c))

2. in a partnership for a term or undertaking, dissociation creates the possibility of dissolution, which occurs within 90 days after a partner‟s

wrongful dissociation the express will of at least half of the remaining partners is to wind up the partnership business (§ 802 (2)(i)).

3. if the partnership continues the wrongfully dissociated partner is not entitled to any payout until the end of the original term unless the partner establishes to the satisfaction of the court that earlier payment will not cause undue hardship to the business of the partnership (§ 701(h)

4. if the dissociation results in dissolution of the partnership, the wrongfully dissociated has no right to participate in winding up (§ 803(a)).

iii. Power of the Agreement over Dissociation

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1. RUPA § 601 is the default and the agreement can change everything except for two: (1) cannot eliminate partner‟s power to dissociate (§

103(b)(6)), nor (2) the right of the court to expel a partner (§103(b)(7)).

2. RUPA § 602(b) is also a default rule, so the agreement can modify what constitutes wrongful dissolution and the effects of wrongful dissolution.

l. Nexus Between Partner Dissociation and Partnership Dissolution

i. Agreement can sever or modify the effects of dissociation on dissolution

ii. Under default rules not every dissociation leads to dissolution; only happens automatically in two circumstances:

1. in at-will partnership the express will dissociation of a partner who has not been previously dissociated through some other cause (§ 801(1))

2. in a partnership for a term or undertaking

a. the express will of at least half of the remaining partners to wind up the partnership business

b. manifested within 90 days after another partner‟s dissociation by

death or otherwise under §601(6)-(10) or wrongful dissociation under §602(b)

m. Switching Provision under RUPA: If dissociation results in dissolution, Article 8 applies; otherwise, Article 7 applies. (§ 603(a)).

n. Dissociation that does not cause Dissolution:

i. Generally

1. Dissociated partner has no further management role (§ 603(b)(1)) and no further fiduciary duties (§§603(b)(2)-(3)). Does have lingering power to

bind partnership and exposure to personal liability.

2. Unless agreement provides otherwise the partnership must cause the dissociated partner‟s interest to be bought out at a price determined by

statute and indemnify him against all partnership liabilities (dissociation does not discharge the dissociated partner from liability for partnership obligations).

ii. Statement of Dissociation

1. Must be filed, stating the name of the partnership and that the partner is dissociated from it (§704(a))

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2.

May be filed by either the dissociated partner or the partnership (§704(a)).

If the partner does it, must be executed by him (§105(c)) but if by the

partnership, must be executed by at least two partners (§105(c)).

3. To be filed in the office of the Secretary of State (§105(a)) unless the state does not use that as the central filing office

4. To have full effect with respect to real property owned by the partnership,

a certified copy must be of record in the office for recording transfers of that property (§303(e)).

a. Once the recording is done, dissociated partner loses all power to transfer real property in the partnership‟s name (§704(b)).

5. With respect to non-real property liabilities, non-partners are deemed to have knowledge after 90 days of filing. (§704(c)).

iii. Lingering Power to Bind

1. Under §702(a) a dissociated partner‟s act binds the partnership if:

a. before the dissociation the act would have bound the partnership under § 301; and

b. at the time the other party enters into the transaction:

i. less than two years had passed since the dissociation;

ii. the other party does not have notice of the dissociation and reasonably believes that the dissociated partner is still a partner;

iii. fewer than 90 days have passed since the filing of a statement of dissociation; and

iv. if the transaction involves the transfer of real property owned in the name of the partnership, a certified copy of a filed statement of dissociation is not of record in the office for recording transfers of that real property

iv. Dissociated Partner‟s Liability for Partnership Obligations

1. Dissociation does not discharge liabilities incurred before the dissociation, but he can be released if a partnership creditor, with notice of the partner‟s dissociation but without his consent, agrees to a material alteration in the nature/time of payment of the obligation. (§703(a) and (d))

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2. § 703(b) creates lingering liability rule; he remains liable as a partner to the other party in a post-dissociation transaction if at the time the other party enters the transaction:

a. the partnership is not an LLP

b. less than 2 years have passed since the dissociation

c. the other party does not have notice of the dissociation and reasonably believes that the dissociated partner is still a partner

d. fewer than 90 days have passed since the filing of a statement of dissociation, and

e. if the transaction involves the transfer of real property owned in the name of the partnership, a certified copy of the filed statement is not of record in the office for recording transfers of that real property.

v. Buyout of the Dissociated Partner

1. § 701: default rule is that if dissociation does not cause dissolution, the

dissociated partner is entitled to be bought out (but the partnership can arrange by having a third party purchase the interest, etc.)

2. Determining the price: § 701 (b) and (c) provides the default rule

a. assume the partnership was terminated on the day of dissociation

b. calculate the amount the partnership would have received for its assets on that date, both through liquidating those assets piecemeal and through a “sale of the entire business as a going concern”

c. using the higher of those two values, calculate the amount that would have been due the dissociated partner (taking into account all liabilities of the partnership)

d. subtract from that amount any damages for wrongful dissociation/other amounts owing (even if not presently due)

e. add to that amount interest “from the date of dissociation to the date of payment”

3. Timing of and tendering the payment

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a. If the partnership was for a term or undertaking, it is presumptively able to defer the payment to the dissociated partner, though it must be adequately secured and bear interest. (§ 701(h)).

b. In other situations, unless otherwise agreed, the partnership shall pay or cause to be paid, in cash, its estimate of the buyout price 120 days after a written demand for payment (§ 701(e))

i. this must be accompanied by specific financial information to explain how the estimated amount was calculated, and a written notice warning that the estimate becomes final unless

dissociated partner commences an

within 120 days

action to determine the buyout price. (§ 702(g)).

the

ii. same written information must be provided if the payment is going to be deferred (§ 701 (f)).

4. Power of the Partnership Agreement

a. § 701 is entirely subject to the partnership agreement, i.e., the

entire section can be modified by agreement. “Indeed, the very right to a buyout itself may be modified, although a provision providing for a complete forfeiture would probably not be enforceable.” (§701, comment 3”

o. Dissociation that Causes Dissolution

i.

Overview

1. Approach is quite similar to UPA; dissolution commences a period of winding up and once that is completed the partnership is dissolved (§

802(a)).

2. Default rule is that any partner who did not wrongfully dissociate may participate in the winding up.

3. Each partner‟s duty to refrain from competing with the partnership ends at dissolution (§ 404(b)(3)) but the other fiduciary duties remain in effect.

4. While winding up, (1) the partnership may preserve business/property as a going concern for a reasonable time, pursue legal disputes, etc., and (2) discharge the partnership‟s liabilities, settle and close the business, and marshal the assets to distribute the net proceeds to the partners in cash. (§§ 803(c), 807(a)).

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5. Settling of accounts among partners is similar to UPA except that (1) under RUPA debts owed by the partnership to partners are treated the same as debts to outsiders (§807(a)), and (2) RUPA expressly refers to each partner having an account reflecting his contributions, profit share, etc. (§401(a)) and uses that to describe the “Settlement of Accounts and Contributions Among Partners.” (§ 807).

6. Reversing: § 802(b) permits partnership to undo dissolution at any time

before the winding up is completed if there is a waiver by all partners including any non-wrongfully dissociated partners. The partnership carries on business as usual (§802(b)(1)) but the rights of third parties cannot be adversely affected (§802(b)(2)).

ii. Partner‟s Power to Bind During Winding Up

1. §804: partnership is bound by a partner‟s act after dissolution that (1) is appropriate for winding up the partnership business; or (2) would have bound the partnership under § 301 before dissolution, if the other party did

not have notice of the dissolution. This can include a partner‟s act whose dissociation resulted in the dissolution.

2. §805(a): non-wrongfully dissociated partner may file a statement of dissolution.

a. For transactions involving real property, as soon as a certified copy of the filed statement is of record, it has the immediate effect of restricting the authority of all partners to real property transfers that are appropriate for winding up the business (because it is a limitation on authority for the purposes of § 303(e)).

b. Also has the effect of canceling all previously filed statements of

partnership authority granting authority (§805(b)). Also, 90 days after filing the statement operates as constructive notice conclusively limiting the apparent authority of partners to transactions that are appropriate for winding up the business. (§ 805, comment 3)

p. Other Causes of Dissolution

i. RUPA provides other events that may lead to dissolution that are not related to dissociation:

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1. in a partnership for a term or undertaking

a. the expiration of the term or the completion of the undertaking

(§801(2)(iii)

b. the express will of all the partners to wind up the business before the expiration or completion (§801(2)(ii)

c. an event that the partnership agreement establishes as causing

dissolution (§801(3))

d. On application by a partner, a judicial determination that (1) the economic purpose of the partnership is likely to be unreasonably frustrated, (2) another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner; (3) it is not otherwise reasonably practicable to carry on the partnership business in conformity with the agreement (§ 801(5)

e. on application by a transferee of a partner‟s transferable interest, a judicial determination that it is equitable to wind up the partnership business: (1) after the expiration of the term or completion of the undertaking, if the partnership was for a definite term or particular undertaking at the time of the transfer or entry of the charging order that gave rise to the transfer; or (2) at any time, if the partnership was a partnership at will at the time of the transfer or entry of the charging order that gave rise to the transfer. (§ 801(6)).

2. Grounds for judicial dissolution on application by a partner mirror the grounds for judicial expulsion under § 601(5). Grounds for judicial dissolution on application by a transferee come from UPA § 32(2)

4. Cases

a. Adams v. Jarvis: Despite UPA‟s dissolutiontermination presumption, the continuation provisions in a partnership agreement were able to overcome that presumption and allow the partnership to continue with respect to the remaining partners.

b. Robinson v. Nussbaum: There were many attempts to put in place a formal written partnership agreement but the partners could not agree, so the court used the default UPA provisions, and held that all profits taken in for partnership business after

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dissolution began (though not profits for new business) had to be shared equally among all partners.

b. Limited Partnerships

i.

Generally

1. Differ from general partners in seven fundamental ways

a. created by following statutory requirements

b. two types of partners (general and limited)

c. only general partners are liable for the partnership‟s debts, and limited partners only personally liable in extraordinary circumstances

d. only general partners have right to day-to-day management and power to bind responsibilities; limited partners have rights in only a few matters ((which can be further restricted by agreement)

e. unless the agreement provides otherwise, the default rule is that the parties share profits in proportion to their capital contributions

f. unless agreement provides otherwise, dissociation of limited partner does not dissolve the partnership and dissociation of general partner only threatens dissolution

g. name of the limited partnership must contain a signifier (i.e., “limited partnership or

„LP‟”)

2. Comprised of at least one general partner and at least one limited partner

3. General partner has unlimited liability, but limited partner has none beyond the loss of his investment (though this is just a default rule; can be changed)

4. General and Limited Partnership statutes have historically been linked so gaps in Limited

statutes are often covered by General statutes

a. UPA §6(2): applies to limited partnerships except for where Limited statutes inconsistent

with the UPA

b. RUPA § 202(b): association formed under a statute other than the RUPA is not a partnership for RUPA purposes, but comment to § 101 says that § 202(b) was not intended to preclude RUPA rules to limited partnerships where Limited statutes otherwise adopt General rules i. Therefore important to note: RULPA § 101(7) of 1976 and 1985 defines limited partnership as a “partnership,” § 403 provides that a general partner in a limited partnership has the rights, powers, restrictions, and liabilities of a partner in a

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partnership without limited partners, and § 1105 indicates that in any case RULPA doesn‟t govern then UPA governs.

ii. ULPA (2001) de-links itself, but that doesn‟t really apply to our class

5. It is a distinct legal entity, rather than an aggregate of its owners.

ii.

Formation

1. File certificate of limited partnership with the secretary of state (or equivalent)

a. Skeletal document with basic information about the company including its name and the identity of its general partners (RULPA § 201)

b. Serves to give notice to third parties

2. Does not need to be filed in state where it does most of its business; can choose whichever state it desires (so as to benefit from its choice of law) but it must maintain an office and an agent for service of process (RULPA § 104).

3. Partnership agreement still used to detail the full set of rights and duties, but is not required

a. Does not need to be written (RULPA § 101(9))

4. If the limited partnership plans to do business in other states, it should also file in those states

(RULPA 1985 § 902)

5. Defective Formation

a. § 201(b) of RULPA (1985): formed at time the certificate is filed if there has been substantial compliance with the section‟s requirements.

b. § 304(a) protects a person who makes a contribution to a business enterprise under the

mistaken but good faith belief that he is a limited partner; such a person is not a general partner and not bound by its obligations if upon ascertaining the mistake, he either

1. causes an appropriate certificate of limited partnership or a certificate of amendment to be executed and filed; or

2. withdraws from future equity participation in the enterprise by executing

and filing in the office of the Secretary of State a certificate declaring withdrawal under this section.

ii. if those requirements are met, a mistaken person is only liable as a general partner to any third party who transacts business with the enterprise before either (1) or (2) are accomplished, and even then, liability is only imposed if the third party actually believed in good faith that the person was a general partner at the

time of the transaction.

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c.

Even if formation was defective but third parties had knowledge of its nature as a limited

partnership, the defective formation may or may not matter (case law varies).

6. Partners in a limited partnership are usually required to make a contribution to the venture, and this “contribution” is broadly defined (RULPA 1985 §§ 101(2), 501)

7. RULPA does not address whether limited partnerships can be converted to other entities and vice-versa, but RUPA §§ 902-903 provide requirements for converting a general partnership to a limited partnership (and vice-versa) and § 904 specifies the effects.

8. Limited partnership interests are usually treated as securities under federal and state securities laws and conclude that they are investment contracts because limited partners often lack the right to participate in management and usually depend on general partners‟ efforts (so general

partners‟ interests are not securities). The effect of this is that when securities laws apply, it is very difficult to transfer that because there is a complicated transfer process.

iii. General vs. Limited Partners: Role & Liability

1. General partners

a. same rights and powers as a general partner in a general partnership (except for where

RULPA provides otherwise). (RULPA § 403(a)).

b. may be removed if the agreement provides a mechanism for limited partners to remove him (§ 402(3): person ceases to be a general partner if he is removed in accordance with the agreement).

i. voting is not the only method by which a partner can be removed, i.e., bankruptcy

c. § 405: Agreement can grant to all or certain identified general partners the right to vote (on a per capita basis or otherwise) on any matter

2. Limited partners

a. Management: RULPA does not explicitly grant or deny management rights to limited

partners

b. Several cases have indicated that limited partners cannot take part in management (i.e., Goodman v. Epstein) and partnership agreements tend to deny such rights.

i. helps retain liability since limited partners who participate in control risk liability (RULPA § 303).

c. Agency: RULPA does not address whether a limited partner is an agent who can bind the venture via apparent authority but there is some case law stating that they have no agency authority.

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d.

Voting: RULPA § 302: the agreement may grant to all or any set of limited partners the

right to vote on any matter

e. Right to inspect: § 305 provides the right to inspect records and to obtain information about the partnership (important because they don‟t participate in the actual management)

iv. Financial Rights and Obligations

1. RULPA §§ 503, 504: unless otherwise agreed in the agreement the profits/losses/distributions of a limited partnership are allocated on the basis of the value made by each partner to the extent they have been received by the partnership and not returned.

2. There are several provisions designed to prevent partners from abusing their financial rights to the detriment of creditors.

a. § 502: creditor has right under certain circumstances to enforce a limited partner‟s promise to contribute to the venture

b. § 607: distribution to a partner is prohibited if it would leave the firm insolvent

c. § 608: makes partners liable to the limited partnership for wrongful distributions and in

some cases for rightful distributions

3. As a practical matter, financial rights of general partners and limited partners are almost always specified in the agreement.

4. § 601: Except as provided in Article 6, partner entitled to receive distributions before his withdrawal from the partnership and before dissolution/winding up to the extent and at the

v. Entity Status

1. RULPA does not itself specify that limited partnerships are distinct entities from their partners but courts have generally treated them as such--BUT courts might nevertheless ignore this

when policy considerations are compelling).

vi. Limited Liability

1. The Control Rule: Under the old ULPA it was unclear how much control was enough to eliminate the limited liability which is one thing that led to the RULPAs.

2. RULPA 1976 § 303(a): retained control rule and adds second sentence that narrowed scope of liability so that if the limited partner‟s participation in the control of the business is not substantially the same as the exercise of the powers of a general partner, he is liable only to persons who transact business with the limited partnership with actual knowledge of his participation of control. § 303(b) added a list of “safe harbor” activities that did not constitute participation in the control of the business.

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3.

RULPA 1985 § 303(a) kept the control rule and further altered the second sentence so that a

limited partner is only liable 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. § 303(b) expands the safe harbor provisions.

4. Special Circumstances where limited partner may be exposed to claims from creditors

a. Unfilled promise to contribute: limited partner makes enforceable promise to contribute to the limited partnership, he is liable for that promise. If the partnership becomes insolvent this liability can be invoked to benefit the partnership‟s creditors. RULPA

§502(b).

b. Wrongfully returned contributions: if the limited partnership has returned all or part of a limited partner‟s contribution and the return violated the agreement, then for 6 years afterward the limited partner is liable to the partnership for the amount of the wrongful return, and also to creditors if it becomes insolvent. §§ 608(b) is the general rule and 607 prohibits distributions leaving it insolvent.

c. Properly Returned Contributions: If (1) the limited partnership has returned all or part of a limited partner‟s contribution without violating the partnership agreement and without leaving it insolvent, and (2) the limited partnership cannot pay creditors who extended credit to the partnership during the period the contribution was held by the partnership, then for one year after the returned contribution. §§608(a) and 607.

d. Mistaken Belief in Limited Partner Status: If (1) a person makes a contribution to an enterprise, believing a good faith that the contribution is made as a limited partner, but (2) either no limited partnership exists or the certificate of limited partnership erroneously identifies the person as a general partner, and (3) when the person learns of the problem, he either formally withdraws from the enterprise or has the certificate corrected, then the person is not categorically liable as a general partner in the enterprise. However, if before the partner takes corrective action a third party transacts business believing in good faith that the person is a general partner, then the person is liable on that transaction as if he is a general partner. RULPA § 304(b)

e. Use of a limited partner’s name: If he allows his name to be used in the name of the limited partnership and a third party extends credit to the partnership without knowing that he is not a general partner, then he is liable to that third party on the transaction as if a general partner. RULPA § 303(d). **does not apply if his name is the same as the

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general partner‟s or if the limited partnership had used the name before the limited partner became a limited partner**

f. Participation in Control: If (1) a limited partner participates in the control of the business of the limited partnership, (2) that conduct causes a third party to reasonably believe that the limited partner is a general partner, and (3) with that belief the third party transacts business with the limited partnership then the partner is liable to the third party as if a general partner. RULPA § 303(a)

vii.

Management

1. Default management structure-general partners manage and only they have the power to bind the partnership. **A limited partner may separately be an agent of the limited partnership and in that capacity may have the power to bind the partnership under agency principles**

2. RULPA requires consent of all partners for admission of any new limited or general partner. RULPA §§301(b)(2) and 401

3. Limited partners have the right to information about the business

4. Can bring derivative suits to assert partnership claims (RUPLA §§1001-1004.

5. RULPA does not, as a default rule, empower limited partners to remove general partners (but the agreement may so allow).

viii.

Fiduciary Duties

1. General Partners

a. RULPA does not explicitly address general partner fiduciary duties but because of the linkage with general partnership law, UPA § 21 and RUPA § 404 provide guidance for general partner fiduciary duties in a limited partnership.

b. Despite RULPA‟s linkage to general partnership law, the limited partnership context presents its own issues: (1) most legal developments on contractually modifying fiduciary duties have been in the LP context, and (2) when a general partner of a limited partnership is a business entity, managers of the entity may personally owe fiduciary duties to the limited partners and the limited partnership.

c. Partners have broad latitude to contractually modify fiduciary duties

i. In Delaware, basic premise is that unless limited by the partnership agreement, the general partner has the fiduciary duty to manage the partnership in its interest and in the interests of the limited partners. In other words, look first to the operative governing instrument (the agreement). BUT in Delaware, current

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jurisprudence is that statutory language allows modification or restriction of fiduciary rights but not elimination of such duties.

d. RULPA § 403: General Partner fiduciary duties in the limited partnership context, using linkage to general partnership law.

e. General partners may have an affirmative duty to disclose information to limited partners even without a demand for information by the limited partners through case law (because partnership law does not eliminate common law fiduciary duty to disclose all material facts)

f. RULPA § 107 states that except as provided in the agreement, a partner may lend money to and transact other business with the limited partnership and, subject to other applicable law, has the same rights and obligations with respect thereto as a person who is not a partner.

2. Limited Partners

a. RULPA does not address this topic, but § 1105 indicates that general partnership law applies--though they also fail to address this. But since RULPA (1985) § 101(8) defines partner to include limited partners, there is an argument that general partnership fiduciary duties apply to them as well but that results in a poor fit because they do not exercise the same control.

b. ULPA 2001 § 305(a) states that a limited partner does not have a fiduciary duty to the limited partnership or to any other partner solely by reason of being a limited partner. But under § 305(b) he must discharge his duties to the partnership and the other

partners or under the partnership consistently with the obligation of good faith and fair dealing.

ix. Profit and Loss Sharing

1. Default rules differ from general partnership rule; RULPA addresses the allocation of profits

and losses separately from the sharing of distributions, though the default rule is the same under both rubrics.

2. §§503-504 hold that profits and losses are allocated and distributed in proportion to the value of contributions made by each partner to the extent they have been received by the partnership and not returned.

x. Transfer of Partner‟s Ownership Interest

1. Default rule is that financial rights are transferable while management rights are not. (RULPA 1985 §§101(10), 702).

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2. § 704: assignee of a partnership (including an assignee of a general partner interest) has the right to become a limited partner “if and to the extent that (1) the assignor gives the assignee that right in accordance with authority described in the partnership agreement, or (2) all other partners consent.” RULPA § 301 addresses the admission of limited partners, while RULPA § 401 addresses admission of general partners.

3. Entity general partners is unusual; transfer of shares of a corporate general partner is distinct from the transfer of a general partner interest.

a. Anti-transfer clauses may alleviate problems associated with this problem (In re Asian Yard Partners held that an agreement prohibiting directly or indirectly prohibited transfer of control through transfer of stock of a corporate entity).

b. A merger involving an entity general partner may also shift control so it could constitute a transfer or assignment in violation of anti-transfer clauses.

4. Keep in mind that RULPA follows the “pick your partner” rule; unless the agreement provides otherwise, no partner (general or limited) may transfer its governance authority to another person without the consent of all the other partners. RULPA § 702. BUT absent a contrary agreement a partner may freely transfer its financial rights. RULPA § 702.

xi. Withdrawal, Dissolution, and Winding Up

1. RULPA § 402: events of withdrawal for a general partner (including voluntary withdrawal, removal, and bankruptcy).

2. § 602 allows a general partner to withdraw at any time by giving written notice to the other partners, but if withdrawal violates the agreement, the limited partnership may recover damages.

3. § 604: withdrawing partner, general or limited, is entitled to receive any distribution provided for

in the agreement. If the agreement is silent, the section specifies that a partner shall receive within a reasonable time after withdrawal, the fair value of his interest in the limited partnership as of the date of withdrawal based on his right to share in distributions from the limited partnership.

4. § 603 allows a limited partner to withdraw under circumstances specified in a written agreement but if it‟s silent, he may withdraw upon not less than 6 months prior written notice to each general partner.

a. Many states limit the limited partner‟s right to withdraw

5. ULPA (2001) eliminates the right of limited partners to dissociate before the firm‟s termination but still recognizes the power to dissociate.

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6.

Dissolution

a. RULPA § 801: limited partnership is dissolved

i. at the time specified in the certificate of limited partnership

ii. upon the occurrence of events specified in a written partnership agreement

iii. upon the written consent of all partners

iv. upon an event of withdrawal of a general partner under § 402 (except when certain requirements are met); and

v. by the entry of a decree of judicial dissolution under § 802

b. § 802 provides that a court may decree dissolution of a limited partnership whenever it is not reasonably practicable to carry on the business in conformity with the partnership

agreement

c. Dissociation of limited partner does not cause dissolution because of their nature: they are passive owners so it doesn‟t really cause a substantial change in the business.

7. There are linkage issues for dissolution because with RULPA § 802, UPA § 32(2)/RUPA § 801(6) it‟s unclear if assignees can apply for dissolution, or just partners

8. Dissociation

a. RULPA refers to partner dissociation was “withdrawal” (§ 602, 603) and a general partner has the power to withdraw at any time

b. General partner‟s withdrawal threatens but does not necessarily cause dissolution; limited partnership can avoid dissolution if either (1) the partnership has at least one remaining general partner, the partnership agreement allows the remaining general partners to do so, and the remaining general partners do so, or (2) within 90 days after the withdrawal all the remaining partners (limited & general) agree in writing to continue

the partnership. RULPA § 801(4).

c. If general partner‟s withdrawal does result in dissolution its similar to dissolution of general partnership; if partnership continues the former general partner has the right (subject to the agreement) to be paid within a reasonable time the fair value of his interest (RULPA § 604) unless his withdrawal breached the agreement (in which case damages are taken out pursuant to RULPA § 602).

d. Whether limited partners have the right to dissociate depends on the agreement especially if it (1) states a particular term for the partnership, (2) authorizes limited partner withdrawal, or (3) does both.

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i. If the agreement does neither then a limited partner can withdraw by giving at least six months written notice to each general partner (RULPA § 603).

xii. Limited Partnerships with Corporate General Partners

1.

If

the general partner is a corporate entity and is marginally capitalized, it becomes akin to a

corporation because most of the capital is provided by limited partners, so actual person is personally liable for debts.

2.

There is no legal prohibition against limited partners serving as shareholders/directors/officers

of the corporate general partner.

3.

Using a corporate entity is very common these days, where it basically acts as a shield for the limited partners (99% of financial benefits accrue to the limited partners and they all control the corporation).

4.

Corporate general partner differs from an individual in several respects

 

a. Subject to control of somebody else

b. Relatively easy to control transfers of managerial authority to third persons when individuals are involved, but when it‟s a corporation, difficult to do so because the actual corporation does not change

c. Corporation may be entirely acceptable as a general partner even though its assets are nominal, likely where shareholders are also the limited partners; claim of breach of fiduciary duty would need to be against the parties that manage the general partner in order to recover much

d. Even if the corporate partner is reasonably capitalized, subsequent transactions may

bleed off those assets to its owners, while greatly increasing the potential risks to the limited partners.

5.

Generally courts don‟t frown on use of entity of general partners even when controlled by the other limited partners, but this could still be an issue.

6.

Case: In re USACafes, L.P.--directors in control of a corporate general partner have fiduciary duties to the partnership itself, and not merely to the corporation, because they‟re the ones

actually in control. I.e., would it make sense to allow the corporate general partner to establish

a new corporation and then cause the partnership to convey its assets to the new company at

an unfairly low price? No, so the corporate general partner cannot sell its assets to a third party

at an unfairly low price either.

xiii. Changes in the ULPA (2001)

1. Stand-alone act that delinks limited partnership law from general partnership law.

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2. Meant to target sophisticated, manager-entrenched commercial deals meant to be for the long term, and family limited partnerships so it assumes that people will want: (1) strong centralized management, strongly entrenched, and (2) passive investors with little control over or right to exit the entity.

3. Provides for a Limited Liability Limited Partnership (“LLLP”), where no partner (general or limited) is liable on account of his partner status for the partnership‟s obligations

4. Gets rid of the control rule for limited partners and provides status-based shield against limited partner liability for entity obligations regardless of whether it is an LLLP.

5. 12 major differences between this and RULPA:

a. stand-alone act incorporating many important RUPA provisions

b. provides constructive notice, 90 days after appropriate filing, of general partner dissociation and of limited partnership dissolution, termination, merger, and conversion

c. has perpetual duration, which means that the limited partnership continues indefinitely without a term unless otherwise provided in the partnership agreement and subject to dissolution by partner consent

d. expressly delineates the permissible scope and effect of the partnership agreement

e. provides a complete, corporate-like liability shield for limited partners even if the limited partner participates in the management and control of the limited partnership

f. permits a limited partnership to be an LLLP and thereby makes a corporate-like liability shield available to general partners

g. gives limited partners the power but not the right to dissociate before the limited partnership‟s termination and allows the partnership agreement to eliminate even the power

h. eliminates any pretermination payout to dissociated partners unless the partnership agreement provides otherwise

i. eschews the UPA‟s open-ended approach to general partner fiduciary duties and incorporates essentially verbatim RUPA‟s provision on fiduciary duty and the obligation of good faith and fair dealing

j. provides for judicial expulsion of a general partner though the agreement can negate that provision

k. makes dissolution following a general partner‟s dissociation less likely, replacing RULPA‟s unanimous consent rule with a two-pronged approach:

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i. if at least one general partner remains, no dissolution occurs unless within 90 days after the dissociation, partners owning a majority of the rights to receive distributions as partners consent to dissolve the limited partnership ii. if no general partner remains, dissolution occurs upon the passage of 90 days after the dissociation, unless before that deadline limited partners owning a majority of the rights to receive distributions owned by limited partners consent to continue the business and admit at least one new general partner and a new general partner is admitted

l. authorizes a limited partnership to participate in mergers and conversions

c. Limited Liability Partnership (LLP)

i.

Generally

1. LLP is a general partnership that, depending on the relevant statute, provides the partners with limited liability for the firm‟s tort obligations for both its tort and contract obligations.

2. Since it is a “partnership,” general partnership law is applicable to LLPs when it is not explicitly modified by LLP-specific provisions

3. The original LLP was only meant to protect innocent partners from responsibility for malpractice claims, liabilities arising from negligence, or misconduct in which they were not personally involved.

4. In 1996 the ABA concluded that LLPs were OK but disagreed on amount of disclosure about LLP‟s limited liability; minority felt that use of initials was not sufficient, but majority felt that abbreviations place client on notice and encourages them to inquire if they are in doubt as to its implications. When client inquires, ABA says that lawyer must clearly explain the limitation

ii.

of liability features of his firm‟s business organization--but without such an inquiry lawyers do not have to explain the restriction. Formation

1. Since LLP is a partnership, formation must fall within the statutory definition of a partnership but it must also satisfy certain statutory formalities: (1) filing a document (application, etc.) with the secretary of state or other official that has its name/address/statement of its purpose, (2) some jurisdictions require it to provide a specified amount of liability insurance or a pool of funds segregated for the satisfaction of judgments against the partnership.

a. LLP that fails to satisfy the second prong presumably loses its limited liability protection, at least up to the amount that insurance should have provided

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2. Specifically, most LLP statutes reflect RUPA:

a. First obtains quantum of consent from its partners and then filing a statement

b. Unless the agreement provides otherwise, the consent necessary to approve becoming an LLP is the same as that required to approve an amendment to the agreement except in the case of an agreement that expressly considers obligations to contribute to the partnership, the LLP approval quantum is the vote necessary to amend those provisions

c. Statement must be executed by at least two partners and be accompanied by whatever filing fee is required, and contain the name of the partnership, the street address of its chief office and its local office, or if not a local office then an address for an agent for service of process, a statement that the partnership elects to be an LLP, and a deferred effective date if any

d. An LLPs name must include designators that show its an LLP

e. Must file an annual report with the same official that receives the statement of

qualification, containing minimal information and its function is merely to keep the public record current

f. When a statement of qualification takes effect, a full liability shield for torts, contracts, or otherwise arises (so only the partnership itself is liable).

iii. Dissolution has no effect on the LLP status (RUPA §1001(e)), BUT if the assets/business are transferred to a successor organization, that does not have LLP status unless it gets it on its own (so there could be gaps in the shield).

iv. Shield only applies to acts that occur while a partnership is actually an LLP (and a partner incurs obligations at the time they occur, i.e., when the contract is made or tortious conduct carried out. Unless parties agree, modifications to contract do not reset the incurred date.

v. Contribution Conundrum: if one partner is liable as a result of his negligence and the partnership must indemnify him, then the shield is essentially useless. RUPA § 306(c) affects this

1. RUPA‟s loss sharing provisions remain intact as to capital losses suffered by the partners

2. RUPA‟s contribution provisions will never create a hole in the LLP shield

3. partnership agreement‟s provisions on contribution will jeopardize the shield only if adopted or reaffirmed after the general partnership becomes an LLP

d. Limited Liability Limited Partnership (LLLP)

i.

Generally

1. Limited partnership that has invoked the LLLP provisions of its state partnership law

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2.

Requires filing with specified public official

3. Completely eliminates the automatic personal liability of each general partner for each partnership obligation and, under most statutes, also eliminating the “control rule” liability exposure for all limited partners.

4. General partner in an LLLP is liable for the obligations of the business only when a general partner in an LLP would be liable

5. Some jurisdictions hold that limited partners are also granted protection, which in effect means that they‟re protected where ordinarily the control rule might pierce their limited liability shield (unless the conduct would result in liability for an LLP partner).

6. NOTE: All this means that limited partners in an LLLP may only have RULPA § 303(a) protection while general partners have the superior § 306(c) shield.

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III.

Limited Liability Companies (LLC) a. Generally It is a noncorporate business structure that provides its owners (also known as members) which several benefits:

i.

1. limited liability for the venture‟s obligations, even if a member helps control the business

2. pass-through tax treatment

3. tremendous freedom to contractually arrange the internal operations of the venture

ii.

Preferred form for many closely held businesses

iii.

For our class focusing on the RULLCA of 2006

iv.

Combines elements of partnerships and companies

v.

Why would people not use an LLC? Higher fees for LLCs, other taxes may be higher for LLCs, may require greater detail for operating agreement that is tailored to the founders‟ wishes because of few default rules, professional unfamiliarity with the LLC structure, sparse case law, LLC statutes limit exit rights while partnership default rules provide broad dissociation/dissolution rights, difficulties with LLC merging with corporation

vi.

An LLC is distinct from its members (RULLCA 2006 § 104)

vii.

Operating agreement does not need to be in writing, but LLC statutes usually don‟t provide much information which is why the freedom of contract is important: agreements generally provide the detail

viii.

Which controls--the articles of organization or the operating agreement? Some statutes say the former always controls, while ULLCA § 203(c) say so long as agreement is not inconsistent with the article, it controls as to managers, members, and members‟ transferees while the articles control as to other persons who reasonably rely on the articles to their detriment (RULLCA § 112(d) is substantially the same).

ix.

Has full, corporate-like liability shield to protect its owners against automatic, vicarious liability for the debts of the enterprise.

x.

LLC may be perpetual, do not have to have a specified term or duration

xi.

LLC governance structure can be member-managed (like a general partnership) or manager- managed (like a corporation)

xii.

Not required that that the LLC form in the state where it does most or all of its business.

xiii.

“Internal affairs” doctrine: choice of the state of formation is always a choice of law (RULLCA § 106(1) comment), though that has not really been codified. It is unclear whether this includes claims of liability with respect to outside people because they are outside the LLC.

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xiv. Neither RULLCA nor Delaware use “membership interest” as a defined term, but Delaware does

define “limited liability company interest” as only a member‟s share in the profits/losses and his right to receive distributions of the company‟s assets.

1. Not accurate to state that a member necessarily has both economic and governance rights

xv. Some generalizations with respect to typical LLC membership and the typical relationship between a

member‟s governance rights and economic rights:

1. When person becomes a member through interaction with the LLC (rather than as transferee), he typically obtains a membership in return for something he brought that has value (RULLCA § 402: broad form of contribution definition that includes money, services rendered, etc.)

2. An LLC typically has some governance rights; at a minimum rights to information about the company‟s activities and the right to vote on or consent to major issues.

3. An LLC member typically has the right to share in profit distributions, subject to the operating agreement

b. Formation

i.

Generally

1. File a document usually known as the “articles of organization” or “certificate of organization,” usually skeletal and requiring only basic information.

a. For example, in Delaware: name of the LLC, address of its registered office, and the name and address of its registered agent for service of process

b. ULLA demands more content, e.g., must specify whether its member-managed.

2. Real detail provided in separate document known as an “operating agreement” which is a nonpublic document that is similar to a partnership agreement or corporation bylaws

a. Contains specifics on the rights, duties, and obligations of the LLC‟s members and managers and on the operation of the LLC as a whole

b. Can generally be tailored to suit the particular needs of an LLC‟s members and will

displace most, if not all, of the statutory provisions (in other words: freedom of contract is central to the LLC‟s structure)

3. Some statutes hold that an LLC is created so long as there is substantial compliance with the formation requirements (DLLCA § 18-201(b)), others omit that but provide that filing of the articles is conclusive proof that formation requirements have been satisfied (ULLCA § 202(c); RULLCA § 201(d)(3), (e)(3). This means that an error does not prevent formation.

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a. Unlike limited partnership statutes, LLC statutes do not typically provide any amendment/withdrawal protection for members who mistakenly (but in good faith) believe that an LLC was formed.

4. In the event of improper formation, the underlying agreement is typically enforce with respect to the members (and only impacts cases with respect to third parties)

5. Some statutes have liability for those acting on behalf of an unformed LLC

6. LLC members usually required to make a contribution to the company‟s capital, with contributions broadly defined (DLLCA § 18-101(3) and ULLCA § 401 and RULLCA § 402)

7. Law of jurisdiction where LLC formed will govern a foreign LLC‟s internal affairs, etc. (DLLCA § 18-901(a)(1); ULLCA § 1001(a); RULLCA § 801(a).

8. LLC statutes used to require at least 2 members (analogous to partnership law) but now they typically only need one

9. In many jurisdictions, LLCs can be formed by converting existing non-LLC business tructures into LLCs and statutes typically specify the procedures for making that happen (DLLCA § 18- 901(a)(1); ULLCA § 1001(a); RULLCA § 801(a)).

10. Under most statutes, LLC is characterized as a separate legal entity whose entity is distinct from that of its owners (DLLCA § 18-201(b); ULLCA § 201; RULLCA § 104(a)), so it can exercise rights and powers in its own name, But judicial treatment is not always predictable.

ii. Many like to have “shelf LLCs” where it is formed before it has a member but this can be difficult for statutes like ULLCA § 202(a) that presuppose that an LLC has a member upon formation

1. RULLCA permits shelf LLCs but two filings must be made: (1) certificate of organization must be filed and explicitly state that the LLC will have no members when the Secretary of State files the certificate (RULLCA § 201(b)(3)), (2) within 90 days from the filing of the certificate, an organizer of the LLC must file a notice stating that the LLC has at least one member and the date when the person or persons became the LLC‟s initial member or members (RULLCA § 201(e)(1)). If the second filing isn‟t made, then the certificate lapses and is void.

c.

Organizers

i. Nomenclature: statutes differ as to how they refer to this person

ii. Role: sign and submit the document whose public filing will create the LLC; do not need to be a

natural person iii. Member?: Organizer is not a member because his role is preformation--member status for anyone

presupposes the organizer‟s task is finished. Does not need to become a member after it comes into existence but may do so if desired.

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iv. Legal relationship with the LLC: strictly speaking, no legal relationship between an organizer and the LLC--cannot be an agent

v. Legal relationship with the persons who are agreed/destined to become initial members: most statutes are silent but Delaware contemplates that the organizer is acting on their behalf, and REULLCA § 401 contemplates this

vi. Multiple organizers: statutes contemplate this but most are formed by a single organizer

d. Articles of Organization:

i. Nomenclature: names vary but articles

ii. Contents: name, address, service of process, etc. Most do not require disclosure of members‟

identities but recent controversy has caused some to require articles to assert there is at least one member

iii. Require that name contains language signifying its LLC status and must be distinguishable in the records from other entities.

iv. Optional contents: all statutes allow for other information but unclear what effect this has

v. Notice: a few state that filing articles are constructive notice that it‟s an LLC, but some cases hold that it‟s ineffective to change common law agency principles.

e. Taxation

i. Original “Kinter” regulations sought to avoid corporate similarities

ii. In 1997 replaced them with new “check the box” regulations

1. LLC can simply elect whether to be taxed as a partnership (pass through) or a corporation (double taxation)

2. Certain entities must be taxed as corporations: (1) entities organized under a federal or state statute that refers to the entity as “incorporated” or a “corporation”; (2) certain foreign entities

that are specifically listed in the regulations as per se corporations; and (3) business entities that are taxable as corporations under other provisions of the Internal Revenue Code such as publicly traded firms and regulated investment companies. Result: federal income tax treatment is now determined by a simple taxpayer choice.

f. LLC is now the most popular form of new business entity

g. Because the LLC is a mishmash of business entities, courts often analogize to existing structures for other forms

h. LLC as a juridical person

i. Separate entity

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ii. Modern trend is to permit LLC to have any lawful purpose, so it does not have to be just a business purpose.

iii. Tax-exempt Single Member LLCs: must (1) be organized for one or more nonprofit p